CBSH 6.30.2013 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, 2013

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, 2013, the registrant had outstanding 90,697,504 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, 2013
 
December 31, 2012
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
10,370,155

 
$
9,831,384

  Allowance for loan losses
(166,032
)
 
(172,532
)
Net loans
10,204,123

 
9,658,852

Loans held for sale
8,941

 
8,827

Investment securities:
 
 
 

 Available for sale ($746,141,000 and $736,183,000 pledged in 2013 and 2012,
 
 
 
  respectively, to secure swap and repurchase agreements)
8,927,815

 
9,522,248

 Trading
14,670

 
28,837

 Non-marketable
113,470

 
118,650

Total investment securities
9,055,955

 
9,669,735

Short-term federal funds sold and securities purchased under agreements to resell
22,990

 
27,595

Long-term securities purchased under agreements to resell
1,200,000

 
1,200,000

Interest earning deposits with banks
6,816

 
179,164

Cash and due from banks
399,687

 
573,066

Land, buildings and equipment, net
352,462

 
357,612

Goodwill
125,585

 
125,585

Other intangible assets, net
4,517

 
5,300

Other assets
529,275

 
353,853

Total assets
$
21,910,351

 
$
22,159,589

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
5,811,473

 
$
6,299,903

   Savings, interest checking and money market
9,573,390

 
9,817,943

   Time open and C.D.'s of less than $100,000
1,039,131

 
1,074,618

   Time open and C.D.'s of $100,000 and over
1,472,944

 
1,156,189

Total deposits
17,896,938

 
18,348,653

Federal funds purchased and securities sold under agreements to repurchase
1,620,694

 
1,083,550

Other borrowings
102,766

 
103,710

Other liabilities
183,166

 
452,102

Total liabilities
19,803,564

 
19,988,015

Commerce Bancshares, Inc. stockholders’ equity:
 
 
 

   Preferred stock, $1 par value
 
 
 
      Authorized and unissued 2,000,000 shares

 

   Common stock, $5 par value
 
 
 

 Authorized 100,000,000 shares; issued 91,729,235 shares in 2013 and 2012
458,646

 
458,646

   Capital surplus
1,094,922

 
1,102,507

   Retained earnings
563,166

 
477,210

   Treasury stock of 934,853 shares in 2013 and 196,922 shares in 2012, at cost
(35,771
)
 
(7,580
)
   Accumulated other comprehensive income
21,864

 
136,344

Total Commerce Bancshares, Inc. stockholders' equity
2,102,827

 
2,167,127

Non-controlling interest
3,960

 
4,447

Total equity
2,106,787

 
2,171,574

Total liabilities and equity
$
21,910,351

 
$
22,159,589

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)
2013
2012
 
2013
2012
 
(Unaudited)
INTEREST INCOME
 
 
 
 
 
Interest and fees on loans
$
108,018

$
112,252

 
$
215,804

$
224,008

Interest and fees on loans held for sale
91

88

 
176

193

Interest on investment securities
53,233

57,561

 
98,192

111,319

Interest on short-term federal funds sold and securities purchased under
 
 
 
 
 
   agreements to resell
28

29

 
37

46

Interest on long-term securities purchased under agreements to resell
5,810

4,582

 
11,639

8,857

Interest on deposits with banks
75

112

 
152

167

Total interest income
167,255

174,624

 
326,000

344,590

INTEREST EXPENSE
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
   Savings, interest checking and money market
3,375

4,634

 
7,299

9,715

   Time open and C.D.'s of less than $100,000
1,656

2,004

 
3,405

4,110

   Time open and C.D.'s of $100,000 and over
1,667

1,828

 
3,366

3,739

Interest on federal funds purchased and securities sold under
 
 
 
 
 
   agreements to repurchase
270

177

 
488

402

Interest on other borrowings
829

876

 
1,641

1,782

Total interest expense
7,797

9,519

 
16,199

19,748

Net interest income
159,458

165,105

 
309,801

324,842

Provision for loan losses
7,379

5,215

 
10,664

13,380

Net interest income after provision for loan losses
152,079

159,890

 
299,137

311,462

NON-INTEREST INCOME
 
 
 
 
 
Bank card transaction fees
40,700

38,434

 
79,250

73,167

Trust fees
25,734

23,833

 
50,903

46,647

Deposit account charges and other fees
19,602

19,975

 
38,314

39,311

Capital market fees
3,305

5,010

 
7,696

11,881

Consumer brokerage services
2,853

2,576

 
5,539

5,102

Loan fees and sales
1,314

1,706

 
2,787

3,267

Other
9,168

9,282

 
18,064

16,024

Total non-interest income
102,676

100,816

 
202,553

195,399

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
 
 
 
Impairment (losses) reversals on debt securities
(293
)
3

 
1,096

5,590

Noncredit-related reversals on securities not expected to be sold
(195
)
(353
)
 
(2,026
)
(6,260
)
Net impairment losses
(488
)
(350
)
 
(930
)
(670
)
Realized gains (losses) on sales and fair value adjustments
(1,080
)
1,686

 
(2,803
)
6,046

Investment securities gains (losses), net
(1,568
)
1,336

 
(3,733
)
5,376

NON-INTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
89,569

87,511

 
180,450

177,054

Net occupancy
11,234

11,105

 
22,469

22,365

Equipment
4,680

4,999

 
9,363

10,188

Supplies and communication
5,797

5,667

 
11,386

11,280

Data processing and software
19,584

18,282

 
38,535

35,751

Marketing
4,048

4,469

 
7,407

8,291

Deposit insurance
2,790

2,618

 
5,557

5,138

Other
19,264

21,689

 
36,836

36,734

Total non-interest expense
156,966

156,340

 
312,003

306,801

Income before income taxes
96,221

105,702

 
185,954

205,436

Less income taxes
30,182

34,466

 
59,107

67,386

Net income
66,039

71,236

 
126,847

138,050

Less non-controlling interest expense
234

503

 
25

1,518

Net income attributable to Commerce Bancshares, Inc.
$
65,805

$
70,733

 
$
126,822

$
136,532

Net income per common share — basic
$
.72

$
.77

 
$
1.39

$
1.47

Net income per common share — diluted
$
.72

$
.76

 
$
1.39

$
1.46

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)
 
2013
2012
 
2013
2012
 
 
(Unaudited)
Net income
 
$
66,039

$
71,236

 
$
126,847

$
138,050

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
 
(120
)
537

 
1,017

3,897

Net unrealized gains (losses) on other securities
 
(108,254
)
17,686

 
(116,447
)
21,392

Pension loss amortization
 
475

453

 
950

905

Other comprehensive income (loss)
 
(107,899
)
18,676

 
(114,480
)
26,194

Comprehensive income (loss)
 
(41,860
)
89,912

 
12,367

164,244

Less non-controlling interest expense
 
234

503

 
25

1,518

Comprehensive income (loss) attributable to Commerce Bancshares, Inc.
$
(42,094
)
$
89,409

 
$
12,342

$
162,726

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)
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
 
(Unaudited)
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 ($.450 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

Balance January 1, 2012
$
446,387

$
1,042,065

$
575,419

$
(8,362
)
$
110,538

$
4,314

$
2,170,361

Net income




136,532





1,518

138,050

Other comprehensive income








26,194



26,194

Distributions to non-controlling interest










(1,614
)
(1,614
)
Purchase of treasury stock






(71,652
)




(71,652
)
Issuance of stock under purchase and equity compensation plans


(3,491
)


10,276





6,785

Net tax benefit related to equity compensation plans


744









744

Stock-based compensation


2,555









2,555

Issuance of nonvested stock awards


(8,350
)


8,350






Cash dividends ($.438 per share)




(40,654
)






(40,654
)
Balance June 30, 2012
$
446,387

$
1,033,523

$
671,297

$
(61,388
)
$
136,732

$
4,218

$
2,230,769

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)
2013
 
2012
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
126,847

 
$
138,050

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
10,664

 
13,380

  Provision for depreciation and amortization
20,817

 
21,847

  Amortization of investment security premiums, net
17,227

 
16,862

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

 
(5,376
)
  Net gains on sales of loans held for sale

 
(375
)
  Proceeds from sales of loans held for sale

 
22,508

  Net (increase) decrease in trading securities
7,465

 
(4,006
)
  Stock-based compensation
2,748

 
2,555

  Decrease in interest receivable
116

 
4,495

  Decrease in interest payable
(238
)
 
(185
)
  Increase (decrease) in income taxes payable
(6,719
)
 
1,999

  Net tax benefit related to equity compensation plans
(209
)
 
(744
)
  Other changes, net
(14,546
)
 
(7,617
)
Net cash provided by operating activities
167,905

 
203,393

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities(A)
4,096

 
14,116

Proceeds from maturities/pay downs of investment securities(A)
1,478,237

 
1,479,062

Purchases of investment securities(A)
(1,309,380
)
 
(1,477,434
)
Net increase in loans
(555,935
)
 
(218,816
)
Long-term securities purchased under agreements to resell
(50,000
)
 

Repayments of long-term securities purchased under agreements to resell
50,000

 

Purchases of land, buildings and equipment
(10,713
)
 
(11,703
)
Sales of land, buildings and equipment
715

 
1,743

Net cash used in investing activities
(392,980
)
 
(213,032
)
FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
(863,336
)
 
335,614

Net increase (decrease) in time open and C.D.'s
281,268

 
(277,223
)
Net increase in short-term federal funds purchased and securities sold under
 
 
 
  agreements to repurchase
537,144

 
49,664

Repayment of long-term borrowings
(943
)
 
(525
)
Purchases of treasury stock
(45,292
)
 
(71,652
)
Issuance of stock under stock purchase and equity compensation plans
6,559

 
6,785

Net tax benefit related to equity compensation plans
209

 
744

Cash dividends paid on common stock
(40,866
)
 
(40,654
)
Net cash provided by (used in) financing activities
(125,257
)
 
2,753

Decrease in cash and cash equivalents
(350,332
)
 
(6,886
)
Cash and cash equivalents at beginning of year
779,825

 
517,551

Cash and cash equivalents at June 30
$
429,493

 
$
510,665

(A) Available for sale and non-marketable securities
 
 
 
Income tax payments, net
$
65,453

 
$
64,799

Interest paid on deposits and borrowings
$
16,437

 
$
19,933

Loans transferred to foreclosed real estate
$
5,532

 
$
5,488

See accompanying notes to consolidated financial statements.

7

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013 (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 2012 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, 2013 are not necessarily indicative of results to be attained for the full year or any other interim periods.

The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2012 Annual Report on Form 10-K.

2. Acquisition

On May 15, 2013, the Company and Summit Bancshares Inc. (Summit) signed a definitive merger agreement in which the Company will acquire all outstanding shares of Summit. Immediately after the merger, Summit's wholly-owned subsidiary, Summit Bank, will merge into the Bank. The Company's acquisition of Summit will add approximately $257 million in assets (including $214 million in loans), $226 million in deposits, and two branch locations in Tulsa and Oklahoma City. Under the terms of the agreement, if the transaction closes, it is anticipated that the Company will issue approximately 1,000,000 shares of Company common stock. It is anticipated that the transaction will be completed in the third quarter of 2013, pending customary closing conditions, including regulatory approvals and Summit shareholder approval.

3. Loans and Allowance for Loan Losses

Major classifications within the Company’s held to maturity loan portfolio at June 30, 2013 and December 31, 2012 are as follows:

(In thousands)
 
June 30, 2013
 
December 31, 2012
Commercial:
 
 
 
 
Business
 
$
3,415,361

 
$
3,134,801

Real estate – construction and land
 
398,625

 
355,996

Real estate – business
 
2,210,260

 
2,214,975

Personal Banking:
 
 
 
 
Real estate – personal
 
1,700,060

 
1,584,859

Consumer
 
1,450,781

 
1,289,650

Revolving home equity
 
422,902

 
437,567

Consumer credit card
 
760,512

 
804,245

Overdrafts
 
11,654

 
9,291

Total loans
 
$
10,370,155

 
$
9,831,384


At June 30, 2013, loans of $3.4 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, 2013 and 2012, 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
$
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

Balance at beginning of period
$
117,474

$
64,058

$
181,532

 
$
122,497

$
62,035

$
184,532

Provision
(4,448
)
9,663

5,215

 
(7,646
)
21,026

13,380

Deductions:
 
 
 
 
 
 
 
   Loans charged off
3,179

13,841

17,020

 
5,707

27,230

32,937

   Less recoveries on loans
4,824

3,982

8,806

 
5,527

8,031

13,558

Net loan charge-offs (recoveries)
(1,645
)
9,859

8,214

 
180

19,199

19,379

Balance June 30, 2012
$
114,671

$
63,862

$
178,533

 
$
114,671

$
63,862

$
178,533


The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 2013 and December 31, 2012, 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, 2013
 
 
 
 
 
Commercial
$
7,548

$
76,511

 
$
91,051

$
5,947,735

Personal Banking
2,288

28,906

 
65,145

4,317,003

Total
$
9,836

$
105,417

 
$
156,196

$
10,264,738

December 31, 2012
 
 
 
 
 
Commercial
$
5,434

$
80,807

 
$
100,291

$
5,624,965

Personal Banking
2,051

36,111

 
64,756

4,089,501

Total
$
7,485

$
116,918

 
$
165,047

$
9,714,466



Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, 2013 and December 31, 2012. 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, 2013
 
Dec. 31, 2012
Non-accrual loans
 
$
39,092

 
$
51,410

Restructured loans (accruing)
 
66,325

 
65,508

Total impaired loans
 
$
105,417

 
$
116,918




9

Table of contents

The following table provides additional information about impaired loans held by the Company at June 30, 2013 and December 31, 2012, 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, 2013
 
 
 
With no related allowance recorded:
 
 
 
Business
$
7,969

$
9,000

$

Real estate – construction and land
8,763

16,862


Real estate – business
6,040

8,802


Real estate – personal
603

666


 
$
23,375

$
35,330

$

With an allowance recorded:
 
 
 
Business
$
20,185

$
23,609

$
3,054

Real estate – construction and land
22,395

24,007

2,459

Real estate – business
11,159

16,871

2,035

Real estate – personal
10,032

12,684

1,183

Consumer
4,418

4,418

86

Revolving home equity
717

717

14

Consumer credit card
13,136

13,136

1,005

 
$
82,042

$
95,442

$
9,836

Total
$
105,417

$
130,772

$
9,836

December 31, 2012
 
 
 
With no related allowance recorded:
 
 
 
Business
$
9,964

$
12,697

$

Real estate – construction and land
8,440

15,102


Real estate – business
5,484

8,200


Real estate – personal
1,166

1,380


Revolving home equity
510

843


 
$
25,564

$
38,222

$

With an allowance recorded:
 
 
 
Business
$
19,358

$
22,513

$
1,888

Real estate – construction and land
20,446

25,808

1,762

Real estate – business
17,115

23,888

1,784

Real estate – personal
14,157

17,304

857

Consumer
4,779

4,779

93

Revolving home equity
779

779

18

Consumer credit card
14,720

14,720

1,083

 
$
91,354

$
109,791

$
7,485

Total
$
116,918

$
148,013

$
7,485


















10

Table of contents

Total average impaired loans for the three and six months periods ended June 30, 2013 and 2012, respectively, are shown in the table below.

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

For the three months ended June 30, 2012
 
 
 
Non-accrual loans
$
58,662

$
7,165

$
65,827

Restructured loans (accruing)
50,102

20,324

70,426

Total
$
108,764

$
27,489

$
136,253

For the six months ended June 30, 2012
 
 
 
Non-accrual loans
$
63,113

$
7,287

$
70,400

Restructured loans (accruing)
45,164

21,939

67,103

Total
$
108,277

$
29,226

$
137,503


The table below shows interest income recognized during the three and six month periods ended June 30, 2013 and 2012 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)
2013
2012
 
2013
2012
Interest income recognized on impaired loans:
 
 
 
 
 
Business
$
141

$
236

 
$
282

$
471

Real estate – construction and land
215

249

 
430

498

Real estate – business
50

105

 
100

210

Real estate – personal
70

9

 
139

17

Consumer
91

19

 
182

38

Revolving home equity
10

1

 
19

1

Consumer credit card
253

321

 
506

642

Total
$
830

$
940

 
$
1,658

$
1,877



















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, 2013 and December 31, 2012.




(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, 2013
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
3,397,158

$
6,244

$
629

$
11,330

$
3,415,361

Real estate – construction and land
386,625

1,759

84

10,157

398,625

Real estate – business
2,160,535

36,841

138

12,746

2,210,260

Personal Banking:
 
 
 
 
 
Real estate – personal
1,681,776

10,893

2,532

4,859

1,700,060

Consumer
1,431,476

17,709

1,596


1,450,781

Revolving home equity
420,727

1,642

533


422,902

Consumer credit card
744,876

8,639

6,997


760,512

Overdrafts
11,283

371



11,654

Total
$
10,234,456

$
84,098

$
12,509

$
39,092

$
10,370,155

December 31, 2012
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
3,110,403

$
10,054

$
1,288

$
13,056

$
3,134,801

Real estate – construction and land
325,541

16,721

56

13,678

355,996

Real estate – business
2,194,395

3,276


17,304

2,214,975

Personal Banking:
 
 
 
 
 
Real estate – personal
1,564,281

10,862

2,854

6,862

1,584,859

Consumer
1,273,581

13,926

2,143


1,289,650

Revolving home equity
433,437

2,121

1,499

510

437,567

Consumer credit card
786,081

10,657

7,507


804,245

Overdrafts
8,925

366



9,291

Total
$
9,696,644

$
67,983

$
15,347

$
51,410

$
9,831,384



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, 2013
 
 
 
 
Pass
$
3,302,856

$
356,347

$
2,092,071

$
5,751,274

Special mention
62,000

2,462

50,982

115,444

Substandard
39,175

29,659

54,461

123,295

Non-accrual
11,330

10,157

12,746

34,233

Total
$
3,415,361

$
398,625

$
2,210,260

$
6,024,246

December 31, 2012
 
 
 
 
Pass
$
3,018,062

$
297,156

$
2,103,913

$
5,419,131

Special mention
58,793

11,400

38,396

108,589

Substandard
44,890

33,762

55,362

134,014

Non-accrual
13,056

13,678

17,304

44,038

Total
$
3,134,801

$
355,996

$
2,214,975

$
5,705,772


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, 2013, these were comprised of $228.6 million in personal real estate loans and $76.1 million in consumer loans, or 7.0% of the Personal Banking portfolio. At December 31, 2012, these were comprised of $224.5 million in personal real estate loans and $87.4 million in consumer loans, or 7.6% 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, 2013 and December 31, 2012 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
June 30, 2013
 
 
 
 
FICO score:
 
 
 
 
Under 600
2.0
%
5.6
%
2.0
%
4.0
%
600 - 659
3.1

10.9

4.9

11.6

660 - 719
9.8

24.0

16.0

33.1

720 - 779
25.6

27.4

28.7

28.5

780 and Over
59.5

32.1

48.4

22.8

Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2012
 
 
 
 
FICO score:
 
 
 
 
Under 600
2.3
%
6.7
%
2.6
%
4.4
%
600 - 659
3.2

11.3

5.3

11.7

660 - 719
10.4

24.4

15.2

32.1

720 - 779
26.6

26.4

30.0

28.2

780 and Over
57.5

31.2

46.9

23.6

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 $89.5 million at June 30, 2013. 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 $23.1 million at June 30, 2013. Other performing restructured loans totaled $66.3 million at June 30, 2013. These are primarily comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity,

13

Table of contents

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 troubled debt restructurings. These commercial loans totaled $43.5 million at June 30, 2013. 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 $13.1 million at June 30, 2013. 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, 2013, these loans totaled $9.7 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, 2013, 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, 2013
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
24,929

$

Real estate - construction and land
29,946

4,403

Real estate - business
8,979

3,753

Personal Banking:
 
 
Real estate - personal
7,343


Consumer
4,418

104

Revolving home equity
718

49

Consumer credit card
13,136

789

Total restructured loans
$
89,469

$
9,098


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 $1.5 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 $11.4 million at June 30, 2013 to lend additional funds to borrowers with restructured loans.


14

Table of contents

The Company’s holdings of foreclosed real estate totaled $13.4 million and $13.5 million at June 30, 2013 and December 31, 2012, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.3 million and $3.5 million at June 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012.
 
(In thousands)
June 30, 2013
Dec. 31, 2012
Available for sale
$
8,927,815

$
9,522,248

Trading
14,670

28,837

Non-marketable
113,470

118,650

Total investment securities
$
9,055,955

$
9,669,735


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 $45.4 million at both June 30, 2013 and December 31, 2012. 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 $68.0 million at June 30, 2013 and $73.2 million at December 31, 2012.


15

Table of contents

A summary of the available for sale investment securities by maturity groupings as of June 30, 2013 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.
(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
 
 
After 1 but within 5 years
$
247,531

$
265,394

After 5 but within 10 years
80,681

86,284

After 10 years
72,863

62,179

Total U.S. government and federal agency obligations
401,075

413,857

Government-sponsored enterprise obligations:
 
 
Within 1 year
20,177

20,323

After 1 but within 5 years
89,693

92,140

After 5 but within 10 years
169,719

161,361

After 10 years
146,967

140,994

Total government-sponsored enterprise obligations
426,556

414,818

State and municipal obligations:
 
 
Within 1 year
103,698

104,485

After 1 but within 5 years
698,390

716,807

After 5 but within 10 years
564,173

554,505

After 10 years
259,367

245,397

Total state and municipal obligations
1,625,628

1,621,194

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
2,889,382

2,937,002

  Non-agency mortgage-backed securities
230,729

242,432

  Asset-backed securities
3,094,715

3,088,148

Total mortgage and asset-backed securities
6,214,826

6,267,582

Other debt securities:
 
 
Within 1 year
38,193

38,961

After 1 but within 5 years
45,751

45,826

After 5 but within 10 years
86,319

80,948

Total other debt securities
170,263

165,735

Equity securities
11,921

44,629

Total available for sale investment securities
$
8,850,269

$
8,927,815


Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities (TIPS), which totaled $413.7 million, at fair value, at June 30, 2013. 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 $126.8 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 $35.9 million at June 30, 2013.


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, 2013
 
 
 
 
U.S. government and federal agency obligations
$
401,075

$
23,466

$
(10,684
)
$
413,857

Government-sponsored enterprise obligations
426,556

2,597

(14,335
)
414,818

State and municipal obligations
1,625,628

29,529

(33,963
)
1,621,194

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,889,382

67,921

(20,301
)
2,937,002

  Non-agency mortgage-backed securities
230,729

13,400

(1,697
)
242,432

  Asset-backed securities
3,094,715

6,742

(13,309
)
3,088,148

Total mortgage and asset-backed securities
6,214,826

88,063

(35,307
)
6,267,582

Other debt securities
170,263

1,251

(5,779
)
165,735

Equity securities
11,921

32,708


44,629

Total
$
8,850,269

$
177,614

$
(100,068
)
$
8,927,815

December 31, 2012
 
 
 
 
U.S. government and federal agency obligations
$
399,971

$
40,395

$
(1,607
)
$
438,759

Government-sponsored enterprise obligations
467,063

5,188

(677
)
471,574

State and municipal obligations
1,585,926

46,076

(16,295
)
1,615,707

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,248,007

132,953

(5
)
3,380,955

  Non-agency mortgage-backed securities
224,223

12,906

(118
)
237,011

  Asset-backed securities
3,152,913

15,848

(1,367
)
3,167,394

Total mortgage and asset-backed securities
6,625,143

161,707

(1,490
)
6,785,360

Other debt securities
174,727

3,127

(102
)
177,752

Equity securities
5,695

27,401


33,096

Total
$
9,258,525

$
283,894

$
(20,171
)
$
9,522,248


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/A-, 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, 2013, the fair value of securities on this watch list was $221.8 million compared to $220.7 million at December 31, 2012.

As of June 30, 2013, 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 $86.2 million. The cumulative credit-related portion of the impairment initially recorded on these securities totaled $12.5 million and was recorded in earnings. 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 included the following:

Significant Inputs
Range
Prepayment CPR
0%
-
33%
Projected cumulative default
16%
-
61%
Credit support
0%
-
15%
Loss severity
17%
-
81%


17

Table of contents

The following table shows changes in the credit losses recorded in earnings during the during the six months ended June 30, 2013 and 2012, for which a portion of an OTTI was recognized in other comprehensive income.
 
For the Six Months Ended June 30
(In thousands)
2013
2012
Balance at January 1
$
11,306

$
9,931

Credit losses on debt securities for which impairment was previously recognized
930

670

Increase in expected cash flows that are recognized over remaining life of security
(40
)
(70
)
Balance at June 30
$
12,196

$
10,531


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, 2013
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
62,179

$
10,684

 
$

$

 
$
62,179

$
10,684

Government-sponsored enterprise obligations
297,058

14,335

 


 
297,058

14,335

State and municipal obligations
580,175

21,019

 
81,599

12,944

 
661,774

33,963

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
609,376

20,301

 


 
609,376

20,301

   Non-agency mortgage-backed securities
45,788

1,650

 
2,257

47

 
48,045

1,697

   Asset-backed securities
1,832,777

11,702

 
104,962

1,607

 
1,937,739

13,309

Total mortgage and asset-backed securities
2,487,941

33,653

 
107,219

1,654

 
2,595,160

35,307

Other debt securities
99,895

5,779

 


 
99,895

5,779

Total
$
3,527,248

$
85,470

 
$
188,818

$
14,598

 
$
3,716,066

$
100,068

December 31, 2012
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
71,464

$
1,607

 
$

$

 
$
71,464

$
1,607

Government-sponsored enterprise obligations
102,082

677

 


 
102,082

677

State and municipal obligations
173,600

2,107

 
80,530

14,188

 
254,130

16,295

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
5,874

5

 


 
5,874

5

   Non-agency mortgage-backed securities


 
12,609

118

 
12,609

118

   Asset-backed securities
338,007

976

 
78,684

391

 
416,691

1,367

Total mortgage and asset-backed securities
343,881

981

 
91,293

509

 
435,174

1,490

Other debt securities
39,032

102

 


 
39,032

102

Total
$
730,059

$
5,474

 
$
171,823

$
14,697

 
$
901,882

$
20,171


The total available for sale portfolio consisted of approximately 1,700 individual securities at June 30, 2013. The portfolio included 507 securities, having an aggregate fair value of $3.7 billion, that were in an unrealized loss position at June 30, 2013, compared to 144 securities, with a fair value of $901.9 million, at December 31, 2012. The total amount of unrealized loss on these securities increased $79.9 million to $100.1 million at June 30, 2013, which was mainly due to a recent rise in interest rates. At June 30, 2013, the fair value of securities in an unrealized loss position for 12 months or longer with temporary impairment totaled $186.6 million, or 2.1% of the total portfolio value, and the fair value of other securities with other-than-temporary impairment totaled $2.3 million.



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Table of contents

The Company’s holdings of state and municipal obligations included gross unrealized losses of $34.0 million at June 30, 2013. Of these losses, $12.9 million related to auction rate securities and $21.0 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.5 billion at fair value, or 16.7% of total available for sale securities. The average credit quality of the portfolio, excluding ARS, 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 Detroit, Michigan, which recently 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.
 

% of
Portfolio
Average
Life
(in years)
Average
Rating
(Moody’s)
At June 30, 2013
 
 
 
Texas
9.8
%
5.3
      Aa1
Florida
9.4

4.8
      Aa2
Ohio
5.7

5.3
      Aa2
Washington
5.5

4.8
      Aa2
New York
5.1

6.7
      Aa2
General obligation
31.7
%
4.8
      Aa2
Housing
17.5

6.4
      Aa1
Lease
16.7

4.9
      Aa2
Transportation
13.5

4.5