CBSH 6.30.2014 10Q
Table of contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
_________________________________________________________

For the quarterly period ended June 30, 2014

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
____________________________________________________________

For the transition period from           to          
Commission File No. 0-2989
 
COMMERCE BANCSHARES, INC.
 
(Exact name of registrant as specified in its charter)
Missouri
 
43-0889454
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 
 
1000 Walnut,
Kansas City, MO
 
64106
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(816) 234-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
As of July 31, 2014, the registrant had outstanding 91,640,404 shares of its $5 par value common stock, registrant’s only class of common stock.



Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q
 

 
 
 
Page
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
 
June 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
11,460,039

 
$
10,956,836

  Allowance for loan losses
(161,532
)
 
(161,532
)
Net loans
11,298,507

 
10,795,304

Investment securities:
 
 
 

 Available for sale ($651,952,000 pledged at June 30, 2014 and $687,680,000 at
 
 
 
  December 31, 2013 to secure swap and repurchase agreements)
9,282,640

 
8,915,680

 Trading
15,684

 
19,993

 Non-marketable
93,748

 
107,324

Total investment securities
9,392,072

 
9,042,997

Short-term federal funds sold and securities purchased under agreements to resell
29,490

 
43,845

Long-term securities purchased under agreements to resell
950,000

 
1,150,000

Interest earning deposits with banks
18,877

 
707,249

Cash and due from banks
516,509

 
518,420

Land, buildings and equipment, net
346,363

 
349,654

Goodwill
138,921

 
138,921

Other intangible assets, net
8,249

 
9,268

Other assets
306,191

 
316,378

Total assets
$
23,005,179

 
$
23,072,036

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
6,413,161

 
$
6,750,674

   Savings, interest checking and money market
10,085,460

 
10,108,236

   Time open and C.D.'s of less than $100,000
942,233

 
983,689

   Time open and C.D.'s of $100,000 and over
1,498,982

 
1,204,749

Total deposits
18,939,836

 
19,047,348

Federal funds purchased and securities sold under agreements to repurchase
1,154,323

 
1,346,558

Other borrowings
105,096

 
107,310

Other liabilities
543,771

 
356,423

Total liabilities
20,743,026

 
20,857,639

Commerce Bancshares, Inc. stockholders’ equity:
 
 
 

   Preferred stock, $1 par value
 
 
 
      Authorized 2,000,000 shares; issued 6,000 shares at June 30, 2014 and none at December 31, 2013
144,816

 

   Common stock, $5 par value
 
 
 

 Authorized 120,000,000 shares at June 30, 2014 and 100,000,000 at December 31, 2013;
 
 
 
  issued 96,244,762 shares
481,224

 
481,224

   Capital surplus
1,214,836

 
1,279,948

   Retained earnings
537,759

 
449,836

   Treasury stock of 4,504,256 shares at June 30, 2014
 
 
 
    and 235,986 shares at December 31, 2013, at cost
(203,174
)
 
(10,097
)
   Accumulated other comprehensive income
84,314

 
9,731

Total Commerce Bancshares, Inc. stockholders' equity
2,259,775

 
2,210,642

Non-controlling interest
2,378

 
3,755

Total equity
2,262,153

 
2,214,397

Total liabilities and equity
$
23,005,179

 
$
23,072,036

See accompanying notes to consolidated financial statements.

3

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
 
For the Three Months Ended June 30
 
For the Six Months Ended June 30
(In thousands, except per share data)
2014
2013
 
2014
2013
 
(Unaudited)
INTEREST INCOME
 
 
 
 
 
Interest and fees on loans
$
111,496

$
108,018

 
$
222,198

$
215,804

Interest and fees on loans held for sale

91

 

176

Interest on investment securities
53,016

53,233

 
98,035

98,192

Interest on short-term federal funds sold and securities purchased under
 
 
 
 
 
   agreements to resell
24

28

 
50

37

Interest on long-term securities purchased under agreements to resell
2,943

5,810

 
7,094

11,639

Interest on deposits with banks
88

75

 
188

152

Total interest income
167,567

167,255

 
327,565

326,000

INTEREST EXPENSE
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
   Savings, interest checking and money market
3,358

3,375

 
6,664

7,299

   Time open and C.D.'s of less than $100,000
1,063

1,656

 
2,183

3,405

   Time open and C.D.'s of $100,000 and over
1,515

1,667

 
2,967

3,366

Interest on federal funds purchased and securities sold under
 
 
 
 
 
   agreements to repurchase
263

270

 
466

488

Interest on other borrowings
875

829

 
1,726

1,641

Total interest expense
7,074

7,797

 
14,006

16,199

Net interest income
160,493

159,458

 
313,559

309,801

Provision for loan losses
7,555

7,379

 
17,215

10,664

Net interest income after provision for loan losses
152,938

152,079

 
296,344

299,137

NON-INTEREST INCOME
 
 
 
 
 
Bank card transaction fees
44,444

40,700

 
86,161

79,250

Trust fees
27,765

25,734

 
54,338

50,903

Deposit account charges and other fees
19,709

19,602

 
38,299

38,314

Capital market fees
3,246

3,305

 
7,116

7,696

Consumer brokerage services
2,972

2,853

 
5,719

5,539

Loan fees and sales
1,211

1,314

 
2,420

2,787

Other
9,416

9,168

 
17,337

18,064

Total non-interest income
108,763

102,676

 
211,390

202,553

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
 
 
 
Change in fair value of other-than-temporarily impaired securities
(785
)
(293
)
 
(848
)
1,096

Portion recognized in other comprehensive income
154

(195
)
 
(129
)
(2,026
)
Net impairment losses recognized in earnings
(631
)
(488
)
 
(977
)
(930
)
Realized gains (losses) on sales and fair value adjustments
(1,927
)
(1,080
)
 
8,456

(2,803
)
Investment securities gains (losses), net
(2,558
)
(1,568
)
 
7,479

(3,733
)
NON-INTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
94,849

89,569

 
189,112

180,450

Net occupancy
11,151

11,234

 
22,767

22,469

Equipment
4,525

4,680

 
9,029

9,363

Supplies and communication
5,486

5,797

 
11,185

11,386

Data processing and software
19,578

19,584

 
38,665

38,535

Marketing
3,949

4,048

 
7,630

7,407

Deposit insurance
2,892

2,790

 
5,786

5,557

Other
20,501

19,264

 
41,097

36,836

Total non-interest expense
162,931

156,966

 
325,271

312,003

Income before income taxes
96,212

96,221

 
189,942

185,954

Less income taxes
30,312

30,182

 
59,921

59,107

Net income
65,900

66,039

 
130,021

126,847

Less non-controlling interest expense (income)
(631
)
234

 
(823
)
25

Net income attributable to Commerce Bancshares, Inc.
66,531

65,805

 
130,844

126,822

Less preferred stock dividends


 


Net income available to common shareholders
$
66,531

$
65,805

 
$
130,844

$
126,822

Net income per common share — basic
$
.70

$
.69

 
$
1.37

$
1.33

Net income per common share — diluted
$
.70

$
.69

 
$
1.37

$
1.32

See accompanying notes to consolidated financial statements.

4

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
For the Three Months Ended June 30
 
For the Six Months Ended June 30
(In thousands)
 
2014
2013
 
2014
2013
 
 
(Unaudited)
Net income
 
$
65,900

$
66,039

 
$
130,021

$
126,847

Other comprehensive income (loss):
 
 
 
 
 
 
Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings
 
(58
)
(120
)
 
108

1,017

Net unrealized gains (losses) on other securities
 
43,650

(108,254
)
 
74,029

(116,447
)
Pension loss amortization
 
223

475

 
446

950

Other comprehensive income (loss)
 
43,815

(107,899
)
 
74,583

(114,480
)
Comprehensive income (loss)
 
109,715

(41,860
)
 
204,604

12,367

Less non-controlling interest expense (income)
 
(631
)
234

 
(823
)
25

Comprehensive income (loss) attributable to Commerce Bancshares, Inc.
$
110,346

$
(42,094
)
 
$
205,427

$
12,342

See accompanying notes to consolidated financial statements.














5

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
Commerce Bancshares, Inc. Shareholders
 
 
 
 

(In thousands, except per share data)
Preferred Stock
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
 
 
(Unaudited)
Balance January 1, 2014
$

$
481,224

$
1,279,948

$
449,836

$
(10,097
)
$
9,731

$
3,755

$
2,214,397

Net income
 




130,844





(823
)
130,021

Other comprehensive income
 








74,583



74,583

Distributions to non-controlling interest
 










(554
)
(554
)
Issuance of preferred stock
144,816

 
 
 
 
 
 
144,816

Purchase of treasury stock
 






(208,989
)




(208,989
)
Accelerated share repurchase forward contract
 
 
(60,000
)
 
 
 
 
(60,000
)
Issuance of stock under purchase and equity compensation plans
 


(3,670
)


8,911





5,241

Net tax benefit related to equity compensation plans
 


1,091









1,091

Stock-based compensation
 


4,468









4,468

Issuance of nonvested stock awards
 


(7,001
)


7,001






Cash dividends on common stock ($.450 per share)
 




(42,921
)






(42,921
)
Balance June 30, 2014
$
144,816

$
481,224

$
1,214,836

$
537,759

$
(203,174
)
$
84,314

$
2,378

$
2,262,153

Balance January 1, 2013
$

$
458,646

$
1,102,507

$
477,210

$
(7,580
)
$
136,344

$
4,447

$
2,171,574

Net income
 




126,822





25

126,847

Other comprehensive loss
 








(114,480
)


(114,480
)
Distributions to non-controlling interest
 










(512
)
(512
)
Purchase of treasury stock
 






(45,292
)




(45,292
)
Issuance of stock under purchase and equity compensation plans
 


(2,488
)


9,047





6,559

Net tax benefit related to equity compensation plans
 


209









209

Stock-based compensation
 


2,748









2,748

Issuance of nonvested stock awards
 


(8,054
)


8,054






Cash dividends on common stock ($.429 per share)
 




(40,866
)






(40,866
)
Balance June 30, 2013
$

$
458,646

$
1,094,922

$
563,166

$
(35,771
)
$
21,864

$
3,960

$
2,106,787

See accompanying notes to consolidated financial statements.



6

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Six Months Ended June 30
(In thousands)
2014
 
2013
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
130,021

 
$
126,847

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
17,215

 
10,664

  Provision for depreciation and amortization
21,033

 
20,817

  Amortization of investment security premiums, net
8,323

 
17,227

  Investment securities (gains) losses, net(A)
(7,479
)
 
3,733

  Net decrease in trading securities
16,845

 
7,465

  Stock-based compensation
4,468

 
2,748

  Decrease in interest receivable
104

 
116

  Decrease in interest payable
(11
)
 
(238
)
  Increase (decrease) in income taxes payable
14,719

 
(6,719
)
  Net tax benefit related to equity compensation plans
(1,091
)
 
(209
)
  Other changes, net
4,705

 
(14,546
)
Net cash provided by operating activities
208,852

 
167,905

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities(A)
63,899

 
4,096

Proceeds from maturities/pay downs of investment securities(A)
928,075

 
1,478,237

Purchases of investment securities(A)
(1,196,956
)
 
(1,309,380
)
Net increase in loans
(520,767
)
 
(555,935
)
Long-term securities purchased under agreements to resell
(250,000
)
 
(50,000
)
Repayments of long-term securities purchased under agreements to resell
450,000

 
50,000

Purchases of land, buildings and equipment
(14,583
)
 
(10,713
)
Sales of land, buildings and equipment
2,074

 
715

Net cash used in investing activities
(538,258
)
 
(392,980
)
FINANCING ACTIVITIES:
 
 
 
Net decrease in non-interest bearing, savings, interest checking and money market deposits
(272,723
)
 
(863,336
)
Net increase in time open and C.D.'s
252,702

 
281,268

Repayment of long-term securities sold under agreements to repurchase
(150,000
)
 

Net increase (decrease) in short-term federal funds purchased and securities sold under
 
 
 
  agreements to repurchase
(42,235
)
 
537,144

Repayment of other long-term borrowings
(214
)
 
(943
)
Net decrease in other short-term borrowings
(2,000
)
 

Proceeds from issuance of preferred stock
144,816

 

Purchases of treasury stock
(208,989
)
 
(45,292
)
Accelerated stock repurchase agreement
(60,000
)
 

Issuance of stock under stock purchase and equity compensation plans
5,241

 
6,559

Net tax benefit related to equity compensation plans
1,091

 
209

Cash dividends paid on common stock
(42,921
)
 
(40,866
)
Net cash used in financing activities
(375,232
)
 
(125,257
)
Decrease in cash and cash equivalents
(704,638
)
 
(350,332
)
Cash and cash equivalents at beginning of year
1,269,514

 
779,825

Cash and cash equivalents at June 30
$
564,876

 
$
429,493

(A) Available for sale and non-marketable securities
 
 
 
Income tax payments, net
$
45,154

 
$
65,453

Interest paid on deposits and borrowings
$
13,942

 
$
16,437

Loans transferred to foreclosed real estate
$
3,769

 
$
5,532

See accompanying notes to consolidated financial statements.

7

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (Unaudited)
 
1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2013 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of results to be attained for the full year or any other interim period.

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

2. Acquisition and Disposition

On September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The transaction was accounted for using the acquisition method of accounting and, as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. In this transaction, the Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million. The valuation of Company stock was determined on the basis of the closing market price of the Company's common shares on August 30, 2013. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $13.3 million in goodwill and $5.6 million in core deposit premium. Most of the goodwill was assigned to the Company's Commercial segment. None of the goodwill recognized is deductible for income tax purposes.
On July 25, 2014, the Company sold banking branches in Farmington, Desloge and Bonne Terre, Missouri. The sale included approximately $13.3 million in loans, $60.3 million in deposits, and various bank premises.
3. Loans and Allowance for Loan Losses

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

(In thousands)
 
June 30, 2014
 
December 31, 2013
Commercial:
 
 
 
 
Business
 
$
4,095,253

 
$
3,715,319

Real estate – construction and land
 
442,093

 
406,197

Real estate – business
 
2,277,898

 
2,313,550

Personal Banking:
 
 
 
 
Real estate – personal
 
1,819,204

 
1,787,626

Consumer
 
1,637,841

 
1,512,716

Revolving home equity
 
423,566

 
420,589

Consumer credit card
 
760,289

 
796,228

Overdrafts
 
3,895

 
4,611

Total loans
 
$
11,460,039

 
$
10,956,836


At June 30, 2014, loans of $3.5 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.1 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.


8

Table of contents

Allowance for loan losses    

A summary of the activity in the allowance for loan losses during the three and six months ended June 30, 2014 and 2013, respectively, follows:
 
 
For the Three Months Ended June 30
 
For the Six Months Ended June 30
(In thousands)
 
Commercial
Personal Banking

Total
 
Commercial
Personal Banking

Total
Balance at beginning of period
$
97,881

$
63,651

$
161,532

 
$
94,189

$
67,343

$
161,532

Provision
486

7,069

7,555

 
4,553

12,662

17,215

Deductions:
 
 
 
 
 
 
 
   Loans charged off
1,218

11,752

12,970

 
2,348

24,503

26,851

   Less recoveries on loans
1,779

3,636

5,415

 
2,534

7,102

9,636

Net loan charge-offs (recoveries)
(561
)
8,116

7,555

 
(186
)
17,401

17,215

Balance June 30, 2014
$
98,928

$
62,604

$
161,532

 
$
98,928

$
62,604

$
161,532

Balance at beginning of period
$
99,821

$
68,211

$
168,032

 
$
105,725

$
66,807

$
172,532

Provision
(800
)
8,179

7,379

 
(7,390
)
18,054

10,664

Deductions:
 
 
 
 
 
 
 
   Loans charged off
2,261

12,430

14,691

 
2,966

24,231

27,197

   Less recoveries on loans
1,839

3,473

5,312

 
3,230

6,803

10,033

Net loan charge-offs (recoveries)
422

8,957

9,379

 
(264
)
17,428

17,164

Balance June 30, 2013
$
98,599

$
67,433

$
166,032

 
$
98,599

$
67,433

$
166,032


The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 2014 and December 31, 2013, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
 
Impaired Loans
 
All Other Loans

(In thousands)
Allowance for Loan Losses
Loans Outstanding
 
Allowance for Loan Losses
Loans Outstanding
June 30, 2014
 
 
 
 
 
Commercial
$
8,274

$
76,834

 
$
90,654

$
6,738,410

Personal Banking
2,461

27,891

 
60,143

4,616,904

Total
$
10,735

$
104,725

 
$
150,797

$
11,355,314

December 31, 2013
 
 
 
 
 
Commercial
$
8,476

$
78,516

 
$
85,713

$
6,356,550

Personal Banking
2,424

29,120

 
64,919

4,492,650

Total
$
10,900

$
107,636

 
$
150,632

$
10,849,200


Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, 2014 and December 31, 2013. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 13.
(In thousands)
 
June 30, 2014
 
Dec. 31, 2013
Non-accrual loans
 
$
43,260

 
$
48,814

Restructured loans (accruing)
 
61,465

 
58,822

Total impaired loans
 
$
104,725

 
$
107,636



9

Table of contents

The following table provides additional information about impaired loans held by the Company at June 30, 2014 and December 31, 2013, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.


(In thousands)
Recorded Investment
Unpaid Principal
Balance
 Related
Allowance
June 30, 2014
 
 
 
With no related allowance recorded:
 
 
 
Business
$
8,673

$
10,709

$

Real estate – construction and land
7,058

14,876


Real estate – business
1,914

2,223


 
$
17,645

$
27,808

$

With an allowance recorded:
 
 
 
Business
$
27,014

$
28,858

$
3,720

Real estate – construction and land
13,762

15,893

1,829

Real estate – business
18,413

27,780

2,725

Real estate – personal
10,512

13,684

1,129

Consumer
5,448

6,135

158

Revolving home equity
560

560

2

Consumer credit card
11,371

11,371

1,172

 
$
87,080

$
104,281

$
10,735

Total
$
104,725

$
132,089

$
10,735

December 31, 2013
 
 
 
With no related allowance recorded:
 
 
 
Business
$
7,969

$
9,000

$

Real estate – construction and land
8,766

16,067


Real estate – business
4,089

6,417


Revolving home equity
2,191

2,741


 
$
23,015

$
34,225

$

With an allowance recorded:
 
 
 
Business
$
19,266

$
22,597

$
3,037

Real estate – construction and land
17,632

19,708

2,174

Real estate – business
20,794

29,287

3,265

Real estate – personal
10,425

13,576

1,361

Consumer
4,025

4,025

85

Revolving home equity
666

666

2

Consumer credit card
11,813

11,813

976

 
$
84,621

$
101,672

$
10,900

Total
$
107,636

$
135,897

$
10,900




10

Table of contents

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

(In thousands)
Commercial
Personal Banking
Total
Average Impaired Loans:
 
 
 
For the three months ended June 30, 2014
 
 
 
Non-accrual loans
$
35,908

$
7,131

$
43,039

Restructured loans (accruing)
40,167

20,745

60,912

Total
$
76,075

$
27,876

$
103,951

For the six months ended June 30, 2014
 
 
 
Non-accrual loans
$
38,093

$
7,347

$
45,440

Restructured loans (accruing)
39,285

21,086

60,371

Total
$
77,378

$
28,433

$
105,811

For the three months ended June 30, 2013
 
 
 
Non-accrual loans
$
36,384

$
4,949

$
41,333

Restructured loans (accruing)
41,053

25,141

66,194

Total
$
77,437

$
30,090

$
107,527

For the six months ended June 30, 2013
 
 
 
Non-accrual loans
$
38,733

$
5,501

$
44,234

Restructured loans (accruing)
39,854

26,210

66,064

Total
$
78,587

$
31,711

$
110,298


The table below shows interest income recognized during the three and six month periods ended June 30, 2014 and 2013 for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 13.
 
For the Three Months Ended June 30
 
For the Six Months Ended June 30
(In thousands)
2014
2013
 
2014
2013
Interest income recognized on impaired loans:
 
 
 
 
 
Business
$
181

$
141

 
$
361

$
282

Real estate – construction and land
142

215

 
283

430

Real estate – business
46

50

 
91

100

Real estate – personal
58

70

 
115

139

Consumer
71

91

 
142

182

Revolving home equity
7

10

 
14

19

Consumer credit card
228

253

 
456

506

Total
$
733

$
830

 
$
1,462

$
1,658



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Table of contents

Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at June 30, 2014 and December 31, 2013.




(In thousands)
Current or Less Than 30 Days Past Due

30 – 89
Days Past Due
90 Days Past Due and Still Accruing
Non-accrual



Total
June 30, 2014
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
4,077,664

$
5,873

$
623

$
11,093

$
4,095,253

Real estate – construction and land
423,589

10,031

275

8,198

442,093

Real estate – business
2,256,513

4,911


16,474

2,277,898

Personal Banking:
 
 
 
 
 
Real estate – personal
1,802,553

9,559

1,235

5,857

1,819,204

Consumer
1,621,468

13,377

1,358

1,638

1,637,841

Revolving home equity
421,186

1,465

915


423,566

Consumer credit card
744,410

8,656

7,223


760,289

Overdrafts
3,622

273



3,895

Total
$
11,351,005

$
54,145

$
11,629

$
43,260

$
11,460,039

December 31, 2013
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
3,697,589

$
5,467

$
671

$
11,592

$
3,715,319

Real estate – construction and land
386,423

9,601


10,173

406,197

Real estate – business
2,292,385

1,340

47

19,778

2,313,550

Personal Banking:
 
 
 
 
 
Real estate – personal
1,771,231

9,755

1,560

5,080

1,787,626

Consumer
1,492,960

17,482

2,274


1,512,716

Revolving home equity
416,614

1,082

702

2,191

420,589

Consumer credit card
777,564

9,952

8,712


796,228

Overdrafts
4,315

296



4,611

Total
$
10,839,081

$
54,975

$
13,966

$
48,814

$
10,956,836



Credit quality

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

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Table of contents

Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
June 30, 2014
 
 
 
 
Pass
$
3,993,646

$
418,424

$
2,161,318

$
6,573,388

Special mention
52,297

1,392

44,600

98,289

Substandard
38,217

14,079

55,506

107,802

Non-accrual
11,093

8,198

16,474

35,765

Total
$
4,095,253

$
442,093

$
2,277,898

$
6,815,244

December 31, 2013
 
 
 
 
Pass
$
3,618,120

$
372,515

$
2,190,344

$
6,180,979

Special mention
61,916

1,697

53,079

116,692

Substandard
23,691

21,812

50,349

95,852

Non-accrual
11,592

10,173

19,778

41,543

Total
$
3,715,319

$
406,197

$
2,313,550

$
6,435,066


The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At June 30, 2014, these were comprised of $237.4 million in personal real estate loans and $7.1 million in consumer loans, or 5.3% of the Personal Banking portfolio. At December 31, 2013, these were comprised of $244.3 million in personal real estate loans and $47.5 million in consumer loans, or 6.5% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, 2014 and December 31, 2013 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
June 30, 2014
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.8
%
5.1
%
2.0
%
4.0
%
600 - 659
3.4

9.4

4.8

11.6

660 - 719
9.4

22.8

14.7

32.9

720 - 779
25.7

29.7

30.2

28.1

780 and over
59.7

33.0

48.3

23.4

Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2013
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.7
%
5.4
%
2.1
%
4.1
%
600 - 659
3.3

10.1

7.3

11.7

660 - 719
10.3

23.4

15.0

32.9

720 - 779
25.8

28.3

28.5

27.9

780 and over
58.9

32.8

47.1

23.4

Total
100.0
%
100.0
%
100.0
%
100.0
%

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $82.3 million at June 30, 2014. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $20.8 million at June 30, 2014. Other performing restructured loans totaled $61.5 million at June 30, 2014. These are primarily comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as

13

Table of contents

troubled debt restructurings. These commercial loans totaled $42.1 million at June 30, 2014. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $11.4 million at June 30, 2014. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At June 30, 2014, these loans totaled $8.0 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at June 30, 2014, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
(In thousands)
June 30, 2014
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
32,239

$
7,606

Real estate - construction and land
20,173

4,664

Real estate - business
6,013

23

Personal Banking:
 
 
Real estate - personal
6,435

446

Consumer
5,468

1,672

Revolving home equity
560


Consumer credit card
11,371

1,415

Total restructured loans
$
82,259

$
15,826


For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $1.2 million on an annual, pre-tax basis, compared to amounts contractually owed.

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

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

The Company had commitments of $9.5 million at June 30, 2014 to lend additional funds to borrowers with restructured loans.


14

Table of contents

The Company’s holdings of foreclosed real estate totaled $8.4 million and $6.6 million at June 30, 2014 and December 31, 2013, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $1.7 million and $2.8 million at June 30, 2014 and December 31, 2013, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.

4. Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2014 and December 31, 2013.
 
(In thousands)
June 30, 2014
Dec. 31, 2013
Available for sale
$
9,282,640

$
8,915,680

Trading
15,684

19,993

Non-marketable
93,748

107,324

Total investment securities
$
9,392,072

$
9,042,997


Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $46.5 million at both June 30, 2014 and December 31, 2013. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $47.1 million at June 30, 2014 and $60.7 million at December 31, 2013.


15

Table of contents

A summary of the available for sale investment securities by maturity groupings as of June 30, 2014 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments and does not hold trust preferred securities.
(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
 
 
Within 1 year
$
43,443

$
44,168

After 1 but within 5 years
259,660

276,658

After 5 but within 10 years
141,044

147,856

After 10 years
53,516

50,161

Total U.S. government and federal agency obligations
497,663

518,843

Government-sponsored enterprise obligations:
 
 
Within 1 year
32,831

33,057

After 1 but within 5 years
448,512

451,784

After 5 but within 10 years
143,551

137,177

After 10 years
142,006

136,211

Total government-sponsored enterprise obligations
766,900

758,229

State and municipal obligations:
 
 
Within 1 year
167,929

169,519

After 1 but within 5 years
710,057

734,237

After 5 but within 10 years
728,853

727,635

After 10 years
175,289

171,928

Total state and municipal obligations
1,782,128

1,803,319

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
2,726,315

2,795,929

  Non-agency mortgage-backed securities
289,782

301,661

  Asset-backed securities
2,914,610

2,920,062

Total mortgage and asset-backed securities
5,930,707

6,017,652

Other debt securities:
 
 
Within 1 year
11,939

12,012

After 1 but within 5 years
42,329

43,033

After 5 but within 10 years
86,067

83,607

Total other debt securities
140,335

138,652

Equity securities
4,194

45,945

Total available for sale investment securities
$
9,121,927

$
9,282,640


Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $518.7 million, at fair value, at June 30, 2014. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $132.1 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $44.9 million at June 30, 2014.


16

Table of contents

For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.
 
 
(In thousands)
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
June 30, 2014
 
 
 
 
U.S. government and federal agency obligations
$
497,663

$
25,145

$
(3,965
)
$
518,843

Government-sponsored enterprise obligations
766,900

3,656

(12,327
)
758,229

State and municipal obligations
1,782,128

34,014

(12,823
)
1,803,319

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,726,315

79,719

(10,105
)
2,795,929

  Non-agency mortgage-backed securities
289,782

12,546

(667
)
301,661

  Asset-backed securities
2,914,610

9,861

(4,409
)
2,920,062

Total mortgage and asset-backed securities
5,930,707

102,126

(15,181
)
6,017,652

Other debt securities
140,335

790

(2,473
)
138,652

Equity securities
4,194

41,751


45,945

Total
$
9,121,927

$
207,482

$
(46,769
)
$
9,282,640

December 31, 2013
 
 
 
 
U.S. government and federal agency obligations
$
498,226

$
20,614

$
(13,144
)
$
505,696

Government-sponsored enterprise obligations
766,802

2,245

(27,281
)
741,766

State and municipal obligations
1,624,195

28,321

(33,345
)
1,619,171

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,743,803

54,659

(26,124
)
2,772,338

  Non-agency mortgage-backed securities
236,595

12,008

(1,620
)
246,983

  Asset-backed securities
2,847,368

6,872

(10,169
)
2,844,071

Total mortgage and asset-backed securities
5,827,766

73,539

(37,913
)
5,863,392

Other debt securities
147,581

671

(6,495
)
141,757

Equity securities
9,970

33,928


43,898

Total
$
8,874,540

$
159,318

$
(118,178
)
$
8,915,680


The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At June 30, 2014, the fair value of securities on this watch list was $171.7 million compared to $188.8 million at December 31, 2013.

As of June 30, 2014, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $62.0 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $13.4 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

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

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

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Table of contents

The following table shows changes in the credit losses recorded in earnings during the six months ended June 30, 2014 and 2013, for which a portion of an OTTI was recognized in other comprehensive income.
 
For the Six Months Ended June 30
(In thousands)
2014
2013
Balance at January 1
$
12,499

$
11,306

Credit losses on debt securities for which impairment was previously recognized
977

930

Increase in expected cash flows that are recognized over remaining life of security
(66
)
(40
)
Balance at June 30
$
13,410

$
12,196


Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.
 
Less than 12 months
 
12 months or longer
 
Total
 
(In thousands)
   Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
June 30, 2014
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$

$

 
$
32,570

$
3,965

 
$
32,570

$
3,965

Government-sponsored enterprise obligations
69,973

102

 
295,532

12,225

 
365,505

12,327

State and municipal obligations
131,531

711

 
355,533

12,112

 
487,064

12,823

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
4,775

16

 
400,697

10,089

 
405,472

10,105

   Non-agency mortgage-backed securities
37,014

23

 
43,762

644

 
80,776

667

   Asset-backed securities
236,398

294

 
296,606

4,115

 
533,004

4,409

Total mortgage and asset-backed securities
278,187

333

 
741,065

14,848

 
1,019,252

15,181

Other debt securities
6,492

3

 
83,842

2,470

 
90,334

2,473

Total
$
486,183

$
1,149

 
$
1,508,542

$
45,620

 
$
1,994,725

$
46,769

December 31, 2013
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
96,172

$
243

 
$
59,677

$
12,901

 
$
155,849

$
13,144

Government-sponsored enterprise obligations
487,317

18,155

 
93,654

9,126

 
580,971

27,281

State and municipal obligations
478,818

15,520

 
178,150

17,825

 
656,968

33,345

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
717,778

26,124

 


 
717,778

26,124

   Non-agency mortgage-backed securities
53,454

918

 
22,289

702

 
75,743

1,620

   Asset-backed securities
1,088,556

9,072

 
58,398

1,097

 
1,146,954

10,169

Total mortgage and asset-backed securities
1,859,788

36,114

 
80,687

1,799

 
1,940,475

37,913

Other debt securities
90,028

5,604

 
9,034

891

 
99,062

6,495

Total
$
3,012,123

$
75,636

 
$
421,202

$
42,542

 
$
3,433,325

$
118,178


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


18

Table of contents

The Company’s holdings of state and municipal obligations included gross unrealized losses of $12.8 million at June 30, 2014. Of these losses, $6.0 million related to auction rate securities and $6.9 million related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.7 billion at fair value, or 18.0% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the table below. The Company does not have exposure to obligations of municipalities which have filed for Chapter 9 bankruptcy. The Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.
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