Investment Securities

Investment securities, at fair value, consisted of the following at September 30, 2016 and December 31, 2015.



(In thousands)	Sept. 30, 2016		Dec. 31, 2015
Available for sale	$	9,438,871	$	9,777,004
Trading	28,586		11,890
Non-marketable	108,224		112,786
Total investment securities	$	9,575,681	$	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 September 30, 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 $61.0 million at September 30, 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 September 30, 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	$	59,068	$	60,028
After 1 but within 5 years	500,823		514,620
After 5 but within 10 years	106,427		110,802
After 10 years	72,340		70,199
Total U.S. government and federal agency obligations	738,658		755,649
Government-sponsored enterprise obligations:
Within 1 year	11,589		11,627
After 1 but within 5 years	419,071		424,410
After 5 but within 10 years	14,988		15,205
Total government-sponsored enterprise obligations	445,648		451,242
State and municipal obligations:
Within 1 year	153,968		155,078
After 1 but within 5 years	626,147		641,498
After 5 but within 10 years	941,494		983,236
After 10 years	55,248		56,189
Total state and municipal obligations	1,776,857		1,836,001
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,590,902		2,663,677
Non-agency mortgage-backed securities	922,302		937,208
Asset-backed securities	2,403,019		2,409,324
Total mortgage and asset-backed securities	5,916,223		6,010,209
Other debt securities:
Within 1 year	5,997		6,025
After 1 but within 5 years	97,136		98,939
After 5 but within 10 years	214,311		222,376
After 10 years	11,588		11,472
Total other debt securities	329,032		338,812
Equity securities	5,678		46,958
Total available for sale investment securities	$	9,212,096	$	9,438,871

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $437.9 million, at fair value, at September 30, 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 $46.9 million at September 30, 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
September 30, 2016
U.S. government and federal agency obligations	$	738,658	$	19,132	$	(2,141	)	$	755,649
Government-sponsored enterprise obligations	445,648		5,637		(43		)	451,242
State and municipal obligations	1,776,857		59,760		(616		)	1,836,001
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,590,902		72,803		(28		)	2,663,677
Non-agency mortgage-backed securities	922,302		15,145		(239		)	937,208
Asset-backed securities	2,403,019		14,026		(7,721		)	2,409,324
Total mortgage and asset-backed securities	5,916,223		101,974		(7,988		)	6,010,209
Other debt securities	329,032		9,946		(166		)	338,812
Equity securities	5,678		41,280		—			46,958
Total	$	9,212,096	$	237,729	$	(10,954	)	$	9,438,871
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, cash flow analyses are prepared. For more complex analyses, 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, 2016, the fair value of securities on this watch list was $103.7 million compared to $95.8 million at December 31, 2015.

As of September 30, 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 $34.6 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 September 30, 2016 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	18%	-	51%
Credit support	0%	-	30%
Loss severity	17%	-	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)	2016			2015
Cumulative OTTI credit losses at January 1	$	14,129		$	13,734
Credit losses on debt securities for which impairment was not previously recognized	—			76
Credit losses on debt securities for which impairment was previously recognized	270			407
Increase in expected cash flows that are recognized over remaining life of security	(171		)	(73		)
Cumulative OTTI credit losses at September 30	$	14,228		$	14,144

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, 2016
U.S. government and federal agency obligations	$	36,586	$	61	$	33,613	$	2,080	$	70,199	$	2,141
Government-sponsored enterprise obligations	49,901		43		—		—		49,901		43
State and municipal obligations	26,335		227		16,276		389		42,611		616
Mortgage and asset-backed securities:
Agency mortgage-backed securities	24,564		23		2,304		5		26,868		28
Non-agency mortgage-backed securities	61,283		127		39,070		112		100,353		239
Asset-backed securities	279,282		1,510		365,402		6,211		644,684		7,721
Total mortgage and asset-backed securities	365,129		1,660		406,776		6,328		771,905		7,988
Other debt securities	7,936		36		12,458		130		20,394		166
Total	$	485,887	$	2,027	$	469,123	$	8,927	$	955,010	$	10,954
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 September 30, 2016. The portfolio included 152 securities, having an aggregate fair value of $955.0 million, that were in an unrealized loss position at September 30, 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 $41.7 million to $11.0 million at September 30, 2016, largely due to a lower rate environment. At September 30, 2016, the fair value of securities in an unrealized loss position for 12 months or longer totaled $469.1 million, or 5.0% of the total portfolio value.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $616 thousand at September 30, 2016, of which $378 thousand related to auction rate securities. This portfolio totaled $1.8 billion at fair value, or 19.5% 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 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 Nine Months Ended September 30
(In thousands)	2016			2015
Proceeds from sales of available for sale securities	$	—		$	675,870
Proceeds from sales of non-marketable securities	7,946			9,023
Total proceeds	$	7,946		$	684,893
Available for sale:
Gains realized on sales	$	—		$	2,813
Other-than-temporary impairment recognized on debt securities	(270		)	(483		)
Non-marketable:
Gains realized on sales	3,717			2,516
Losses realized on sales	(502		)	—
Fair value adjustments, net	(6,649		)	2,954
Investment securities gains (losses), net	$	(3,704	)	$	7,800

At September 30, 2016, securities totaling $4.0 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 $578.1 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.