Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2017 and December 31, 2016.



(In thousands)	Mar. 31, 2017		Dec. 31, 2016
Available for sale	$	9,671,975	$	9,649,203
Trading	20,200		22,225
Non-marketable	101,688		99,558
Total investment securities	$	9,793,863	$	9,770,986

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 $47.1 million at March 31, 2017 and $46.9 million at December 31, 2016. 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 $54.3 million at March 31, 2017 and $52.3 million at December 31, 2016. 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, 2017 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	$	58,300	$	59,291
After 1 but within 5 years	498,843		504,344
After 5 but within 10 years	317,572		318,018
After 10 years	35,391		32,768
Total U.S. government and federal agency obligations	910,106		914,421
Government-sponsored enterprise obligations:
Within 1 year	28,975		29,025
After 1 but within 5 years	412,289		411,880
After 10 years	9,295		9,301
Total government-sponsored enterprise obligations	450,559		450,206
State and municipal obligations:
Within 1 year	208,310		209,638
After 1 but within 5 years	607,968		616,965
After 5 but within 10 years	911,634		918,378
After 10 years	52,259		51,056
Total state and municipal obligations	1,780,171		1,796,037
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,695,352		2,708,746
Non-agency mortgage-backed securities	1,077,623		1,078,256
Asset-backed securities	2,345,961		2,343,637
Total mortgage and asset-backed securities	6,118,936		6,130,639
Other debt securities:
Within 1 year	19,385		19,383
After 1 but within 5 years	128,409		128,768
After 5 but within 10 years	167,585		167,607
After 10 years	11,588		11,049
Total other debt securities	326,967		326,807
Equity securities	5,560		53,865
Total available for sale investment securities	$	9,592,299	$	9,671,975

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $434.9 million, at fair value, at March 31, 2017. 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 $17.1 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $53.8 million at March 31, 2017.

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, 2017
U.S. government and federal agency obligations	$	910,106	$	8,242	$	(3,927	)	$	914,421
Government-sponsored enterprise obligations	450,559		1,020		(1,373		)	450,206
State and municipal obligations	1,780,171		22,154		(6,288		)	1,796,037
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,695,352		31,321		(17,927		)	2,708,746
Non-agency mortgage-backed securities	1,077,623		7,183		(6,550		)	1,078,256
Asset-backed securities	2,345,961		4,402		(6,726		)	2,343,637
Total mortgage and asset-backed securities	6,118,936		42,906		(31,203		)	6,130,639
Other debt securities	326,967		1,368		(1,528		)	326,807
Equity securities	5,560		48,305		—			53,865
Total	$	9,592,299	$	123,995	$	(44,319	)	$	9,671,975
December 31, 2016
U.S. government and federal agency obligations	$	919,904	$	7,312	$	(6,312	)	$	920,904
Government-sponsored enterprise obligations	450,448		1,126		(1,576		)	449,998
State and municipal obligations	1,778,684		12,223		(12,693		)	1,778,214
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,674,964		31,610		(20,643		)	2,685,931
Non-agency mortgage-backed securities	1,054,446		7,686		(6,493		)	1,055,639
Asset-backed securities	2,389,176		3,338		(11,213		)	2,381,301
Total mortgage and asset-backed securities	6,118,586		42,634		(38,349		)	6,122,871
Other debt securities	327,030		935		(2,012		)	325,953
Equity securities	5,678		45,585		—			51,263
Total	$	9,600,330	$	109,815	$	(60,942	)	$	9,649,203

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 March 31, 2017, the fair value of securities on this watch list was $74.2 million compared to $79.6 million at December 31, 2016.

As of March 31, 2017, 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 $29.3 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 March 31, 2017 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	18%	-	51%
Credit support	0%	-	38%
Loss severity	16%	-	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 Three Months Ended March 31
(In thousands)	2017			2016
Cumulative OTTI credit losses at January 1	$	14,080		$	14,129
Credit losses on debt securities for which impairment was previously recognized	109			123
Increase in expected cash flows that are recognized over remaining life of security	(73		)	(18		)
Cumulative OTTI credit losses at March 31	$	14,116		$	14,234

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, 2017
U.S. government and federal agency obligations	$	243,847	$	3,927	$	—	$	—	$	243,847	$	3,927
Government-sponsored enterprise obligations	165,707		1,373		—		—		165,707		1,373
State and municipal obligations	328,771		5,883		10,051		405		338,822		6,288
Mortgage and asset-backed securities:
Agency mortgage-backed securities	988,095		17,923		1,895		4		989,990		17,927
Non-agency mortgage-backed securities	681,162		6,467		28,136		83		709,298		6,550
Asset-backed securities	836,925		3,662		288,968		3,064		1,125,893		6,726
Total mortgage and asset-backed securities	2,506,182		28,052		318,999		3,151		2,825,181		31,203
Other debt securities	136,453		1,505		977		23		137,430		1,528
Total	$	3,380,960	$	40,740	$	330,027	$	3,579	$	3,710,987	$	44,319
December 31, 2016
U.S. government and federal agency obligations	$	349,538	$	2,823	$	32,208	$	3,489	$	381,746	$	6,312
Government-sponsored enterprise obligations	190,441		1,576		—		—		190,441		1,576
State and municipal obligations	700,779		12,164		15,195		529		715,974		12,693
Mortgage and asset-backed securities:
Agency mortgage-backed securities	1,147,416		20,638		2,150		5		1,149,566		20,643
Non-agency mortgage-backed securities	688,131		6,373		34,946		120		723,077		6,493
Asset-backed securities	780,209		5,277		358,778		5,936		1,138,987		11,213
Total mortgage and asset-backed securities	2,615,756		32,288		395,874		6,061		3,011,630		38,349
Other debt securities	179,639		1,986		975		26		180,614		2,012
Total	$	4,036,153	$	50,837	$	444,252	$	10,105	$	4,480,405	$	60,942

The total available for sale portfolio consisted of approximately 2,000 individual securities at March 31, 2017. The portfolio included 535 securities, having an aggregate fair value of $3.7 billion, that were in an unrealized loss position at March 31, 2017, compared to 771 securities, with a fair value of $4.5 billion, at December 31, 2016. The total amount of unrealized losses on these securities decreased $16.6 million to $44.3 million at March 31, 2017. At March 31, 2017, the fair value of securities in an unrealized loss position for 12 months or longer totaled $330.0 million, or 3.4% of the total portfolio value.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $6.3 million at March 31, 2017, of which $392 thousand related to auction rate securities. This portfolio totaled $1.8 billion at fair value, or 18.6% 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)	2017			2016
Proceeds from sales of non-marketable securities	$	98		$	94
Available for sale:
Gain realized on donation	$	2,157		$	—
Other-than-temporary impairment recognized on debt securities	(109		)	(123		)
Non-marketable:
Gains realized on sales	58			42
Fair value adjustments, net	(2,878		)	(914		)
Investment securities gains (losses), net	$	(772	)	$	(995	)

At March 31, 2017, securities totaling $3.8 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 $720.1 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.