3. Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2012 and December 31, 2011.




(In thousands)	Mar. 31, 2012		Dec. 31, 2011
Available for sale:
U.S. government and federal agency obligations	$	368,662	$	364,665
Government-sponsored enterprise obligations	277,924		315,698
State and municipal obligations	1,326,867		1,245,284
Agency mortgage-backed securities	3,866,456		4,106,059
Non-agency mortgage-backed securities	294,221		316,902
Asset-backed securities	2,817,492		2,693,143
Other debt securities	123,355		141,260
Equity securities	45,422		41,691
Total available for sale	9,120,399		9,224,702
Trading	34,178		17,853
Non-marketable	120,734		115,832
Total investment securities	$	9,275,311	$	9,358,387

Most of the Company's investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $45.3 million at both March 31, 2012 and December 31, 2011. 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 $75.4 million and $70.5 million at March 31, 2012 and December 31, 2011, respectively.

A summary of the available for sale investment securities by maturity groupings as of March 31, 2012 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.




(Dollars in thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	7,856	$	8,011
After 1 but within 5 years	186,985		208,287
After 5 but within 10 years	133,940		152,364
Total U.S. government and federal agency obligations	328,781		368,662
Government-sponsored enterprise obligations:
Within 1 year	31,111		31,230
After 1 but within 5 years	108,983		112,296
After 5 but within 10 years	12,114		12,219
After 10 years	122,904		122,179
Total government-sponsored enterprise obligations	275,112		277,924
State and municipal obligations:
Within 1 year	82,630		83,542
After 1 but within 5 years	542,924		561,698
After 5 but within 10 years	471,973		484,430
After 10 years	210,317		197,197
Total state and municipal obligations	1,307,844		1,326,867
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,742,525		3,866,456
Non-agency mortgage-backed securities	287,375		294,221
Asset-backed securities	2,815,676		2,817,492
Total mortgage and asset-backed securities	6,845,576		6,978,169
Other debt securities:
Within 1 year	47,999		49,544
After 1 but within 5 years	63,858		67,837
After 5 but within 10 years	5,974		5,974
Total other debt securities	117,831		123,355
Equity securities	21,252		45,422
Total available for sale investment securities	$	8,896,396	$	9,120,399

Included in U.S. government securities are $360.5 million, at fair value, of U.S. Treasury inflation-protected securities (TIPS). 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 $129.9 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $27.5 million at March 31, 2012.

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, 2012
U.S. government and federal agency obligations	$	328,781	$	39,881	$	—		$	368,662
Government-sponsored enterprise obligations	275,112		3,580		(768		)	277,924
State and municipal obligations	1,307,844		36,873		(17,850		)	1,326,867
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,742,525		124,282		(351		)	3,866,456
Non-agency mortgage-backed securities	287,375		10,288		(3,442		)	294,221
Asset-backed securities	2,815,676		8,409		(6,593		)	2,817,492
Total mortgage and asset-backed securities	6,845,576		142,979		(10,386		)	6,978,169
Other debt securities	117,831		5,524		—			123,355
Equity securities	21,252		24,170		—			45,422
Total	$	8,896,396	$	253,007	$	(29,004	)	$	9,120,399
December 31, 2011
U.S. government and federal agency obligations	$	328,530	$	36,135	$	—		$	364,665
Government-sponsored enterprise obligations	311,529		4,169		—			315,698
State and municipal obligations	1,220,840		35,663		(11,219		)	1,245,284
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,989,464		117,088		(493		)	4,106,059
Non-agency mortgage-backed securities	315,752		8,962		(7,812		)	316,902
Asset-backed securities	2,692,436		7,083		(6,376		)	2,693,143
Total mortgage and asset-backed securities	6,997,652		133,133		(14,681		)	7,116,104
Other debt securities	135,190		6,070		—			141,260
Equity securities	18,354		23,337		—			41,691
Total	$	9,012,095	$	238,507	$	(25,900	)	$	9,224,702

The Company's impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3/A-, whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management's judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2012, the fair value of securities on this watch list was $211.5 million.

As of March 31, 2012, 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 $118.3 million. The credit-related portion of the impairment totaled $10.4 million and was recorded in earnings. The noncredit-related portion of the impairment totaled $1.5 million on a pre-tax basis, and has been recognized in accumulated other comprehensive income. The Company does not intend to sell these securities and believes it is not more likely than not that it will be required to sell the securities before the recovery of their amortized cost bases.

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




Significant Inputs	Range
Prepayment CPR	0% - 31%
Projected cumulative default	13% - 57%
Credit support	0% - 17%
Loss severity	33% - 57%

The following table shows changes in the credit losses recorded in the three months ended March 31, 2012 and 2011, for which a portion of an OTTI was recognized in other comprehensive income.




	For the Three Months Ended March 31
(In thousands)	2012			2011
Balance at January 1	$	9,931		$	7,542
Credit losses on debt securities for which impairment was previously recognized	320			274
Increase in expected cash flows that are recognized over remaining life of security	(38		)	—
Balance at March 31	$	10,213		$	7,816

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, 2012
Government-sponsored enterprise obligations	$	82,149	$	768	$	—	$	—	$	82,149	$	768
State and municipal obligations	148,038		1,582		87,350		16,268		235,388		17,850
Mortgage and asset-backed securities:
Agency mortgage-backed securities	60,464		351		—		—		60,464		351
Non-agency mortgage-backed securities	4,602		115		72,198		3,327		76,800		3,442
Asset-backed securities	708,365		4,897		96,157		1,696		804,522		6,593
Total mortgage and asset-backed securities	773,431		5,363		168,355		5,023		941,786		10,386
Total	$	1,003,618	$	7,713	$	255,705	$	21,291	$	1,259,323	$	29,004
December 31, 2011
State and municipal obligations	$	65,962	$	712	$	110,807	$	10,507	$	176,769	$	11,219
Mortgage and asset-backed securities:
Agency mortgage-backed securities	72,019		493		—		—		72,019		493
Non-agency mortgage-backed securities	23,672		784		118,972		7,028		142,644		7,812
Asset-backed securities	1,236,526		4,982		87,224		1,394		1,323,750		6,376
Total mortgage and asset-backed securities	1,332,217		6,259		206,196		8,422		1,538,413		14,681
Total	$	1,398,179	$	6,971	$	317,003	$	18,929	$	1,715,182	$	25,900

The total available for sale portfolio consisted of approximately 1,550 individual securities at March 31, 2012. The portfolio included 181 securities, having an aggregate fair value of $1.3 billion that were in a loss position at March 31, 2012. Securities identified as other-than-temporarily impaired which have been in a loss position for 12 months or longer totaled $60.7 million at fair value, or .7% of the total available for sale portfolio value. Securities with temporary impairment which have been in a loss position for 12 months or longer totaled $195.0 million, or 2.1% of the total portfolio value.

The Company's holdings of state and municipal obligations included gross unrealized losses of $17.9 million at March 31, 2012. Of these losses, $16.5 million related to auction rate securities (ARS) and $1.3 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.2 billion at fair value, or 13.1% of total available for sale securities. The average credit quality of the portfolio, excluding ARS, is Aa2 as rated by Moody's.

The portfolio is diversified in order to reduce risk, and information about the largest holdings, by state and economic sector, is shown in the table below.




	% of Portfolio	Average Life (in years)	Average Rating (Moody's)
At March 31, 2012
Texas	10.1%	5.3	Aa1
Florida	9.1	4.7	Aa3
Washington	6.2	4.0	Aa2
Illinois	4.9	6.0	Aa3
Ohio	4.9	5.1	Aa2
General obligation	27.5%	4.5	Aa2
Housing	20.0	4.6	Aa1
Transportation	14.5	4.0	Aa3
Lease	13.9	3.7	Aa3
Limited Tax	6.4	5.1	Aa2

The remaining unrealized losses on the Company's investments, as shown in the preceding tables, are largely contained in the categories of non-agency mortgage-backed and other asset-backed securities. These securities are not guaranteed by an outside agency and are dependent on payments received from the underlying collateral. While virtually all of these securities, at purchase date, were comprised of senior tranches and were highly rated by various rating agencies, changes in interest rates, the adverse housing market, liquidity pressures, and overall economic climate has resulted in low fair values for certain of these securities. As mentioned above, the Company maintains a watch list comprised mostly of these securities, and has recorded OTTI losses on certain of these securities.

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)	2012			2011
Proceeds from sales of available for sale securities	$	4,951		$	11,202
Proceeds from sales of non-marketable securities	2,035			—
Total proceeds	$	6,986		$	11,202
Available for sale:
Gains realized on sales	$	342		$	176
Other-than-temporary impairment recognized on debt securities	(320		)	(274		)
Non-marketable:
Gains realized on sales	93			—
Losses realized on sales	(200		)	—
Fair value adjustments, net	4,125			1,425
Investment securities gains, net	$	4,040		$	1,327

At March 31, 2012, securities carried at $4.2 billion 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 $420.1 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 exceeds 10% of stockholders' equity.