Investment Securities

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



(In thousands)	Sept. 30, 2017		December 31, 2016
Available for sale	$	9,109,287	$	9,649,203
Trading	24,605		22,225
Non-marketable	99,268		99,558
Total investment securities	$	9,233,160	$	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 $47.3 million at September 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 $51.7 million at September 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 September 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 commercial and 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	$	57,511	$	58,238
After 1 but within 5 years	570,284		573,789
After 5 but within 10 years	218,912		219,468
After 10 years	69,517		67,109
Total U.S. government and federal agency obligations	916,224		918,604
Government-sponsored enterprise obligations:
Within 1 year	187,032		187,027
After 1 but within 5 years	247,444		247,141
After 10 years	35,927		35,246
Total government-sponsored enterprise obligations	470,403		469,414
State and municipal obligations:
Within 1 year	177,616		178,836
After 1 but within 5 years	659,012		671,931
After 5 but within 10 years	800,504		819,943
After 10 years	50,004		49,693
Total state and municipal obligations	1,687,136		1,720,403
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,741,329		2,756,973
Non-agency mortgage-backed securities	1,062,079		1,066,764
Asset-backed securities	1,735,004		1,736,966
Total mortgage and asset-backed securities	5,538,412		5,560,703
Other debt securities:
Within 1 year	13,388		13,393
After 1 but within 5 years	207,556		210,022
After 5 but within 10 years	133,140		133,226
Total other debt securities	354,084		356,641
Equity securities	5,353		83,522
Total available for sale investment securities	$	8,971,612	$	9,109,287

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $438.7 million, at fair value, at September 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 $16.9 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 $83.4 million at September 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
September 30, 2017
U.S. government and federal agency obligations	$	916,224	$	6,359	$	(3,979	)	$	918,604
Government-sponsored enterprise obligations	470,403		844		(1,833		)	469,414
State and municipal obligations	1,687,136		34,952		(1,685		)	1,720,403
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,741,329		28,827		(13,183		)	2,756,973
Non-agency mortgage-backed securities	1,062,079		8,536		(3,851		)	1,066,764
Asset-backed securities	1,735,004		5,047		(3,085		)	1,736,966
Total mortgage and asset-backed securities	5,538,412		42,410		(20,119		)	5,560,703
Other debt securities	354,084		3,293		(736		)	356,641
Equity securities	5,353		78,169		—			83,522
Total	$	8,971,612	$	166,027	$	(28,352	)	$	9,109,287
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 September 30, 2017, the fair value of securities on this watch list was $63.6 million compared to $79.6 million at December 31, 2016.

As of September 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 $28.1 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, 2017 included the following:



Significant Inputs	Range
Prepayment CPR	3%	-	25%
Projected cumulative default	13%	-	50%
Credit support	0%	-	47%
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 Nine Months Ended September 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	98			—
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	(207		)	(171		)
Cumulative OTTI credit losses at September 30	$	14,245		$	14,228

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, 2017
U.S. government and federal agency obligations	$	123,071	$	3,979	$	—	$	—	$	123,071	$	3,979
Government-sponsored enterprise obligations	190,141		1,650		49,793		183		239,934		1,833
State and municipal obligations	95,890		692		38,026		993		133,916		1,685
Mortgage and asset-backed securities:
Agency mortgage-backed securities	887,047		9,741		223,550		3,442		1,110,597		13,183
Non-agency mortgage-backed securities	381,896		1,674		156,455		2,177		538,351		3,851
Asset-backed securities	488,409		522		279,402		2,563		767,811		3,085
Total mortgage and asset-backed securities	1,757,352		11,937		659,407		8,182		2,416,759		20,119
Other debt securities	70,143		622		9,363		114		79,506		736
Total	$	2,236,597	$	18,880	$	756,589	$	9,472	$	2,993,186	$	28,352
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 $1.7 million at September 30, 2017, of which $221 thousand related to auction rate securities. This portfolio totaled $1.7 billion at fair value, or 18.9% of total available for sale securities. The average credit quality of the portfolio 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 Nine Months Ended September 30
(In thousands)	2017			2016
Proceeds from sales of securities:
Available for sale	$	367,453		$	—
Non-marketable	1,583			7,946
Total proceeds	$	369,036		$	7,946

Investment securities gains (losses), net:
Available for sale:
Losses realized on called bonds	$	(254	)	$	—
Gains realized on sales	592			—
Losses realized on sales	(568		)	—
Gains realized on donations of securities	6,707			—
Other-than-temporary impairment recognized on debt securities	(372		)	(270		)
Non-marketable:
Gains realized on sales	645			3,717
Losses realized on sales	(880		)	(502		)
Fair value adjustments, net	(8,028		)	(6,649		)
Total gains (losses), net	$	(2,158	)	$	(3,704	)

At September 30, 2017, securities totaling $3.7 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 $667.2 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.