3. Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2011 and December 31, 2010.


	June 30		December 31
(In thousands)	2011		2010

Available for sale:
U.S. government and federal agency obligations	$	356,246	$	455,537
Government-sponsored enterprise obligations		264,553		201,895
State and municipal obligations		1,193,561		1,119,485
Agency mortgage-backed securities		2,913,805		2,491,199
Non-agency mortgage-backed securities		385,937		455,790
Other asset-backed securities		2,394,627		2,354,260
Other debt securities		168,859		176,964
Equity securities		40,046		39,173

Total available for sale		7,717,634		7,294,303

Trading		32,074		11,710
Non-marketable		109,867		103,521

Total investment securities	$	7,859,575	$	7,409,534

Most of the Company's investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank (FRB) stock held for debt and regulatory purposes, which totaled $45.2 million at both June 30, 2011 and December 31, 2010. Investment in FRB 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. Non-marketable securities also include private equity investments, which amounted to $64.6 million and $58.2 million at June 30, 2011 and December 31, 2010, respectively.

A summary of the available for sale investment securities by maturity groupings as of June 30, 2011 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. 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. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.


	Amortized
(Dollars in thousands)	Cost		Fair Value

U.S. government and federal agency obligations:
Within 1 year	$	2,365	$	2,367
After 1 but within 5 years		135,522		147,445
After 5 but within 10 years		190,441		206,434

Total U.S. government and federal agency obligations		328,328		356,246

Government-sponsored enterprise obligations:
Within 1 year		85,130		86,384
After 1 but within 5 years		107,184		108,351
After 5 but within 10 years		58,727		58,863
After 10 years		11,000		10,955

Total government-sponsored enterprise obligations		262,041		264,553

State and municipal obligations:
Within 1 year		135,296		136,620
After 1 but within 5 years		459,340		472,245
After 5 but within 10 years		355,389		357,330
After 10 years		234,770		227,366

Total state and municipal obligations		1,184,795		1,193,561

Mortgage and asset-backed securities:
Agency mortgage-backed securities		2,845,564		2,913,805
Non-agency mortgage-backed securities		383,271		385,937
Other asset-backed securities		2,383,208		2,394,627

Total mortgage and asset-backed securities		5,612,043		5,694,369

Other debt securities:
Within 1 year		61,531		62,499
After 1 but within 5 years		98,445		106,360

Total other debt securities		159,976		168,859

Equity securities		10,291		40,046

Total available for sale investment securities	$	7,557,474	$	7,717,634

Included in U.S. government securities are $346.4 million, at fair value, of U.S. Treasury inflation-protected securities (TIPS). 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 $141.9 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $33.1 million at June 30, 2011.

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.



			Gross		Gross
	Amortized		Unrealized		Unrealized
(In thousands)	Cost		Gains		Losses			Fair Value

June 30, 2011
U.S. government and federal agency obligations	$	328,328	$	27,918	$	—		$	356,246
Government-sponsored enterprise obligations		262,041		2,843		(331	)		264,553
State and municipal obligations		1,184,795		22,365		(13,599	)		1,193,561
Mortgage and asset-backed securities:
Agency mortgage-backed securities		2,845,564		69,910		(1,669	)		2,913,805
Non-agency mortgage-backed securities		383,271		10,653		(7,987	)		385,937
Other asset-backed securities		2,383,208		11,797		(378	)		2,394,627

Total mortgage and asset-backed securities		5,612,043		92,360		(10,034	)		5,694,369

Other debt securities		159,976		8,883		—			168,859
Equity securities		10,291		29,755		—			40,046

Total	$	7,557,474	$	184,124	$	(23,964	)	$	7,717,634

December 31, 2010
U.S. government and federal agency obligations	$	434,878	$	20,659	$	—		$	455,537
Government-sponsored enterprise obligations		200,061		2,364		(530	)		201,895
State and municipal obligations		1,117,020		19,108		(16,643	)		1,119,485
Mortgage and asset-backed securities:
Agency mortgage-backed securities		2,437,123		57,516		(3,440	)		2,491,199
Non-agency mortgage-backed securities		459,363		10,940		(14,513	)		455,790
Other asset-backed securities		2,342,866		12,445		(1,051	)		2,354,260

Total mortgage and asset-backed securities		5,239,352		80,901		(19,004	)		5,301,249

Other debt securities		165,883		11,081		—			176,964
Equity securities		7,569		31,604		—			39,173

Total	$	7,164,763	$	165,717	$	(36,177	)	$	7,294,303

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/A-, 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 June 30, 2011, the fair value of securities on this watch list was $258.4 million.

As of June 30, 2011, 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 $146.9 million. The credit-related portion of the impairment totaled $8.5 million and was recorded in earnings. The noncredit-related portion of the impairment totaled $6.5 million on a pre-tax basis, and has been recognized in accumulated other comprehensive income. The Company does not intend to sell these securities and believes it is not more likely than not that it will be required to sell the securities before the recovery of their amortized cost bases.

The credit 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 included the following:


Significant Inputs		Range

Prepayment CPR		7% — 25%
Projected cumulative default		11% — 51%
Credit support		0% — 18%
Loss severity		33% — 57%

The following table shows changes in the credit losses recorded in the six months ended June 30, 2011 and 2010, for which a portion of an OTTI was recognized in other comprehensive income.


	For the
	Six Months
	Ended June 30
(In thousands)	2011			2010

Balance at January 1	$	7,542		$	2,473
Credit losses on debt securities for which impairment was not previously recognized		53			88
Credit losses on debt securities for which impairment was previously recognized		871			2,045
Increase in expected cash flows that are recognized over remaining life of security		(53	)		—

Balance at June 30	$	8,413		$	4,606

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
			Unrealized				Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

June 30, 2011
Government-sponsored enterprise obligations	$	42,078	$	331	$	—	$	—	$	42,078	$	331
State and municipal obligations		177,677		2,453		96,602		11,146		274,279		13,599
Mortgage and asset-backed securities:
Agency mortgage-backed securities		238,483		1,669		—		—		238,483		1,669
Non-agency mortgage-backed securities		38,749		250		139,127		7,737		177,876		7,987
Other asset-backed securities		299,909		378		—		—		299,909		378

Total mortgage and asset-backed securities		577,141		2,297		139,127		7,737		716,268		10,034

Total	$	796,896	$	5,081	$	235,729	$	18,883	$	1,032,625	$	23,964

December 31, 2010
Government-sponsored enterprise obligations	$	10,850	$	530	$	—	$	—	$	10,850	$	530
State and municipal obligations		345,775		7,470		82,269		9,173		428,044		16,643
Mortgage and asset-backed securities:
Agency mortgage-backed securities		660,326		3,440		—		—		660,326		3,440
Non-agency mortgage-backed securities		15,893		36		170,545		14,477		186,438		14,513
Other asset-backed securities		487,822		1,029		24,928		22		512,750		1,051

Total mortgage and asset-backed securities		1,164,041		4,505		195,473		14,499		1,359,514		19,004

Total	$	1,520,666	$	12,505	$	277,742	$	23,672	$	1,798,408	$	36,177

The total available for sale portfolio consisted of approximately 1,400 individual securities at June 30, 2011. The portfolio included 186 securities, having an aggregate fair value of $1.0 billion that were in a loss position at June 30, 2011. Securities identified as other-than-temporarily impaired which have been in a loss position for 12 months or longer totaled $121.4 million at fair value, or 1.6% of the total available for sale portfolio value. Securities with temporary impairment which have been in a loss position for 12 months or longer totaled $114.4 million, or 1.5% of the total portfolio value.

The Company's holdings of state and municipal obligations included gross unrealized losses of $13.6 million at June 30, 2011. Of these losses, $11.1 million related to auction rate securities (ARS) and $2.5 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.1 billion at fair value, or 13.6% of total available for sale securities. The average credit quality of the portfolio, excluding ARS, is Aa2 as rated by Moody's. The portfolio is diversified in order to reduce risk, and information about the largest holdings, by state and economic sector, is shown in the table below.


				Average		Average
	% of			Life		Rating
	Portfolio			(in years)		(Moody's)

At June 30, 2011
Texas		10.3	%		5.6	Aa1
Florida		8.2			5.2	Aa3
Washington		7.0			3.3	Aa2
Arizona		5.1			3.7	Aa3
Illinois		5.1			5.2	Aa2

General obligation		26.0	%		3.7	Aa2
Housing		18.5			4.9	Aa1
Transportation		16.3			4.0	Aa3
Lease		12.8			3.3	Aa2
Refunded		6.7			2.0	Aaa

The remaining unrealized losses on the Company's investments, as shown in the preceding tables, are largely contained in the portfolio of non-agency mortgage-backed securities. These securities are not guaranteed by an outside agency and are dependent on payments received from the underlying mortgage collateral. While virtually all of these securities, at purchase date, were comprised of senior tranches and were highly rated by various rating agencies, the adverse housing market and overall economic climate has resulted in low fair values for these securities. Also, as mentioned above, the Company maintains a watch list comprised mostly of these securities, and has recorded OTTI losses on certain of these securities. The Company continues to closely monitor the performance of these securities. Additional OTTI losses may arise in future periods due to further deterioration in expected cash flows, loss severities and delinquency levels of the securities' underlying collateral, which would negatively affect the Company's financial results.

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 Six Months
	Ended June 30

(In thousands)	2011			2010

Proceeds from sales of available for sale securities	$	11,202		$	64,087

Available for sale:
Gains realized on sales	$	177		$	1,920
Losses realized on sales		—			(151	)
Other-than-temporary impairment recognized on debt securities		(924	)		(2,133	)
Non-marketable:
Fair value adjustments, net		4,030			(2,641	)

Investment securities gains (losses), net	$	3,283		$	(3,005	)

At June 30, 2011, securities carried at $3.7 billion were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $425.9 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 exceeds 10% of stockholders' equity.