CBSH 3.31.2014 10Q
Table of contents

 

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

For the quarterly period ended March 31, 2014

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

For the transition period from           to          
Commission File No. 0-2989
 
COMMERCE BANCSHARES, INC.
 
(Exact name of registrant as specified in its charter)
Missouri
 
43-0889454
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 
 
1000 Walnut,
Kansas City, MO
 
64106
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(816) 234-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
As of April 30, 2014, the registrant had outstanding 95,185,720 shares of its $5 par value common stock, registrant’s only class of common stock.


Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q
 

 
 
 
Page
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2014
 
December 31, 2013
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
11,222,038

 
$
10,956,836

  Allowance for loan losses
(161,532
)
 
(161,532
)
Net loans
11,060,506

 
10,795,304

Investment securities:
 
 
 

 Available for sale ($552,477,000 and $687,680,000 pledged in 2014 and 2013,
 
 
 
  respectively, to secure swap and repurchase agreements)
9,115,116

 
8,915,680

 Trading
15,740

 
19,993

 Non-marketable
126,119

 
107,324

Total investment securities
9,256,975

 
9,042,997

Short-term federal funds sold and securities purchased under agreements to resell
19,525

 
43,845

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

 
1,150,000

Interest earning deposits with banks
198,417

 
707,249

Cash and due from banks
530,244

 
518,420

Land, buildings and equipment, net
344,790

 
349,654

Goodwill
138,921

 
138,921

Other intangible assets, net
8,811

 
9,268

Other assets
328,931

 
316,378

Total assets
$
22,837,120

 
$
23,072,036

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
6,552,085

 
$
6,750,674

   Savings, interest checking and money market
10,328,912

 
10,108,236

   Time open and C.D.'s of less than $100,000
967,272

 
983,689

   Time open and C.D.'s of $100,000 and over
1,389,065

 
1,204,749

Total deposits
19,237,334

 
19,047,348

Federal funds purchased and securities sold under agreements to repurchase
927,152

 
1,346,558

Other borrowings
105,114

 
107,310

Other liabilities
294,009

 
356,423

Total liabilities
20,563,609

 
20,857,639

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 96,244,762 shares in 2014 and 2013
481,224

 
481,224

   Capital surplus
1,273,290

 
1,279,948

   Retained earnings
492,559

 
449,836

   Treasury stock of 391,599 shares in 2014 and 235,986 shares in 2013, at cost
(17,193
)
 
(10,097
)
   Accumulated other comprehensive income
40,499

 
9,731

Total Commerce Bancshares, Inc. stockholders' equity
2,270,379

 
2,210,642

Non-controlling interest
3,132

 
3,755

Total equity
2,273,511

 
2,214,397

Total liabilities and equity
$
22,837,120

 
$
23,072,036

See accompanying notes to consolidated financial statements.

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Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
 
For the Three Months Ended March 31
(In thousands, except per share data)
2014
2013
 
(Unaudited)
INTEREST INCOME
 
 
Interest and fees on loans
$
110,702

$
107,786

Interest and fees on loans held for sale
—

85

Interest on investment securities
45,019

44,959

Interest on short-term federal funds sold and securities purchased under
 
 
   agreements to resell
26

9

Interest on long-term securities purchased under agreements to resell
4,151

5,829

Interest on deposits with banks
100

77

Total interest income
159,998

158,745

INTEREST EXPENSE
 
 
Interest on deposits:
 
 
   Savings, interest checking and money market
3,306

3,924

   Time open and C.D.'s of less than $100,000
1,120

1,749

   Time open and C.D.'s of $100,000 and over
1,452

1,699

Interest on federal funds purchased and securities sold under
 
 
   agreements to repurchase
203

218

Interest on other borrowings
851

812

Total interest expense
6,932

8,402

Net interest income
153,066

150,343

Provision for loan losses
9,660

3,285

Net interest income after provision for loan losses
143,406

147,058

NON-INTEREST INCOME
 
 
Bank card transaction fees
41,717

38,550

Trust fees
26,573

25,169

Deposit account charges and other fees
18,590

18,712

Capital market fees
3,870

4,391

Consumer brokerage services
2,747

2,686

Loan fees and sales
1,209

1,473

Other
7,921

8,896

Total non-interest income
102,627

99,877

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
Change in fair value of other-than-temporarily impaired securities
(63
)
1,389

Portion recognized in other comprehensive income
(283
)
(1,831
)
Net impairment losses recognized in earnings
(346
)
(442
)
Realized gains (losses) on sales and fair value adjustments
10,383

(1,723
)
Investment securities gains (losses), net
10,037

(2,165
)
NON-INTEREST EXPENSE
 
 
Salaries and employee benefits
94,263

90,881

Net occupancy
11,616

11,235

Equipment
4,504

4,683

Supplies and communication
5,699

5,589

Data processing and software
19,087

18,951

Marketing
3,681

3,359

Deposit insurance
2,894

2,767

Other
20,596

17,572

Total non-interest expense
162,340

155,037

Income before income taxes
93,730

89,733

Less income taxes
29,609

28,925

Net income
64,121

60,808

Less non-controlling interest expense (income)
(192
)
(209
)
Net income attributable to Commerce Bancshares, Inc.
$
64,313

$
61,017

Net income per common share — basic
$
.67

$
.64

Net income per common share — diluted
$
.67

$
.63

See accompanying notes to consolidated financial statements.

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Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
For the Three Months Ended March 31
(In thousands)
 
2014
2013
 
 
(Unaudited)
Net income
 
$
64,121

$
60,808

Other comprehensive income (loss):
 
 
 
Net unrealized gains on securities for which a portion of an other-than-temporary impairment has been recorded in earnings
 
166

1,137

Net unrealized gains (losses) on other securities
 
30,379

(8,193
)
Pension loss amortization
 
223

475

Other comprehensive income (loss)
 
30,768

(6,581
)
Comprehensive income
 
94,889

54,227

Less non-controlling interest expense (income)
 
(192
)
(209
)
Comprehensive income attributable to Commerce Bancshares, Inc.
$
95,081

$
54,436

See accompanying notes to consolidated financial statements.














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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, 2014
$
481,224

$
1,279,948

$
449,836

$
(10,097
)
$
9,731

$
3,755

$
2,214,397

Net income




64,313





(192
)
64,121

Other comprehensive income








30,768



30,768

Distributions to non-controlling interest










(431
)
(431
)
Purchase of treasury stock






(20,900
)




(20,900
)
Issuance of stock under purchase and equity compensation plans


(2,897
)


6,982





4,085

Net tax benefit related to equity compensation plans


800









800

Stock-based compensation


2,261









2,261

Issuance of nonvested stock awards


(6,822
)


6,822





—

Cash dividends ($.225 per share)




(21,590
)






(21,590
)
Balance March 31, 2014
$
481,224

$
1,273,290

$
492,559

$
(17,193
)
$
40,499

$
3,132

$
2,273,511

Balance January 1, 2013
$
458,646

$
1,102,507

$
477,210

$
(7,580
)
$
136,344

$
4,447

$
2,171,574

Net income




61,017





(209
)
60,808

Other comprehensive loss








(6,581
)


(6,581
)
Distributions to non-controlling interest










(192
)
(192
)
Purchase of treasury stock






(29,993
)




(29,993
)
Issuance of stock under purchase and equity compensation plans


(1,146
)


3,752





2,606

Net tax benefit related to equity compensation plans


181









181

Stock-based compensation


1,223









1,223

Issuance of nonvested stock awards


(1,320
)


1,320





—

Cash dividends ($.214 per share)




(20,435
)






(20,435
)
Balance March 31, 2013
$
458,646

$
1,101,445

$
517,792

$
(32,501
)
$
129,763

$
4,046

$
2,179,191

See accompanying notes to consolidated financial statements.



6
Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended March 31
(In thousands)
2014
 
2013
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
64,121

 
$
60,808

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
9,660

 
3,285

  Provision for depreciation and amortization
10,508

 
10,424

  Amortization of investment security premiums, net
6,675

 
12,539

  Investment securities (gains) losses, net(A)
(10,037
)
 
2,165

  Net decrease in trading securities
16,597

 
9,609

  Stock-based compensation
2,261

 
1,223

  Increase in interest receivable
(1,421
)
 
(5
)
  Increase in interest payable
25

 
246

  Increase in income taxes payable
30,410

 
26,894

  Net tax benefit related to equity compensation plans
(800
)
 
(181
)
  Other changes, net
(6,524
)
 
(28,936
)
Net cash provided by operating activities
121,475

 
98,071

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities(A)
31,666

 
52

Proceeds from maturities/pay downs of investment securities(A)
456,956

 
674,270

Purchases of investment securities(A)
(628,237
)
 
(934,142
)
Net increase in loans
(275,036
)
 
(159,087
)
Long-term securities purchased under agreements to resell
(100,000
)
 
(50,000
)
Repayments of long-term securities purchased under agreements to resell
300,000

 
50,000

Purchases of land, buildings and equipment
(3,954
)
 
(5,867
)
Sales of land, buildings and equipment
5

 
404

Net cash used in investing activities
(218,600
)
 
(424,370
)
FINANCING ACTIVITIES:
 
 
 
Net decrease in non-interest bearing, savings, interest checking and money market deposits
(132,858
)
 
(138,419
)
Net increase in time open and C.D.'s
167,862

 
310,948

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

Net increase (decrease) in short-term federal funds purchased and securities sold under
 
 
 
  agreements to repurchase
(269,406
)
 
43,308

Repayment of other long-term borrowings
(196
)
 
(927
)
Net decrease in other short-term borrowings
(2,000
)
 
—

Purchases of treasury stock
(20,900
)
 
(29,993
)
Issuance of stock under stock purchase and equity compensation plans
4,085

 
2,606

Net tax benefit related to equity compensation plans
800

 
181

Cash dividends paid on common stock
(21,590
)
 
(20,435
)
Net cash provided by (used in) financing activities
(424,203
)
 
167,269

Decrease in cash and cash equivalents
(521,328
)
 
(159,030
)
Cash and cash equivalents at beginning of year
1,269,514

 
779,825

Cash and cash equivalents at March 31
$
748,186

 
$
620,795

(A) Available for sale and non-marketable securities
 
 
 
Income tax net payments (refunds)
$
(807
)
 
$
2,031

Interest paid on deposits and borrowings
$
6,869

 
$
8,156

Loans transferred to foreclosed real estate
$
836

 
$
3,925

See accompanying notes to consolidated financial statements.

7
Table of contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014 (Unaudited)
 
1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2013 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2014 are not necessarily indicative of results to be attained for the full year or any other interim period.

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

2. Acquisition and Disposition

On September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The transaction was accounted for using the acquisition method of accounting and, as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. In this transaction, the Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million. The valuation of Company stock was determined on the basis of the closing market price of the Company's common shares on August 30, 2013. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $13.3 million in goodwill and $5.6 million in core deposit premium. Most of the goodwill was assigned to the Company's Commercial segment. None of the goodwill recognized is deductible for income tax purposes.
The Company has contracted to sell banking branches in Farmington, Desloge and Bonne Terre, Missouri. The transaction is expected to close in July 2014, pending regulatory approval. The Company expects to sell approximately $16 million in loans, $75 million in deposits, and various bank premises.
3. Loans and Allowance for Loan Losses

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

(In thousands)
 
March 31, 2014
 
December 31, 2013
Commercial:
 
 
 
 
Business
 
$
3,941,394

 
$
3,715,319

Real estate – construction and land
 
423,667

 
406,197

Real estate – business
 
2,315,167

 
2,313,550

Personal Banking:
 
 
 
 
Real estate – personal
 
1,782,831

 
1,787,626

Consumer
 
1,561,973

 
1,512,716

Revolving home equity
 
419,376

 
420,589

Consumer credit card
 
775,044

 
796,228

Overdrafts
 
2,586

 
4,611

Total loans
 
$
11,222,038

 
$
10,956,836


At March 31, 2014, loans of $3.7 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.4 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.


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Table of contents

Allowance for loan losses    

A summary of the activity in the allowance for loan losses during the three months ended March 31, 2014 and 2013, respectively, follows:
 
 
For the Three Months Ended March 31, 2014
 
For the Three Months Ended March 31, 2013
(In thousands)
 
Commercial
Personal Banking

Total
 
Commercial
Personal Banking

Total
Balance at January 1
$
94,189

$
67,343

$
161,532

 
$
105,725

$
66,807

$
172,532

Provision
4,067

5,593

9,660

 
(6,590
)
9,875

3,285

Deductions:
 
 
 
 
 
 
 
   Loans charged off
1,130

12,751

13,881

 
705

11,801

12,506

   Less recoveries on loans
755

3,466

4,221

 
1,391

3,330

4,721

Net loan charge-offs (recoveries)
375

9,285

9,660

 
(686
)
8,471

7,785

Balance at March 31
$
97,881

$
63,651

$
161,532

 
$
99,821

$
68,211

$
168,032


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

(In thousands)
Allowance for Loan Losses
Loans Outstanding
 
Allowance for Loan Losses
Loans Outstanding
March 31, 2014
 
 
 
 
 
Commercial
$
7,637

$
79,325

 
$
90,244

$
6,600,903

Personal Banking
2,119

29,074

 
61,532

4,512,736

Total
$
9,756

$
108,399

 
$
151,776

$
11,113,639

December 31, 2013
 
 
 
 
 
Commercial
$
8,476

$
78,516

 
$
85,713

$
6,356,550

Personal Banking
2,424

29,120

 
64,919

4,492,650

Total
$
10,900

$
107,636

 
$
150,632

$
10,849,200


Impaired loans

The table below shows the Company’s investment in impaired loans at March 31, 2014 and December 31, 2013. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 13.
(In thousands)
 
Mar. 31, 2014
 
Dec. 31, 2013
Non-accrual loans
 
$
47,573

 
$
48,814

Restructured loans (accruing)
 
60,826

 
58,822

Total impaired loans
 
$
108,399

 
$
107,636



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Table of contents

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


(In thousands)
Recorded Investment
Unpaid Principal
Balance
 Related
Allowance
March 31, 2014
 
 
 
With no related allowance recorded:
 
 
 
Business
$
7,969

$
9,000

$
—

Real estate – construction and land
8,228

15,965

—

Real estate – business
3,742

6,432

—

Consumer
1,538

2,188

—

Revolving home equity
2,191

2,741

—

 
$
23,668

$
36,326

$
—

With an allowance recorded:
 
 
 
Business
$
25,834

$
29,189

$
2,806

Real estate – construction and land
15,558

17,591

1,968

Real estate – business
17,994

26,755

2,863

Real estate – personal
9,496

12,517

1,127

Consumer
3,948

3,948

75

Revolving home equity
605

605

2

Consumer credit card
11,296

11,296

915

 
$
84,731

$
101,901

$
9,756

Total
$
108,399

$
138,227

$
9,756

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

$
9,000

$
—

Real estate – construction and land
8,766

16,067

—

Real estate – business
4,089

6,417

—

Revolving home equity
2,191

2,741

—

 
$
23,015

$
34,225

$
—

With an allowance recorded:
 
 
 
Business
$
19,266

$
22,597

$
3,037

Real estate – construction and land
17,632

19,708

2,174

Real estate – business
20,794

29,287

3,265

Real estate – personal
10,425

13,576

1,361

Consumer
4,025

4,025

85

Revolving home equity
666

666

2

Consumer credit card
11,813

11,813

976

 
$
84,621

$
101,672

$
10,900

Total
$
107,636

$
135,897

$
10,900



Total average impaired loans for the three month periods ended March 31, 2014 and 2013, respectively, are shown in the table below.

(In thousands)
Commercial
Personal Banking
Total
Average Impaired Loans:
 
 
 
For the three months ended March 31, 2014
 
 
 
Non-accrual loans
$
40,302

$
7,565

$
47,867

Restructured loans (accruing)
38,393

21,431

59,824

Total
$
78,695

$
28,996

$
107,691

For the three months ended March 31, 2013
 
 
 
Non-accrual loans
$
41,108

$
6,059

$
47,167

Restructured loans (accruing)
38,642

27,291

65,933

Total
$
79,750

$
33,350

$
113,100



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Table of contents

The table below shows interest income recognized during the three month periods ended March 31, 2014 and 2013 for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 13.
 
For the Three Months Ended March 31
(In thousands)
2014
2013
Interest income recognized on impaired loans:
 
 
Business
$
163

$
397

Real estate – construction and land
161

202

Real estate – business
30

61

Real estate – personal
63

73

Consumer
75

93

Revolving home equity
8

9

Consumer credit card
202

240

Total
$
702

$
1,075


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 March 31, 2014 and December 31, 2013.




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

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



Total
March 31, 2014
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
3,922,118

$
7,780

$
485

$
11,011

$
3,941,394

Real estate – construction and land
409,592

4,609

19

9,447

423,667

Real estate – business
2,284,479

11,592

42

19,054

2,315,167

Personal Banking:
 
 
 
 
 
Real estate – personal
1,766,163

11,569

767

4,332

1,782,831

Consumer
1,547,246

10,980

2,209

1,538

1,561,973

Revolving home equity
415,637

884

664

2,191

419,376

Consumer credit card
758,313

8,430

8,301

—

775,044

Overdrafts
2,380

206

—

—

2,586

Total
$
11,105,928

$
56,050

$
12,487

$
47,573

$
11,222,038

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

$
5,467

$
671

$
11,592

$
3,715,319

Real estate – construction and land
386,423

9,601

—

10,173

406,197

Real estate – business
2,292,385

1,340

47

19,778

2,313,550

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

9,755

1,560

5,080

1,787,626

Consumer
1,492,960

17,482

2,274

—

1,512,716

Revolving home equity
416,614

1,082

702

2,191

420,589

Consumer credit card
777,564

9,952

8,712

—

796,228

Overdrafts
4,315

296

—

—

4,611

Total
$
10,839,081

$
54,975

$
13,966

$
48,814

$
10,956,836











11
Table of contents

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.
Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
March 31, 2014
 
 
 
 
Pass
$
3,840,105

$
391,080

$
2,193,862

$
6,425,047

Special mention
59,603

1,917

48,782

110,302

Substandard
30,675

21,223

53,469

105,367

Non-accrual
11,011

9,447

19,054

39,512

Total
$
3,941,394

$
423,667

$
2,315,167

$
6,680,228

December 31, 2013
 
 
 
 
Pass
$
3,618,120

$
372,515

$
2,190,344

$
6,180,979

Special mention
61,916

1,697

53,079

116,692

Substandard
23,691

21,812

50,349

95,852

Non-accrual
11,592

10,173

19,778

41,543

Total
$
3,715,319

$
406,197

$
2,313,550

$
6,435,066



12
Table of contents

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 March 31, 2014, these were comprised of $240.8 million in personal real estate loans and $12.3 million in consumer loans, or 5.6% of the Personal Banking portfolio. At December 31, 2013, these were comprised of $244.3 million in personal real estate loans and $47.5 million in consumer loans, or 6.5% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2014 and December 31, 2013 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
March 31, 2014
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.7
%
5.5
%
3.0
%
4.4
%
600 - 659
3.2

10.3

4.9

12.1

660 - 719
10.4

23.0

14.6

34.0

720 - 779
26.1

28.9

31.9

27.7

780 and Over
58.6

32.3

45.6

21.8

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

10.1

7.3

11.7

660 - 719
10.3

23.4

15.0

32.9

720 - 779
25.8

28.3

28.5

27.9

780 and Over
58.9

32.8

47.1

23.4

Total
100.0
%
100.0
%
100.0
%
100.0
%

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $86.0 million at March 31, 2014. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $25.2 million at March 31, 2014. Other performing restructured loans totaled $60.8 million at March 31, 2014. These are primarily comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as troubled debt restructurings. These commercial loans totaled $41.0 million at March 31, 2014. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $11.3 million at March 31, 2014. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At March 31, 2014, these loans totaled $8.5 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.







13
Table of contents

The following table shows the outstanding balances of loans classified as troubled debt restructurings at March 31, 2014, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
(In thousands)
March 31, 2014
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
30,973

$
7,969

Real estate - construction and land
23,217

5,014

Real estate - business
7,414

2,421

Personal Banking:
 
 
Real estate - personal
7,002

60

Consumer
5,486

1,676

Revolving home equity
605

—

Consumer credit card
11,296

854

Total restructured loans
$
85,993

$
17,994


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

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

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

The Company had commitments of $10.5 million at March 31, 2014 to lend additional funds to borrowers with restructured loans.

The Company’s holdings of foreclosed real estate totaled $6.9 million and $6.6 million at March 31, 2014 and December 31, 2013, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.0 million and $2.8 million at March 31, 2014 and December 31, 2013, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.








14
Table of contents

4. Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2014 and December 31, 2013.
 
(In thousands)
Mar. 31, 2014
Dec. 31, 2013
Available for sale
$
9,115,116

$
8,915,680

Trading
15,740

19,993

Non-marketable
126,119

107,324

Total investment securities
$
9,256,975

$
9,042,997


Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $46.5 million at both March 31, 2014 and December 31, 2013. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $79.5 million at March 31, 2014 and $60.7 million at December 31, 2013.

A summary of the available for sale investment securities by maturity groupings as of March 31, 2014 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments and does not hold trust preferred securities.
(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
 
 
Within 1 year
$
42,859

$
43,982

After 1 but within 5 years
256,506

273,415

After 5 but within 10 years
139,206

142,538

After 10 years
52,996

47,703

Total U.S. government and federal agency obligations
491,567

507,638

Government-sponsored enterprise obligations:
 
 
Within 1 year
35,317

35,599

After 1 but within 5 years
492,447

492,574

After 5 but within 10 years
143,543

135,524

After 10 years
141,998

133,076

Total government-sponsored enterprise obligations
813,305

796,773

State and municipal obligations:
 
 
Within 1 year
139,190

140,356

After 1 but within 5 years
732,552

755,227

After 5 but within 10 years
560,235

549,538

After 10 years
186,056

177,527

Total state and municipal obligations
1,618,033

1,622,648

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
2,850,043

2,892,499

  Non-agency mortgage-backed securities
287,342

298,633

  Asset-backed securities
2,813,445

2,816,012

Total mortgage and asset-backed securities
5,950,830

6,007,144

Other debt securities:
 
 
Within 1 year
11,938

12,042

After 1 but within 5 years
42,390

42,904

After 5 but within 10 years
86,130

81,907

Total other debt securities
140,458

136,853

Equity securities
10,517

44,060

Total available for sale investment securities
$
9,024,710

$
9,115,116



15
Table of contents

Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $507.5 million, at fair value, at March 31, 2014. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $127.0 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 $36.8 million at March 31, 2014.

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
March 31, 2014
 
 
 
 
U.S. government and federal agency obligations
$
491,567

$
21,368

$
(5,297
)
$
507,638

Government-sponsored enterprise obligations
813,305

2,264

(18,796
)
796,773

State and municipal obligations
1,618,033

29,651

(25,036
)
1,622,648

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,850,043

62,175

(19,719
)
2,892,499

  Non-agency mortgage-backed securities
287,342

12,428

(1,137
)
298,633

  Asset-backed securities
2,813,445

9,290

(6,723
)
2,816,012

Total mortgage and asset-backed securities
5,950,830

83,893

(27,579
)
6,007,144

Other debt securities
140,458

752

(4,357
)
136,853

Equity securities
10,517

33,543

—

44,060

Total
$
9,024,710

$
171,471

$
(81,065
)
$
9,115,116

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

$
20,614

$
(13,144
)
$
505,696

Government-sponsored enterprise obligations
766,802

2,245

(27,281
)
741,766

State and municipal obligations
1,624,195

28,321

(33,345
)
1,619,171

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

54,659

(26,124
)
2,772,338

  Non-agency mortgage-backed securities
236,595

12,008

(1,620
)
246,983

  Asset-backed securities
2,847,368

6,872

(10,169
)
2,844,071

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

73,539

(37,913
)
5,863,392

Other debt securities
147,581

671

(6,495
)
141,757

Equity securities
9,970

33,928

—

43,898

Total
$
8,874,540

$
159,318

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


The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2014, the fair value of securities on this watch list was $180.2 million compared to $188.8 million at December 31, 2013.

As of March 31, 2014, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $66.1 million. The cumulative credit-related portion of the impairment initially recorded on these securities totaled $13.2 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.


16
Table of contents

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 March 31, 2014 included the following:

Significant Inputs
Range
Prepayment CPR
0%
-
25%
Projected cumulative default
18%
-
56%
Credit support
0%
-
14%
Loss severity
20%
-
81%

The following table shows changes in the credit losses recorded in earnings during the three months ended March 31, 2014 and 2013, for which a portion of an OTTI was recognized in other comprehensive income.
 
For the Three Months Ended March 31
(In thousands)
2014
2013
Balance at January 1
$
12,499

$
11,306

Credit losses on debt securities for which impairment was previously recognized
346

442

Increase in expected cash flows that are recognized over remaining life of security
(25
)
(20
)
Balance at March 31
$
12,820

$
11,728


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
March 31, 2014
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
29,349

$
27

 
$
30,928

$
5,270

 
$
60,277

$
5,297

Government-sponsored enterprise obligations
481,558

11,182

 
106,412

7,614

 
587,970

18,796

State and municipal obligations
387,791

8,018

 
189,058

17,018

 
576,849

25,036

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
759,734

19,716

 
107

3

 
759,841

19,719

   Non-agency mortgage-backed securities
56,501

563

 
22,388

574

 
78,889

1,137

   Asset-backed securities
583,899

5,535

 
118,267

1,188

 
702,166

6,723

Total mortgage and asset-backed securities
1,400,134

25,814

 
140,762

1,765

 
1,540,896

27,579

Other debt securities
85,844

3,321

 
15,294

1,036

 
101,138

4,357

Total
$
2,384,676

$
48,362

 
$
482,454

$
32,703

 
$
2,867,130

$
81,065

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

$
243

 
$
59,677

$
12,901

 
$
155,849

$
13,144

Government-sponsored enterprise obligations
487,317

18,155

 
93,654

9,126

 
580,971

27,281

State and municipal obligations
478,818

15,520

 
178,150

17,825

 
656,968

33,345

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

26,124

 
—

—

 
717,778

26,124

   Non-agency mortgage-backed securities
53,454

918

 
22,289

702

 
75,743

1,620

   Asset-backed securities
1,088,556

9,072

 
58,398

1,097

 
1,146,954

10,169

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

36,114

 
80,687

1,799

 
1,940,475

37,913

Other debt securities
90,028

5,604

 
9,034

891

 
99,062

6,495

Total
$
3,012,123

$
75,636

 
$
421,202

$
42,542

 
$
3,433,325

$
118,178


The total available for sale portfolio consisted of approximately 1,800 individual securities at March 31, 2014. The portfolio included 431 securities, having an aggregate fair value of $2.9 billion, that were in an unrealized loss position at March 31, 2014, compared to 507 securities, with a fair value of $3.4 billion, at December 31, 2013. The total amount of unrealized loss on these securities decreased $37.1 million to $81.1 million at March 31, 2014. At March 31, 2014, the fair value of securities in an unrealized loss position for 12 months or longer totaled $482.5 million, or 5.3% of the total portfolio value, and did not include any securities identified as other-than-temporarily impaired.


17
Table of contents

The Company’s holdings of state and municipal obligations included gross unrealized losses of $25.0 million at March 31, 2014. Of these losses, $11.0 million related to auction rate securities and $14.1 million related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.5 billion at fair value, or 16.4% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the table below. The Company does not have exposure to obligations of municipalities which have filed for Chapter 9 bankruptcy. The Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.
 

% of
Portfolio
Average
Life
(in years)
Average
Rating
(Moody’s)
At March 31, 2014
 
 
 
Texas
10.5
%
4.6
      Aa1
Florida
9.8

4.5
      Aa3
New York
6.2

6.1
      Aa2
Ohio
6.0

4.9
      Aa2
Washington
5.2

4.8
      Aa2
General obligation
31.0
%
4.6
      Aa2
Lease
16.5

4.7
      Aa3
Housing
15.5

4.3
      Aa1
Transportation
13.6

4.3
        A1
Limited tax
6.0

5.3
      Aa1
    
The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
 
For the Three Months Ended March 31
(In thousands)
2014
2013
Proceeds from sales of available for sale securities
$
30,998

$
—

Proceeds from sales of non-marketable securities
668

52

Total proceeds
$
31,666

$
52

Available for sale:
 
 
Losses realized on sales
$
(5,197
)
$
—

Other-than-temporary impairment recognized on debt securities
(346
)
(442
)
 Non-marketable:
 
 
 Gains realized on sales
2

52

 Losses realized on sales
(134
)
—

Fair value adjustments, net
15,712

(1,775
)
Investment securities gains (losses), net
$
10,037

$
(2,165
)

At March 31, 2014, securities totaling $4.8 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve Bank and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $552.5 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.


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Table of contents

5. Goodwill and Other Intangible Assets

The following table presents information about the Company's intangible assets which have estimable useful lives.
 
March 31, 2014
 
December 31, 2013
 
 
(In thousands)
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
 
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
Core deposit premium
$
31,270

$
(23,302
)
$
—

$
7,968

 
$
31,270

$
(22,781
)
$
—

$
8,489

Mortgage servicing rights
3,518

(2,605
)
(70
)
843

 
3,430

(2,567
)
(84
)
779

Total
$
34,788

$
(25,907
)
$
(70
)
$
8,811

 
$
34,700

$
(25,348
)
$
(84
)
$
9,268


Aggregate amortization expense on intangible assets was $559 thousand and $557 thousand, respectively, for the three month periods ended March 31, 2014 and 2013. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2014. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.
 (In thousands)
 
2014
$
1,997

2015
1,607

2016
1,244

2017
920

2018
687



Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2014 is as follows.
(In thousands)
Goodwill
Core Deposit Premium
Mortgage Servicing Rights
Balance January 1, 2014
$
138,921

$
8,489

$
779

Originations
—

—

88

Amortization
—

(521
)
(38
)
Impairment reversal
—

—

14

Balance March 31, 2014
$
138,921

$
7,968

$
843



Goodwill allocated to the Company’s operating segments at March 31, 2014 and December 31, 2013 is shown below.
(In thousands)
 
Consumer segment
$
70,721

Commercial segment
67,454

Wealth segment
746

Total goodwill
$
138,921



6. Guarantees

The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.


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Table of contents

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2014 that net liability was $3.5 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $333.3 million at March 31, 2014.

The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at March 31, 2014, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term, with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 3 to 10 years. At March 31, 2014, the fair value of the Company's guarantee liabilities for RPAs was $71 thousand, and the notional amount of the underlying swaps was $65.4 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.

7. Pension

The amount of net pension cost is shown in the table below:
 
For the Three Months Ended March 31
(In thousands)
2014
2013
Service cost - benefits earned during the period
$
133

$
132

Interest cost on projected benefit obligation
1,261

1,122

Expected return on plan assets
(1,561
)
(1,609
)
Amortization of unrecognized net loss
360

767

Net periodic pension cost
$
193

$
412


Substantially all benefits accrued under the Company’s defined benefit pension plan were frozen effective January 1, 2005, and the remaining benefits were frozen effective January 1, 2011. During the first three months of 2014, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2014.



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Table of contents

8. Common Stock

Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 13.
 
For the Three Months Ended March 31
(In thousands, except per share data)
2014
2013
Basic income per common share:
 
 
Net income attributable to Commerce Bancshares, Inc.
$
64,313

$
61,017

Less income allocated to nonvested restricted stock
802

594

  Net income allocated to common stock
$
63,511

$
60,423

Weighted average common shares outstanding
94,773

94,722

   Basic income per common share
$
.67

$
.64

Diluted income per common share:
 
 
Net income attributable to Commerce Bancshares, Inc.
$
64,313

$
61,017

Less income allocated to nonvested restricted stock
799

593

  Net income allocated to common stock
$
63,514

$
60,424

Weighted average common shares outstanding
94,773

94,722

  Net effect of the assumed exercise of stock-based awards - based on
 
 
    the treasury stock method using the average market price for the respective periods
421

244

  Weighted average diluted common shares outstanding
95,194

94,966

    Diluted income per common share
$
.67

$
.63


Unexercised stock options and stock appreciation rights of 90 thousand were excluded in the computation of diluted income per share for the three month period ended March 31, 2014 because their inclusion would have been anti-dilutive. All unexercised stock options and rights were included in the computation of diluted income per share for the three month period ended March 31, 2013.

In the Annual Meeting of the Shareholders, held on April 16, 2014, a proposal to increase the shares of Company common stock authorized for issuance under its articles of incorporation was approved. This approval increased the authorized shares from 100,000,000 to 120,000,000.



21


9. Accumulated Other Comprehensive Income

The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale securities. Unrealized gains and losses on debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately below. The other component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost.
 
Unrealized Gains (Losses) on Securities (1)
Pension Loss (2)
Total Accumulated Other Comprehensive Income
(In thousands)
OTTI
Other
Balance January 1, 2014
$
4,203

$
21,303

$
(15,775
)
$
9,731

Other comprehensive income (loss) before reclassifications
(78
)
43,801

—

43,723

Amounts reclassified from accumulated other comprehensive income
346

5,197

360

5,903

Current period other comprehensive income, before tax
268

48,998

360

49,626