Investment Securities

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



(In thousands)	Sept. 30, 2015		Dec. 31, 2014
Available for sale	$	9,472,959	$	9,523,560
Trading	14,463		15,357
Non-marketable	116,634		106,875
Total investment securities	$	9,604,056	$	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 $46.8 million at September 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 $69.5 million at September 30, 2015 and $60.2 million at December 31, 2014.

A summary of the available for sale investment securities by maturity groupings as of September 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	$	59,884	$	60,116
After 1 but within 5 years	163,996		167,780
After 5 but within 10 years	143,940		144,161
After 10 years	52,882		48,342
Total U.S. government and federal agency obligations	420,702		420,399
Government-sponsored enterprise obligations:
Within 1 year	42,108		42,249
After 1 but within 5 years	477,115		482,232
After 5 but within 10 years	332,296		332,248
After 10 years	5,630		5,480
Total government-sponsored enterprise obligations	857,149		862,209
State and municipal obligations:
Within 1 year	99,618		99,985
After 1 but within 5 years	667,923		685,757
After 5 but within 10 years	912,614		924,070
After 10 years	140,081		137,347
Total state and municipal obligations	1,820,236		1,847,159
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,508,870		2,575,835
Non-agency mortgage-backed securities	805,560		817,197
Asset-backed securities	2,585,088		2,584,688
Total mortgage and asset-backed securities	5,899,518		5,977,720
Other debt securities:
Within 1 year	3,999		4,048
After 1 but within 5 years	83,398		83,613
After 5 but within 10 years	229,071		226,599
After 10 years	12,000		11,748
Total other debt securities	328,468		326,008
Equity securities	5,677		39,464
Total available for sale investment securities	$	9,331,750	$	9,472,959

Investments in U.S. government and federal agency obligations are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $420.3 million, at fair value, at September 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 $93.2 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 $39.4 million at September 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
September 30, 2015
U.S. government and federal agency obligations	$	420,702	$	5,930	$	(6,233	)	$	420,399
Government-sponsored enterprise obligations	857,149		7,809		(2,749		)	862,209
State and municipal obligations	1,820,236		33,416		(6,493		)	1,847,159
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,508,870		69,477		(2,512		)	2,575,835
Non-agency mortgage-backed securities	805,560		12,285		(648		)	817,197
Asset-backed securities	2,585,088		7,444		(7,844		)	2,584,688
Total mortgage and asset-backed securities	5,899,518		89,206		(11,004		)	5,977,720
Other debt securities	328,468		979		(3,439		)	326,008
Equity securities	5,677		33,787		—			39,464
Total	$	9,331,750	$	171,127	$	(29,918	)	$	9,472,959
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 September 30, 2015, the fair value of securities on this watch list was $102.8 million compared to $123.9 million at December 31, 2014.

As of September 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 $47.4 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.1 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 September 30, 2015 included the following:



Significant Inputs	Range
Prepayment CPR	1%	-	25%
Projected cumulative default	17%	-	54%
Credit support	0%	-	22%
Loss severity	20%	-	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 Nine Months Ended September 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			1,348
Increase in expected cash flows that are recognized over remaining life of security	(73		)	(97		)
Cumulative OTTI credit losses at September 30	$	14,144		$	13,750

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
September 30, 2015
U.S. government and federal agency obligations	$	158,390	$	1,701	$	31,479	$	4,532	$	189,869	$	6,233
Government-sponsored enterprise obligations	11,419		57		110,123		2,692		121,542		2,749
State and municipal obligations	120,098		703		110,550		5,790		230,648		6,493
Mortgage and asset-backed securities:
Agency mortgage-backed securities	64,863		259		305,767		2,253		370,630		2,512
Non-agency mortgage-backed securities	199,875		361		53,765		287		253,640		648
Asset-backed securities	998,031		5,542		152,502		2,302		1,150,533		7,844
Total mortgage and asset-backed securities	1,262,769		6,162		512,034		4,842		1,774,803		11,004
Other debt securities	179,566		2,490		25,565		949		205,131		3,439
Total	$	1,732,242	$	11,113	$	789,751	$	18,805	$	2,521,993	$	29,918
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 September 30, 2015. The portfolio included 332 securities, having an aggregate fair value of $2.5 billion, that were in an unrealized loss position at September 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 decreased $5.5 million to $29.9 million at September 30, 2015. At September 30, 2015, the fair value of securities in an unrealized loss position for 12 months or longer totaled $789.8 million, or 8.3% 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 $6.5 million at September 30, 2015. Of these losses, $5.5 million related to auction rate securities and $1.0 million related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.8 billion at fair value, or 18.5% 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 September 30, 2015
Texas	12.1	%	6.1	Aa2
Florida	7.0		4.5	Aa3
New York	6.9		6.8	Aa2
Ohio	6.7		6.1	Aa2
Washington	5.4		5.7	Aa2
General obligation	37.7	%	5.6	Aa2
Lease	18.9		5.5	Aa2
Transportation	12.9		4.7	A1
Housing	12.9		6.4	Aa1
Limited tax	8.9		6.5	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 Nine Months Ended September 30
(In thousands)	2015			2014
Proceeds from sales of available for sale securities	$	675,870		$	30,998
Proceeds from sales of non-marketable securities	9,023			33,043
Total proceeds	$	684,893		$	64,041
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		)	(1,348		)
Non-marketable:
Gains realized on sales	2,516			1,613
Losses realized on sales	—			(134		)
Fair value adjustments, net	2,954			13,970
Investment securities gains, net	$	7,800		$	10,474

At September 30, 2015, securities totaling $4.3 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 $364.1 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 exceeded 10% of stockholders’ equity.