CBSH 9.30.2013 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 September 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 November 1, 2013, the registrant had outstanding 91,294,404 shares of its $5 par value common stock, registrant’s only class of common stock.



Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q
 

 
 
 
Page
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2013
 
December 31, 2012
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
10,823,654

 
$
9,831,384

  Allowance for loan losses
(163,532
)
 
(172,532
)
Net loans
10,660,122

 
9,658,852

Loans held for sale

 
8,827

Investment securities:
 
 
 

 Available for sale ($704,650,000 and $736,183,000 pledged in 2013 and 2012,
 
 
 
  respectively, to secure swap and repurchase agreements)
8,577,282

 
9,522,248

 Trading
18,295

 
28,837

 Non-marketable
114,520

 
118,650

Total investment securities
8,710,097

 
9,669,735

Short-term federal funds sold and securities purchased under agreements to resell
87,167

 
27,595

Long-term securities purchased under agreements to resell
1,150,000

 
1,200,000

Interest earning deposits with banks
267,548

 
179,164

Cash and due from banks
594,309

 
573,066

Land, buildings and equipment, net
353,473

 
357,612

Goodwill
138,676

 
125,585

Other intangible assets, net
9,050

 
5,300

Other assets
481,855

 
353,853

Total assets
$
22,452,297

 
$
22,159,589

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
6,185,098

 
$
6,299,903

   Savings, interest checking and money market
9,680,816

 
9,817,943

   Time open and C.D.'s of less than $100,000
1,013,598

 
1,074,618

   Time open and C.D.'s of $100,000 and over
1,338,252

 
1,156,189

Total deposits
18,217,764

 
18,348,653

Federal funds purchased and securities sold under agreements to repurchase
1,760,393

 
1,083,550

Other borrowings
105,928

 
103,710

Other liabilities
186,726

 
452,102

Total liabilities
20,270,811

 
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 91,929,481 shares in 2013 and 91,729,235 shares in 2012
459,647

 
458,646

   Capital surplus
1,104,669

 
1,102,507

   Retained earnings
610,720

 
477,210

   Treasury stock of 548,585 shares in 2013 and 196,922 shares in 2012, at cost
(23,528
)
 
(7,580
)
   Accumulated other comprehensive income
26,025

 
136,344

Total Commerce Bancshares, Inc. stockholders' equity
2,177,533

 
2,167,127

Non-controlling interest
3,953

 
4,447

Total equity
2,181,486

 
2,171,574

Total liabilities and equity
$
22,452,297

 
$
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 September 30
 
For the Nine Months Ended September 30
(In thousands, except per share data)
2013
2012
 
2013
2012
 
(Unaudited)
INTEREST INCOME
 
 
 
 
 
Interest and fees on loans
$
110,587

$
111,619

 
$
326,391

$
335,627

Interest and fees on loans held for sale

85

 
176

278

Interest on investment securities
46,356

46,513

 
144,548

157,832

Interest on short-term federal funds sold and securities purchased under
 
 
 
 
 
   agreements to resell
35

24

 
72

70

Interest on long-term securities purchased under agreements to resell
5,095

4,913

 
16,734

13,770

Interest on deposits with banks
71

40

 
223

207

Total interest income
162,144

163,194

 
488,144

507,784

INTEREST EXPENSE
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
   Savings, interest checking and money market
3,502

4,623

 
10,801

14,338

   Time open and C.D.'s of less than $100,000
1,380

1,945

 
4,785

6,055

   Time open and C.D.'s of $100,000 and over
1,535

1,743

 
4,901

5,482

Interest on federal funds purchased and securities sold under
 
 
 
 
 
   agreements to repurchase
166

221

 
654

623

Interest on other borrowings
855

851

 
2,496

2,633

Total interest expense
7,438

9,383

 
23,637

29,131

Net interest income
154,706

153,811

 
464,507

478,653

Provision for loan losses
4,146

5,581

 
14,810

18,961

Net interest income after provision for loan losses
150,560

148,230

 
449,697

459,692

NON-INTEREST INCOME
 
 
 
 
 
Bank card transaction fees
43,891

39,488

 
123,141

112,655

Trust fees
25,318

23,681

 
76,221

70,328

Deposit account charges and other fees
20,197

19,873

 
58,511

59,184

Capital market fees
3,242

5,110

 
10,938

16,991

Consumer brokerage services
2,871

2,441

 
8,410

7,543

Loan fees and sales
1,553

1,358

 
4,340

4,625

Other
9,239

8,971

 
27,303

24,995

Total non-interest income
106,311

100,922

 
308,864

296,321

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
 
 
 
Impairment (losses) reversals on debt securities
(588
)
5,989

 
508

11,579

Noncredit-related losses (reversals) on securities not expected to be sold
258

(6,546
)
 
(1,768
)
(12,806
)
Net impairment losses
(330
)
(557
)
 
(1,260
)
(1,227
)
Realized gains (losses) on sales and fair value adjustments
980

3,737

 
(1,823
)
9,783

Investment securities gains (losses), net
650

3,180

 
(3,083
)
8,556

NON-INTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
91,405

89,292

 
271,855

266,346

Net occupancy
11,332

11,588

 
33,801

33,953

Equipment
4,465

4,976

 
13,828

15,164

Supplies and communication
5,449

5,400

 
16,835

16,680

Data processing and software
19,987

19,279

 
58,522

55,030

Marketing
3,848

4,100

 
11,255

12,391

Deposit insurance
2,796

2,608

 
8,353

7,746

Other
17,030

16,148

 
53,866

52,882

Total non-interest expense
156,312

153,391

 
468,315

460,192

Income before income taxes
101,209

98,941

 
287,163

304,377

Less income taxes
32,764

32,155

 
91,871

99,541

Net income
68,445

66,786

 
195,292

204,836

Less non-controlling interest expense
221

780

 
246

2,298

Net income attributable to Commerce Bancshares, Inc.
$
68,224

$
66,006

 
$
195,046

$
202,538

Net income per common share — basic
$
.75

$
.71

 
$
2.14

$
2.18

Net income per common share — diluted
$
.75

$
.72

 
$
2.14

$
2.18

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 September 30
 
For the Nine Months Ended September 30
(In thousands)
 
2013
2012
 
2013
2012
 
 
(Unaudited)
Net income
 
$
68,445

$
66,786

 
$
195,292

$
204,836

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
 
(130
)
3,695

 
887

7,592

Net unrealized gains (losses) on other securities
 
3,815

25,160

 
(112,632
)
46,552

Pension loss amortization
 
476

453

 
1,426

1,358

Other comprehensive income (loss)
 
4,161

29,308

 
(110,319
)
55,502

Comprehensive income
 
72,606

96,094

 
84,973

260,338

Less non-controlling interest expense
 
221

780

 
246

2,298

Comprehensive income attributable to Commerce Bancshares, Inc.
$
72,385

$
95,314

 
$
84,727

$
258,040

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




195,046





246

195,292

Other comprehensive loss








(110,319
)


(110,319
)
Distributions to non-controlling interest










(740
)
(740
)
Acquisition of Summit Bancshares Inc.
1,001

11,125

 
31,071

 
 
43,197

Purchase of treasury stock






(69,195
)




(69,195
)
Issuance of stock under purchase and equity compensation plans


(3,957
)


12,111





8,154

Net tax benefit related to equity compensation plans


454









454

Stock-based compensation


4,605









4,605

Issuance of nonvested stock awards


(10,065
)


10,065






Cash dividends ($.675 per share)




(61,536
)






(61,536
)
Balance September 30, 2013
$
459,647

$
1,104,669

$
610,720

$
(23,528
)
$
26,025

$
3,953

$
2,181,486

Balance January 1, 2012
$
446,387

$
1,042,065

$
575,419

$
(8,362
)
$
110,538

$
4,314

$
2,170,361

Net income




202,538





2,298

204,836

Other comprehensive income








55,502



55,502

Distributions to non-controlling interest










(1,976
)
(1,976
)
Purchase of treasury stock






(75,536
)




(75,536
)
Issuance of stock under purchase and equity compensation plans


(4,987
)


14,753





9,766

Net tax benefit related to equity compensation plans


1,233









1,233

Stock-based compensation


3,705









3,705

Issuance of nonvested stock awards


(8,501
)


8,501






Cash dividends ($.657 per share)




(60,819
)






(60,819
)
Balance September 30, 2012
$
446,387

$
1,033,515

$
717,138

$
(60,644
)
$
166,040

$
4,636

$
2,307,072

See accompanying notes to consolidated financial statements.



6

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30
(In thousands)
2013
 
2012
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
195,292

 
$
204,836

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
14,810

 
18,961

  Provision for depreciation and amortization
31,152

 
32,565

  Amortization of investment security premiums, net
22,840

 
29,989

  Investment securities (gains) losses, net(A)
3,083

 
(8,556
)
  Net gains on sales of loans held for sale

 
(376
)
  Proceeds from sales of loans held for sale

 
22,649

  Net decrease in trading securities
15,977

 
5,454

  Stock-based compensation
4,605

 
3,705

  Decrease in interest receivable
2,694

 
4,728

  Decrease in interest payable
(1,319
)
 
(1,067
)
  Increase (decrease) in income taxes payable
7,183

 
(5,571
)
  Net tax benefit related to equity compensation plans
(454
)
 
(1,233
)
  Other changes, net
(7,086
)
 
(10,718
)
Net cash provided by operating activities
288,777

 
295,366

INVESTING ACTIVITIES:
 
 
 
Cash received in acquisition
47,643

 

Proceeds from sales of investment securities(A)
6,624

 
14,931

Proceeds from maturities/pay downs of investment securities(A)
2,047,277

 
2,341,083

Purchases of investment securities(A)
(1,522,765
)
 
(2,036,260
)
Net increase in loans
(796,215
)
 
(489,628
)
Long-term securities purchased under agreements to resell
(125,000
)
 
(125,000
)
Repayments of long-term securities purchased under agreements to resell
175,000

 
125,000

Purchases of land, buildings and equipment
(18,731
)
 
(19,243
)
Sales of land, buildings and equipment
723

 
2,338

Net cash used in investing activities
(185,444
)
 
(186,779
)
FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
(569,342
)
 
554,167

Net increase (decrease) in time open and C.D.'s
81,449

 
(479,383
)
Net increase in short-term federal funds purchased and securities sold under
 
 
 
  agreements to repurchase
726,843

 
1,868

Repayment of long-term borrowings
(50,961
)
 
(8,073
)
Purchases of treasury stock
(69,195
)
 
(75,536
)
Issuance of stock under stock purchase and equity compensation plans
8,154

 
9,766

Net tax benefit related to equity compensation plans
454

 
1,233

Cash dividends paid on common stock
(61,536
)
 
(60,819
)
Net cash provided by (used in) financing activities
65,866

 
(56,777
)
Increase in cash and cash equivalents
169,199

 
51,810

Cash and cash equivalents at beginning of year
779,825

 
517,551

Cash and cash equivalents at September 30
$
949,024

 
$
569,361

(A) Available for sale and non-marketable securities
 
 
 
Income tax payments, net
$
84,331

 
$
104,175

Interest paid on deposits and borrowings
$
24,956

 
$
30,198

Loans transferred to foreclosed real estate
$
6,744

 
$
7,178

Loans transferred from held for sale to held for investment category
$
8,941

 
$

See accompanying notes to consolidated financial statements.

7

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine month periods ended September 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 September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The transaction was accounted for using the acquisition method of accounting and, as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. In this transaction, the Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million. The valuation of Company stock was determined on the basis of the closing market price of the Company's common shares on August 30, 2013. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $13.1 million in goodwill and $4.9 million in core deposit premium. Most of the goodwill was assigned to the Company's Commercial segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
The fair value of core deposit premium was estimated by a third party using an after-tax cost savings method. This methodology calculates the present value of the estimated after-tax cost savings attributable to the core deposit base, relative to alternative costs of funds and tax benefit, if applicable, over the expected remaining economic life of the depositors. Based on an estimation of the expected remaining economic life of the depositors, the core deposit premium is being amortized over a 14 year period, using an accelerated method.
Historical pro forma information for the acquisition has not been presented because the effect on the Company's financial statements was not material. Acquired loans with evidence of deterioration in credit quality were not material to the consolidated financial statements of the Company. Accordingly, the provisions of ASC 310-30, which require special accounting for such loans, were not applied.
On September 3, 2013, the Company granted nonvested restricted stock awards of 42,674 shares of Company stock to various former Summit officers, which are included in the activity shown in Note 13. These awards vest over periods of 3 to 4 years and, assuming no awards are forfeited, compensation expense of approximately $1.8 million is expected to be recognized over the vesting period.

8

Table of contents

3. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at September 30, 2013 and December 31, 2012 are as follows:

(In thousands)
 
September 30, 2013
 
December 31, 2012
Commercial:
 
 
 
 
Business
 
$
3,634,461

 
$
3,134,801

Real estate – construction and land
 
363,194

 
355,996

Real estate – business
 
2,357,894

 
2,214,975

Personal Banking:
 
 
 
 
Real estate – personal
 
1,766,609

 
1,584,859

Consumer
 
1,489,066

 
1,289,650

Revolving home equity
 
421,569

 
437,567

Consumer credit card
 
787,215

 
804,245

Overdrafts
 
3,646

 
9,291

Total loans
 
$
10,823,654

 
$
9,831,384


At September 30, 2013, 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 $1.4 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Allowance for loan losses    

A summary of the activity in the allowance for loan losses during the three and nine months ended September 30, 2013 and 2012, respectively, follows:
 
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In thousands)
 
Commercial
Personal Banking

Total
 
Commercial
Personal Banking

Total
Balance at beginning of period
$
98,599

$
67,433

$
166,032

 
$
105,725

$
66,807

$
172,532

Provision
(2,885
)
7,031

4,146

 
(10,275
)
25,085

14,810

Deductions:
 
 
 
 
 
 
 
   Loans charged off
913

12,174

13,087

 
3,879

36,405

40,284

   Less recoveries on loans
3,144

3,297

6,441

 
6,374

10,100

16,474

Net loan charge-offs (recoveries)
(2,231
)
8,877

6,646

 
(2,495
)
26,305

23,810

Balance September 30, 2013
$
97,945

$
65,587

$
163,532

 
$
97,945

$
65,587

$
163,532

Balance at beginning of period
$
114,671

$
63,862

$
178,533

 
$
122,497

$
62,035

$
184,532

Provision
(2,479
)
8,060

5,581

 
(10,125
)
29,086

18,961

Deductions:
 
 
 
 
 
 
 
   Loans charged off
1,795

12,480

14,275

 
7,502

39,710

47,212

   Less recoveries on loans
1,720

3,473

5,193

 
7,247

11,504

18,751

Net loan charge-offs
75

9,007

9,082

 
255

28,206

28,461

Balance September 30, 2012
$
112,117

$
62,915

$
175,032

 
$
112,117

$
62,915

$
175,032



9

Table of contents

The following table shows the balance in the allowance for loan losses and the related loan balance at September 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
September 30, 2013
 
 
 
 
 
Commercial
$
7,689

$
73,698

 
$
90,256

$
6,281,851

Personal Banking
2,607

30,183

 
62,980

4,437,922

Total
$
10,296

$
103,881

 
$
153,236

$
10,719,773

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 September 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 14.
(In thousands)
 
Sept. 30, 2013
 
Dec. 31, 2012
Non-accrual loans
 
$
37,846

 
$
51,410

Restructured loans (accruing)
 
66,035

 
65,508

Total impaired loans
 
$
103,881

 
$
116,918



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Table of contents

The following table provides additional information about impaired loans held by the Company at September 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
September 30, 2013
 
 
 
With no related allowance recorded:
 
 
 
Business
$
8,444

$
9,485

$

Real estate – construction and land
7,056

14,276


Real estate – business
6,048

9,038


 
$
21,548

$
32,799

$

With an allowance recorded:
 
 
 
Business
$
18,026

$
20,549

$
2,740

Real estate – construction and land
22,970

24,934

2,687

Real estate – business
11,154

16,710

2,262

Real estate – personal
12,770

15,641

1,552

Consumer
4,647

4,647

134

Revolving home equity
643

643

2

Consumer credit card
12,123

12,123

919

 
$
82,333

$
95,247

$
10,296

Total
$
103,881

$
128,046

$
10,296

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




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Table of contents

Total average impaired loans for the three and nine month periods ended September 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 September 30, 2013
 
 
 
Non-accrual loans
$
32,570

$
4,866

$
37,436

Restructured loans (accruing)
40,881

25,163

66,044

Total
$
73,451

$
30,029

$
103,480

For the nine months ended September 30, 2013
 
 
 
Non-accrual loans
$
36,656

$
5,287

$
41,943

Restructured loans (accruing)
40,200

25,857

66,057

Total
$
76,856

$
31,144

$
108,000

For the three months ended September 30, 2012
 
 
 
Non-accrual loans
$
51,337

$
7,621

$
58,958

Restructured loans (accruing)
41,885

19,750

61,635

Total
$
93,222

$
27,371

$
120,593

For the nine months ended September 30, 2012
 
 
 
Non-accrual loans
$
59,159

$
7,399

$
66,558

Restructured loans (accruing)
44,063

21,204

65,267

Total
$
103,222

$
28,603

$
131,825


The table below shows interest income recognized during the three and nine month periods ended September 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 14.
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In thousands)
2013
2012
 
2013
2012
Interest income recognized on impaired loans:
 
 
 
 
 
Business
$
124

$
248

 
$
372

$
745

Real estate – construction and land
218

210

 
653

630

Real estate – business
48

72

 
145

216

Real estate – personal
64

22

 
192

65

Consumer
87

16

 
261

47

Revolving home equity
9

1

 
26

2

Consumer credit card
262

328

 
785

983

Total
$
812

$
897

 
$
2,434

$
2,688



















12

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 September 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
September 30, 2013
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
3,616,498

$
5,837

$
596

$
11,530

$
3,634,461

Real estate – construction and land
342,953

11,126

83

9,032

363,194

Real estate – business
2,310,501

35,495


11,898

2,357,894

Personal Banking:
 
 
 
 
 
Real estate – personal
1,747,785

12,176

1,262

5,386

1,766,609

Consumer
1,473,403

14,008

1,655


1,489,066

Revolving home equity
419,333

1,576

660


421,569

Consumer credit card
769,906

10,050

7,259


787,215

Overdrafts
3,377

269



3,646

Total
$
10,683,756

$
90,537

$
11,515

$
37,846

$
10,823,654

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.

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Table of contents

Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
September 30, 2013
 
 
 
 
Pass
$
3,534,162

$
323,142

$
2,239,654

$
6,096,958

Special mention
63,931

1,636

52,241

117,808

Substandard
24,838

29,384

54,101

108,323

Non-accrual
11,530

9,032

11,898

32,460

Total
$
3,634,461

$
363,194

$
2,357,894

$
6,355,549

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 September 30, 2013, these were comprised of $228.3 million in personal real estate loans and $60.4 million in consumer loans, or 6.5% 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 September 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
September 30, 2013
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.8
%
5.5
%
2.0
%
4.0
%
600 - 659
3.2

10.5

8.2

11.8

660 - 719
9.7

24.5

15.4

33.6

720 - 779
26.6

28.2

29.5

28.2

780 and Over
58.7

31.3

44.9

22.4

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 $89.1 million at September 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 September 30, 2013. Other performing restructured loans totaled $66.0 million at September 30, 2013. These are primarily comprised of certain business, construction and business real estate loans classified as

14

Table of contents

substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as troubled debt restructurings. These commercial loans totaled $44.7 million at September 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 $12.1 million at September 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 September 30, 2013, these loans totaled $9.2 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 September 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)
September 30, 2013
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
23,167

$
7,969

Real estate - construction and land
28,631

3,507

Real estate - business
10,614

3,129

Personal Banking:
 
 
Real estate - personal
9,306


Consumer
2,058


Revolving home equity
3,232


Consumer credit card
12,123

710

Total restructured loans
$
89,131

$
15,315


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 $1.4 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 $12.8 million at September 30, 2013 to lend additional funds to borrowers with restructured loans.


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Table of contents

The Company’s holdings of foreclosed real estate totaled $7.0 million and $13.5 million at September 30, 2013 and December 31, 2012, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.8 million and $3.5 million at September 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 September 30, 2013 and December 31, 2012.
 
(In thousands)
Sept. 30, 2013
Dec. 31, 2012
Available for sale
$
8,577,282

$
9,522,248

Trading
18,295

28,837

Non-marketable
114,520

118,650

Total investment securities
$
8,710,097

$
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 $45.2 million at September 30, 2013 and $45.4 million at 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 $69.2 million at September 30, 2013 and $73.2 million at December 31, 2012.


16

Table of contents

A summary of the available for sale investment securities by maturity groupings as of September 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
$
275,088

$
295,587

After 5 but within 10 years
54,421

57,489

After 10 years
72,895

62,429

Total U.S. government and federal agency obligations
402,404

415,505

Government-sponsored enterprise obligations:
 
 
Within 1 year
25,115

25,286

After 1 but within 5 years
99,119

101,383

After 5 but within 10 years
169,727

160,947

After 10 years
146,976

137,346

Total government-sponsored enterprise obligations
440,937

424,962

State and municipal obligations:
 
 
Within 1 year
133,539

134,734

After 1 but within 5 years
700,750

721,051

After 5 but within 10 years
535,416

524,339

After 10 years
239,264

223,187

Total state and municipal obligations
1,608,969

1,603,311

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
2,755,358

2,810,261

  Non-agency mortgage-backed securities
210,917

222,081

  Asset-backed securities
2,893,173

2,890,646

Total mortgage and asset-backed securities
5,859,448

5,922,988

Other debt securities:
 
 
Within 1 year
30,103

30,451

After 1 but within 5 years
46,473

46,796

After 5 but within 10 years
90,036

84,559

Total other debt securities
166,612

161,806

Equity securities
15,423

48,710

Total available for sale investment securities
$
8,493,793

$
8,577,282


Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities (TIPS), which totaled $415.4 million, at fair value, at September 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 $125.0 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 $36.5 million at September 30, 2013.


17

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
September 30, 2013
 
 
 
 
U.S. government and federal agency obligations
$
402,404

$
23,567

$
(10,466
)
$
415,505

Government-sponsored enterprise obligations
440,937

2,458

(18,433
)
424,962

State and municipal obligations
1,608,969

29,756

(35,414
)
1,603,311

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,755,358

74,070

(19,167
)
2,810,261

  Non-agency mortgage-backed securities
210,917

12,570

(1,406
)
222,081

  Asset-backed securities
2,893,173

7,603

(10,130
)
2,890,646

Total mortgage and asset-backed securities
5,859,448

94,243

(30,703
)
5,922,988

Other debt securities
166,612

971

(5,777
)
161,806

Equity securities
15,423

33,287


48,710

Total
$
8,493,793

$
184,282

$
(100,793
)
$
8,577,282

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 September 30, 2013, the fair value of securities on this watch list was $202.9 million compared to $220.7 million at December 31, 2012.

As of September 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 $77.4 million. The cumulative credit-related portion of the impairment initially recorded on these securities totaled $12.8 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 at September 30, 2013 included the following:

Significant Inputs
Range
Prepayment CPR
0%
-
25%
Projected cumulative default
13%
-
55%
Credit support
0%
-
15%
Loss severity
17%
-
81%

18

Table of contents

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

$
9,931

Credit losses on debt securities for which impairment was previously recognized
1,260

1,227

Increase in expected cash flows that are recognized over remaining life of security
(59
)
(93
)
Balance at September 30
$
12,507

$
11,065


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
September 30, 2013
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
62,429

$
10,466

 
$

$

 
$
62,429

$
10,466

Government-sponsored enterprise obligations
308,029

18,433

 


 
308,029

18,433

State and municipal obligations
560,695

20,370

 
79,486

15,044

 
640,181

35,414

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
638,282

19,167

 


 
638,282

19,167

   Non-agency mortgage-backed securities
53,871

1,387

 
1,629

19

 
55,500

1,406

   Asset-backed securities
1,299,698

8,865

 
70,515

1,265

 
1,370,213

10,130

Total mortgage and asset-backed securities
1,991,851

29,419

 
72,144

1,284

 
2,063,995

30,703

Other debt securities
97,093

5,541

 
2,744

236

 
99,837

5,777

Total
$
3,020,097

$
84,229

 
$
154,374

$
16,564

 
$
3,174,471

$
100,793

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 September 30, 2013. The portfolio included 490 securities, having an aggregate fair value of $3.2 billion, that were in an unrealized loss position at September 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 $80.6 million to $100.8 million at September 30, 2013, which was mainly due to higher interest rates in the second and third quarters of 2013. At September 30, 2013, the fair value of securities in an unrealized loss position for 12 months or longer with temporary impairment totaled $152.7 million, or 1.8% of the total portfolio value, and the fair value of other securities with other-than-temporary impairment totaled $1.6 million.


19

Table of contents

The Company’s holdings of state and municipal obligations included gross unrealized losses of $35.4 million at September 30, 2013. Of these losses, $15.0 million related to auction rate securities and $20.4 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.5 billion at fair value, or 17.2% 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 municipalities which have filed for Chapter 9 bankruptcy. The Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.
 

% of
Portfolio
Average
Life
(in years)
Average
Rating
(Moody’s)
At September 30, 2013
 
 
 
Texas
10.2
%
5.0
      Aa1
Florida
9.5

4.6
      Aa2
Ohio
5.7

5.0
      Aa2
Washington
5.5

5.1
      Aa2
New York
5.1