Document
Table of Contents


 

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

For the quarterly period ended September 30, 2016

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

For the transition period from           to          
Commission File No. 0-2989
 
COMMERCE BANCSHARES, INC.
 
(Exact name of registrant as specified in its charter)
Missouri
 
43-0889454
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 
 
1000 Walnut,
Kansas City, MO
 
64106
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(816) 234-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
As of November 2, 2016, the registrant had outstanding 96,592,152 shares of its $5 par value common stock, registrant’s only class of common stock.



Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q
 

 
 
 
Page
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents


PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
13,230,241

 
$
12,436,692

  Allowance for loan losses
(154,532
)
 
(151,532
)
Net loans
13,075,709

 
12,285,160

Loans held for sale (including $4,447,000 of residential mortgage loans carried at fair value at September 30, 2016 and $4,981,000 at December 31, 2015)
9,511

 
7,607

Investment securities:
 
 
 

Available for sale ($578,090,000 pledged at September 30, 2016 and $568,257,000 at
 
 
 
    December 31, 2015 to secure swap and repurchase agreements)
9,438,871

 
9,777,004

 Trading
28,586

 
11,890

 Non-marketable
108,224

 
112,786

Total investment securities
9,575,681

 
9,901,680

Federal funds sold and short-term securities purchased under agreements to resell
13,415

 
14,505

Long-term securities purchased under agreements to resell
725,000

 
875,000

Interest earning deposits with banks
56,767

 
23,803

Cash and due from banks
396,938

 
464,411

Land, buildings and equipment, net
339,196

 
352,581

Goodwill
138,921

 
138,921

Other intangible assets, net
6,621

 
6,669

Other assets
396,709

 
534,625

Total assets
$
24,734,468

 
$
24,604,962

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
7,130,415

 
$
7,146,398

   Savings, interest checking and money market
11,023,526

 
10,834,746

   Time open and C.D.'s of less than $100,000
732,575

 
785,191

   Time open and C.D.'s of $100,000 and over
1,279,644

 
1,212,518

Total deposits
20,166,160

 
19,978,853

Federal funds purchased and securities sold under agreements to repurchase
1,489,891

 
1,963,552

Other borrowings
101,415

 
103,818

Other liabilities
416,189

 
191,321

Total liabilities
22,173,655

 
22,237,544

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 97,972,433 shares
489,862

 
489,862

   Capital surplus
1,335,150

 
1,337,677

   Retained earnings
515,081

 
383,313

   Treasury stock of 1,212,837 shares at September 30, 2016
 
 
 
     and 603,003 shares at December 31, 2015, at cost
(50,538
)
 
(26,116
)
   Accumulated other comprehensive income
121,082

 
32,470

Total Commerce Bancshares, Inc. stockholders' equity
2,555,421

 
2,361,990

Non-controlling interest
5,392

 
5,428

Total equity
2,560,813

 
2,367,418

Total liabilities and equity
$
24,734,468

 
$
24,604,962

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In thousands, except per share data)
2016
2015
 
2016
2015
 
(Unaudited)
INTEREST INCOME
 
 
 
 
 
Interest and fees on loans
$
123,750

$
114,954

 
$
364,234

$
339,707

Interest and fees on loans held for sale
334

48

 
1,161

108

Interest on investment securities
51,661

50,716

 
155,250

142,416

Interest on federal funds sold and short-term securities purchased under
 
 
 
 
 
   agreements to resell
20

21

 
63

45

Interest on long-term securities purchased under agreements to resell
3,328

3,273

 
10,157

9,994

Interest on deposits with banks
268

103

 
689

404

Total interest income
179,361

169,115

 
531,554

492,674

INTEREST EXPENSE
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
   Savings, interest checking and money market
3,619

3,356

 
10,651

9,951

   Time open and C.D.'s of less than $100,000
683

786

 
2,134

2,484

   Time open and C.D.'s of $100,000 and over
2,186

1,554

 
6,519

4,468

Interest on federal funds purchased and securities sold under
 
 
 
 
 
   agreements to repurchase
724

483

 
2,337

1,271

Interest on other borrowings
906

898

 
3,066

2,667

Total interest expense
8,118

7,077

 
24,707

20,841

Net interest income
171,243

162,038

 
506,847

471,833

Provision for loan losses
7,263

8,364

 
25,918

19,541

Net interest income after provision for loan losses
163,980

153,674

 
480,929

452,292

NON-INTEREST INCOME
 
 
 
 
 
Bank card transaction fees
47,006

44,635

 
136,541

132,606

Trust fees
30,951

29,302

 
90,435

88,815

Deposit account charges and other fees
22,241

20,674

 
64,260

58,810

Capital market fees
2,751

2,620

 
7,976

8,360

Consumer brokerage services
3,375

3,687

 
10,375

10,530

Loan fees and sales
3,123

1,855

 
8,829

6,127

Other
9,872

8,515

 
36,497

26,849

Total non-interest income
119,319

111,288

 
354,913

332,097

INVESTMENT SECURITIES GAINS (LOSSES), NET
(1,965
)
(378
)
 
(3,704
)
7,800

NON-INTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
107,004

100,874

 
318,671

298,603

Net occupancy
12,366

11,247

 
34,761

33,807

Equipment
4,842

4,789

 
14,257

14,171

Supplies and communication
5,968

5,609

 
18,490

16,416

Data processing and software
23,663

21,119

 
69,332

61,670

Marketing
4,399

4,343

 
12,601

12,568

Deposit insurance
3,576

2,981

 
9,884

9,001

Other
19,424

20,440

 
57,808

54,474

Total non-interest expense
181,242

171,402

 
535,804

500,710

Income before income taxes
100,092

93,182

 
296,334

291,479

Less income taxes
30,942

27,969

 
91,854

88,929

Net income
69,150

65,213

 
204,480

202,550

Less non-controlling interest expense
605

601

 
668

2,530

Net income attributable to Commerce Bancshares, Inc.
68,545

64,612

 
203,812

200,020

Less preferred stock dividends
2,250

2,250

 
6,750

6,750

Net income available to common shareholders
$
66,295

$
62,362

 
$
197,062

$
193,270

Net income per common share — basic
$
.69

$
.63

 
$
2.04

$
1.93

Net income per common share — diluted
$
.68

$
.63

 
$
2.03

$
1.93

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In thousands)
 
2016
2015
 
2016
2015
 
 
(Unaudited)
Net income
 
$
69,150

$
65,213

 
$
204,480

$
202,550

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
 
46

(327
)
 
(352
)
(306
)
Net unrealized gains (losses) on other securities
 
(13,747
)
16,891

 
87,887

2,754

Pension loss amortization
 
359

283

 
1,077

1,095

Other comprehensive income (loss)
 
(13,342
)
16,847

 
88,612

3,543

Comprehensive income
 
55,808

82,060

 
293,092

206,093

Less non-controlling interest expense
 
605

601

 
668

2,530

Comprehensive income attributable to Commerce Bancshares, Inc.
$
55,203

$
81,459

 
$
292,424

$
203,563

See accompanying notes to consolidated financial statements.














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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, 2016
$
144,784

$
489,862

$
1,337,677

$
383,313

$
(26,116
)
$
32,470

$
5,428

$
2,367,418

Net income
 




203,812





668

204,480

Other comprehensive income
 








88,612



88,612

Distributions to non-controlling interest
 










(704
)
(704
)
Purchases of treasury stock
 






(38,476
)




(38,476
)
Issuance of stock under purchase and equity compensation plans
 


(14,057
)


14,054





(3
)
Excess tax benefit related to equity compensation plans
 


2,629









2,629

Stock-based compensation
 


8,901









8,901

Cash dividends on common stock ($.675 per share)
 




(65,294
)






(65,294
)
Cash dividends on preferred stock ($1.125 per depositary share)






(6,750
)






(6,750
)
Balance September 30, 2016
$
144,784

$
489,862

$
1,335,150

$
515,081

$
(50,538
)
$
121,082

$
5,392

$
2,560,813

Balance January 1, 2015
$
144,784

$
484,155

$
1,229,075

$
426,648

$
(16,562
)
$
62,093

$
4,053

$
2,334,246

Net income
 




200,020





2,530

202,550

Other comprehensive income
 








3,543



3,543

Distributions to non-controlling interest
 










(845
)
(845
)
Purchases of treasury stock
 






(9,147
)




(9,147
)
Accelerated share repurchase agreements
 
 
60,000

 
(160,000
)
 
 
(100,000
)
Issuance of stock under purchase and equity compensation plans
 


(15,302
)


17,216





1,914

Excess tax benefit related to equity compensation plans
 


1,871









1,871

Stock-based compensation
 


7,702









7,702

Cash dividends on common stock ($.643 per share)
 




(64,041
)






(64,041
)
Cash dividends on preferred stock ($1.125 per depositary share)
 
 
 
(6,750
)
 
 
 
(6,750
)
Balance September 30, 2015
$
144,784

$
484,155

$
1,283,346

$
555,877

$
(168,493
)
$
65,636

$
5,738

$
2,371,043

See accompanying notes to consolidated financial statements.



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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30
(In thousands)
2016
 
2015
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
204,480

 
$
202,550

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
25,918

 
19,541

  Provision for depreciation and amortization
30,997

 
32,100

  Amortization of investment security premiums, net
23,357

 
23,249

  Investment securities (gains) losses, net (A)
3,704

 
(7,800
)
  Net gains on sales of loans held for sale
(4,924
)
 
(2,184
)
  Originations of loans held for sale
(115,768
)
 
(75,589
)
  Proceeds from sales of loans held for sale
117,746

 
72,973

  Net (increase) decrease in trading securities, excluding unsettled transactions
77,262

 
(5,042
)
  Stock-based compensation
8,901

 
7,702

  Increase in interest receivable
(331
)
 
(2,652
)
  Increase (decrease) in interest payable
269

 
(96
)
  Increase in income taxes payable
1,787

 
16,312

  Excess tax benefit related to equity compensation plans
(2,629
)
 
(1,871
)
  Other changes, net
(24,602
)
 
(365
)
Net cash provided by operating activities
346,167

 
278,828

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities (A)
7,946

 
684,893

Proceeds from maturities/pay downs of investment securities (A)
1,659,778

 
1,923,785

Purchases of investment securities (A)
(1,080,003
)
 
(2,507,803
)
Net increase in loans
(817,886
)
 
(782,559
)
Repayments of long-term securities purchased under agreements to resell
150,000

 
75,000

Purchases of land, buildings and equipment
(18,479
)
 
(22,718
)
Sales of land, buildings and equipment
5,831

 
4,752

Net cash used in investing activities
(92,813
)
 
(624,650
)
FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
280,495

 
(319,853
)
Net increase (decrease) in time open and C.D.'s
14,510

 
(130,591
)
Net increase (decrease) in federal funds purchased and short-term securities sold under agreements to repurchase
(473,661
)
 
330,679

Repayment of long-term borrowings
(3,872
)
 
(227
)
Additional long-term borrowings
1,469



Purchases of treasury stock
(38,476
)
 
(9,147
)
Accelerated share repurchase agreements

 
(100,000
)
Issuance of stock under equity compensation plans
(3
)
 
1,914

Excess tax benefit related to equity compensation plans
2,629

 
1,871

Cash dividends paid on common stock
(65,294
)
 
(64,041
)
Cash dividends paid on preferred stock
(6,750
)
 
(6,750
)
Net cash used in financing activities
(288,953
)
 
(296,145
)
Decrease in cash and cash equivalents
(35,599
)
 
(641,967
)
Cash and cash equivalents at beginning of year
502,719

 
1,100,717

Cash and cash equivalents at September 30
$
467,120

 
$
458,750

(A) Available for sale and non-marketable securities
 
 
 
Income tax payments, net
$
88,531

 
$
70,860

Interest paid on deposits and borrowings
$
24,438

 
$
20,937

Loans transferred to foreclosed real estate
$
1,031

 
$
2,459

Loans transferred from held for investment to held for sale, net
$
42,688

 
$

Settlement of accelerated stock repurchase agreement and receipt of treasury stock
$

 
$
60,000

See accompanying notes to consolidated financial statements.

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Table of Contents


Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016 (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 2015 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three and nine month periods ended September 30, 2016 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.


2. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at September 30, 2016 and December 31, 2015 are as follows:

(In thousands)
 
September 30, 2016
 
December 31, 2015
Commercial:
 
 
 
 
Business
 
$
4,770,883

 
$
4,397,893

Real estate – construction and land
 
800,545

 
624,070

Real estate – business
 
2,520,528

 
2,355,544

Personal Banking:
 
 
 
 
Real estate – personal
 
1,968,005

 
1,915,953

Consumer
 
1,972,969

 
1,924,365

Revolving home equity
 
417,591

 
432,981

Consumer credit card
 
760,022

 
779,744

Overdrafts
 
19,698

 
6,142

Total loans
 
$
13,230,241

 
$
12,436,692


At September 30, 2016, 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 $1.6 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.


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Allowance for loan losses    
A summary of the activity in the allowance for loan losses during the three and nine months ended September 30, 2016 and 2015, respectively, follows:
 
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In thousands)
 
Commercial
Personal Banking

Total
 
Commercial
Personal Banking

Total
Balance at beginning of period
$
89,198

$
64,634

$
153,832

 
$
82,086

$
69,446

$
151,532

Provision
(1,411
)
8,674

7,263

 
4,309

21,609

25,918

Deductions:
 
 
 
 
 
 
 
   Loans charged off
291

11,872

12,163

 
2,465

35,633

38,098

   Less recoveries on loans
2,759

2,841

5,600

 
6,325

8,855

15,180

Net loan charge-offs (recoveries)
(2,468
)
9,031

6,563

 
(3,860
)
26,778

22,918

Balance September 30, 2016
$
90,255

$
64,277

$
154,532

 
$
90,255

$
64,277

$
154,532

Balance at beginning of period
$
86,329

$
65,203

$
151,532

 
$
89,622

$
66,910

$
156,532

Provision
(1,976
)
10,340

8,364

 
(6,089
)
25,630

19,541

Deductions:
 
 
 
 
 
 
 
   Loans charged off
903

11,321

12,224

 
3,035

34,194

37,229

   Less recoveries on loans
1,167

2,693

3,860

 
4,119

8,569

12,688

Net loan charge-offs (recoveries)
(264
)
8,628

8,364

 
(1,084
)
25,625

24,541

Balance September 30, 2015
$
84,617

$
66,915

$
151,532

 
$
84,617

$
66,915

$
151,532


The following table shows the balance in the allowance for loan losses and the related loan balance at September 30, 2016 and December 31, 2015, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
 
Impaired Loans
 
All Other Loans

(In thousands)
Allowance for Loan Losses
Loans Outstanding
 
Allowance for Loan Losses
Loans Outstanding
September 30, 2016
 
 
 
 
 
Commercial
$
1,816

$
44,526

 
$
88,439

$
8,047,430

Personal Banking
1,253

20,594

 
63,024

5,117,691

Total
$
3,069

$
65,120

 
$
151,463

$
13,165,121

December 31, 2015
 
 
 
 
 
Commercial
$
1,927

$
43,027

 
$
80,159

$
7,334,480

Personal Banking
1,557

22,287

 
67,889

5,036,898

Total
$
3,484

$
65,314

 
$
148,048

$
12,371,378


Impaired loans
The table below shows the Company’s investment in impaired loans at September 30, 2016 and December 31, 2015. 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. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 14.
(In thousands)
 
Sept. 30, 2016
 
Dec. 31, 2015
Non-accrual loans
 
$
15,645

 
$
26,575

Restructured loans (accruing)
 
49,475

 
38,739

Total impaired loans
 
$
65,120

 
$
65,314



9

Table of Contents


The following table provides additional information about impaired loans held by the Company at September 30, 2016 and December 31, 2015, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.


(In thousands)
Recorded Investment
Unpaid Principal
Balance
 Related
Allowance
September 30, 2016
 
 
 
With no related allowance recorded:
 
 
 
Business
$
7,053

$
10,018

$

Real estate – construction and land
1,228

1,594


 
$
8,281

$
11,612

$

With an allowance recorded:
 
 
 
Business
$
28,369

$
30,171

$
1,284

Real estate – construction and land
214

219

18

Real estate – business
7,662

9,077

514

Real estate – personal
6,703

9,564

602

Consumer
5,537

5,537

66

Revolving home equity
636

646

18

Consumer credit card
7,718

7,718

567

 
$
56,839

$
62,932

$
3,069

Total
$
65,120

$
74,544

$
3,069

December 31, 2015
 
 
 
With no related allowance recorded:
 
 
 
Business
$
9,330

$
11,777

$

Real estate – construction and land
2,961

8,956


Real estate – business
4,793

6,264


Real estate – personal
373

373


 
$
17,457

$
27,370

$

With an allowance recorded:
 
 
 
Business
$
18,227

$
20,031

$
1,119

Real estate – construction and land
1,227

2,804

63

Real estate – business
6,489

9,008

745

Real estate – personal
7,667

10,530

831

Consumer
5,599

5,599

63

Revolving home equity
704

852

67

Consumer credit card
7,944

7,944

596

 
$
47,857

$
56,768

$
3,484

Total
$
65,314

$
84,138

$
3,484




10

Table of Contents


Total average impaired loans for the three and nine month periods ended September 30, 2016 and 2015, respectively, are shown in the table below.

(In thousands)
Commercial
Personal Banking
Total
Average Impaired Loans:
 
 
 
For the three months ended September 30, 2016
 
 
 
Non-accrual loans
$
15,106

$
3,928

$
19,034

Restructured loans (accruing)
31,372

17,082

48,454

Total
$
46,478

$
21,010

$
67,488

For the nine months ended September 30, 2016
 
 
 
Non-accrual loans
$
19,387

$
4,336

$
23,723

Restructured loans (accruing)
29,117

17,359

46,476

Total
$
48,504

$
21,695

$
70,199

For the three months ended September 30, 2015
 
 
 
Non-accrual loans
$
21,119

$
5,179

$
26,298

Restructured loans (accruing)
13,399

18,221

31,620

Total
$
34,518

$
23,400

$
57,918

For the nine months ended September 30, 2015
 
 
 
Non-accrual loans
$
25,784

$
5,791

$
31,575

Restructured loans (accruing)
16,612

18,854

35,466

Total
$
42,396

$
24,645

$
67,041


The table below shows interest income recognized during the three and nine month periods ended September 30, 2016 and 2015, respectively, for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 14.
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In thousands)
2016
2015
 
2016
2015
Interest income recognized on impaired loans:
 
 
 
 
 
Business
$
277

$
63

 
$
830

$
188

Real estate – construction and land
2

22

 
7

66

Real estate – business
42

33

 
126

99

Real estate – personal
39

47

 
118

142

Consumer
89

87

 
267

261

Revolving home equity
7

6

 
22

17

Consumer credit card
174

186

 
522

558

Total
$
630

$
444

 
$
1,892

$
1,331



11

Table of Contents


Delinquent and non-accrual loans
The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at September 30, 2016 and December 31, 2015.




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

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



Total
September 30, 2016
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
4,758,519

$
3,100

$
506

$
8,758

$
4,770,883

Real estate – construction and land
794,731

2,357

2,147

1,310

800,545

Real estate – business
2,513,270

5,011

327

1,920

2,520,528

Personal Banking:
 
 
 
 
 
Real estate – personal
1,954,889

6,901

2,581

3,634

1,968,005

Consumer
1,951,011

19,510

2,448


1,972,969

Revolving home equity
414,251

2,246

1,071

23

417,591

Consumer credit card
742,820

9,366

7,836


760,022

Overdrafts
19,254

444



19,698

Total
$
13,148,745

$
48,935

$
16,916

$
15,645

$
13,230,241

December 31, 2015
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
4,384,149

$
2,306

$
564

$
10,874

$
4,397,893

Real estate – construction and land
617,838

3,142


3,090

624,070

Real estate – business
2,340,919

6,762


7,863

2,355,544

Personal Banking:
 
 
 
 
 
Real estate – personal
1,901,330

7,117

3,081

4,425

1,915,953

Consumer
1,903,389

18,273

2,703


1,924,365

Revolving home equity
427,998

2,641

2,019

323

432,981

Consumer credit card
762,750

8,894

8,100


779,744

Overdrafts
5,834

308



6,142

Total
$
12,344,207

$
49,443

$
16,467

$
26,575

$
12,436,692



Credit quality
The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.

12

Table of Contents


Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
September 30, 2016
 
 
 
 
Pass
$
4,625,175

$
798,168

$
2,421,327

$
7,844,670

Special mention
76,105

860

46,281

123,246

Substandard
60,845

207

51,000

112,052

Non-accrual
8,758

1,310

1,920

11,988

Total
$
4,770,883

$
800,545

$
2,520,528

$
8,091,956

December 31, 2015
 
 
 
 
Pass
$
4,278,857

$
618,788

$
2,281,565

$
7,179,210

Special mention
49,302

1,033

15,009

65,344

Substandard
58,860

1,159

51,107

111,126

Non-accrual
10,874

3,090

7,863

21,827

Total
$
4,397,893

$
624,070

$
2,355,544

$
7,377,507


The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At September 30, 2016, these were comprised of $251.7 million in personal real estate loans, or 4.9% of the Personal Banking portfolio, compared to $257.8 million at December 31, 2015. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2016 and December 31, 2015 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
September 30, 2016
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.4
%
4.2
%
1.2
%
4.0
%
600 - 659
3.0

8.5

3.8

11.9

660 - 719
10.3

21.0

13.2

31.4

720 - 779
24.8

26.5

28.1

28.4

780 and over
60.5

39.8

53.7

24.3

Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2015
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.5
%
4.5
%
1.5
%
3.9
%
600 - 659
3.0

9.7

3.9

12.0

660 - 719
9.1

21.8

13.6

31.7

720 - 779
25.0

26.4

28.4

27.9

780 and over
61.4

37.6

52.6

24.5

Total
100.0
%
100.0
%
100.0
%
100.0
%





13

Table of Contents


Troubled debt restructurings
As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $59.0 million at September 30, 2016. 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 $9.6 million at September 30, 2016. Other performing restructured loans totaled $49.5 million at September 30, 2016. These include certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result the loans were classified as troubled debt restructurings. These commercial loans totaled $33.2 million at September 30, 2016. 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 $7.7 million at September 30, 2016. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At September 30, 2016, these loans totaled $8.2 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at September 30, 2016, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
(In thousands)
September 30, 2016
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
34,227

$

Real estate - construction and land
784

676

Real estate - business
5,742

751

Personal Banking:
 
 
Real estate - personal
4,387

358

Consumer
5,560

62

Revolving home equity
613

67

Consumer credit card
7,718

537

Total restructured loans
$
59,031

$
2,451


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 $926 thousand 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

14

Table of Contents


restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begun.

The Company had commitments of $11.5 million at September 30, 2016 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 September 30, 2016, the fair value of these loans was $4.4 million, and the unpaid principal balance was $4.3 million.

Beginning in the third quarter of 2015, the Company has designated certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans at various times while the student is attending school or shortly after graduation. At September 30, 2016, the balance of these loans was $5.1 million. These loans are carried at lower of cost or fair value.
 
In March 2016, the Company designated certain loans secured by automobiles as held for sale in order to rebalance the auto loan portfolio in relation to the Company's other loan categories. The loans were sold in the second and third quarters and totaled $33.6 million, resulting in a net gain of $56 thousand. The group of loans were representative of the overall auto loan portfolio and were sold to other financial institutions.

At September 30, 2016, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing. Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate. Gains and losses in fair value resulting from the application of the fair value option, or lower of cost or fair value accounting, are recognized in loan fees and sales in the consolidated statements of income.

Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $950 thousand and $2.8 million at September 30, 2016 and December 31, 2015, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.5 million and $3.3 million at September 30, 2016 and December 31, 2015, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.

3. Investment Securities

Investment securities, at fair value, consisted of the following at September 30, 2016 and December 31, 2015.
 
(In thousands)
Sept. 30, 2016
Dec. 31, 2015
Available for sale
$
9,438,871

$
9,777,004

Trading
28,586

11,890

Non-marketable
108,224

112,786

Total investment securities
$
9,575,681

$
9,901,680


Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. The available for sale and the trading portfolios are carried at fair value. 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 $46.9 million at September 30, 2016 and $46.8 million at December 31, 2015. 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. These holdings are carried at cost. Non-marketable securities also include private equity investments, which amounted to $61.0 million at September 30, 2016 and $65.6 million at December 31, 2015. In the absence of readily ascertainable market values, these securities are carried at estimated fair value.


15

Table of Contents


A summary of the available for sale investment securities by maturity groupings as of September 30, 2016 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 but are collateralized by residential mortgages. 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
$
59,068

$
60,028

After 1 but within 5 years
500,823

514,620

After 5 but within 10 years
106,427

110,802

After 10 years
72,340

70,199

Total U.S. government and federal agency obligations
738,658

755,649

Government-sponsored enterprise obligations:
 
 
Within 1 year
11,589

11,627

After 1 but within 5 years
419,071

424,410

After 5 but within 10 years
14,988

15,205

Total government-sponsored enterprise obligations
445,648

451,242

State and municipal obligations:
 
 
Within 1 year
153,968

155,078

After 1 but within 5 years
626,147

641,498

After 5 but within 10 years
941,494

983,236

After 10 years
55,248

56,189

Total state and municipal obligations
1,776,857

1,836,001

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
2,590,902

2,663,677

  Non-agency mortgage-backed securities
922,302

937,208

  Asset-backed securities
2,403,019

2,409,324

Total mortgage and asset-backed securities
5,916,223

6,010,209

Other debt securities:
 
 
Within 1 year
5,997

6,025

After 1 but within 5 years
97,136

98,939

After 5 but within 10 years
214,311

222,376

After 10 years
11,588

11,472

Total other debt securities
329,032

338,812

Equity securities
5,678

46,958

Total available for sale investment securities
$
9,212,096

$
9,438,871


Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $437.9 million, at fair value, at September 30, 2016. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $46.9 million at September 30, 2016.


16

Table of Contents


For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.
 
 
(In thousands)
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
September 30, 2016
 
 
 
 
U.S. government and federal agency obligations
$
738,658

$
19,132

$
(2,141
)
$
755,649

Government-sponsored enterprise obligations
445,648

5,637

(43
)
451,242

State and municipal obligations
1,776,857

59,760

(616
)
1,836,001

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,590,902

72,803

(28
)
2,663,677

  Non-agency mortgage-backed securities
922,302

15,145

(239
)
937,208

  Asset-backed securities
2,403,019

14,026

(7,721
)
2,409,324

Total mortgage and asset-backed securities
5,916,223

101,974

(7,988
)
6,010,209

Other debt securities
329,032

9,946

(166
)
338,812

Equity securities
5,678

41,280


46,958

Total
$
9,212,096

$
237,729

$
(10,954
)
$
9,438,871

December 31, 2015
 
 
 
 
U.S. government and federal agency obligations
$
729,846

$
5,051

$
(7,821
)
$
727,076

Government-sponsored enterprise obligations
794,912

2,657

(4,546
)
793,023

State and municipal obligations
1,706,635

37,061

(1,739
)
1,741,957

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
2,579,031

47,856

(8,606
)
2,618,281

  Non-agency mortgage-backed securities
879,186

8,596

(7,819
)
879,963

  Asset-backed securities
2,660,201

1,287

(17,107
)
2,644,381

Total mortgage and asset-backed securities
6,118,418

57,739

(33,532
)
6,142,625

Other debt securities
335,925

377

(4,982
)
331,320

Equity securities
5,678

35,325


41,003

Total
$
9,691,414

$
138,210

$
(52,620
)
$
9,777,004


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, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At September 30, 2016, the fair value of securities on this watch list was $103.7 million compared to $95.8 million at December 31, 2015.

As of September 30, 2016, 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 $34.6 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.2 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at September 30, 2016 included the following:

Significant Inputs
Range
Prepayment CPR
0%
-
25%
Projected cumulative default
18%
-
51%
Credit support
0%
-
30%
Loss severity
17%
-
63%

17

Table of Contents


The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.
 
For the Nine Months Ended September 30
(In thousands)
2016
2015
Cumulative OTTI credit losses at January 1
$
14,129

$
13,734

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

76

Credit losses on debt securities for which impairment was previously recognized
270

407

Increase in expected cash flows that are recognized over remaining life of security
(171
)
(73
)
Cumulative OTTI credit losses at September 30
$
14,228

$
14,144


Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.
 
Less than 12 months
 
12 months or longer
 
Total
 
(In thousands)
   Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
September 30, 2016
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
36,586

$
61

 
$
33,613

$
2,080

 
$
70,199

$
2,141

Government-sponsored enterprise obligations
49,901

43

 


 
49,901

43

State and municipal obligations
26,335

227

 
16,276

389

 
42,611

616

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
24,564

23

 
2,304

5

 
26,868

28

   Non-agency mortgage-backed securities
61,283

127

 
39,070

112

 
100,353

239

   Asset-backed securities
279,282

1,510

 
365,402

6,211

 
644,684

7,721

Total mortgage and asset-backed securities
365,129

1,660

 
406,776

6,328

 
771,905

7,988

Other debt securities
7,936

36

 
12,458

130

 
20,394

166

Total
$
485,887

$
2,027

 
$
469,123

$
8,927

 
$
955,010

$
10,954

December 31, 2015
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
491,998

$
3,098

 
$
31,012

$
4,723

 
$
523,010

$
7,821

Government-sponsored enterprise obligations
157,830

1,975

 
110,250

2,571

 
268,080

4,546

State and municipal obligations
66,998

544

 
31,120

1,195

 
98,118

1,739

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
530,035

2,989

 
291,902

5,617

 
821,937

8,606

   Non-agency mortgage-backed securities
653,603

7,059

 
54,536

760

 
708,139

7,819

   Asset-backed securities
2,207,922

12,492

 
223,311

4,615

 
2,431,233

17,107

Total mortgage and asset-backed securities
3,391,560

22,540

 
569,749

10,992

 
3,961,309

33,532

Other debt securities
244,452

3,687

 
25,218

1,295

 
269,670

4,982

Total
$
4,352,838

$
31,844

 
$
767,349

$
20,776

 
$
5,120,187

$
52,620


The total available for sale portfolio consisted of approximately 2,000 individual securities at September 30, 2016. The portfolio included 152 securities, having an aggregate fair value of $955.0 million, that were in an unrealized loss position at September 30, 2016, compared to 466 securities, with a fair value of $5.1 billion, at December 31, 2015. The total amount of unrealized losses on these securities decreased $41.7 million to $11.0 million at September 30, 2016, largely due to a lower rate environment. At September 30, 2016, the fair value of securities in an unrealized loss position for 12 months or longer totaled $469.1 million, or 5.0% of the total portfolio value.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $616 thousand at September 30, 2016, of which $378 thousand related to auction rate securities. This portfolio totaled $1.8 billion at fair value, or 19.5% 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 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.

    

18

Table of Contents


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 Nine Months Ended September 30
(In thousands)
2016
2015
Proceeds from sales of available for sale securities
$

$
675,870

Proceeds from sales of non-marketable securities
7,946

9,023