Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2013 and December 31, 2012.



(In thousands)	Mar. 31, 2013		Dec. 31, 2012
Available for sale	$	9,572,751	$	9,522,248
Trading	23,400		28,837
Non-marketable	118,620		118,650
Total investment securities	$	9,714,771	$	9,669,735

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $45.4 million at both March 31, 2013 and December 31, 2012. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $73.2 million at both March 31, 2013 and December 31, 2012.

A summary of the available for sale investment securities by maturity groupings as of March 31, 2013 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
After 1 but within 5 years	$	245,326	$	274,127
After 5 but within 10 years	79,911		93,321
After 10 years	72,452		69,860
Total U.S. government and federal agency obligations	397,689		437,308
Government-sponsored enterprise obligations:
Within 1 year	12,637		12,734
After 1 but within 5 years	97,483		100,759
After 5 but within 10 years	169,711		168,919
After 10 years	171,279		171,290
Total government-sponsored enterprise obligations	451,110		453,702
State and municipal obligations:
Within 1 year	105,160		105,961
After 1 but within 5 years	683,255		710,447
After 5 but within 10 years	559,371		570,030
After 10 years	280,828		272,730
Total state and municipal obligations	1,628,614		1,659,168
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,152,708		3,268,377
Non-agency mortgage-backed securities	229,520		243,907
Asset-backed securities	3,271,145		3,285,310
Total mortgage and asset-backed securities	6,653,373		6,797,594
Other debt securities:
Within 1 year	38,213		39,484
After 1 but within 5 years	45,774		46,724
After 5 but within 10 years	86,381		85,811
Total other debt securities	170,368		172,019
Equity securities	19,255		52,960
Total available for sale investment securities	$	9,320,409	$	9,572,751

Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities (TIPS), which totaled $437.2 million, at fair value, at March 31, 2013. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $128.1 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 $37.0 million at March 31, 2013.

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, 2013
U.S. government and federal agency obligations	$	397,689	$	42,212	$	(2,593	)	$	437,308
Government-sponsored enterprise obligations	451,110		4,119		(1,527		)	453,702
State and municipal obligations	1,628,614		46,279		(15,725		)	1,659,168
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,152,708		117,875		(2,206		)	3,268,377
Non-agency mortgage-backed securities	229,520		14,595		(208		)	243,907
Asset-backed securities	3,271,145		15,967		(1,802		)	3,285,310
Total mortgage and asset-backed securities	6,653,373		148,437		(4,216		)	6,797,594
Other debt securities	170,368		2,333		(682		)	172,019
Equity securities	19,255		33,705		—			52,960
Total	$	9,320,409	$	277,085	$	(24,743	)	$	9,572,751
December 31, 2012
U.S. government and federal agency obligations	$	399,971	$	40,395	$	(1,607	)	$	438,759
Government-sponsored enterprise obligations	467,063		5,188		(677		)	471,574
State and municipal obligations	1,585,926		46,076		(16,295		)	1,615,707
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,248,007		132,953		(5		)	3,380,955
Non-agency mortgage-backed securities	224,223		12,906		(118		)	237,011
Asset-backed securities	3,152,913		15,848		(1,367		)	3,167,394
Total mortgage and asset-backed securities	6,625,143		161,707		(1,490		)	6,785,360
Other debt securities	174,727		3,127		(102		)	177,752
Equity securities	5,695		27,401		—			33,096
Total	$	9,258,525	$	283,894	$	(20,171	)	$	9,522,248

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3/A-, whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2013, the fair value of securities on this watch list was $214.8 million compared to $220.7 million at December 31, 2012.

As of March 31, 2013, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $96.4 million. The cumulative credit-related portion of the impairment initially recorded on these securities totaled $12.0 million and was recorded in earnings. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

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



Significant Inputs	Range
Prepayment CPR	2%	-	25%
Projected cumulative default	15%	-	58%
Credit support	0%	-	16%
Loss severity	17%	-	95%

The following table shows changes in the credit losses recorded in earnings during the during the three months ended March 31, 2013 and 2012, for which a portion of an OTTI was recognized in other comprehensive income.



	For the Three Months Ended March 31
(In thousands)	2013			2012
Balance at January 1	$	11,306		$	9,931
Credit losses on debt securities for which impairment was previously recognized	442			320
Increase in expected cash flows that are recognized over remaining life of security	(20		)	(38		)
Balance at March 31	$	11,728		$	10,213

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, 2013
U.S. government and federal agency obligations	$	69,860	$	2,593	$	—	$	—	$	69,860	$	2,593
Government-sponsored enterprise obligations	177,432		1,527		—		—		177,432		1,527
State and municipal obligations	165,614		3,500		82,492		12,225		248,106		15,725
Mortgage and asset-backed securities:
Agency mortgage-backed securities	463,362		2,206		—		—		463,362		2,206
Non-agency mortgage-backed securities	22,953		131		8,026		77		30,979		208
Asset-backed securities	594,084		988		114,122		814		708,206		1,802
Total mortgage and asset-backed securities	1,080,399		3,325		122,148		891		1,202,547		4,216
Other debt securities	71,722		682		—		—		71,722		682
Total	$	1,565,027	$	11,627	$	204,640	$	13,116	$	1,769,667	$	24,743
December 31, 2012
U.S. government and federal agency obligations	$	71,464	$	1,607	$	—	$	—	$	71,464	$	1,607
Government-sponsored enterprise obligations	102,082		677		—		—		102,082		677
State and municipal obligations	173,600		2,107		80,530		14,188		254,130		16,295
Mortgage and asset-backed securities:
Agency mortgage-backed securities	5,874		5		—		—		5,874		5
Non-agency mortgage-backed securities	—		—		12,609		118		12,609		118
Asset-backed securities	338,007		976		78,684		391		416,691		1,367
Total mortgage and asset-backed securities	343,881		981		91,293		509		435,174		1,490
Other debt securities	39,032		102		—		—		$	39,032	$	102
Total	$	730,059	$	5,474	$	171,823	$	14,697	$	901,882	$	20,171

The total available for sale portfolio consisted of approximately 1,700 individual securities at March 31, 2013. The portfolio included 197 securities, having an aggregate fair value of $1.8 billion, that were in an unrealized loss position at March 31, 2013, compared to 144 securities, with a fair value of $901.9 million, at December 31, 2012. The total amount of unrealized loss on these securities increased $4.6 million to $24.7 million at March 31, 2013, which was partly related to recent acquisitions of mortgage and asset-backed securities. At March 31, 2013, securities in an unrealized loss position for 12 months or longer included those with temporary impairment totaling $202.2 million, or 2.1% of the total portfolio value, and other securities identified as other-than-temporarily impaired totaling $2.4 million.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $15.7 million at March 31, 2013. Of these losses, $12.2 million related to auction rate securities, which are discussed above, and $3.5 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.5 billion at fair value, or 16.0% of total available for sale securities. The average credit quality of the portfolio, excluding ARS, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the table below.



	% of Portfolio		Average Life (in years)	Average Rating (Moody’s)
At March 31, 2013
Texas	10.0	%	5.5	Aa1
Florida	9.5		5.0	Aa2
Ohio	5.8		5.5	Aa2
Washington	5.6		5.1	Aa2
New York	5.1		7.0	Aa2
General obligation	31.9	%	5.0	Aa2
Housing	17.6		6.6	Aa1
Lease	15.4		5.0	Aa3
Transportation	13.2		4.6	Aa3
Limited tax	5.1		5.7	Aa1

The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.



	For the Three Months Ended March 31
(In thousands)	2013			2012
Proceeds from sales of available for sale securities	$	—		$	4,951
Proceeds from sales of non-marketable securities	52			2,035
Total proceeds	$	52		$	6,986
Available for sale:
Gains realized on sales	$	—		$	342
Other-than-temporary impairment recognized on debt securities	(442		)	(320		)
Non-marketable:
Gains realized on sales	52			93
Losses realized on sales	—			(200		)
Fair value adjustments, net	(1,775		)	4,125
Investment securities gains (losses), net	$	(2,165	)	$	4,040

At March 31, 2013, securities totaling $4.8 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve Bank and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $733.5 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.