Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2017 and December 31, 2016.



(In thousands)	June 30, 2017		December 31, 2016
Available for sale	$	9,439,701	$	9,649,203
Trading	22,291		22,225
Non-marketable	102,388		99,558
Total investment securities	$	9,564,380	$	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 June 30, 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 $55.0 million at June 30, 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 June 30, 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	$	58,665	$	58,829
After 1 but within 5 years	499,601		502,990
After 5 but within 10 years	318,318		318,212
After 10 years	35,444		32,524
Total U.S. government and federal agency obligations	912,028		912,555
Government-sponsored enterprise obligations:
Within 1 year	98,069		98,206
After 1 but within 5 years	336,302		335,723
After 10 years	12,493		12,356
Total government-sponsored enterprise obligations	446,864		446,285
State and municipal obligations:
Within 1 year	171,936		172,890
After 1 but within 5 years	643,200		654,145
After 5 but within 10 years	879,036		900,292
After 10 years	50,896		50,470
Total state and municipal obligations	1,745,068		1,777,797
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,604,217		2,620,198
Non-agency mortgage-backed securities	1,063,236		1,066,889
Asset-backed securities	2,249,399		2,250,426
Total mortgage and asset-backed securities	5,916,852		5,937,513
Other debt securities:
Within 1 year	13,387		13,389
After 1 but within 5 years	176,199		177,812
After 5 but within 10 years	125,910		126,503
Total other debt securities	315,496		317,704
Equity securities	5,463		47,847
Total available for sale investment securities	$	9,341,771	$	9,439,701

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $432.0 million, at fair value, at June 30, 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 $16.8 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 $47.7 million at June 30, 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
June 30, 2017
U.S. government and federal agency obligations	$	912,028	$	5,575	$	(5,048	)	$	912,555
Government-sponsored enterprise obligations	446,864		892		(1,471		)	446,285
State and municipal obligations	1,745,068		34,717		(1,988		)	1,777,797
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,604,217		29,780		(13,799		)	2,620,198
Non-agency mortgage-backed securities	1,063,236		8,063		(4,410		)	1,066,889
Asset-backed securities	2,249,399		5,725		(4,698		)	2,250,426
Total mortgage and asset-backed securities	5,916,852		43,568		(22,907		)	5,937,513
Other debt securities	315,496		2,745		(537		)	317,704
Equity securities	5,463		42,384		—			47,847
Total	$	9,341,771	$	129,881	$	(31,951	)	$	9,439,701
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 June 30, 2017, the fair value of securities on this watch list was $68.9 million compared to $79.6 million at December 31, 2016.

As of June 30, 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 $30.3 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.3 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, 2017 included the following:



Significant Inputs	Range
Prepayment CPR	4%	-	25%
Projected cumulative default	14%	-	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 Six Months Ended June 30
(In thousands)	2017			2016
Cumulative OTTI credit losses at January 1	$	14,080		$	14,129
Credit losses on debt securities for which impairment was not previously recognized	46			—
Credit losses on debt securities for which impairment was previously recognized	274			270
Increase in expected cash flows that are recognized over remaining life of security	(146		)	(37		)
Cumulative OTTI credit losses at June 30	$	14,254		$	14,362

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, 2017
U.S. government and federal agency obligations	$	145,884	$	5,048	$	—	$	—	$	145,884	$	5,048
Government-sponsored enterprise obligations	181,682		1,471		—		—		181,682		1,471
State and municipal obligations	168,613		1,365		13,761		623		182,374		1,988
Mortgage and asset-backed securities:
Agency mortgage-backed securities	959,777		13,795		1,720		4		961,497		13,799
Non-agency mortgage-backed securities	503,709		4,165		47,189		245		550,898		4,410
Asset-backed securities	795,526		2,606		234,619		2,092		1,030,145		4,698
Total mortgage and asset-backed securities	2,259,012		20,566		283,528		2,341		2,542,540		22,907
Other debt securities	65,547		500		1,463		37		67,010		537
Total	$	2,820,738	$	28,950	$	298,752	$	3,001	$	3,119,490	$	31,951
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 Company’s holdings of state and municipal obligations included gross unrealized losses of $2.0 million at June 30, 2017, of which $230 thousand related to auction rate securities. This portfolio 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 tables present 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)	2017			2016
Proceeds from sales of securities:
Available for sale	$	4,972		$	—
Non-marketable	1,580			2,071
Total proceeds	$	6,552		$	2,071

Investment securities gains (losses), net:
Available for sale:
Losses realized on called bonds	$	(254	)	$	—
Losses realized on sales	(22		)	—
Gains realized on donations	4,315			—
Other-than-temporary impairment recognized on debt securities	(320		)	(270		)
Non-marketable:
Gains realized on sales	642			2,260
Losses realized on sales	(652		)	—
Fair value adjustments, net	(2,830		)	(3,729		)
Total gains (losses), net	$	879		$	(1,739	)

At June 30, 2017, 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 $719.8 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.