Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2014 and December 31, 2013.



(In thousands)	June 30, 2014		Dec. 31, 2013
Available for sale	$	9,282,640	$	8,915,680
Trading	15,684		19,993
Non-marketable	93,748		107,324
Total investment securities	$	9,392,072	$	9,042,997

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $46.5 million at both June 30, 2014 and December 31, 2013. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $47.1 million at June 30, 2014 and $60.7 million at December 31, 2013.

A summary of the available for sale investment securities by maturity groupings as of June 30, 2014 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments and does not hold trust preferred securities.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	43,443	$	44,168
After 1 but within 5 years	259,660		276,658
After 5 but within 10 years	141,044		147,856
After 10 years	53,516		50,161
Total U.S. government and federal agency obligations	497,663		518,843
Government-sponsored enterprise obligations:
Within 1 year	32,831		33,057
After 1 but within 5 years	448,512		451,784
After 5 but within 10 years	143,551		137,177
After 10 years	142,006		136,211
Total government-sponsored enterprise obligations	766,900		758,229
State and municipal obligations:
Within 1 year	167,929		169,519
After 1 but within 5 years	710,057		734,237
After 5 but within 10 years	728,853		727,635
After 10 years	175,289		171,928
Total state and municipal obligations	1,782,128		1,803,319
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,726,315		2,795,929
Non-agency mortgage-backed securities	289,782		301,661
Asset-backed securities	2,914,610		2,920,062
Total mortgage and asset-backed securities	5,930,707		6,017,652
Other debt securities:
Within 1 year	11,939		12,012
After 1 but within 5 years	42,329		43,033
After 5 but within 10 years	86,067		83,607
Total other debt securities	140,335		138,652
Equity securities	4,194		45,945
Total available for sale investment securities	$	9,121,927	$	9,282,640

Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $518.7 million, at fair value, at June 30, 2014. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $132.1 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 $44.9 million at June 30, 2014.

For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2014
U.S. government and federal agency obligations	$	497,663	$	25,145	$	(3,965	)	$	518,843
Government-sponsored enterprise obligations	766,900		3,656		(12,327		)	758,229
State and municipal obligations	1,782,128		34,014		(12,823		)	1,803,319
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,726,315		79,719		(10,105		)	2,795,929
Non-agency mortgage-backed securities	289,782		12,546		(667		)	301,661
Asset-backed securities	2,914,610		9,861		(4,409		)	2,920,062
Total mortgage and asset-backed securities	5,930,707		102,126		(15,181		)	6,017,652
Other debt securities	140,335		790		(2,473		)	138,652
Equity securities	4,194		41,751		—			45,945
Total	$	9,121,927	$	207,482	$	(46,769	)	$	9,282,640
December 31, 2013
U.S. government and federal agency obligations	$	498,226	$	20,614	$	(13,144	)	$	505,696
Government-sponsored enterprise obligations	766,802		2,245		(27,281		)	741,766
State and municipal obligations	1,624,195		28,321		(33,345		)	1,619,171
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,743,803		54,659		(26,124		)	2,772,338
Non-agency mortgage-backed securities	236,595		12,008		(1,620		)	246,983
Asset-backed securities	2,847,368		6,872		(10,169		)	2,844,071
Total mortgage and asset-backed securities	5,827,766		73,539		(37,913		)	5,863,392
Other debt securities	147,581		671		(6,495		)	141,757
Equity securities	9,970		33,928		—			43,898
Total	$	8,874,540	$	159,318	$	(118,178	)	$	8,915,680

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At June 30, 2014, the fair value of securities on this watch list was $171.7 million compared to $188.8 million at December 31, 2013.

As of June 30, 2014, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $62.0 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $13.4 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 June 30, 2014 included the following:



Significant Inputs	Range
Prepayment CPR	1%	-	25%
Projected cumulative default	0%	-	56%
Credit support	0%	-	14%
Loss severity	20%	-	81%

The following table shows changes in the credit losses recorded in earnings during the six months ended June 30, 2014 and 2013, for which a portion of an OTTI was recognized in other comprehensive income.



	For the Six Months Ended June 30
(In thousands)	2014			2013
Balance at January 1	$	12,499		$	11,306
Credit losses on debt securities for which impairment was previously recognized	977			930
Increase in expected cash flows that are recognized over remaining life of security	(66		)	(40		)
Balance at June 30	$	13,410		$	12,196

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
June 30, 2014
U.S. government and federal agency obligations	$	—	$	—	$	32,570	$	3,965	$	32,570	$	3,965
Government-sponsored enterprise obligations	69,973		102		295,532		12,225		365,505		12,327
State and municipal obligations	131,531		711		355,533		12,112		487,064		12,823
Mortgage and asset-backed securities:
Agency mortgage-backed securities	4,775		16		400,697		10,089		405,472		10,105
Non-agency mortgage-backed securities	37,014		23		43,762		644		80,776		667
Asset-backed securities	236,398		294		296,606		4,115		533,004		4,409
Total mortgage and asset-backed securities	278,187		333		741,065		14,848		1,019,252		15,181
Other debt securities	6,492		3		83,842		2,470		90,334		2,473
Total	$	486,183	$	1,149	$	1,508,542	$	45,620	$	1,994,725	$	46,769
December 31, 2013
U.S. government and federal agency obligations	$	96,172	$	243	$	59,677	$	12,901	$	155,849	$	13,144
Government-sponsored enterprise obligations	487,317		18,155		93,654		9,126		580,971		27,281
State and municipal obligations	478,818		15,520		178,150		17,825		656,968		33,345
Mortgage and asset-backed securities:
Agency mortgage-backed securities	717,778		26,124		—		—		717,778		26,124
Non-agency mortgage-backed securities	53,454		918		22,289		702		75,743		1,620
Asset-backed securities	1,088,556		9,072		58,398		1,097		1,146,954		10,169
Total mortgage and asset-backed securities	1,859,788		36,114		80,687		1,799		1,940,475		37,913
Other debt securities	90,028		5,604		9,034		891		99,062		6,495
Total	$	3,012,123	$	75,636	$	421,202	$	42,542	$	3,433,325	$	118,178

The total available for sale portfolio consisted of nearly 1,900 individual securities at June 30, 2014. The portfolio included 297 securities, having an aggregate fair value of $2.0 billion, that were in an unrealized loss position at June 30, 2014, compared to 507 securities, with a fair value of $3.4 billion, at December 31, 2013. The total amount of unrealized loss on these securities decreased $71.4 million to $46.8 million at June 30, 2014. At June 30, 2014, the fair value of securities in an unrealized loss position for 12 months or longer totaled $1.5 billion, or 16.3% of the total portfolio value, and did not include any securities identified as other-than-temporarily impaired.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $12.8 million at June 30, 2014. Of these losses, $6.0 million related to auction rate securities and $6.9 million related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.7 billion at fair value, or 18.0% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the table below. The Company does not have exposure to obligations of municipalities which have filed for Chapter 9 bankruptcy. The Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.



	% of Portfolio		Average Life (in years)	Average Rating (Moody’s)
At June 30, 2014
Texas	10.6	%	4.5	Aa1
Florida	8.9		4.4	Aa3
New York	7.5		6.9	Aa2
Washington	5.8		5.7	Aa2
Ohio	5.7		5.0	Aa2
General obligation	34.9	%	5.2	Aa2
Lease	15.4		4.8	Aa3
Housing	13.7		4.3	Aa1
Transportation	12.7		4.7	A1
Limited tax	7.5		6.4	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 Six Months Ended June 30
(In thousands)	2014			2013
Proceeds from sales of available for sale securities	$	30,998		$	—
Proceeds from sales of non-marketable securities	32,901			4,096
Total proceeds	$	63,899		$	4,096
Available for sale:
Losses realized on sales	$	(5,197	)	$	—
Gain realized on donation	1,570			1,375
Other-than-temporary impairment recognized on debt securities	(977		)	(930		)
Non-marketable:
Gains realized on sales	1,472			603
Losses realized on sales	(134		)	(2,979		)
Fair value adjustments, net	10,745			(1,802		)
Investment securities gains (losses), net	$	7,479		$	(3,733	)

At June 30, 2014, securities totaling $5.1 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 $652.0 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.