CBSH 3.31.2015 10Q
Table of contents

 

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

For the quarterly period ended March 31, 2015

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

For the transition period from           to          
Commission File No. 0-2989
 
COMMERCE BANCSHARES, INC.
 
(Exact name of registrant as specified in its charter)
Missouri
 
43-0889454
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 
 
1000 Walnut,
Kansas City, MO
 
64106
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(816) 234-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
As of April 30, 2015, the registrant had outstanding 96,551,575 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, 2015
 
December 31, 2014
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
11,721,960

 
$
11,469,238

  Allowance for loan losses
(153,532
)
 
(156,532
)
Net loans
11,568,428

 
11,312,706

Loans held for sale, at fair value
2,770

 

Investment securities:
 
 
 

Available for sale ($468,843,000 pledged at March 31, 2015 and $467,143,000 at
 
 
 
    December 31, 2014 to secure swap and repurchase agreements)
9,917,242

 
9,523,560

 Trading
15,501

 
15,357

 Non-marketable
110,560

 
106,875

Total investment securities
10,043,303

 
9,645,792

Federal funds sold and short-term securities purchased under agreements to resell
12,450

 
32,485

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

 
1,050,000

Interest earning deposits with banks
123,712

 
600,744

Cash and due from banks
416,109

 
467,488

Land, buildings and equipment, net
356,309

 
357,871

Goodwill
138,921

 
138,921

Other intangible assets, net
7,143

 
7,450

Other assets
330,338

 
380,823

Total assets
$
24,049,483

 
$
23,994,280

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
6,785,221

 
$
6,811,959

   Savings, interest checking and money market
10,656,139

 
10,541,601

   Time open and C.D.'s of less than $100,000
853,842

 
878,433

   Time open and C.D.'s of $100,000 and over
1,281,297

 
1,243,785

Total deposits
19,576,499

 
19,475,778

Federal funds purchased and securities sold under agreements to repurchase
1,610,463

 
1,862,518

Other borrowings
103,854

 
104,058

Other liabilities
353,260

 
217,680

Total liabilities
21,644,076

 
21,660,034

Commerce Bancshares, Inc. stockholders’ equity:
 
 
 

   Preferred stock, $1 par value
 
 
 
      Authorized 2,000,000 shares; issued 6,000 shares
144,784

 
144,784

   Common stock, $5 par value
 
 
 

 Authorized 120,000,000 shares;
 
 
 
   issued 96,830,977 shares
484,155

 
484,155

   Capital surplus
1,223,125

 
1,229,075

   Retained earnings
463,701

 
426,648

   Treasury stock of 154,567 shares at March 31, 2015
 
 
 
     and 367,487 shares at December 31, 2014, at cost
(6,868
)
 
(16,562
)
   Accumulated other comprehensive income
91,717

 
62,093

Total Commerce Bancshares, Inc. stockholders' equity
2,400,614

 
2,330,193

Non-controlling interest
4,793

 
4,053

Total equity
2,405,407

 
2,334,246

Total liabilities and equity
$
24,049,483

 
$
23,994,280

See accompanying notes to consolidated financial statements.

3

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
 
For the Three Months Ended March 31
(In thousands, except per share data)
2015
2014
 
(Unaudited)
INTEREST INCOME
 
 
Interest and fees on loans
$
111,286

$
110,702

Interest and fees on loans held for sale
21


Interest on investment securities
38,436

45,019

Interest on federal funds sold and short-term securities purchased under
 
 
   agreements to resell
9

26

Interest on long-term securities purchased under agreements to resell
3,051

4,151

Interest on deposits with banks
179

100

Total interest income
152,982

159,998

INTEREST EXPENSE
 
 
Interest on deposits:
 
 
   Savings, interest checking and money market
3,308

3,306

   Time open and C.D.'s of less than $100,000
880

1,120

   Time open and C.D.'s of $100,000 and over
1,410

1,452

Interest on federal funds purchased and securities sold under
 
 
   agreements to repurchase
367

203

Interest on other borrowings
879

851

Total interest expense
6,844

6,932

Net interest income
146,138

153,066

Provision for loan losses
4,420

9,660

Net interest income after provision for loan losses
141,718

143,406

NON-INTEREST INCOME
 
 
Bank card transaction fees
42,299

41,717

Trust fees
29,586

26,573

Deposit account charges and other fees
18,499

18,590

Capital market fees
3,002

3,870

Consumer brokerage services
3,188

2,747

Loan fees and sales
2,089

1,209

Other
7,763

7,921

Total non-interest income
106,426

102,627

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
Change in fair value of other-than-temporarily impaired securities
(227
)
(63
)
Portion recognized in other comprehensive income
210

(283
)
Net impairment losses recognized in earnings
(17
)
(346
)
Realized gains on sales and fair value adjustments
6,052

10,383

Investment securities gains, net
6,035

10,037

NON-INTEREST EXPENSE
 
 
Salaries and employee benefits
98,074

94,263

Net occupancy
11,561

11,616

Equipment
4,703

4,504

Supplies and communication
5,581

5,699

Data processing and software
19,506

19,087

Marketing
3,918

3,681

Deposit insurance
3,001

2,894

Other
17,353

20,218

Total non-interest expense
163,697

161,962

Income before income taxes
90,482

94,108

Less income taxes
28,468

29,987

Net income
62,014

64,121

Less non-controlling interest expense (income)
959

(192
)
Net income attributable to Commerce Bancshares, Inc.
61,055

64,313

Less preferred stock dividends
2,250


Net income available to common shareholders
$
58,805

$
64,313

Net income per common share — basic
$
.61

$
.64

Net income per common share — diluted
$
.61

$
.64

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 March 31
(In thousands)
 
2015
2014
 
 
(Unaudited)
Net income
 
$
62,014

$
64,121

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
 
(128
)
166

Net unrealized gains on other securities
 
29,346

30,379

Pension loss amortization
 
406

223

Other comprehensive income
 
29,624

30,768

Comprehensive income
 
91,638

94,889

Less non-controlling interest expense (income)
 
959

(192
)
Comprehensive income attributable to Commerce Bancshares, Inc.
$
90,679

$
95,081

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)
Preferred Stock
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
 
(Unaudited)
Balance January 1, 2015
$
144,784

$
484,155

$
1,229,075

$
426,648

$
(16,562
)
$
62,093

$
4,053

$
2,334,246

Net income
 




61,055





959

62,014

Other comprehensive income
 








29,624



29,624

Distributions to non-controlling interest
 










(219
)
(219
)
Purchases of treasury stock
 






(1,718
)




(1,718
)
Issuance of stock under purchase and equity compensation plans
 


(1,312
)


3,177





1,865

Net tax benefit related to equity compensation plans
 


857









857

Stock-based compensation
 


2,740









2,740

Issuance of nonvested stock awards
 


(8,235
)


8,235






Cash dividends on common stock ($.225 per share)
 




(21,752
)






(21,752
)
Cash dividends on preferred stock ($.375 per share)






(2,250
)






(2,250
)
Balance March 31, 2015
$
144,784

$
484,155

$
1,223,125

$
463,701

$
(6,868
)
$
91,717

$
4,793

$
2,405,407

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
)
Purchases 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 on common stock ($.214 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

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)
2015
 
2014
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
62,014

 
$
64,121

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
4,420

 
9,660

  Provision for depreciation and amortization
10,694

 
10,508

  Amortization of investment security premiums, net
15,099

 
6,675

  Investment securities gains, net(A)
(6,035
)
 
(10,037
)
  Net gains on sales of loans held for sale
(467
)
 

  Originations of loans held for sale
(17,806
)
 

  Proceeds from sales of loans held for sale
15,575

 

  Net (increase) decrease in trading securities
(4,361
)
 
16,597

  Stock-based compensation
2,740

 
2,261

  Increase in interest receivable
(788
)
 
(1,421
)
  Increase in interest payable
27

 
25

  Increase in income taxes payable
24,904

 
30,410

  Net tax benefit related to equity compensation plans
(857
)
 
(800
)
  Other changes, net
(9,642
)
 
(6,524
)
Net cash provided by operating activities
95,517

 
121,475

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities(A)
185,732

 
31,666

Proceeds from maturities/pay downs of investment securities(A)
609,144

 
456,956

Purchases of investment securities(A)
(1,125,969
)
 
(628,237
)
Net increase in loans
(260,799
)
 
(275,036
)
Long-term securities purchased under agreements to resell

 
(100,000
)
Repayments of long-term securities purchased under agreements to resell

 
300,000

Purchases of land, buildings and equipment
(8,575
)
 
(3,954
)
Sales of land, buildings and equipment
3

 
5

Net cash used in investing activities
(600,464
)
 
(218,600
)
FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
218,837

 
(132,858
)
Net increase in time open and C.D.'s
12,921

 
167,862

Repayment of long-term securities sold under agreements to repurchase

 
(150,000
)
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase
(252,055
)
 
(269,406
)
Repayment of other long-term borrowings
(204
)
 
(196
)
Net decrease in other short-term borrowings

 
(2,000
)
Purchases of treasury stock
(1,718
)
 
(20,900
)
Issuance of stock under equity compensation plans
1,865

 
4,085

Net tax benefit related to equity compensation plans
857

 
800

Cash dividends paid on common stock
(21,752
)
 
(21,590
)
Cash dividends paid on preferred stock
(2,250
)
 

Net cash used in financing activities
(43,499
)
 
(424,203
)
Decrease in cash and cash equivalents
(548,446
)
 
(521,328
)
Cash and cash equivalents at beginning of year
1,100,717

 
1,269,514

Cash and cash equivalents at March 31
$
552,271

 
$
748,186

(A) Available for sale and non-marketable securities
 
 
 
Income tax net payments (refunds)
$
2,953

 
$
(807
)
Interest paid on deposits and borrowings
$
6,817

 
$
6,869

Loans transferred to foreclosed real estate
$
482

 
$
836

See accompanying notes to consolidated financial statements.

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Table of contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited)
 
1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2014 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three month period ended March 31, 2015 are not necessarily indicative of results to be attained for the full year or any other interim period.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.

The Company invests in low-income housing partnerships which supply funds for the construction and operation of apartment complexes that provide affordable housing to lower income families. As permitted by ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects", issued by the Financial Accounting Standards Board, the Company adopted a new method of accounting for these investments on January 1, 2015. The new method is the practical expedient to the proportional amortization method, which allows the Company to record the amortization of its investments in income tax expense, rather than in non-interest expense. The Company made this change because it believes that presenting the investment performance net of taxes more fairly represents the economics and returns on such investments. The amortization recognized as a component of income tax expense for the three months ended March 31, 2015 was $497 thousand. As required by the ASU, all prior period information in this report has been revised to reflect the adoption, resulting in a decrease to non-interest expense and an increase to income tax expense (as originally reported) of $378 thousand for the three months ended March 31, 2014.


2. Loans and Allowance for Loan Losses

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

(In thousands)
 
March 31, 2015
 
December 31, 2014
Commercial:
 
 
 
 
Business
 
$
4,183,977

 
$
3,969,952

Real estate – construction and land
 
423,928

 
403,507

Real estate – business
 
2,282,988

 
2,288,215

Personal Banking:
 
 
 
 
Real estate – personal
 
1,887,557

 
1,883,092

Consumer
 
1,766,888

 
1,705,134

Revolving home equity
 
426,964

 
430,873

Consumer credit card
 
739,543

 
782,370

Overdrafts
 
10,115

 
6,095

Total loans
 
$
11,721,960

 
$
11,469,238


At March 31, 2015, loans of $3.6 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.3 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

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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, 2015 and 2014, respectively, follows:
 
 
For the Three Months Ended March 31, 2015
 
For the Three Months Ended March 31, 2014
(In thousands)
 
Commercial
Personal Banking

Total
 
Commercial
Personal Banking

Total
Balance at January 1
$
89,622

$
66,910

$
156,532

 
$
94,189

$
67,343

$
161,532

Provision
(1,752
)
6,172

4,420

 
4,067

5,593

9,660

Deductions:
 
 
 
 
 
 
 
   Loans charged off
724

11,576

12,300

 
1,130

12,751

13,881

   Less recoveries on loans
1,760

3,120

4,880

 
755

3,466

4,221

Net loan charge-offs (recoveries)
(1,036
)
8,456

7,420

 
375

9,285

9,660

Balance at March 31
$
88,906

$
64,626

$
153,532

 
$
97,881

$
63,651

$
161,532


The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2015 and December 31, 2014, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
 
Impaired Loans
 
All Other Loans

(In thousands)
Allowance for Loan Losses
Loans Outstanding
 
Allowance for Loan Losses
Loans Outstanding
March 31, 2015
 
 
 
 
 
Commercial
$
3,390

$
53,067

 
$
85,516

$
6,837,826

Personal Banking
1,918

25,742

 
62,708

4,805,325

Total
$
5,308

$
78,809

 
$
148,224

$
11,643,151

December 31, 2014
 
 
 
 
 
Commercial
$
4,527

$
55,551

 
$
85,095

$
6,606,123

Personal Banking
2,314

25,537

 
64,596

4,782,027

Total
$
6,841

$
81,088

 
$
149,691

$
11,388,150


Impaired loans

The table below shows the Company’s investment in impaired loans at March 31, 2015 and December 31, 2014. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 13.
(In thousands)
 
Mar. 31, 2015
 
Dec. 31, 2014
Non-accrual loans
 
$
35,818

 
$
40,775

Restructured loans (accruing)
 
42,991

 
40,313

Total impaired loans
 
$
78,809

 
$
81,088



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Table of contents

The following table provides additional information about impaired loans held by the Company at March 31, 2015 and December 31, 2014, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.


(In thousands)
Recorded Investment
Unpaid Principal
Balance
 Related
Allowance
March 31, 2015
 
 
 
With no related allowance recorded:
 
 
 
Business
$
7,685

$
10,372

$

Real estate – construction and land
3,441

8,804


Real estate – business
10,588

14,403


Real estate – personal
1,007

1,187


 
$
22,721

$
34,766

$

With an allowance recorded:
 
 
 
Business
$
16,921

$
18,569

$
1,615

Real estate – construction and land
8,165

11,978

791

Real estate – business
6,267

10,931

984

Real estate – personal
9,338

12,564

1,111

Consumer
5,260

5,260

64

Revolving home equity
532

532

20

Consumer credit card
9,605

9,605

723

 
$
56,088

$
69,439

$
5,308

Total
$
78,809

$
104,205

$
5,308

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

$
11,532

$

Real estate – construction and land
4,552

8,493


Real estate – business
13,453

17,258


Revolving home equity
1,227

1,384


 
$
28,469

$
38,667

$

With an allowance recorded:
 
 
 
Business
$
12,326

$
13,846

$
1,844

Real estate – construction and land
8,148

9,610

1,081

Real estate – business
7,835

15,025

1,602

Real estate – personal
9,096

12,465

1,441

Consumer
4,244

4,244

50

Revolving home equity
529

529

9

Consumer credit card
10,441

10,441

814

 
$
52,619

$
66,160

$
6,841

Total
$
81,088

$
104,827

$
6,841



Total average impaired loans for the three month periods ended March 31, 2015 and 2014, respectively, are shown in the table below.

(In thousands)
Commercial
Personal Banking
Total
Average Impaired Loans:
 
 
 
For the three months ended March 31, 2015
 
 
 
Non-accrual loans
$
31,281

$
6,258

$
37,539

Restructured loans (accruing)
22,280

19,386

41,666

Total
$
53,561

$
25,644

$
79,205

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



10

Table of contents

The table below shows interest income recognized during the three month periods ended March 31, 2015 and 2014, respectively, for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 13.
 
For the Three Months Ended March 31
(In thousands)
2015
2014
Interest income recognized on impaired loans:
 
 
Business
$
135

$
163

Real estate – construction and land
80

161

Real estate – business
15

30

Real estate – personal
53

63

Consumer
52

75

Revolving home equity
4

8

Consumer credit card
174

202

Total
$
513

$
702


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, 2015 and December 31, 2014.




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

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



Total
March 31, 2015
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
4,167,679

$
5,893

$
444

$
9,961

$
4,183,977

Real estate – construction and land
413,150

6,032

258

4,488

423,928

Real estate – business
2,261,667

6,293


15,028

2,282,988

Personal Banking:
 
 
 
 
 
Real estate – personal
1,874,779

5,092

1,345

6,341

1,887,557

Consumer
1,750,328

14,965

1,595


1,766,888

Revolving home equity
423,984

2,241

739


426,964

Consumer credit card
724,023

7,720

7,800


739,543

Overdrafts
9,909

206



10,115

Total
$
11,625,519

$
48,442

$
12,181

$
35,818

$
11,721,960

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

$
11,152

$
1,096

$
11,560

$
3,969,952

Real estate – construction and land
397,488

827

35

5,157

403,507

Real estate – business
2,266,688

3,661


17,866

2,288,215

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

6,618

1,676

6,192

1,883,092

Consumer
1,687,285

16,053

1,796


1,705,134

Revolving home equity
428,478

1,552

843


430,873

Consumer credit card
764,599

9,559

8,212


782,370

Overdrafts
5,721

374



6,095

Total
$
11,365,009

$
49,796

$
13,658

$
40,775

$
11,469,238



Credit quality

The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial

11

Table of contents

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, 2015
 
 
 
 
Pass
$
4,075,346

$
406,042

$
2,186,965

$
6,668,353

Special mention
65,335

5,395

34,757

105,487

Substandard
33,335

8,003

46,238

87,576

Non-accrual
9,961

4,488

15,028

29,477

Total
$
4,183,977

$
423,928

$
2,282,988

$
6,890,893

December 31, 2014
 
 
 
 
Pass
$
3,871,569

$
385,831

$
2,184,541

$
6,441,941

Special mention
62,904

3,865

40,668

107,437

Substandard
23,919

8,654

45,140

77,713

Non-accrual
11,560

5,157

17,866

34,583

Total
$
3,969,952

$
403,507

$
2,288,215

$
6,661,674


The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At March 31, 2015, these were comprised of $241.9 million in personal real estate loans, or 5.0% of the Personal Banking portfolio, compared to $244.3 million at December 31, 2014. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2015 and December 31, 2014 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
March 31, 2015
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.6
%
5.2
%
1.9
%
4.3
%
600 - 659
3.2

10.6

4.6

12.4

660 - 719
9.7

23.0

13.6

33.2

720 - 779
26.6

26.7

28.0

27.9

780 and over
58.9

34.5

51.9

22.2

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

10.2

4.4

11.8

660 - 719
9.9

22.9

13.7

32.4

720 - 779
26.7

28.0

32.8

27.8

780 and over
58.9

33.7

47.3

23.9

Total
100.0
%
100.0
%
100.0
%
100.0
%





12

Table of contents

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $65.9 million at March 31, 2015. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $23.0 million at March 31, 2015. Other performing restructured loans totaled $43.0 million at March 31, 2015. 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 $24.4 million at March 31, 2015. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $9.6 million at March 31, 2015. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At March 31, 2015, these loans totaled $9.0 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at March 31, 2015, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
(In thousands)
March 31, 2015
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
22,457

$

Real estate - construction and land
11,154

181

Real estate - business
10,786


Personal Banking:
 
 
Real estate - personal
5,732


Consumer
6,124

123

Revolving home equity
85

85

Consumer credit card
9,605

761

Total restructured loans
$
65,943

$
1,150


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 $1.1 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.


13

Table of contents

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

The Company had commitments of $6.4 million at March 31, 2015 to lend additional funds to borrowers with restructured loans.

Loans held for sale

Beginning January 1, 2015, certain long-term fixed rate personal real estate loan originations have been designated as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 10. At March 31, 2015, the fair value of these loans was $2.8 million, and the unpaid principal balance was $2.7 million. The unrealized gain in fair value was recognized in loan fees and sales in the consolidated statement of income. None of these loans were on non-accrual status or 90 days or more past due. Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $5.0 million and $5.5 million at March 31, 2015 and December 31, 2014, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.2 million and $2.4 million at March 31, 2015 and December 31, 2014, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.

3. Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2015 and December 31, 2014.
 
(In thousands)
Mar. 31, 2015
Dec. 31, 2014
Available for sale
$
9,917,242

$
9,523,560

Trading
15,501

15,357

Non-marketable
110,560

106,875

Total investment securities
$
10,043,303

$
9,645,792


Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $46.7 million at March 31, 2015 and $46.6 million at December 31, 2014. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $63.8 million at March 31, 2015 and $60.2 million at December 31, 2014.


14

Table of contents

A summary of the available for sale investment securities by maturity groupings as of March 31, 2015 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
 
 
Within 1 year
$
89,740

$
91,306

After 1 but within 5 years
165,330

174,362

After 5 but within 10 years
115,646

120,640

After 10 years
52,174

50,084

Total U.S. government and federal agency obligations
422,890

436,392

Government-sponsored enterprise obligations:
 
 
Within 1 year
48,054

48,504

After 1 but within 5 years
537,133

541,462

After 5 but within 10 years
428,623

427,923

After 10 years
50,834

50,878

Total government-sponsored enterprise obligations
1,064,644

1,068,767

State and municipal obligations:
 
 
Within 1 year
167,015

168,215

After 1 but within 5 years
647,803

667,497

After 5 but within 10 years
809,242

821,062

After 10 years
157,225

154,771

Total state and municipal obligations
1,781,285

1,811,545

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
2,626,920

2,709,914

  Non-agency mortgage-backed securities
478,285

490,233

  Asset-backed securities
3,156,146

3,162,824

Total mortgage and asset-backed securities
6,261,351

6,362,971

Other debt securities:
 
 
Within 1 year
3,997

4,006

After 1 but within 5 years
56,061

56,765

After 5 but within 10 years
136,950

137,247

Total other debt securities
197,008

198,018

Equity securities
5,678

39,549

Total available for sale investment securities
$
9,732,856

$
9,917,242


Investments in U.S. government and federal agency obligations are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $436.3 million, at fair value, at March 31, 2015. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $93.3 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $39.5 million at March 31, 2015.


15

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
March 31, 2015
 
 
 
 
U.S. government and federal agency obligations
$
422,890

$
16,427

$
(2,925
)
$
436,392

Government-sponsored enterprise obligations
1,064,644

7,224

(3,101
)
1,068,767

State and municipal obligations
1,781,285

36,872

(6,612
)
1,811,545

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,626,920

86,710

(3,716
)
2,709,914

  Non-agency mortgage-backed securities
478,285

12,226

(278
)
490,233

  Asset-backed securities
3,156,146

9,287

(2,609
)
3,162,824

Total mortgage and asset-backed securities
6,261,351

108,223

(6,603
)
6,362,971

Other debt securities
197,008

1,496

(486
)
198,018

Equity securities
5,678

33,871


39,549

Total
$
9,732,856

$
204,113

$
(19,727
)
$
9,917,242

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

$
9,095

$
(5,024
)
$
501,407

Government-sponsored enterprise obligations
968,574

2,593

(8,040
)
963,127

State and municipal obligations
1,789,215

32,340

(8,354
)
1,813,201

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

75,923

(5,592
)
2,593,708

  Non-agency mortgage-backed securities
372,911

11,061

(1,228
)
382,744

  Asset-backed securities
3,090,174

6,922

(5,103
)
3,091,993

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

93,906

(11,923
)
6,068,445

Other debt securities
140,784

420

(2,043
)
139,161

Equity securities
3,931

34,288


38,219

Total
$
9,386,302

$
172,642

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


The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2015, the fair value of securities on this watch list was $117.4 million compared to $123.9 million at December 31, 2014.

As of March 31, 2015, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $52.5 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $13.7 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at March 31, 2015 included the following:

Significant Inputs
Range
Prepayment CPR
3%
-
23%
Projected cumulative default
20%
-
58%
Credit support
0%
-
19%
Loss severity
21%
-
70%

16

Table of contents


The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.
 
For the Three Months Ended March 31
(In thousands)
2015
2014
Cumulative OTTI credit losses at January 1
$
13,734

$
12,499

Credit losses on debt securities for which impairment was previously recognized
17

346

Increase in expected cash flows that are recognized over remaining life of security
(29
)
(25
)
Cumulative OTTI credit losses at March 31
$
13,722

$
12,820


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

$

 
$
32,641

$
2,925

 
$
32,641

$
2,925

Government-sponsored enterprise obligations
11,439

35

 
159,458

3,066

 
170,897

3,101

State and municipal obligations
81,475

315

 
125,284

6,297

 
206,759

6,612

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
33,319

35

 
323,023

3,681

 
356,342

3,716

   Non-agency mortgage-backed securities
29,873

47

 
43,981

231

 
73,854

278

   Asset-backed securities
852,860

801

 
157,377

1,808

 
1,010,237

2,609

Total mortgage and asset-backed securities
916,052

883

 
524,381

5,720

 
1,440,433

6,603

Other debt securities
24,001

48

 
41,195

438

 
65,196

486

Total
$
1,032,967

$
1,281

 
$
882,959

$
18,446

 
$
1,915,926

$
19,727

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

$
818

 
$
32,077

$
4,206

 
$
122,338

$
5,024

Government-sponsored enterprise obligations
224,808

922

 
224,779

7,118

 
449,587

8,040

State and municipal obligations
172,980

646

 
215,702

7,708

 
388,682

8,354

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

429

 
381,617

5,163

 
436,745

5,592

   Non-agency mortgage-backed securities
141,655

609

 
43,659

619

 
185,314

1,228

   Asset-backed securities
1,424,457

2,009

 
159,098

3,094

 
1,583,555

5,103

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

3,047

 
584,374

8,876

 
2,205,614

11,923

Other debt securities
16,434

55

 
80,203

1,988

 
96,637

2,043

Total
$
2,125,723

$
5,488

 
$
1,137,135

$
29,896

 
$
3,262,858

$
35,384


The total available for sale portfolio consisted of nearly 2,000 individual securities at March 31, 2015. The portfolio included 204 securities, having an aggregate fair value of $1.9 billion, that were in an unrealized loss position at March 31, 2015, compared to 363 securities, with a fair value of $3.3 billion, at December 31, 2014. The total amount of unrealized losses on these securities decreased $15.7 million to $19.7 million at March 31, 2015. At March 31, 2015, the fair value of securities in an unrealized loss position for 12 months or longer totaled $883.0 million, or 8.9% 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 $6.6 million at March 31, 2015. Of these losses, $5.7 million related to auction rate securities and $931 thousand related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.7 billion at fair value, or 17.3% 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 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, 2015
 
 
 
Texas
11.1
%
5.1
      Aa2
Florida
7.9

4.0
      Aa3
Ohio
6.0

5.5
      Aa2
New York
6.0

6.5
      Aa2
Washington
5.5

5.5
      Aa2
General obligation
33.7
%
5.3
      Aa2
Lease
18.3

5.3
      Aa3
Housing
12.6

3.5
      Aa1
Transportation
12.6

4.8
        A1
Limited tax
8.3

6.6
      Aa2
    
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)
2015
2014
Proceeds from sales of available for sale securities
$
185,053

$
30,998

Proceeds from sales of non-marketable securities
679

668

Total proceeds
$
185,732

$
31,666

Available for sale:
 
 
Gains realized on sales
$
2,526

$

Losses realized on sales

(5,197
)
Other-than-temporary impairment recognized on debt securities
(17
)
(346
)
 Non-marketable:
 
 
 Gains realized on sales
226

2

 Losses realized on sales

(134
)
Fair value adjustments, net
3,300

15,712

Investment securities gains, net
$
6,035

$
10,037


At March 31, 2015, securities totaling $4.7 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 $468.8 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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4. Goodwill and Other Intangible Assets

The following table presents information about the Company's intangible assets which have estimable useful lives.
 
March 31, 2015
 
December 31, 2014
 
 
(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

$
(25,121
)
$

$
6,149

 
$
31,270

$
(24,698
)
$

$
6,572

Mortgage servicing rights
3,844

(2,768
)
(82
)
994

 
3,693

(2,718
)
(97
)
878

Total
$
35,114

$
(27,889
)
$
(82
)
$
7,143

 
$
34,963

$
(27,416
)
$
(97
)
$
7,450


Aggregate amortization expense on intangible assets was $473 thousand and $559 thousand, respectively, for the three month periods ended March 31, 2015 and 2014. 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, 2015. 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)
 
2015
$
1,694

2016
1,320

2017
985

2018
742

2019
610



Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2015 is as follows.
(In thousands)
Goodwill
Core Deposit Premium
Mortgage Servicing Rights
Balance January 1, 2015
$
138,921

$
6,572

$
878

Originations


151

Amortization

(423
)
(50
)
Impairment reversal


15

Balance March 31, 2015
$
138,921

$
6,149

$
994



Goodwill allocated to the Company’s operating segments at March 31, 2015 and December 31, 2014 is shown below.
(In thousands)
 
Consumer segment
$
70,721

Commercial segment
67,454

Wealth segment
746

Total goodwill
$
138,921


5. 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.

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,

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2015, that net liability was $3.1 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 $313.8 million at March 31, 2015.

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, 2015, 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 11 years. At March 31, 2015, the fair value of the Company's guarantee liabilities for RPAs was $253 thousand, and the notional amount of the underlying swaps was $68.9 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.

6. Pension

The amount of net pension cost is shown in the table below:
 
For the Three Months Ended March 31
(In thousands)
2015
2014
Service cost - benefits earned during the period
$
126

$
133

Interest cost on projected benefit obligation
1,216

1,261

Expected return on plan assets
(1,523
)
(1,561
)
Amortization of unrecognized net loss
655

360

Net periodic pension cost
$
474

$
193


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 2015, 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 2015.



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7. Common and Preferred 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 12.
 
For the Three Months Ended March 31
(In thousands, except per share data)
2015
2014
Basic income per common share:
 
 
Net income attributable to Commerce Bancshares, Inc.
$
61,055

$
64,313

Less preferred stock dividends
2,250


Net income available to common shareholders
58,805

64,313

Less income allocated to nonvested restricted stock
796

802

  Net income allocated to common stock
$
58,009

$
63,511

Weighted average common shares outstanding
95,289

99,511

   Basic income per common share
$
.61

$
.64

Diluted income per common share:
 
 
Net income available to common shareholders
$
58,805

$
64,313

Less income allocated to nonvested restricted stock
794

799

  Net income allocated to common stock
$
58,011

$
63,514

Weighted average common shares outstanding
95,289

99,511

  Net effect of the assumed exercise of stock-based awards - based on