Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2015 and December 31, 2014.



(In thousands)	June 30, 2015		Dec. 31, 2014
Available for sale	$	9,221,821	$	9,523,560
Trading	18,971		15,357
Non-marketable	108,346		106,875
Total investment securities	$	9,349,138	$	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 June 30, 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 $61.3 million at June 30, 2015 and $60.2 million at December 31, 2014.

A summary of the available for sale investment securities by maturity groupings as of June 30, 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	$	90,775	$	91,331
After 1 but within 5 years	167,145		174,685
After 5 but within 10 years	117,077		119,760
After 10 years	52,624		49,090
Total U.S. government and federal agency obligations	427,621		434,866
Government-sponsored enterprise obligations:
Within 1 year	43,033		43,300
After 1 but within 5 years	481,824		484,932
After 5 but within 10 years	357,783		352,912
After 10 years	5,630		5,357
Total government-sponsored enterprise obligations	888,270		886,501
State and municipal obligations:
Within 1 year	139,111		139,708
After 1 but within 5 years	657,544		673,868
After 5 but within 10 years	851,707		848,846
After 10 years	159,222		154,679
Total state and municipal obligations	1,807,584		1,817,101
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,531,365		2,587,693
Non-agency mortgage-backed securities	682,114		690,938
Asset-backed securities	2,494,905		2,498,506
Total mortgage and asset-backed securities	5,708,384		5,777,137
Other debt securities:
Within 1 year	3,999		4,063
After 1 but within 5 years	62,023		62,069
After 5 but within 10 years	191,771		187,374
After 10 years	12,000		11,601
Total other debt securities	269,793		265,107
Equity securities	5,678		41,109
Total available for sale investment securities	$	9,107,330	$	9,221,821

Investments in U.S. government and federal agency obligations are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $434.8 million, at fair value, at June 30, 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 $92.9 million, at fair value, of auction rate securities, which were previously purchased from bank customers. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $41.1 million at June 30, 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
June 30, 2015
U.S. government and federal agency obligations	$	427,621	$	11,597	$	(4,352	)	$	434,866
Government-sponsored enterprise obligations	888,270		4,462		(6,231		)	886,501
State and municipal obligations	1,807,584		22,700		(13,183		)	1,817,101
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,531,365		63,083		(6,755		)	2,587,693
Non-agency mortgage-backed securities	682,114		11,079		(2,255		)	690,938
Asset-backed securities	2,494,905		7,410		(3,809		)	2,498,506
Total mortgage and asset-backed securities	5,708,384		81,572		(12,819		)	5,777,137
Other debt securities	269,793		416		(5,102		)	265,107
Equity securities	5,678		35,431		—			41,109
Total	$	9,107,330	$	156,178	$	(41,687	)	$	9,221,821
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 June 30, 2015, the fair value of securities on this watch list was $109.2 million compared to $123.9 million at December 31, 2014.

As of June 30, 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 $50.7 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 June 30, 2015 included the following:



Significant Inputs	Range
Prepayment CPR	1%	-	25%
Projected cumulative default	18%	-	54%
Credit support	0%	-	20%
Loss severity	21%	-	63%

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



	For the Six Months Ended June 30
(In thousands)	2015			2014
Cumulative OTTI credit losses at January 1	$	13,734		$	12,499
Credit losses on debt securities for which impairment was not previously recognized	76			—
Credit losses on debt securities for which impairment was previously recognized	407			977
Increase in expected cash flows that are recognized over remaining life of security	(51		)	(66		)
Cumulative OTTI credit losses at June 30	$	14,166		$	13,410

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, 2015
U.S. government and federal agency obligations	$	24,495	$	482	$	31,984	$	3,870	$	56,479	$	4,352
Government-sponsored enterprise obligations	193,644		882		157,187		5,349		350,831		6,231
State and municipal obligations	515,521		5,907		124,227		7,276		639,748		13,183
Mortgage and asset-backed securities:
Agency mortgage-backed securities	214,715		1,417		315,002		5,338		529,717		6,755
Non-agency mortgage-backed securities	369,784		1,861		54,265		394		424,049		2,255
Asset-backed securities	806,300		1,259		144,478		2,550		950,778		3,809
Total mortgage and asset-backed securities	1,390,799		4,537		513,745		8,282		1,904,544		12,819
Other debt securities	202,489		3,998		25,411		1,104		227,900		5,102
Total	$	2,326,948	$	15,806	$	852,554	$	25,881	$	3,179,502	$	41,687
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 approximately 2,000 individual securities at June 30, 2015. The portfolio included 514 securities, having an aggregate fair value of $3.2 billion, that were in an unrealized loss position at June 30, 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 increased $6.3 million to $41.7 million at June 30, 2015. At June 30, 2015, the fair value of securities in an unrealized loss position for 12 months or longer totaled $852.6 million, or 9.2% 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 $13.2 million at June 30, 2015. Of these losses, $6.0 million related to auction rate securities and $7.2 million related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.7 billion at fair value, or 18.7% 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 June 30, 2015
Texas	12.6	%	5.8	Aa2
Florida	7.7		4.0	Aa3
Ohio	6.5		5.7	Aa2
New York	6.2		6.4	Aa2
Washington	5.3		5.1	Aa2
General obligation	34.7	%	5.6	Aa2
Lease	19.1		5.6	Aa3
Housing	12.5		3.8	Aa1
Transportation	12.1		4.8	A1
Limited tax	8.4		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 Six Months Ended June 30
(In thousands)	2015			2014
Proceeds from sales of available for sale securities	$	675,870		$	30,998
Proceeds from sales of non-marketable securities	7,332			32,901
Total proceeds	$	683,202		$	63,899
Available for sale:
Gains realized on sales	$	2,813		$	—
Losses realized on sales	—			(5,197		)
Gain realized on donation	—			1,570
Other-than-temporary impairment recognized on debt securities	(483		)	(977		)
Non-marketable:
Gains realized on sales	1,673			1,472
Losses realized on sales	—			(134		)
Fair value adjustments, net	4,175			10,745
Investment securities gains, net	$	8,178		$	7,479

At June 30, 2015, securities totaling $4.6 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 $465.5 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.