Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2016 and December 31, 2015.



(In thousands)	Mar. 31, 2016		Dec. 31, 2015
Available for sale	$	9,552,179	$	9,777,004
Trading	23,130		11,890
Non-marketable	117,259		112,786
Total investment securities	$	9,692,568	$	9,901,680

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. The available for sale and the trading portfolios are carried at fair value. 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 $46.9 million at March 31, 2016 and $46.8 million at December 31, 2015. 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. These holdings are carried at cost. Non-marketable securities also include private equity investments, which amounted to $70.0 million at March 31, 2016 and $65.6 million at December 31, 2015. In the absence of readily ascertainable market values, these securities are carried at estimated fair value.

A summary of the available for sale investment securities by maturity groupings as of March 31, 2016 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 but are collateralized by residential mortgages. 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	$	58,866	$	60,127
After 1 but within 5 years	498,613		514,076
After 5 but within 10 years	104,754		108,327
After 10 years	35,444		32,780
Total U.S. government and federal agency obligations	697,677		715,310
Government-sponsored enterprise obligations:
Within 1 year	10,680		10,754
After 1 but within 5 years	572,163		579,157
After 5 but within 10 years	125,012		126,156
After 10 years	5,630		5,591
Total government-sponsored enterprise obligations	713,485		721,658
State and municipal obligations:
Within 1 year	99,478		99,618
After 1 but within 5 years	680,866		698,660
After 5 but within 10 years	916,693		948,352
After 10 years	64,768		66,161
Total state and municipal obligations	1,761,805		1,812,791
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,538,407		2,611,384
Non-agency mortgage-backed securities	852,059		863,158
Asset-backed securities	2,445,528		2,440,055
Total mortgage and asset-backed securities	5,835,994		5,914,597
Other debt securities:
Within 1 year	9,327		9,341
After 1 but within 5 years	94,819		95,938
After 5 but within 10 years	222,744		227,750
After 10 years	12,000		11,748
Total other debt securities	338,890		344,777
Equity securities	5,678		43,046
Total available for sale investment securities	$	9,353,529	$	9,552,179

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $397.4 million, at fair value, at March 31, 2016. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $43.0 million at March 31, 2016.

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, 2016
U.S. government and federal agency obligations	$	697,677	$	20,297	$	(2,664	)	$	715,310
Government-sponsored enterprise obligations	713,485		8,353		(180		)	721,658
State and municipal obligations	1,761,805		52,229		(1,243		)	1,812,791
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,538,407		73,025		(48		)	2,611,384
Non-agency mortgage-backed securities	852,059		12,341		(1,242		)	863,158
Asset-backed securities	2,445,528		7,493		(12,966		)	2,440,055
Total mortgage and asset-backed securities	5,835,994		92,859		(14,256		)	5,914,597
Other debt securities	338,890		6,673		(786		)	344,777
Equity securities	5,678		37,368		—			43,046
Total	$	9,353,529	$	217,779	$	(19,129	)	$	9,552,179
December 31, 2015
U.S. government and federal agency obligations	$	729,846	$	5,051	$	(7,821	)	$	727,076
Government-sponsored enterprise obligations	794,912		2,657		(4,546		)	793,023
State and municipal obligations	1,706,635		37,061		(1,739		)	1,741,957
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,579,031		47,856		(8,606		)	2,618,281
Non-agency mortgage-backed securities	879,186		8,596		(7,819		)	879,963
Asset-backed securities	2,660,201		1,287		(17,107		)	2,644,381
Total mortgage and asset-backed securities	6,118,418		57,739		(33,532		)	6,142,625
Other debt securities	335,925		377		(4,982		)	331,320
Equity securities	5,678		35,325		—			41,003
Total	$	9,691,414	$	138,210	$	(52,620	)	$	9,777,004

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, 2016, the fair value of securities on this watch list was $85.9 million compared to $95.8 million at December 31, 2015.

As of March 31, 2016, 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 $39.9 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 March 31, 2016 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	17%	-	53%
Credit support	0%	-	25%
Loss severity	19%	-	68%

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)	2016			2015
Cumulative OTTI credit losses at January 1	$	14,129		$	13,734
Credit losses on debt securities for which impairment was previously recognized	123			17
Increase in expected cash flows that are recognized over remaining life of security	(18		)	(29		)
Cumulative OTTI credit losses at March 31	$	14,234		$	13,722

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, 2016
U.S. government and federal agency obligations	$	—	$	—	$	32,780	$	2,664	$	32,780	$	2,664
Government-sponsored enterprise obligations	—		—		15,445		180		15,445		180
State and municipal obligations	31,624		512		10,997		731		42,621		1,243
Mortgage and asset-backed securities:
Agency mortgage-backed securities	33,723		40		2,819		8		36,542		48
Non-agency mortgage-backed securities	155,845		752		66,103		490		221,948		1,242
Asset-backed securities	1,000,464		9,430		172,710		3,536		1,173,174		12,966
Total mortgage and asset-backed securities	1,190,032		10,222		241,632		4,034		1,431,664		14,256
Other debt securities	20,356		276		13,425		510		33,781		786
Total	$	1,242,012	$	11,010	$	314,279	$	8,119	$	1,556,291	$	19,129
December 31, 2015
U.S. government and federal agency obligations	$	491,998	$	3,098	$	31,012	$	4,723	$	523,010	$	7,821
Government-sponsored enterprise obligations	157,830		1,975		110,250		2,571		268,080		4,546
State and municipal obligations	66,998		544		31,120		1,195		98,118		1,739
Mortgage and asset-backed securities:
Agency mortgage-backed securities	530,035		2,989		291,902		5,617		821,937		8,606
Non-agency mortgage-backed securities	653,603		7,059		54,536		760		708,139		7,819
Asset-backed securities	2,207,922		12,492		223,311		4,615		2,431,233		17,107
Total mortgage and asset-backed securities	3,391,560		22,540		569,749		10,992		3,961,309		33,532
Other debt securities	244,452		3,687		25,218		1,295		269,670		4,982
Total	$	4,352,838	$	31,844	$	767,349	$	20,776	$	5,120,187	$	52,620

The total available for sale portfolio consisted of approximately 2,000 individual securities at March 31, 2016. The portfolio included 228 securities, having an aggregate fair value of $1.6 billion, that were in an unrealized loss position at March 31, 2016, compared to 466 securities, with a fair value of $5.1 billion, at December 31, 2015. The total amount of unrealized losses on these securities decreased $33.5 million to $19.1 million at March 31, 2016, largely due to a lower rate environment. At March 31, 2016, the fair value of securities in an unrealized loss position for 12 months or longer totaled $314.3 million, or 3.3% of the total portfolio value.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $1.2 million at March 31, 2016. Of these losses, $1.1 million related to auction rate securities and $171 thousand related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.8 billion at fair value, or 18.8% 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 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.

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)	2016			2015
Proceeds from sales of available for sale securities	$	—		$	185,053
Proceeds from sales of non-marketable securities	94			679
Total proceeds	$	94		$	185,732
Available for sale:
Gains realized on sales	$	—		$	2,526
Other-than-temporary impairment recognized on debt securities	(123		)	(17		)
Non-marketable:
Gains realized on sales	42			226
Fair value adjustments, net	(914		)	3,300
Investment securities gains (losses), net	$	(995	)	$	6,035

At March 31, 2016, securities totaling $3.9 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 $581.0 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.