CBSH 06.30.2015 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, 2015

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, 2015, the registrant had outstanding 93,335,596 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, 2015
 
December 31, 2014
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
11,928,481

 
$
11,469,238

  Allowance for loan losses
(151,532
)
 
(156,532
)
Net loans
11,776,949

 
11,312,706

Loans held for sale, at fair value
7,852

 

Investment securities:
 
 
 

Available for sale ($465,491,000 pledged at June 30, 2015 and $467,143,000 at
 
 
 
    December 31, 2014 to secure swap and repurchase agreements)
9,221,821

 
9,523,560

 Trading
18,971

 
15,357

 Non-marketable
108,346

 
106,875

Total investment securities
9,349,138

 
9,645,792

Federal funds sold and short-term securities purchased under agreements to resell
26,875

 
32,485

Long-term securities purchased under agreements to resell
1,050,000

 
1,050,000

Interest earning deposits with banks
264,683

 
600,744

Cash and due from banks
409,791

 
467,488

Land, buildings and equipment, net
353,366

 
357,871

Goodwill
138,921

 
138,921

Other intangible assets, net
6,978

 
7,450

Other assets
321,382

 
380,823

Total assets
$
23,705,935

 
$
23,994,280

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
6,886,509

 
$
6,811,959

   Savings, interest checking and money market
10,369,031

 
10,541,601

   Time open and C.D.'s of less than $100,000
833,161

 
878,433

   Time open and C.D.'s of $100,000 and over
1,200,008

 
1,243,785

Total deposits
19,288,709

 
19,475,778

Federal funds purchased and securities sold under agreements to repurchase
1,666,043

 
1,862,518

Other borrowings
103,843

 
104,058

Other liabilities
331,980

 
217,680

Total liabilities
21,390,575

 
21,660,034

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 96,830,977 shares
484,155

 
484,155

   Capital surplus
1,261,307

 
1,229,075

   Retained earnings
514,451

 
426,648

   Treasury stock of 3,362,811 shares at June 30, 2015
 
 
 
     and 367,487 shares at December 31, 2014, at cost
(143,565
)
 
(16,562
)
   Accumulated other comprehensive income
48,789

 
62,093

Total Commerce Bancshares, Inc. stockholders' equity
2,309,921

 
2,330,193

Non-controlling interest
5,439

 
4,053

Total equity
2,315,360

 
2,334,246

Total liabilities and equity
$
23,705,935

 
$
23,994,280

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)
2015
2014
 
2015
2014
 
(Unaudited)
INTEREST INCOME
 
 
 
 
 
Interest and fees on loans
$
113,467

$
111,496

 
$
224,753

$
222,198

Interest and fees on loans held for sale
39


 
60


Interest on investment securities
53,264

53,016

 
91,700

98,035

Interest on federal funds sold and short-term securities purchased under
 
 
 
 
 
   agreements to resell
15

24

 
24

50

Interest on long-term securities purchased under agreements to resell
3,670

2,943

 
6,721

7,094

Interest on deposits with banks
122

88

 
301

188

Total interest income
170,577

167,567

 
323,559

327,565

INTEREST EXPENSE
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
   Savings, interest checking and money market
3,287

3,358

 
6,595

6,664

   Time open and C.D.'s of less than $100,000
818

1,063

 
1,698

2,183

   Time open and C.D.'s of $100,000 and over
1,504

1,515

 
2,914

2,967

Interest on federal funds purchased and securities sold under
 
 
 
 
 
   agreements to repurchase
421

263

 
788

466

Interest on other borrowings
890

875

 
1,769

1,726

Total interest expense
6,920

7,074

 
13,764

14,006

Net interest income
163,657

160,493

 
309,795

313,559

Provision for loan losses
6,757

7,555

 
11,177

17,215

Net interest income after provision for loan losses
156,900

152,938

 
298,618

296,344

NON-INTEREST INCOME
 
 
 
 
 
Bank card transaction fees
45,672

44,444

 
87,971

86,161

Trust fees
30,531

27,765

 
60,117

54,338

Deposit account charges and other fees
19,637

19,709

 
38,136

38,299

Capital market fees
2,738

3,246

 
5,740

7,116

Consumer brokerage services
3,364

2,972

 
6,552

5,719

Loan fees and sales
2,183

1,211

 
4,272

2,420

Other
9,967

9,416

 
17,730

17,337

Total non-interest income
114,092

108,763

 
220,518

211,390

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
 
 
 
Change in fair value of other-than-temporarily impaired securities
(88
)
(785
)
 
(315
)
(848
)
Portion recognized in other comprehensive income
(378
)
154

 
(168
)
(129
)
Net impairment losses recognized in earnings
(466
)
(631
)
 
(483
)
(977
)
Realized gains (losses) on sales and fair value adjustments
2,609

(1,927
)
 
8,661

8,456

Investment securities gains (losses), net
2,143

(2,558
)
 
8,178

7,479

NON-INTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
99,655

94,849

 
197,729

189,112

Net occupancy
10,999

11,151

 
22,560

22,767

Equipment
4,679

4,525

 
9,382

9,029

Supplies and communication
5,226

5,486

 
10,807

11,185

Data processing and software
21,045

19,578

 
40,551

38,665

Marketing
4,307

3,949

 
8,225

7,630

Deposit insurance
3,019

2,892

 
6,020

5,786

Other
16,390

20,123

 
33,743

40,341

Total non-interest expense
165,320

162,553

 
329,017

324,515

Income before income taxes
107,815

96,590

 
198,297

190,698

Less income taxes
32,492

30,690

 
60,960

60,677

Net income
75,323

65,900

 
137,337

130,021

Less non-controlling interest expense (income)
970

(631
)
 
1,929

(823
)
Net income attributable to Commerce Bancshares, Inc.
74,353

66,531

 
135,408

130,844

Less preferred stock dividends
2,250


 
4,500


Net income available to common shareholders
$
72,103

$
66,531

 
$
130,908

$
130,844

Net income per common share — basic
$
.75

$
.67

 
$
1.36

$
1.31

Net income per common share — diluted
$
.75

$
.66

 
$
1.36

$
1.30

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)
 
2015
2014
 
2015
2014
 
 
(Unaudited)
Net income
 
$
75,323

$
65,900

 
$
137,337

$
130,021

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

(58
)
 
21

108

Net unrealized gains (losses) on other securities
 
(43,483
)
43,650

 
(14,137
)
74,029

Pension loss amortization
 
406

223

 
812

446

Other comprehensive income (loss)
 
(42,928
)
43,815

 
(13,304
)
74,583

Comprehensive income
 
32,395

109,715

 
124,033

204,604

Less non-controlling interest expense (income)
 
970

(631
)
 
1,929

(823
)
Comprehensive income attributable to Commerce Bancshares, Inc.
$
31,425

$
110,346

 
$
122,104

$
205,427

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, 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 loss
 








(13,304
)


(13,304
)
Distributions to non-controlling interest
 










(543
)
(543
)
Purchases of treasury stock
 






(143,575
)




(143,575
)
Accelerated share repurchase forward contract
 
 
(20,000
)
 
 
 
 
(20,000
)
Settlement of accelerated share repurchase forward contract
 
 
60,000

 
 
 
 
60,000

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 ($.450 per share)
 




(43,105
)






(43,105
)
Cash dividends on preferred stock ($.750 per 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

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

Purchases 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
 


(10,671
)


15,912





5,241

Excess tax benefit related to equity compensation plans
 


1,091









1,091

Stock-based compensation
 


4,468









4,468

Cash dividends on common stock ($.429 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

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)
2015
 
2014
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
137,337

 
$
130,021

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
11,177

 
17,215

  Provision for depreciation and amortization
21,287

 
21,033

  Amortization of investment security premiums, net
17,797

 
8,323

  Investment securities gains, net(A)
(8,178
)
 
(7,479
)
  Net gains on sales of loans held for sale
(1,234
)
 

  Originations of loans held for sale
(50,143
)
 

  Proceeds from sales of loans held for sale
43,593

 

  Net (increase) decrease in trading securities
(1,310
)
 
16,845

  Stock-based compensation
5,252

 
4,468

  (Increase) decrease in interest receivable
(618
)
 
104

  Decrease in interest payable
(201
)
 
(11
)
  Increase in income taxes payable
17,622

 
14,719

  Excess tax benefit related to equity compensation plans
(1,662
)
 
(1,091
)
  Other changes, net
2,842

 
4,705

Net cash provided by operating activities
193,561

 
208,852

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities(A)
683,202

 
63,899

Proceeds from maturities/pay downs of investment securities(A)
1,323,921

 
928,075

Purchases of investment securities(A)
(1,710,977
)
 
(1,196,956
)
Net increase in loans
(477,902
)
 
(520,767
)
Long-term securities purchased under agreements to resell

 
(250,000
)
Repayments of long-term securities purchased under agreements to resell

 
450,000

Purchases of land, buildings and equipment
(15,523
)
 
(14,583
)
Sales of land, buildings and equipment
3,430

 
2,074

Net cash used in investing activities
(193,849
)
 
(538,258
)
FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
34,287

 
(272,723
)
Net increase (decrease) in time open and C.D.'s
(89,049
)
 
252,702

Repayment of long-term securities sold under agreements to repurchase

 
(150,000
)
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase
(196,475
)
 
(42,235
)
Repayment of other long-term borrowings
(215
)
 
(214
)
Net decrease in other short-term borrowings

 
(2,000
)
Proceeds from issuance of preferred stock

 
144,816

Purchases of treasury stock
(83,575
)
 
(208,989
)
Accelerated stock repurchase agreements
(20,000
)
 
(60,000
)
Issuance of stock under equity compensation plans
1,890

 
5,241

Excess tax benefit related to equity compensation plans
1,662

 
1,091

Cash dividends paid on common stock
(43,105
)
 
(42,921
)
Cash dividends paid on preferred stock
(4,500
)
 

Net cash used in financing activities
(399,080
)
 
(375,232
)
Decrease in cash and cash equivalents
(399,368
)
 
(704,638
)
Cash and cash equivalents at beginning of year
1,100,717

 
1,269,514

Cash and cash equivalents at June 30
$
701,349

 
$
564,876

(A) Available for sale and non-marketable securities
 
 
 
Income tax net payments
$
42,077

 
$
45,154

Interest paid on deposits and borrowings
$
13,964

 
$
13,942

Loans transferred to foreclosed real estate
$
2,133

 
$
3,769

Settlement of accelerated stock repurchase agreement and receipt of treasury stock
$
60,000

 
$

See accompanying notes to consolidated financial statements.

7

Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015 (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 2014 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, 2015 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.

The Company invests in low-income housing partnerships which supply funds for the construction and operation of apartment complexes that provide affordable housing to lower income families. As permitted by ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects," issued by the Financial Accounting Standards Board, the Company adopted a new method of accounting for these investments on January 1, 2015. The new method is the practical expedient to the proportional amortization method, which allows the Company to record the amortization of its investments in income tax expense, rather than in non-interest expense. The Company made this change because it believes that presenting the investment performance net of taxes more fairly represents the economics and returns on such investments. The amortization recognized as a component of income tax expense for the six months ended June 30, 2015 was $995 thousand. As required by the ASU, all prior period information in this report has been revised to reflect the adoption, resulting in a decrease to non-interest expense and an increase to income tax expense (as originally reported) of $756 thousand for the six months ended June 30, 2014.


2. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at June 30, 2015 and December 31, 2014 are as follows:

(In thousands)
 
June 30, 2015
 
December 31, 2014
Commercial:
 
 
 
 
Business
 
$
4,267,997

 
$
3,969,952

Real estate – construction and land
 
448,887

 
403,507

Real estate – business
 
2,276,231

 
2,288,215

Personal Banking:
 
 
 
 
Real estate – personal
 
1,901,671

 
1,883,092

Consumer
 
1,848,457

 
1,705,134

Revolving home equity
 
430,880

 
430,873

Consumer credit card
 
750,731

 
782,370

Overdrafts
 
3,627

 
6,095

Total loans
 
$
11,928,481

 
$
11,469,238


At June 30, 2015, 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 $1.3 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, 2015 and 2014, 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
$
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

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



The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 2015 and December 31, 2014, 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, 2015
 
 
 
 
 
Commercial
$
1,943

$
31,276

 
$
84,386

$
6,961,839

Personal Banking
1,813

24,300

 
63,390

4,911,066

Total
$
3,756

$
55,576

 
$
147,776

$
11,872,905

December 31, 2014
 
 
 
 
 
Commercial
$
4,527

$
55,551

 
$
85,095

$
6,606,123

Personal Banking
2,314

25,537

 
64,596

4,782,027

Total
$
6,841

$
81,088

 
$
149,691

$
11,388,150


Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, 2015 and December 31, 2014. 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 14.
(In thousands)
 
June 30, 2015
 
Dec. 31, 2014
Non-accrual loans
 
$
26,645

 
$
40,775

Restructured loans (accruing)
 
28,931

 
40,313

Total impaired loans
 
$
55,576

 
$
81,088



9

Table of Contents

The following table provides additional information about impaired loans held by the Company at June 30, 2015 and December 31, 2014, 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, 2015
 
 
 
With no related allowance recorded:
 
 
 
Business
$
9,779

$
11,911

$

Real estate – construction and land
3,102

8,554


Real estate – business
2,213

3,629


Real estate – personal
618

815


 
$
15,712

$
24,909

$

With an allowance recorded:
 
 
 
Business
$
7,303

$
9,408

$
836

Real estate – construction and land
3,658

5,129

321

Real estate – business
5,221

9,299

786

Real estate – personal
8,710

11,832

1,030

Consumer
5,378

5,492

91

Revolving home equity
523

523

21

Consumer credit card
9,071

9,071

671

 
$
39,864

$
50,754

$
3,756

Total
$
55,576

$
75,663

$
3,756

December 31, 2014
 
 
 
With no related allowance recorded:
 
 
 
Business
$
9,237

$
11,532

$

Real estate – construction and land
4,552

8,493


Real estate – business
13,453

17,258


Revolving home equity
1,227

1,384


 
$
28,469

$
38,667

$

With an allowance recorded:
 
 
 
Business
$
12,326

$
13,846

$
1,844

Real estate – construction and land
8,148

9,610

1,081

Real estate – business
7,835

15,025

1,602

Real estate – personal
9,096

12,465

1,441

Consumer
4,244

4,244

50

Revolving home equity
529

529

9

Consumer credit card
10,441

10,441

814

 
$
52,619

$
66,160

$
6,841

Total
$
81,088

$
104,827

$
6,841




10

Table of Contents

Total average impaired loans for the three and six month periods ended June 30, 2015 and 2014, respectively, are shown in the table below.

(In thousands)
Commercial
Personal Banking
Total
Average Impaired Loans:
 
 
 
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

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


The table below shows interest income recognized during the three and six month periods ended June 30, 2015 and 2014, 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)
2015
2014
 
2015
2014
Interest income recognized on impaired loans:
 
 
 
 
 
Business
$
42

$
181

 
$
84

$
361

Real estate – construction and land
42

142

 
84

283

Real estate – business
15

46

 
30

91

Real estate – personal
48

58

 
96

115

Consumer
85

71

 
169

142

Revolving home equity
6

7

 
11

14

Consumer credit card
179

228

 
357

456

Total
$
417

$
733

 
$
831

$
1,462



11

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, 2015 and December 31, 2014.




(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, 2015
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
4,252,087

$
3,643

$
411

$
11,856

$
4,267,997

Real estate – construction and land
438,905

4,903

1,479

3,600

448,887

Real estate – business
2,264,297

6,291


5,643

2,276,231

Personal Banking:
 
 
 
 
 
Real estate – personal
1,885,544

8,480

2,201

5,446

1,901,671

Consumer
1,832,142

14,179

2,036

100

1,848,457

Revolving home equity
427,644

1,912

1,324


430,880

Consumer credit card
736,213

7,751

6,767


750,731

Overdrafts
3,345

282



3,627

Total
$
11,840,177

$
47,441

$
14,218

$
26,645

$
11,928,481

December 31, 2014
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
3,946,144

$
11,152

$
1,096

$
11,560

$
3,969,952

Real estate – construction and land
397,488

827

35

5,157

403,507

Real estate – business
2,266,688

3,661


17,866

2,288,215

Personal Banking:
 
 
 
 
 
Real estate – personal
1,868,606

6,618

1,676

6,192

1,883,092

Consumer
1,687,285

16,053

1,796


1,705,134

Revolving home equity
428,478

1,552

843


430,873

Consumer credit card
764,599

9,559

8,212


782,370

Overdrafts
5,721

374



6,095

Total
$
11,365,009

$
49,796

$
13,658

$
40,775

$
11,469,238



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.

12

Table of Contents

Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
June 30, 2015
 
 
 
 
Pass
$
4,179,038

$
439,769

$
2,210,059

$
6,828,866

Special mention
46,321

1,111

15,842

63,274

Substandard
30,782

4,407

44,687

79,876

Non-accrual
11,856

3,600

5,643

21,099

Total
$
4,267,997

$
448,887

$
2,276,231

$
6,993,115

December 31, 2014
 
 
 
 
Pass
$
3,871,569

$
385,831

$
2,184,541

$
6,441,941

Special mention
62,904

3,865

40,668

107,437

Substandard
23,919

8,654

45,140

77,713

Non-accrual
11,560

5,157

17,866

34,583

Total
$
3,969,952

$
403,507

$
2,288,215

$
6,661,674


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, 2015, these were comprised of $246.3 million in personal real estate loans, or 5.0% of the Personal Banking portfolio, compared to $244.3 million at December 31, 2014. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, 2015 and December 31, 2014 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
June 30, 2015
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.6
%
4.8
%
1.8
%
3.9
%
600 - 659
3.2

9.7

3.9

11.7

660 - 719
9.7

22.5

13.3

32.4

720 - 779
26.8

26.9

25.7

28.0

780 and over
58.7

36.1

55.3

24.0

Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2014
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.4
%
5.2
%
1.8
%
4.1
%
600 - 659
3.1

10.2

4.4

11.8

660 - 719
9.9

22.9

13.7

32.4

720 - 779
26.7

28.0

32.8

27.8

780 and over
58.9

33.7

47.3

23.9

Total
100.0
%
100.0
%
100.0
%
100.0
%





13

Table of Contents

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 $45.4 million at June 30, 2015. 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 $16.4 million at June 30, 2015. Other performing restructured loans totaled $28.9 million at June 30, 2015. 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 $10.9 million at June 30, 2015. 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 $9.1 million at June 30, 2015. 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, 2015, these loans totaled $8.5 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, 2015, 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, 2015
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
14,945

$

Real estate - construction and land
6,418

181

Real estate - business
3,495


Personal Banking:
 
 
Real estate - personal
5,606

192

Consumer
5,303

84

Revolving home equity
523

91

Consumer credit card
9,071

693

Total restructured loans
$
45,361

$
1,241


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 $1.0 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.


14

Table of Contents

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 $2.2 million at June 30, 2015 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, 2015, the fair value of these loans was $7.9 million, and the unpaid principal balance was $7.8 million. The unrealized gain in fair value was recognized in loan fees and sales in the consolidated statement of income. None of these loans were on non-accrual status or 90 days or more past due. Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $4.2 million and $5.5 million at June 30, 2015 and December 31, 2014, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.8 million and $2.4 million at June 30, 2015 and December 31, 2014, 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.

3. Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2015 and December 31, 2014.
 
(In thousands)
June 30, 2015
Dec. 31, 2014
Available for sale
$
9,221,821

$
9,523,560

Trading
18,971

15,357

Non-marketable
108,346

106,875

Total investment securities
$
9,349,138

$
9,645,792


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 $46.7 million at June 30, 2015 and $46.6 million at December 31, 2014. 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 $61.3 million at June 30, 2015 and $60.2 million at December 31, 2014.


15

Table of Contents

A summary of the available for sale investment securities by maturity groupings as of June 30, 2015 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.
(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
 
 
Within 1 year
$
90,775

$
91,331

After 1 but within 5 years
167,145

174,685

After 5 but within 10 years
117,077

119,760

After 10 years
52,624

49,090

Total U.S. government and federal agency obligations
427,621

434,866

Government-sponsored enterprise obligations:
 
 
Within 1 year
43,033

43,300

After 1 but within 5 years
481,824

484,932

After 5 but within 10 years
357,783

352,912

After 10 years
5,630

5,357

Total government-sponsored enterprise obligations
888,270

886,501

State and municipal obligations:
 
 
Within 1 year
139,111

139,708

After 1 but within 5 years
657,544

673,868

After 5 but within 10 years
851,707

848,846

After 10 years
159,222

154,679

Total state and municipal obligations
1,807,584

1,817,101

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
2,531,365

2,587,693

  Non-agency mortgage-backed securities
682,114

690,938

  Asset-backed securities
2,494,905

2,498,506

Total mortgage and asset-backed securities
5,708,384

5,777,137

Other debt securities:
 
 
Within 1 year
3,999

4,063

After 1 but within 5 years
62,023

62,069

After 5 but within 10 years
191,771

187,374

After 10 years
12,000

11,601

Total other debt securities
269,793

265,107

Equity securities
5,678

41,109

Total available for sale investment securities
$
9,107,330

$
9,221,821


Investments in U.S. government and federal agency obligations are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $434.8 million, at fair value, at June 30, 2015. 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 $92.9 million, at fair value, of auction rate securities, which were previously purchased from bank customers. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $41.1 million at June 30, 2015.


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, 2015
 
 
 
 
U.S. government and federal agency obligations
$
427,621

$
11,597

$
(4,352
)
$
434,866

Government-sponsored enterprise obligations
888,270

4,462

(6,231
)
886,501

State and municipal obligations
1,807,584

22,700

(13,183
)
1,817,101

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,531,365

63,083

(6,755
)
2,587,693

  Non-agency mortgage-backed securities
682,114

11,079

(2,255
)
690,938

  Asset-backed securities
2,494,905

7,410

(3,809
)
2,498,506

Total mortgage and asset-backed securities
5,708,384

81,572

(12,819
)
5,777,137

Other debt securities
269,793

416

(5,102
)
265,107

Equity securities
5,678

35,431


41,109

Total
$
9,107,330

$
156,178

$
(41,687
)
$
9,221,821

December 31, 2014
 
 
 
 
U.S. government and federal agency obligations
$
497,336

$
9,095

$
(5,024
)
$
501,407

Government-sponsored enterprise obligations
968,574

2,593

(8,040
)
963,127

State and municipal obligations
1,789,215

32,340

(8,354
)
1,813,201

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,523,377

75,923

(5,592
)
2,593,708

  Non-agency mortgage-backed securities
372,911

11,061

(1,228
)
382,744

  Asset-backed securities
3,090,174

6,922

(5,103
)
3,091,993

Total mortgage and asset-backed securities
5,986,462

93,906

(11,923
)
6,068,445

Other debt securities
140,784

420

(2,043
)
139,161

Equity securities
3,931

34,288


38,219

Total
$
9,386,302

$
172,642

$
(35,384
)
$
9,523,560


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, 2015, the fair value of securities on this watch list was $109.2 million compared to $123.9 million at December 31, 2014.

As of June 30, 2015, 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 $50.7 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.2 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at June 30, 2015 included the following:

Significant Inputs
Range
Prepayment CPR
1%
-
25%
Projected cumulative default
18%
-
54%
Credit support
0%
-
20%
Loss severity
21%
-
63%

17

Table of Contents


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)
2015
2014
Cumulative OTTI credit losses at January 1
$
13,734

$
12,499

Credit losses on debt securities for which impairment was not previously recognized
76


Credit losses on debt securities for which impairment was previously recognized
407

977

Increase in expected cash flows that are recognized over remaining life of security
(51
)
(66
)
Cumulative OTTI credit losses at June 30
$
14,166

$
13,410


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, 2015
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
24,495

$
482

 
$
31,984

$
3,870

 
$
56,479

$
4,352

Government-sponsored enterprise obligations
193,644

882

 
157,187

5,349

 
350,831

6,231

State and municipal obligations
515,521

5,907

 
124,227

7,276

 
639,748

13,183

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
214,715

1,417

 
315,002

5,338

 
529,717

6,755

   Non-agency mortgage-backed securities
369,784

1,861

 
54,265

394

 
424,049

2,255

   Asset-backed securities
806,300

1,259

 
144,478

2,550

 
950,778

3,809

Total mortgage and asset-backed securities
1,390,799

4,537

 
513,745

8,282

 
1,904,544

12,819

Other debt securities
202,489

3,998

 
25,411

1,104

 
227,900

5,102

Total
$
2,326,948

$
15,806

 
$
852,554

$
25,881

 
$
3,179,502

$
41,687

December 31, 2014
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
90,261

$
818

 
$
32,077

$
4,206

 
$
122,338

$
5,024

Government-sponsored enterprise obligations
224,808

922

 
224,779

7,118

 
449,587

8,040

State and municipal obligations
172,980

646

 
215,702

7,708

 
388,682

8,354

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
55,128

429

 
381,617

5,163

 
436,745

5,592

   Non-agency mortgage-backed securities
141,655

609

 
43,659

619

 
185,314

1,228

   Asset-backed securities
1,424,457

2,009

 
159,098

3,094

 
1,583,555

5,103

Total mortgage and asset-backed securities
1,621,240

3,047

 
584,374

8,876

 
2,205,614

11,923

Other debt securities
16,