Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2015 and December 31, 2014.



(In thousands)	Mar. 31, 2015		Dec. 31, 2014
Available for sale	$	9,917,242	$	9,523,560
Trading	15,501		15,357
Non-marketable	110,560		106,875
Total investment securities	$	10,043,303	$	9,645,792

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

A summary of the available for sale investment securities by maturity groupings as of March 31, 2015 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	89,740	$	91,306
After 1 but within 5 years	165,330		174,362
After 5 but within 10 years	115,646		120,640
After 10 years	52,174		50,084
Total U.S. government and federal agency obligations	422,890		436,392
Government-sponsored enterprise obligations:
Within 1 year	48,054		48,504
After 1 but within 5 years	537,133		541,462
After 5 but within 10 years	428,623		427,923
After 10 years	50,834		50,878
Total government-sponsored enterprise obligations	1,064,644		1,068,767
State and municipal obligations:
Within 1 year	167,015		168,215
After 1 but within 5 years	647,803		667,497
After 5 but within 10 years	809,242		821,062
After 10 years	157,225		154,771
Total state and municipal obligations	1,781,285		1,811,545
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,626,920		2,709,914
Non-agency mortgage-backed securities	478,285		490,233
Asset-backed securities	3,156,146		3,162,824
Total mortgage and asset-backed securities	6,261,351		6,362,971
Other debt securities:
Within 1 year	3,997		4,006
After 1 but within 5 years	56,061		56,765
After 5 but within 10 years	136,950		137,247
Total other debt securities	197,008		198,018
Equity securities	5,678		39,549
Total available for sale investment securities	$	9,732,856	$	9,917,242

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

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



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2015
U.S. government and federal agency obligations	$	422,890	$	16,427	$	(2,925	)	$	436,392
Government-sponsored enterprise obligations	1,064,644		7,224		(3,101		)	1,068,767
State and municipal obligations	1,781,285		36,872		(6,612		)	1,811,545
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,626,920		86,710		(3,716		)	2,709,914
Non-agency mortgage-backed securities	478,285		12,226		(278		)	490,233
Asset-backed securities	3,156,146		9,287		(2,609		)	3,162,824
Total mortgage and asset-backed securities	6,261,351		108,223		(6,603		)	6,362,971
Other debt securities	197,008		1,496		(486		)	198,018
Equity securities	5,678		33,871		—			39,549
Total	$	9,732,856	$	204,113	$	(19,727	)	$	9,917,242
December 31, 2014
U.S. government and federal agency obligations	$	497,336	$	9,095	$	(5,024	)	$	501,407
Government-sponsored enterprise obligations	968,574		2,593		(8,040		)	963,127
State and municipal obligations	1,789,215		32,340		(8,354		)	1,813,201
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,523,377		75,923		(5,592		)	2,593,708
Non-agency mortgage-backed securities	372,911		11,061		(1,228		)	382,744
Asset-backed securities	3,090,174		6,922		(5,103		)	3,091,993
Total mortgage and asset-backed securities	5,986,462		93,906		(11,923		)	6,068,445
Other debt securities	140,784		420		(2,043		)	139,161
Equity securities	3,931		34,288		—			38,219
Total	$	9,386,302	$	172,642	$	(35,384	)	$	9,523,560

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

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

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



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

The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.



	For the Three Months Ended March 31
(In thousands)	2015			2014
Cumulative OTTI credit losses at January 1	$	13,734		$	12,499
Credit losses on debt securities for which impairment was previously recognized	17			346
Increase in expected cash flows that are recognized over remaining life of security	(29		)	(25		)
Cumulative OTTI credit losses at March 31	$	13,722		$	12,820

Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2015
U.S. government and federal agency obligations	$	—	$	—	$	32,641	$	2,925	$	32,641	$	2,925
Government-sponsored enterprise obligations	11,439		35		159,458		3,066		170,897		3,101
State and municipal obligations	81,475		315		125,284		6,297		206,759		6,612
Mortgage and asset-backed securities:
Agency mortgage-backed securities	33,319		35		323,023		3,681		356,342		3,716
Non-agency mortgage-backed securities	29,873		47		43,981		231		73,854		278
Asset-backed securities	852,860		801		157,377		1,808		1,010,237		2,609
Total mortgage and asset-backed securities	916,052		883		524,381		5,720		1,440,433		6,603
Other debt securities	24,001		48		41,195		438		65,196		486
Total	$	1,032,967	$	1,281	$	882,959	$	18,446	$	1,915,926	$	19,727
December 31, 2014
U.S. government and federal agency obligations	$	90,261	$	818	$	32,077	$	4,206	$	122,338	$	5,024
Government-sponsored enterprise obligations	224,808		922		224,779		7,118		449,587		8,040
State and municipal obligations	172,980		646		215,702		7,708		388,682		8,354
Mortgage and asset-backed securities:
Agency mortgage-backed securities	55,128		429		381,617		5,163		436,745		5,592
Non-agency mortgage-backed securities	141,655		609		43,659		619		185,314		1,228
Asset-backed securities	1,424,457		2,009		159,098		3,094		1,583,555		5,103
Total mortgage and asset-backed securities	1,621,240		3,047		584,374		8,876		2,205,614		11,923
Other debt securities	16,434		55		80,203		1,988		96,637		2,043
Total	$	2,125,723	$	5,488	$	1,137,135	$	29,896	$	3,262,858	$	35,384

The total available for sale portfolio consisted of nearly 2,000 individual securities at March 31, 2015. The portfolio included 204 securities, having an aggregate fair value of $1.9 billion, that were in an unrealized loss position at March 31, 2015, compared to 363 securities, with a fair value of $3.3 billion, at December 31, 2014. The total amount of unrealized losses on these securities decreased $15.7 million to $19.7 million at March 31, 2015. At March 31, 2015, the fair value of securities in an unrealized loss position for 12 months or longer totaled $883.0 million, or 8.9% of the total portfolio value, and did not include any securities identified as other-than-temporarily impaired.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $6.6 million at March 31, 2015. Of these losses, $5.7 million related to auction rate securities and $931 thousand related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.7 billion at fair value, or 17.3% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the table below. The Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.



	% of Portfolio		Average Life (in years)	Average Rating (Moody’s)
At March 31, 2015
Texas	11.1	%	5.1	Aa2
Florida	7.9		4.0	Aa3
Ohio	6.0		5.5	Aa2
New York	6.0		6.5	Aa2
Washington	5.5		5.5	Aa2
General obligation	33.7	%	5.3	Aa2
Lease	18.3		5.3	Aa3
Housing	12.6		3.5	Aa1
Transportation	12.6		4.8	A1
Limited tax	8.3		6.6	Aa2

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



	For the Three Months Ended March 31
(In thousands)	2015			2014
Proceeds from sales of available for sale securities	$	185,053		$	30,998
Proceeds from sales of non-marketable securities	679			668
Total proceeds	$	185,732		$	31,666
Available for sale:
Gains realized on sales	$	2,526		$	—
Losses realized on sales	—			(5,197		)
Other-than-temporary impairment recognized on debt securities	(17		)	(346		)
Non-marketable:
Gains realized on sales	226			2
Losses realized on sales	—			(134		)
Fair value adjustments, net	3,300			15,712
Investment securities gains, net	$	6,035		$	10,037

At March 31, 2015, securities totaling $4.7 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve Bank and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $468.8 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.