COMMERCE BANCSHARES INC /MO/ (Form: 10-Q, Received: 05/07/2014 11:18:32)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

_________________________________________________________

For the quarterly period ended March 31, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

____________________________________________________________

For the transition period from to

Commission File No. 0-2989



	COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)



Missouri		43-0889454
(State of Incorporation)		(IRS Employer Identification No.)

1000 Walnut, Kansas City, MO		64106
(Address of principal executive offices)		(Zip Code)

(816) 234-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of April 30, 2014 , the registrant had outstandin g 95,185,720 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q



			Page
INDEX
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013	3
		Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2014, and 2013 (unaudited)	6
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
	Item 4.	Controls and Procedures	55

Part II	Other Information
	Item 1.	Legal Proceedings	56
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
	Item 6.	Exhibits	56
Signatures			57
Index to Exhibits			58

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PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	March 31, 2014			December 31, 2013
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	11,222,038		$	10,956,836
Allowance for loan losses	(161,532		)	(161,532		)
Net loans	11,060,506			10,795,304
Investment securities:
Available for sale ($552,477,000 and $687,680,000 pledged in 2014 and 2013,
respectively, to secure swap and repurchase agreements)	9,115,116			8,915,680
Trading	15,740			19,993
Non-marketable	126,119			107,324
Total investment securities	9,256,975			9,042,997
Short-term federal funds sold and securities purchased under agreements to resell	19,525			43,845
Long-term securities purchased under agreements to resell	950,000			1,150,000
Interest earning deposits with banks	198,417			707,249
Cash and due from banks	530,244			518,420
Land, buildings and equipment, net	344,790			349,654
Goodwill	138,921			138,921
Other intangible assets, net	8,811			9,268
Other assets	328,931			316,378
Total assets	$	22,837,120		$	23,072,036
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,552,085		$	6,750,674
Savings, interest checking and money market	10,328,912			10,108,236
Time open and C.D.'s of less than $100,000	967,272			983,689
Time open and C.D.'s of $100,000 and over	1,389,065			1,204,749
Total deposits	19,237,334			19,047,348
Federal funds purchased and securities sold under agreements to repurchase	927,152			1,346,558
Other borrowings	105,114			107,310
Other liabilities	294,009			356,423
Total liabilities	20,563,609			20,857,639
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized and unissued 2,000,000 shares	—			—
Common stock, $5 par value
Authorized 100,000,000 shares; issued 96,244,762 shares in 2014 and 2013	481,224			481,224
Capital surplus	1,273,290			1,279,948
Retained earnings	492,559			449,836
Treasury stock of 391,599 shares in 2014 and 235,986 shares in 2013, at cost	(17,193		)	(10,097		)
Accumulated other comprehensive income	40,499			9,731
Total Commerce Bancshares, Inc. stockholders' equity	2,270,379			2,210,642
Non-controlling interest	3,132			3,755
Total equity	2,273,511			2,214,397
Total liabilities and equity	$	22,837,120		$	23,072,036

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended March 31
(In thousands, except per share data)	2014			2013
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	110,702		$	107,786
Interest and fees on loans held for sale	—			85
Interest on investment securities	45,019			44,959
Interest on short-term federal funds sold and securities purchased under
agreements to resell	26			9
Interest on long-term securities purchased under agreements to resell	4,151			5,829
Interest on deposits with banks	100			77
Total interest income	159,998			158,745
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,306			3,924
Time open and C.D.'s of less than $100,000	1,120			1,749
Time open and C.D.'s of $100,000 and over	1,452			1,699
Interest on federal funds purchased and securities sold under
agreements to repurchase	203			218
Interest on other borrowings	851			812
Total interest expense	6,932			8,402
Net interest income	153,066			150,343
Provision for loan losses	9,660			3,285
Net interest income after provision for loan losses	143,406			147,058
NON-INTEREST INCOME
Bank card transaction fees	41,717			38,550
Trust fees	26,573			25,169
Deposit account charges and other fees	18,590			18,712
Capital market fees	3,870			4,391
Consumer brokerage services	2,747			2,686
Loan fees and sales	1,209			1,473
Other	7,921			8,896
Total non-interest income	102,627			99,877
INVESTMENT SECURITIES GAINS (LOSSES), NET
Change in fair value of other-than-temporarily impaired securities	(63		)	1,389
Portion recognized in other comprehensive income	(283		)	(1,831		)
Net impairment losses recognized in earnings	(346		)	(442		)
Realized gains (losses) on sales and fair value adjustments	10,383			(1,723		)
Investment securities gains (losses), net	10,037			(2,165		)
NON-INTEREST EXPENSE
Salaries and employee benefits	94,263			90,881
Net occupancy	11,616			11,235
Equipment	4,504			4,683
Supplies and communication	5,699			5,589
Data processing and software	19,087			18,951
Marketing	3,681			3,359
Deposit insurance	2,894			2,767
Other	20,596			17,572
Total non-interest expense	162,340			155,037
Income before income taxes	93,730			89,733
Less income taxes	29,609			28,925
Net income	64,121			60,808
Less non-controlling interest expense (income)	(192		)	(209		)
Net income attributable to Commerce Bancshares, Inc.	$	64,313		$	61,017
Net income per common share — basic	$	.67		$	.64
Net income per common share — diluted	$	.67		$	.63

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended March 31
(In thousands)	2014			2013
	(Unaudited)
Net income	$	64,121		$	60,808
Other comprehensive income (loss):
Net unrealized gains on securities for which a portion of an other-than-temporary impairment has been recorded in earnings	166			1,137
Net unrealized gains (losses) on other securities	30,379			(8,193		)
Pension loss amortization	223			475
Other comprehensive income (loss)	30,768			(6,581		)
Comprehensive income	94,889			54,227
Less non-controlling interest expense (income)	(192		)	(209		)
Comprehensive income attributable to Commerce Bancshares, Inc.	$	95,081		$	54,436

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY



	Commerce Bancshares, Inc. Shareholders
(In thousands, except per share data)	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Non-Controlling Interest			Total
	(Unaudited)
Balance January 1, 2014	$	481,224	$	1,279,948		$	449,836		$	(10,097	)	$	9,731		$	3,755		$	2,214,397
Net income						64,313									(192		)	64,121
Other comprehensive income												30,768						30,768
Distributions to non-controlling interest															(431		)	(431		)
Purchase of treasury stock									(20,900		)							(20,900		)
Issuance of stock under purchase and equity compensation plans			(2,897		)				6,982									4,085
Net tax benefit related to equity compensation plans			800															800
Stock-based compensation			2,261															2,261
Issuance of nonvested stock awards			(6,822		)				6,822									—
Cash dividends ($.225 per share)						(21,590		)										(21,590		)
Balance March 31, 2014	$	481,224	$	1,273,290		$	492,559		$	(17,193	)	$	40,499		$	3,132		$	2,273,511
Balance January 1, 2013	$	458,646	$	1,102,507		$	477,210		$	(7,580	)	$	136,344		$	4,447		$	2,171,574
Net income						61,017									(209		)	60,808
Other comprehensive loss												(6,581		)				(6,581		)
Distributions to non-controlling interest															(192		)	(192		)
Purchase of treasury stock									(29,993		)							(29,993		)
Issuance of stock under purchase and equity compensation plans			(1,146		)				3,752									2,606
Net tax benefit related to equity compensation plans			181															181
Stock-based compensation			1,223															1,223
Issuance of nonvested stock awards			(1,320		)				1,320									—
Cash dividends ($.214 per share)						(20,435		)										(20,435		)
Balance March 31, 2013	$	458,646	$	1,101,445		$	517,792		$	(32,501	)	$	129,763		$	4,046		$	2,179,191

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Three Months Ended March 31
(In thousands)	2014			2013
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	64,121		$	60,808
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	9,660			3,285
Provision for depreciation and amortization	10,508			10,424
Amortization of investment security premiums, net	6,675			12,539
Investment securities (gains) losses, net(A)	(10,037		)	2,165
Net decrease in trading securities	16,597			9,609
Stock-based compensation	2,261			1,223
Increase in interest receivable	(1,421		)	(5		)
Increase in interest payable	25			246
Increase in income taxes payable	30,410			26,894
Net tax benefit related to equity compensation plans	(800		)	(181		)
Other changes, net	(6,524		)	(28,936		)
Net cash provided by operating activities	121,475			98,071
INVESTING ACTIVITIES:
Proceeds from sales of investment securities(A)	31,666			52
Proceeds from maturities/pay downs of investment securities(A)	456,956			674,270
Purchases of investment securities(A)	(628,237		)	(934,142		)
Net increase in loans	(275,036		)	(159,087		)
Long-term securities purchased under agreements to resell	(100,000		)	(50,000		)
Repayments of long-term securities purchased under agreements to resell	300,000			50,000
Purchases of land, buildings and equipment	(3,954		)	(5,867		)
Sales of land, buildings and equipment	5			404
Net cash used in investing activities	(218,600		)	(424,370		)
FINANCING ACTIVITIES:
Net decrease in non-interest bearing, savings, interest checking and money market deposits	(132,858		)	(138,419		)
Net increase in time open and C.D.'s	167,862			310,948
Repayment of long-term securities sold under agreements to repurchase	(150,000		)	—
Net increase (decrease) in short-term federal funds purchased and securities sold under
agreements to repurchase	(269,406		)	43,308
Repayment of other long-term borrowings	(196		)	(927		)
Net decrease in other short-term borrowings	(2,000		)	—
Purchases of treasury stock	(20,900		)	(29,993		)
Issuance of stock under stock purchase and equity compensation plans	4,085			2,606
Net tax benefit related to equity compensation plans	800			181
Cash dividends paid on common stock	(21,590		)	(20,435		)
Net cash provided by (used in) financing activities	(424,203		)	167,269
Decrease in cash and cash equivalents	(521,328		)	(159,030		)
Cash and cash equivalents at beginning of year	1,269,514			779,825
Cash and cash equivalents at March 31	$	748,186		$	620,795
(A) Available for sale and non-marketable securities
Income tax net payments (refunds)	$	(807	)	$	2,031
Interest paid on deposits and borrowings	$	6,869		$	8,156
Loans transferred to foreclosed real estate	$	836		$	3,925

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014 (Unaudited)

1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2013 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2014 are not necessarily indicative of results to be attained for the full year or any other interim period.

The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2013 Annual Report on Form 10-K.

2. Acquisition and Disposition

On September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The transaction was accounted for using the acquisition method of accounting and, as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. In this transaction, the Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million . The valuation of Company stock was determined on the basis of the closing market price of the Company's common shares on August 30, 2013. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $13.3 million in goodwill and $5.6 million in core deposit premium. Most of the goodwill was assigned to the Company's Commercial segment. None of the goodwill recognized is deductible for income tax purposes.

The Company has contracted to sell banking branches in Farmington, Desloge and Bonne Terre, Missouri. The transaction is expected to close in July 2014, pending regulatory approval. The Company expects to sell approximately $16 million in loans, $75 million in deposits, and various bank premises.

3. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at March 31, 2014 and December 31, 2013 are as follows:



(In thousands)	March 31, 2014		December 31, 2013
Commercial:
Business	$	3,941,394	$	3,715,319
Real estate – construction and land	423,667		406,197
Real estate – business	2,315,167		2,313,550
Personal Banking:
Real estate – personal	1,782,831		1,787,626
Consumer	1,561,973		1,512,716
Revolving home equity	419,376		420,589
Consumer credit card	775,044		796,228
Overdrafts	2,586		4,611
Total loans	$	11,222,038	$	10,956,836

At March 31, 2014 , loans of $3.7 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.4 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

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Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three months ended March 31, 2014 and 2013 , respectively, follows:



	For the Three Months Ended March 31, 2014						For the Three Months Ended March 31, 2013
(In thousands)	Commercial		Personal Banking		Total		Commercial			Personal Banking		Total
Balance at January 1	$	94,189	$	67,343	$	161,532	$	105,725		$	66,807	$	172,532
Provision	4,067		5,593		9,660		(6,590		)	9,875		3,285
Deductions:
Loans charged off	1,130		12,751		13,881		705			11,801		12,506
Less recoveries on loans	755		3,466		4,221		1,391			3,330		4,721
Net loan charge-offs (recoveries)	375		9,285		9,660		(686		)	8,471		7,785
Balance at March 31	$	97,881	$	63,651	$	161,532	$	99,821		$	68,211	$	168,032

The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2014 and December 31, 2013 , disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.



	Impaired Loans				All Other Loans
(In thousands)	Allowance for Loan Losses		Loans Outstanding		Allowance for Loan Losses		Loans Outstanding
March 31, 2014
Commercial	$	7,637	$	79,325	$	90,244	$	6,600,903
Personal Banking	2,119		29,074		61,532		4,512,736
Total	$	9,756	$	108,399	$	151,776	$	11,113,639
December 31, 2013
Commercial	$	8,476	$	78,516	$	85,713	$	6,356,550
Personal Banking	2,424		29,120		64,919		4,492,650
Total	$	10,900	$	107,636	$	150,632	$	10,849,200

Impaired loans

The table below shows the Company’s investment in impaired loans at March 31, 2014 and December 31, 2013 . These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 13.



(In thousands)	Mar. 31, 2014		Dec. 31, 2013
Non-accrual loans	$	47,573	$	48,814
Restructured loans (accruing)	60,826		58,822
Total impaired loans	$	108,399	$	107,636

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The following table provides additional information about impaired loans held by the Company at March 31, 2014 and December 31, 2013 , segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.



(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
March 31, 2014
With no related allowance recorded:
Business	$	7,969	$	9,000	$	—
Real estate – construction and land	8,228		15,965		—
Real estate – business	3,742		6,432		—
Consumer	1,538		2,188		—
Revolving home equity	2,191		2,741		—
	$	23,668	$	36,326	$	—
With an allowance recorded:
Business	$	25,834	$	29,189	$	2,806
Real estate – construction and land	15,558		17,591		1,968
Real estate – business	17,994		26,755		2,863
Real estate – personal	9,496		12,517		1,127
Consumer	3,948		3,948		75
Revolving home equity	605		605		2
Consumer credit card	11,296		11,296		915
	$	84,731	$	101,901	$	9,756
Total	$	108,399	$	138,227	$	9,756
December 31, 2013
With no related allowance recorded:
Business	$	7,969	$	9,000	$	—
Real estate – construction and land	8,766		16,067		—
Real estate – business	4,089		6,417		—
Revolving home equity	2,191		2,741		—
	$	23,015	$	34,225	$	—
With an allowance recorded:
Business	$	19,266	$	22,597	$	3,037
Real estate – construction and land	17,632		19,708		2,174
Real estate – business	20,794		29,287		3,265
Real estate – personal	10,425		13,576		1,361
Consumer	4,025		4,025		85
Revolving home equity	666		666		2
Consumer credit card	11,813		11,813		976
	$	84,621	$	101,672	$	10,900
Total	$	107,636	$	135,897	$	10,900

Total average impaired loans for the three month periods ended March 31, 2014 and 2013 , respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended March 31, 2014
Non-accrual loans	$	40,302	$	7,565	$	47,867
Restructured loans (accruing)	38,393		21,431		59,824
Total	$	78,695	$	28,996	$	107,691
For the three months ended March 31, 2013
Non-accrual loans	$	41,108	$	6,059	$	47,167
Restructured loans (accruing)	38,642		27,291		65,933
Total	$	79,750	$	33,350	$	113,100

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The table below shows interest income recognized during the three month periods ended March 31, 2014 and 2013 for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 13.



	For the Three Months Ended March 31
(In thousands)	2014		2013
Interest income recognized on impaired loans:
Business	$	163	$	397
Real estate – construction and land	161		202
Real estate – business	30		61
Real estate – personal	63		73
Consumer	75		93
Revolving home equity	8		9
Consumer credit card	202		240
Total	$	702	$	1,075

Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at March 31, 2014 and December 31, 2013 .



(In thousands)	Current or Less Than 30 Days Past Due		30 – 89 Days Past Due		90 Days Past Due and Still Accruing		Non-accrual		Total
March 31, 2014
Commercial:
Business	$	3,922,118	$	7,780	$	485	$	11,011	$	3,941,394
Real estate – construction and land	409,592		4,609		19		9,447		423,667
Real estate – business	2,284,479		11,592		42		19,054		2,315,167
Personal Banking:
Real estate – personal	1,766,163		11,569		767		4,332		1,782,831
Consumer	1,547,246		10,980		2,209		1,538		1,561,973
Revolving home equity	415,637		884		664		2,191		419,376
Consumer credit card	758,313		8,430		8,301		—		775,044
Overdrafts	2,380		206		—		—		2,586
Total	$	11,105,928	$	56,050	$	12,487	$	47,573	$	11,222,038
December 31, 2013
Commercial:
Business	$	3,697,589	$	5,467	$	671	$	11,592	$	3,715,319
Real estate – construction and land	386,423		9,601		—		10,173		406,197
Real estate – business	2,292,385		1,340		47		19,778		2,313,550
Personal Banking:
Real estate – personal	1,771,231		9,755		1,560		5,080		1,787,626
Consumer	1,492,960		17,482		2,274		—		1,512,716
Revolving home equity	416,614		1,082		702		2,191		420,589
Consumer credit card	777,564		9,952		8,712		—		796,228
Overdrafts	4,315		296		—		—		4,611
Total	$	10,839,081	$	54,975	$	13,966	$	48,814	$	10,956,836

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Credit quality

The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.



Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
March 31, 2014
Pass	$	3,840,105	$	391,080	$	2,193,862	$	6,425,047
Special mention	59,603		1,917		48,782		110,302
Substandard	30,675		21,223		53,469		105,367
Non-accrual	11,011		9,447		19,054		39,512
Total	$	3,941,394	$	423,667	$	2,315,167	$	6,680,228
December 31, 2013
Pass	$	3,618,120	$	372,515	$	2,190,344	$	6,180,979
Special mention	61,916		1,697		53,079		116,692
Substandard	23,691		21,812		50,349		95,852
Non-accrual	11,592		10,173		19,778		41,543
Total	$	3,715,319	$	406,197	$	2,313,550	$	6,435,066

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The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At March 31, 2014 , these were comprised of $240.8 million in personal real estate loans and $12.3 million in consumer loans, or 5.6% of the Personal Banking portfolio. At December 31, 2013 , these were comprised of $244.3 million in personal real estate loans and $47.5 million in consumer loans, or 6.5% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2014 and December 31, 2013 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
March 31, 2014
FICO score:
Under 600	1.7	%	5.5	%	3.0	%	4.4	%
600 - 659	3.2		10.3		4.9		12.1
660 - 719	10.4		23.0		14.6		34.0
720 - 779	26.1		28.9		31.9		27.7
780 and Over	58.6		32.3		45.6		21.8
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2013
FICO score:
Under 600	1.7	%	5.4	%	2.1	%	4.1	%
600 - 659	3.3		10.1		7.3		11.7
660 - 719	10.3		23.4		15.0		32.9
720 - 779	25.8		28.3		28.5		27.9
780 and Over	58.9		32.8		47.1		23.4
Total	100.0	%	100.0	%	100.0	%	100.0	%

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $86.0 million at March 31, 2014 . Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $25.2 million at March 31, 2014 . Other performing restructured loans totaled $60.8 million at March 31, 2014 . These are primarily comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as troubled debt restructurings. These commercial loans totaled $41.0 million at March 31, 2014 . These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $11.3 million at March 31, 2014 . Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At March 31, 2014 , these loans totaled $8.5 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

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The following table shows the outstanding balances of loans classified as troubled debt restructurings at March 31, 2014 , in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.



(In thousands)	March 31, 2014		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	30,973	$	7,969
Real estate - construction and land	23,217		5,014
Real estate - business	7,414		2,421
Personal Banking:
Real estate - personal	7,002		60
Consumer	5,486		1,676
Revolving home equity	605		—
Consumer credit card	11,296		854
Total restructured loans	$	85,993	$	17,994

For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $1.2 million on an annual, pre-tax basis, compared to amounts contractually owed.

The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begun.

The Company had commitments of $10.5 million at March 31, 2014 to lend additional funds to borrowers with restructured loans.

The Company’s holdings of foreclosed real estate totaled $6.9 million and $6.6 million at March 31, 2014 and December 31, 2013 , respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.0 million and $2.8 million at March 31, 2014 and December 31, 2013 , respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.

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4. Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2014 and December 31, 2013 .



(In thousands)	Mar. 31, 2014		Dec. 31, 2013
Available for sale	$	9,115,116	$	8,915,680
Trading	15,740		19,993
Non-marketable	126,119		107,324
Total investment securities	$	9,256,975	$	9,042,997

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 stock held for debt and regulatory purposes, which totaled $46.5 million at both March 31, 2014 and December 31, 2013 . 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. Non-marketable securities also include private equity investments, which amounted to $79.5 million at March 31, 2014 and $60.7 million at December 31, 2013 .

A summary of the available for sale investment securities by maturity groupings as of March 31, 2014 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 and does not hold trust preferred securities.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	42,859	$	43,982
After 1 but within 5 years	256,506		273,415
After 5 but within 10 years	139,206		142,538
After 10 years	52,996		47,703
Total U.S. government and federal agency obligations	491,567		507,638
Government-sponsored enterprise obligations:
Within 1 year	35,317		35,599
After 1 but within 5 years	492,447		492,574
After 5 but within 10 years	143,543		135,524
After 10 years	141,998		133,076
Total government-sponsored enterprise obligations	813,305		796,773
State and municipal obligations:
Within 1 year	139,190		140,356
After 1 but within 5 years	732,552		755,227
After 5 but within 10 years	560,235		549,538
After 10 years	186,056		177,527
Total state and municipal obligations	1,618,033		1,622,648
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,850,043		2,892,499
Non-agency mortgage-backed securities	287,342		298,633
Asset-backed securities	2,813,445		2,816,012
Total mortgage and asset-backed securities	5,950,830		6,007,144
Other debt securities:
Within 1 year	11,938		12,042
After 1 but within 5 years	42,390		42,904
After 5 but within 10 years	86,130		81,907
Total other debt securities	140,458		136,853
Equity securities	10,517		44,060
Total available for sale investment securities	$	9,024,710	$	9,115,116

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Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $507.5 million , at fair value, at March 31, 2014 . 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 $127.0 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 $36.8 million at March 31, 2014 .

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, 2014
U.S. government and federal agency obligations	$	491,567	$	21,368	$	(5,297	)	$	507,638
Government-sponsored enterprise obligations	813,305		2,264		(18,796		)	796,773
State and municipal obligations	1,618,033		29,651		(25,036		)	1,622,648
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,850,043		62,175		(19,719		)	2,892,499
Non-agency mortgage-backed securities	287,342		12,428		(1,137		)	298,633
Asset-backed securities	2,813,445		9,290		(6,723		)	2,816,012
Total mortgage and asset-backed securities	5,950,830		83,893		(27,579		)	6,007,144
Other debt securities	140,458		752		(4,357		)	136,853
Equity securities	10,517		33,543		—			44,060
Total	$	9,024,710	$	171,471	$	(81,065	)	$	9,115,116
December 31, 2013
U.S. government and federal agency obligations	$	498,226	$	20,614	$	(13,144	)	$	505,696
Government-sponsored enterprise obligations	766,802		2,245		(27,281		)	741,766
State and municipal obligations	1,624,195		28,321		(33,345		)	1,619,171
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,743,803		54,659		(26,124		)	2,772,338
Non-agency mortgage-backed securities	236,595		12,008		(1,620		)	246,983
Asset-backed securities	2,847,368		6,872		(10,169		)	2,844,071
Total mortgage and asset-backed securities	5,827,766		73,539		(37,913		)	5,863,392
Other debt securities	147,581		671		(6,495		)	141,757
Equity securities	9,970		33,928		—			43,898
Total	$	8,874,540	$	159,318	$	(118,178	)	$	8,915,680

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, 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, 2014 , the fair value of securities on this watch list was $180.2 million compared to $188.8 million at December 31, 2013 .

As of March 31, 2014 , 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 $66.1 million . The cumulative credit-related portion of the impairment initially recorded on these securities totaled $13.2 million and was recorded in earnings. 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.

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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, 2014 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	18%	-	56%
Credit support	0%	-	14%
Loss severity	20%	-	81%

The following table shows changes in the credit losses recorded in earnings during the three months ended March 31, 2014 and 2013 , for which a portion of an OTTI was recognized in other comprehensive income.



	For the Three Months Ended March 31
(In thousands)	2014			2013
Balance at January 1	$	12,499		$	11,306
Credit losses on debt securities for which impairment was previously recognized	346			442
Increase in expected cash flows that are recognized over remaining life of security	(25		)	(20		)
Balance at March 31	$	12,820		$	11,728

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, 2014
U.S. government and federal agency obligations	$	29,349	$	27	$	30,928	$	5,270	$	60,277	$	5,297
Government-sponsored enterprise obligations	481,558		11,182		106,412		7,614		587,970		18,796
State and municipal obligations	387,791		8,018		189,058		17,018		576,849		25,036
Mortgage and asset-backed securities:
Agency mortgage-backed securities	759,734		19,716		107		3		759,841		19,719
Non-agency mortgage-backed securities	56,501		563		22,388		574		78,889		1,137
Asset-backed securities	583,899		5,535		118,267		1,188		702,166		6,723
Total mortgage and asset-backed securities	1,400,134		25,814		140,762		1,765		1,540,896		27,579
Other debt securities	85,844		3,321		15,294		1,036		101,138		4,357
Total	$	2,384,676	$	48,362	$	482,454	$	32,703	$	2,867,130	$	81,065
December 31, 2013
U.S. government and federal agency obligations	$	96,172	$	243	$	59,677	$	12,901	$	155,849	$	13,144
Government-sponsored enterprise obligations	487,317		18,155		93,654		9,126		580,971		27,281
State and municipal obligations	478,818		15,520		178,150		17,825		656,968		33,345
Mortgage and asset-backed securities:
Agency mortgage-backed securities	717,778		26,124		—		—		717,778		26,124
Non-agency mortgage-backed securities	53,454		918		22,289		702		75,743		1,620
Asset-backed securities	1,088,556		9,072		58,398		1,097		1,146,954		10,169
Total mortgage and asset-backed securities	1,859,788		36,114		80,687		1,799		1,940,475		37,913
Other debt securities	90,028		5,604		9,034		891		99,062		6,495
Total	$	3,012,123	$	75,636	$	421,202	$	42,542	$	3,433,325	$	118,178

The total available for sale portfolio consisted of approximately 1,800 individual securities at March 31, 2014 . The portfolio included 431 securities, having an aggregate fair value of $2.9 billion , that were in an unrealized loss position at March 31, 2014 , compared to 507 securities, with a fair value of $3.4 billion , at December 31, 2013 . The total amount of unrealized loss on these securities decreased $37.1 million to $81.1 million at March 31, 2014 . At March 31, 2014 , the fair value of securities in an unrealized loss position for 12 months or longer totaled $482.5 million , or 5.3% of the total portfolio value, and did not include any securities identified as other-than-temporarily impaired.

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The Company’s holdings of state and municipal obligations included gross unrealized losses of $25.0 million at March 31, 2014 . Of these losses, $11.0 million related to auction rate securities and $14.1 million related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.5 billion at fair value, or 16.4% 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 information about the top five largest holdings, by state and economic sector, is shown in the table below. The Company does not have exposure to obligations of municipalities which have filed for Chapter 9 bankruptcy. 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.



	% of Portfolio		Average Life (in years)	Average Rating (Moody’s)
At March 31, 2014
Texas	10.5	%	4.6	Aa1
Florida	9.8		4.5	Aa3
New York	6.2		6.1	Aa2
Ohio	6.0		4.9	Aa2
Washington	5.2		4.8	Aa2
General obligation	31.0	%	4.6	Aa2
Lease	16.5		4.7	Aa3
Housing	15.5		4.3	Aa1
Transportation	13.6		4.3	A1
Limited tax	6.0		5.3	Aa1

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)	2014			2013
Proceeds from sales of available for sale securities	$	30,998		$	—
Proceeds from sales of non-marketable securities	668			52
Total proceeds	$	31,666		$	52
Available for sale:
Losses realized on sales	$	(5,197	)	$	—
Other-than-temporary impairment recognized on debt securities	(346		)	(442		)
Non-marketable:
Gains realized on sales	2			52
Losses realized on sales	(134		)	—
Fair value adjustments, net	15,712			(1,775		)
Investment securities gains (losses), net	$	10,037		$	(2,165	)

At March 31, 2014 , securities totaling $4.8 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 $552.5 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.

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5. Goodwill and Other Intangible Assets

The following table presents information about the Company's intangible assets which have estimable useful lives.



	March 31, 2014										December 31, 2013
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Valuation Allowance			Net Amount		Gross Carrying Amount		Accumulated Amortization			Valuation Allowance			Net Amount
Amortizable intangible assets:
Core deposit premium	$	31,270	$	(23,302	)	$	—		$	7,968	$	31,270	$	(22,781	)	$	—		$	8,489
Mortgage servicing rights	3,518		(2,605		)	(70		)	843		3,430		(2,567		)	(84		)	779
Total	$	34,788	$	(25,907	)	$	(70	)	$	8,811	$	34,700	$	(25,348	)	$	(84	)	$	9,268

Aggregate amortization expense on intangible assets was $559 thousand and $557 thousand , respectively, for the three month periods ended March 31, 2014 and 2013 . The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2014 . The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.



(In thousands)
2014	$	1,997
2015	1,607
2016	1,244
2017	920
2018	687

Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2014 is as follows.



(In thousands)	Goodwill		Core Deposit Premium			Mortgage Servicing Rights
Balance January 1, 2014	$	138,921	$	8,489		$	779
Originations	—		—			88
Amortization	—		(521		)	(38		)
Impairment reversal	—		—			14
Balance March 31, 2014	$	138,921	$	7,968		$	843

Goodwill allocated to the Company’s operating segments at March 31, 2014 and December 31, 2013 is shown below.



(In thousands)
Consumer segment	$	70,721
Commercial segment	67,454
Wealth segment	746
Total goodwill	$	138,921

6. Guarantees

The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.

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Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2014 that net liability was $3.5 million , which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $333.3 million at March 31, 2014 .

The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at March 31, 2014 , believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term, with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 3 to 10 years. At March 31, 2014 , the fair value of the Company's guarantee liabilities for RPAs was $71 thousand , and the notional amount of the underlying swaps was $65.4 million . The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.

7. Pension

The amount of net pension cost is shown in the table below:



	For the Three Months Ended March 31
(In thousands)	2014			2013
Service cost - benefits earned during the period	$	133		$	132
Interest cost on projected benefit obligation	1,261			1,122
Expected return on plan assets	(1,561		)	(1,609		)
Amortization of unrecognized net loss	360			767
Net periodic pension cost	$	193		$	412

Substantially all benefits accrued under the Company’s defined benefit pension plan were frozen effective January 1, 2005, and the remaining benefits were frozen effective January 1, 2011. During the first three months of 2014 , the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2014 .

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8. Common Stock

Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 13.



	For the Three Months Ended March 31
(In thousands, except per share data)	2014		2013
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.	$	64,313	$	61,017
Less income allocated to nonvested restricted stock	802		594
Net income allocated to common stock	$	63,511	$	60,423
Weighted average common shares outstanding	94,773		94,722
Basic income per common share	$	.67	$	.64
Diluted income per common share:
Net income attributable to Commerce Bancshares, Inc.	$	64,313	$	61,017
Less income allocated to nonvested restricted stock	799		593
Net income allocated to common stock	$	63,514	$	60,424
Weighted average common shares outstanding	94,773		94,722
Net effect of the assumed exercise of stock-based awards - based on
the treasury stock method using the average market price for the respective periods	421		244
Weighted average diluted common shares outstanding	95,194		94,966
Diluted income per common share	$	.67	$	.63

Unexercised stock options and stock appreciation rights of 90 thousand were excluded in the computation of diluted income per share for the three month period ended March 31, 2014 because their inclusion would have been anti-dilutive. All unexercised stock options and rights were included in the computation of diluted income per share for the three month period ended March 31, 2013 .

In the Annual Meeting of the Shareholders, held on April 16, 2014, a proposal to increase the shares of Company common stock authorized for issuance under its articles of incorporation was approved. This approval increased the authorized shares from 100,000,000 to 120,000,000 .

9. Accumulated Other Comprehensive Income

The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale securities. Unrealized gains and losses on debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately below. The other component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost.



	Unrealized Gains (Losses) on Securities (1)						Pension Loss (2)			Total Accumulated Other Comprehensive Income
(In thousands)	OTTI			Other			Pension Loss (2)			Total Accumulated Other Comprehensive Income
Balance January 1, 2014	$	4,203		$	21,303		$	(15,775	)	$	9,731
Other comprehensive income (loss) before reclassifications	(78		)	43,801			—			43,723
Amounts reclassified from accumulated other comprehensive income	346			5,197			360			5,903
Current period other comprehensive income, before tax	268			48,998			360			49,626
Income tax expense	(102		)	(18,619		)	(137		)	(18,858		)
Current period other comprehensive income, net of tax	166			30,379			223			30,768
Balance March 31, 2014	$	4,369		$	51,682		$	(15,552	)	$	40,499
Balance January 1, 2013	$	3,245		$	160,263		$	(27,164	)	$	136,344
Other comprehensive income (loss) before reclassifications	1,392			(13,215		)	—			(11,823		)
Amounts reclassified from accumulated other comprehensive income	442			—			767			1,209
Current period other comprehensive income (loss), before tax	1,834			(13,215		)	767			(10,614		)
Income tax (expense) benefit	(697		)	5,022			(292		)	4,033
Current period other comprehensive income (loss), net of tax	1,137			(8,193		)	475			(6,581		)
Balance March 31, 2013	$	4,382		$	152,070		$	(26,689	)	$	129,763

(1) The pre-tax amounts reclassified from accumulated other comprehensive income are included in "investment securities gains (losses), net" in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost as "amortization of unrecognized net loss" (see Note 7).

10. Segments

The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment includes the consumer portion of the retail branch network (loans, deposits, and other personal banking services), indirect and other consumer financing, and consumer debit and credit bank cards. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as merchant and commercial bank card products. The Commercial segment includes the Capital Markets Group, which sells fixed income securities and provides investment safekeeping and bond accounting services. The Wealth segment provides traditional trust and estate tax planning, advisory and discretionary investment management, and brokerage services, and includes the Private Banking product portfolio.

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The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues among the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below.



(In thousands)	Consumer			Commercial			Wealth			Segment Totals			Other/ Elimination			Consolidated Totals
Three Months Ended March 31, 2014
Net interest income	$	66,862		$	73,401		$	9,912		$	150,175		$	2,891		$	153,066
Provision for loan losses	(9,220		)	(383		)	(41		)	(9,644		)	(16		)	(9,660		)
Non-interest income	25,644			47,117			29,989			102,750			(123		)	102,627
Investment securities gains, net	—			—			—			—			10,037			10,037
Non-interest expense	(66,287		)	(60,826		)	(24,749		)	(151,862		)	(10,478		)	(162,340		)
Income before income taxes	$	16,999		$	59,309		$	15,111		$	91,419		$	2,311		$	93,730
Three Months Ended March 31, 2013
Net interest income	$	67,213		$	70,215		$	10,174		$	147,602		$	2,741		$	150,343
Provision for loan losses	(8,211		)	489			(48		)	(7,770		)	4,485			(3,285		)
Non-interest income	26,608			44,506			28,819			99,933			(56		)	99,877
Investment securities losses, net	—			—			—			—			(2,165		)	(2,165		)
Non-interest expense	(67,904		)	(58,912		)	(24,308		)	(151,124		)	(3,913		)	(155,037		)
Income before income taxes	$	17,706		$	56,298		$	14,637		$	88,641		$	1,092		$	89,733

The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies, which have been developed to reflect the underlying economics of the businesses. The policies address the methodologies applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided) by assets and liabilities based on their maturity, prepayment and/or repricing characteristics.

The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for loan losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for loan loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment.

The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.

11. Derivative Instruments

The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. The largest group of notional amounts relate to interest rate swaps, which are discussed in more detail below. The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 6 on Guarantees. Through its International Department, the Company enters into foreign exchange contracts, which are mainly comprised of contracts to purchase or deliver foreign currencies for customers at specific future dates.



(In thousands)	March 31, 2014		December 31, 2013
Interest rate swaps	$	657,418	$	596,933
Interest rate caps	9,236		9,736
Credit risk participation agreements	67,276		52,456
Foreign exchange contracts	63,544		81,207
Total notional amount	$	797,474	$	740,332

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The Company’s interest rate risk management strategy includes the ability to modify the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Interest rate swaps are used on a limited basis as part of this strategy. At March 31, 2014 , the Company had entered into one interest rate swap with a notional amount of $6.3 million , included in the table above, which is designated as a fair value hedge of a specific fixed rate loan.

The Company’s other derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings. These instruments include interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by matching contracts purchased by the Company from other financial dealer institutions. Contracts with dealers that require central clearing (generally, transactions occurring after June 10, 2013) are novated to a clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings. The notional amount of these free-standing swaps at March 31, 2014 was $651.1 million .

Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or can require instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.

The banking customer counterparties are engaged in a variety of businesses, including real estate, building materials, education, financial services, communications, consumer products, and manufacturing. At March 31, 2014 , the largest loss exposures were in the groups related to real estate, education, and manufacturing. If the counterparties in these groups failed to perform, and if the underlying collateral proved to be of no value, the Company estimates that it would incur losses of $ 2.7 million (real estate and building materials), $ 2.6 million (education) and $ 1.3 million (manufacturing) at March 31, 2014 .

The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 14 on Fair Value Measurements.



	Asset Derivatives					Liability Derivatives
	Balance Sheet	Mar. 31, 2014		Dec. 31, 2013		Balance Sheet	Mar. 31, 2014			Dec. 31, 2013
(In thousands )	Location	Fair Value				Location	Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps	Other assets	$	—	$	—	Other liabilities	$	(229	)	$	(300	)
Total derivatives designated as hedging instruments		$	—	$	—		$	(229	)	$	(300	)
Derivatives not designated as hedging instruments:
Interest rate swaps	Other assets	$	10,971	$	11,428	Other liabilities	$	(10,971	)	$	(11,429	)
Interest rate caps	Other assets	1		1		Other liabilities	(1		)	(1		)
Credit risk participation agreements	Other assets	4		4		Other liabilities	(71		)	(69		)
Foreign exchange contracts	Other assets	988		1,547		Other liabilities	(1,140		)	(1,530		)
Total derivatives not designated as hedging instruments		$	11,964	$	12,980		$	(12,183	)	$	(13,029	)
Total derivatives		$	11,964	$	12,980		$	(12,412	)	$	(13,329	)

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The effects of derivative instruments on the consolidated statements of income are shown in the table below.



	Location of Gain or (Loss) Recognized in Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives
		For the Three Months Ended March 31
(In thousands)		2014			2013
Derivatives in fair value hedging relationships:
Interest rate swaps	Interest and fees on loans	$	72		$	125
Total		$	72		$	125
Derivatives not designated as hedging instruments:
Interest rate swaps	Other non-interest income	$	445		$	139
Credit risk participation agreements	Other non-interest income	105			56
Foreign exchange contracts	Other non-interest income	(170		)	147
Total		$	380		$	342

12. Balance Sheet Offsetting

The following tables show the extent to which assets and liabilities relating to derivative instruments, securities purchased under agreements to resell (resell agreements), and securities sold under agreements to repurchase (repurchase agreements) have been offset in the consolidated balance sheets. They also provide information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which are generally marketable securities. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability (after netting is applied); thus amounts of excess collateral are not shown. Most of the assets and liabilities in the following tables were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.

The Company is party to master netting arrangements with most of its swap derivative counterparties; however, the Company does not offset derivative assets and liabilities under these arrangements on its consolidated balance sheet. Collateral, usually in the form of marketable securities, is exchanged between the Company and dealer bank counterparties, and is generally subject to thresholds and transfer minimums. By contract, it may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash and securities to its clearing agency. At March 31, 2014 , the Company had a net liability position with dealer bank and clearing agency counterparties totaling $9.5 million , and had posted securities with a fair value of $9.8 million and cash totaling $2.3 million . Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.

Resell and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral accepted or pledged in resell and repurchase agreements with other financial institutions also may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with customers.

The Company is party to several agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resell agreements with the same financial institution counterparty. These repurchase and resell agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the balance sheet, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $300.0 million at both March 31, 2014 and December 31, 2013 . At March 31, 2014 , the Company had posted collateral consisting of $310.2 million in agency mortgage-backed securities and accepted $330.6 million in investment grade asset-backed, commercial mortgage-backed, and corporate bonds.

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								Gross Amounts Not Offset in the Balance Sheet
(In thousands)	Gross Amount Recognized		Gross Amounts Offset in the Balance Sheet			Net Amounts Presented in the Balance Sheet		Financial Instruments			Securities Collateral Received/Pledged			Net Amount
March 31, 2014
Assets:
Derivatives subject to master netting agreements	$	10,976	$	—		$	10,976	$	(898	)	$	—		$	10,078
Derivatives not subject to master netting agreements	988		—			988
Total derivatives	11,964		—			11,964
Total resell agreements, subject to master netting arrangements	1,250,000		(300,000		)	950,000		—			(950,000		)	—
Liabilities:
Derivatives subject to master netting agreements	12,212		—			12,212		(898		)	(9,569		)	1,745
Derivatives not subject to master netting agreements	200		—			200
Total derivatives	12,412		—			12,412
Total repurchase agreements, subject to master netting arrangements	1,218,212		(300,000		)	918,212		—			(918,212		)	—
December 31, 2013
Assets:
Derivatives subject to master netting agreements	$	11,579	$	—		$	11,579	$	(1,299	)	$	(338	)	$	9,942
Derivatives not subject to master netting agreements	1,401		—			1,401
Total derivatives	12,980		—			12,980
Total resell agreements, subject to master netting arrangements	1,450,000		(300,000		)	1,150,000		—			(1,150,000		)	—
Liabilities:
Derivatives subject to master netting agreements	12,962		—			12,962		(1,299		)	(9,063		)	2,600
Derivatives not subject to master netting agreements	367		—			367
Total derivatives	13,329		—			13,329
Total repurchase agreements, subject to master netting arrangements	1,621,763		(300,000		)	1,321,763		—			(1,321,763		)	—

13. Stock-Based Compensation

The Company has historically issued stock-based compensation in the form of nonvested restricted stock, stock options and stock appreciation rights (SARs). During the first three months of 2014 , stock-based compensation was issued in the form of nonvested restricted stock and SARs. The stock-based compensation expense that has been charged against income was $2.3 million and $1.2 million in the three month periods ended March 31, 2014 and 2013 , respectively. The Company normally issues most of its annual stock-based compensation awards during the first quarter, which is reflected in the current quarter expense. However, in 2013, due to plan administration considerations, this process was postponed until April.

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Nonvested stock awards generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of March 31, 2014 , and changes during the three month period then ended, is presented below.



	Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2014	1,143,755		$34.27
Granted	171,524		44.52
Vested	(73,330	)	28.25
Forfeited	(15,494	)	40.19
Nonvested at March 31, 2014	1,226,455		$35.99

SARs and stock options are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs vest ratably over 4 years of continuous service and have 10 -year contractual terms. All SARs must be settled in stock under provisions of the plan. Stock options, which have not been granted since 2005, vested ratably over 3 years of continuous service and also have 10 -year contractual terms. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs and options on date of grant. The current year per share average fair value and the model assumptions are shown in the table below.



Weighted per share average fair value at grant date		$9.26
Assumptions:
Dividend yield	2.0		%
Volatility	22.1		%
Risk-free interest rate	2.3		%
Expected term	7.1 years

A summary of SAR activity during the first three months of 2014 is presented below.



(Dollars in thousands, except per share data)	Rights		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2014	1,758,254		$34.68
Granted	172,968		44.52
Forfeited	—		—
Expired	—		—
Exercised	(34,894	)	33.35
Outstanding at March 31, 2014	1,896,328		$35.60	4.3 years	$	20,521

A summary of option activity during the first three months of 2014 is presented below.



(Dollars in thousands, except per share data)	Shares		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2014	452,323		$30.55
Granted	—		—
Forfeited	—		—
Expired	—		—
Exercised	(198,067	)	30.60
Outstanding at March 31, 2014	254,256		$30.51	0.9 years	$	4,044

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14. Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale and trading securities, certain non-marketable securities relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as loans held for sale, mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting or write-downs of individual assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:


•	Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.


•	Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).


•	Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.

When determining the fair value measurements for assets and liabilities required or permitted to be recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets, and the Company must use alternative valuation techniques to derive an estimated fair value measurement.

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Instruments Measured at Fair Value on a Recurring Basis

The table below presents the March 31, 2014 and December 31, 2013 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first three months of 2014 or the year ended December 31, 2013 .



			Fair Value Measurements Using
(In thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2014
Assets:
Available for sale securities:
U.S. government and federal agency obligations	$	507,638	$	507,638	$	—	$	—
Government-sponsored enterprise obligations	796,773		—		796,773		—
State and municipal obligations	1,622,648		—		1,495,669		126,979
Agency mortgage-backed securities	2,892,499		—		2,892,499		—
Non-agency mortgage-backed securities	298,633		—		298,633		—
Asset-backed securities	2,816,012		—		2,816,012		—
Other debt securities	136,853		—		136,853		—
Equity securities	44,060		25,007		19,053		—
Trading securities	15,740		—		15,740		—
Private equity investments	76,446		—		—		76,446
Derivatives *	11,964		—		11,960		4
Assets held in trust	8,285		8,285		—		—
Total assets	$	9,227,551	$	540,930	$	8,483,192	$	203,429
Liabilities:
Derivatives *	$	12,412	$	—	$	12,341	$	71
Total liabilities	$	12,412	$	—	$	12,341	$	71
December 31, 2013
Assets:
Available for sale securities:
U.S. government and federal agency obligations	$	505,696	$	505,696	$	—	$	—
Government-sponsored enterprise obligations	741,766		—		741,766		—
State and municipal obligations	1,619,171		—		1,491,447		127,724
Agency mortgage-backed securities	2,772,338		—		2,772,338		—
Non-agency mortgage-backed securities	246,983		—		246,983		—
Asset-backed securities	2,844,071		—		2,844,071		—
Other debt securities	141,757		—		141,757		—
Equity securities	43,898		24,646		19,252		—
Trading securities	19,993		—		19,993		—
Private equity investments	56,612		—		—		56,612
Derivatives *	12,980		—		12,976		4
Assets held in trust	7,511		7,511		—		—
Total assets	$	9,012,776	$	537,853	$	8,290,583	$	184,340
Liabilities:
Derivatives *	$	13,329	$	—	$	13,260	$	69
Total liabilities	$	13,329	$	—	$	13,260	$	69

* The fair value of each class of derivative is shown in Note 11.

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Valuation methods for instruments measured at fair value on a recurring basis

Following is a description of the Company’s valuation methodologies used for instruments measured at fair value on a recurring basis:

Available for sale investment securities

For available for sale securities, changes in fair value, including that portion of other-than-temporary impairment unrelated to credit loss, are recorded in other comprehensive income. As mentioned in Note 4 on Investment Securities, the Company records the credit-related portion of other-than-temporary impairment in current earnings. This portfolio comprises the majority of the assets which the Company records at fair value. Most of the portfolio, which includes government-sponsored enterprise, mortgage-backed and asset-backed securities, are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2 in the fair value hierarchy. Where quoted prices are available in an active market, the measurements are classified as Level 1. Most of the Level 1 measurements apply to common stock and U.S. Treasury obligations.

The fair values of Level 1 and 2 securities (excluding equity securities) in the available for sale portfolio are prices provided by a third-party pricing service. The prices provided by the third-party pricing service are based on observable market inputs, as described in the sections below. On a quarterly basis, the Company compares a sample of these prices to other independent sources for the same and similar securities. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing service. Based on this research, the pricing service may affirm or revise its quoted price. No significant adjustments have been made to the prices provided by the pricing service. The pricing service also provides documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate.

Valuation methods and inputs, by class of security:


•	U.S. government and federal agency obligations

U.S. treasury bills, bonds and notes, including inflation-protected securities, are valued using live data from active market makers and inter-dealer brokers. Valuations for stripped coupon and principal issues are derived from yield curves generated from various dealer contacts and live data sources.


•	Government-sponsored enterprise obligations

Government-sponsored enterprise obligations are evaluated using cash flow valuation models. Inputs used are live market data, cash settlements, Treasury market yields, and floating rate indices such as LIBOR, CMT, and Prime.


•	State and municipal obligations, excluding auction rate securities

A yield curve is generated and applied to bond sectors, and individual bond valuations are extrapolated. Inputs used to generate the yield curve are bellwether issue levels, established trading spreads between similar issuers or credits, historical trading spreads over widely accepted market benchmarks, new issue scales, and verified bid information. Bid information is verified by corroborating the data against external sources such as broker-dealers, trustees/paying agents, issuers, or non-affiliated bondholders.


•	Mortgage and asset-backed securities

Collateralized mortgage obligations and other asset-backed securities are valued at the tranche level. For each tranche valuation, the process generates predicted cash flows for the tranche, applies a market based (or benchmark) yield/spread for each tranche, and incorporates deal collateral performance and tranche level attributes to determine tranche-specific spreads to adjust the benchmark yield. Tranche cash flows are generated from new deal files and prepayment/default assumptions. Tranche spreads are based on tranche characteristics such as average life, type, volatility, ratings, underlying collateral and performance, and prevailing market conditions. The appropriate tranche spread is applied to the corresponding benchmark, and the resulting value is used to discount the cash flows to generate an evaluated price.

Valuation of agency pass-through securities, typically issued under GNMA, FNMA, FHLMC, and SBA programs, are primarily derived from information from the To Be Announced (TBA) market. This market consists of generic mortgage pools which have not been received for settlement. Snapshots of the TBA market, using live data feeds

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distributed by multiple electronic platforms, and in conjunction with other indices, are used to compute a price based on discounted cash flow models.


•	Other debt securities

Other debt securities are valued using active markets and inter-dealer brokers as well as bullet spread scales and option adjusted spreads. The spreads and models use yield curves, terms and conditions of the bonds, and any special features (i.e., call or put options, redemption features, etc.).


•	Equity securities

Equity securities are priced using the market prices for each security from the major stock exchanges or other electronic quotation systems. These are generally classified as Level 1 measurements. Stocks which trade infrequently are classified as Level 2.

The available for sale portfolio includes certain auction rate securities. The auction process by which auction rate securities are normally priced has not functioned in recent years, and due to the illiquidity in the market, the fair value of these securities cannot be based on observable market prices. The fair values of the auction rate securities are estimated using a discounted cash flows analysis which is discussed more fully in the Level 3 Inputs section of this note. Because several of the inputs significant to the measurement are not observable, these measurements are classified as Level 3 measurements.

Trading securities

The securities in the Company’s trading portfolio are priced by averaging several broker quotes for similar instruments and are classified as Level 2 measurements.

Private equity investments

These securities are held by the Company’s private equity subsidiaries and are included in non-marketable investment securities in the consolidated balance sheets. Due to the absence of quoted market prices, valuation of these nonpublic investments requires significant management judgment. These fair value measurements, which are discussed in the Level 3 Inputs section of this note, are classified as Level 3.

Derivatives

The Company’s derivative instruments include interest rate swaps, foreign exchange forward contracts and certain credit risk guarantee agreements. When appropriate, the impact of credit standing, as well as any potential credit enhancements such as collateral, has been considered in the fair value measurement.

•

Valuations for interest rate swaps are derived from a proprietary model whose significant inputs are readily observable market parameters, primarily yield curves used to calculate current exposure. Counterparty credit risk is incorporated into the model and calculated by applying a net credit spread over LIBOR to the swap's total expected exposure over time. The net credit spread is comprised of spreads for both the Company and its counterparty, derived from probability of default and other loss estimate information obtained from a third party credit data provider or from the Company's Credit Department when not otherwise available. The credit risk component is not significant compared to the overall fair value of the swaps. The results of the model are constantly validated through comparison to active trading in the marketplace. These fair value measurements are classified as Level 2.


•	Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations from global market makers and are classified as Level 2.

•

The Company’s contracts related to credit risk guarantees are valued under a proprietary model which uses unobservable inputs and assumptions about the creditworthiness of the counterparty (generally a Bank customer). Customer credit spreads, which are based on probability of default and other loss estimates, are calculated internally by the Company's Credit Department, as mentioned above, and are based on the Company's internal risk rating for each customer. Because these inputs are significant to the measurements, they are classified as Level 3.

Assets held in trust

Assets held in an outside trust for the Company’s deferred compensation plan consist of investments in mutual funds. The fair value measurements are based on quoted prices in active markets and classified as Level 1. The Company has recorded an asset

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representing the total investment amount. The Company has also recorded a corresponding nonfinancial liability, representing the Company’s liability to the plan participants.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In thousands)	State and Municipal Obligations			Private Equity Investments			Derivatives			Total
For the three months ended March 31, 2014
Balance January 1, 2014	$	127,724		$	56,612		$	(65	)	$	184,271
Total gains or losses (realized/unrealized):
Included in earnings	—			16,794			105			16,899
Included in other comprehensive income *	(784		)	—			—			(784		)
Discount accretion	39			—			—			39
Purchases of private equity investments	—			3,000			—			3,000
Sale/pay down of private equity investments	—			(14		)	—			(14		)
Capitalized interest/dividends	—			54			—			54
Sale of risk participation agreement	—			—			(107		)	(107		)
Balance March 31, 2014	$	126,979		$	76,446		$	(67	)	$	203,358
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2014	$	—		$	16,794		$	105		$	16,899
For the three months ended March 31, 2013
Balance January 1, 2013	$	126,414		$	68,167		$	(187	)	$	194,394
Total gains or losses (realized/unrealized):
Included in earnings	—			(1,775		)	56			(1,719		)
Included in other comprehensive income *	2,188			—			—			2,188
Investment securities called	(525		)	—			—			(525		)
Discount accretion	66			—			—			66
Purchases of private equity investments	—			1,650			—			1,650
Capitalized interest/dividends	—			61			—			61
Balance March 31, 2013	$	128,143		$	68,103		$	(131	)	$	196,115
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2013	$	—		$	(1,775	)	$	56		$	(1,719	)

* Included in "net unrealized gains (losses) on other securities" in the consolidated statements of comprehensive income.

Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:



(In thousands)	Other Non-Interest Income		Investment Securities Gains (Losses), Net			Total
For the three months ended March 31, 2014
Total gains or losses included in earnings	$	105	$	16,794		$	16,899
Change in unrealized gains or losses relating to assets still held at March 31, 2014	$	105	$	16,794		$	16,899
For the three months ended March 31, 2013
Total gains or losses included in earnings	$	56	$	(1,775	)	$	(1,719	)
Change in unrealized gains or losses relating to assets still held at March 31, 2013	$	56	$	(1,775	)	$	(1,719	)

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Level 3 Inputs

As shown above, the Company's significant Level 3 measurements which employ unobservable inputs that are readily quantifiable pertain to auction rate securities (ARS) held by the Bank and investments in portfolio concerns held by the Company's private equity subsidiaries. ARS are included in state and municipal securities and totaled $127.0 million at March 31, 2014 , while private equity investments, included in non-marketable securities, totaled $76.4 million .

Information about these inputs is presented in the table and discussions below.



Quantitative Information about Level 3 Fair Value Measurements
	Valuation Technique	Unobservable Input	Range
Auction rate securities	Discounted cash flow	Estimated market recovery period	4	-	5 years
		Estimated market rate	1.8%	-	4.0%
Private equity investments	Market comparable companies	EBITDA multiple	4.0	-	5.5

The fair values of ARS are estimated using a discounted cash flows analysis in which estimated cash flows are based on mandatory interest rates paid under failing auctions and projected over an estimated market recovery period. Under normal conditions, ARS traded in weekly auctions and were considered liquid investments. The Company's estimate of when these auctions might resume is highly judgmental and subject to variation depending on current and projected market conditions. Few auctions of these securities have been held since 2008, and most sales have been privately arranged. Estimated cash flows during the period over which the Company expects to hold the securities are discounted at an estimated market rate. These securities are comprised of bonds issued by various states and municipalities for healthcare and student lending purposes, and market rates are derived for each type. Market rates are calculated at each valuation date using a LIBOR or Treasury based rate plus spreads representing adjustments for liquidity premium and nonperformance risk. The spreads are developed internally by employees in the Company's bond department. An increase in the holding period alone would result in a higher fair value measurement, while an increase in the estimated market rate (the discount rate) alone would result in a lower fair value measurement. The valuation of the ARS portfolio is reviewed on a quarterly basis by the Company's chief investment officers.

The fair values of the Company's private equity investments are based on a determination of fair value of the investee company less preference payments assuming the sale of the investee company. Investee companies are normally non-public entities. The fair value of the investee company is determined by reference to the investee's total earnings before interest, depreciation/amortization, and income taxes (EBITDA) multiplied by an EBITDA factor. EBITDA is normally determined based on a trailing prior period adjusted for specific factors including current economic outlook, investee management, and specific unique circumstances such as sales order information, major customer status, regulatory changes, etc. The EBITDA multiple is based on management's review of published trading multiples for recent private equity transactions and other judgments and is derived for each individual investee. The fair value of the Company's investment (which is usually a partial interest in the investee company) is then calculated based on its ownership percentage in the investee company. On a quarterly basis, these fair value analyses are reviewed by a valuation committee consisting of investment managers and senior Company management.

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Instruments Measured at Fair Value on a Nonrecurring Basis

For assets measured at fair value on a nonrecurring basis during the first three months of 2014 and 2013 , and still held as of March 31, 2014 and 2013 , the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at March 31, 2014 and 2013 .



			Fair Value Measurements Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Recognized During the Three Months Ended March 31
March 31, 2014
Collateral dependent impaired loans	$	7,916	$	—	$	—	$	7,916	$	(1,875	)
Private equity investments	919		—		—		919		(1,081		)
Mortgage servicing rights	843		—		—		843		14
Foreclosed assets	1,220		—		—		1,220		(181		)
Long-lived assets	7,246		—		—		7,246		(1,408		)

March 31, 2013
Collateral dependent impaired loans	$	1,900	$	—	$	—	$	1,900	$	(659	)
Mortgage servicing rights	503		—		—		503		57

Valuation methods for instruments measured at fair value on a nonrecurring basis

Following is a description of the Company’s valuation methodologies used for other financial and nonfinancial instruments measured at fair value on a nonrecurring basis.

Collateral dependent impaired loans

While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains a staff of qualified appraisers who also review third party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by credit administration. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. These measurements are classified as Level 3. Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company at March 31, 2014 and 2013 are shown in the table above.

Private equity investments and restricted stock

These assets are included in non-marketable investment securities in the consolidated balance sheets. They include certain investments in private equity concerns held by the Parent company which are carried at cost, reduced by other-than-temporary impairment. These investments are periodically evaluated for impairment based on their estimated fair value as determined by review of available information, most of which is provided as monthly or quarterly internal financial statements, annual audited financial statements, investee tax returns, and in certain situations, through research into and analysis of the assets and investments held by those private equity concerns. Restricted stock consists of stock issued by the Federal Reserve Bank and FHLB and is held by the bank subsidiary as required for regulatory purposes. Generally, there are restrictions on the sale and/or liquidation of these investments, and they are carried at cost, reduced by other-than-temporary impairment. Fair value measurements for these securities are classified as Level 3.

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Mortgage servicing rights

The Company initially measures its mortgage servicing rights at fair value and amortizes them over the period of estimated net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The fair value measurements are classified as Level 3.

Foreclosed assets

Foreclosed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, marine and recreational vehicles. Foreclosed assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods. These measurements are classified as Level 3.

Long-lived assets

In accordance with ASC 360-10-35, investments in branch facilities and various office buildings are written down to estimated fair value, or estimated fair value less cost to sell if the property is held for sale. Fair value is estimated in a process which considers current local commercial real estate market conditions and the judgment of the sales agent and often involves obtaining third party appraisals from certified real estate appraisers. The carrying amounts of these real estate holdings are regularly monitored by real estate professionals employed by the Company. These fair value measurements are classified as Level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. The measurements in 2014 pertained to a downtown Kansas City office building and several properties previously designated for future branch sites, which are held for sale.

15. Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The methods and inputs used in the estimation of fair value for the financial instruments in the table below are discussed in the preceding Fair Value Measurements note and in the Fair Value of Financial Instruments note in the Company's 2013 Annual Report on Form 10-K. There have been no significant changes in these methods and inputs since December 31, 2013 .

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The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows:



	Fair Value Hierarchy Level	March 31, 2014				December 31, 2013
(In thousands)		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets
Loans:
Business	Level 3	$	3,941,394	$	3,952,048	$	3,715,319	$	3,723,263
Real estate - construction and land	Level 3	423,667		427,885		406,197		410,022
Real estate - business	Level 3	2,315,167		2,348,642		2,313,550		2,345,124
Real estate - personal	Level 3	1,782,831		1,808,252		1,787,626		1,802,364
Consumer	Level 3	1,561,973		1,571,226		1,512,716		1,519,830
Revolving home equity	Level 3	419,376		423,239		420,589		424,811
Consumer credit card	Level 3	775,044		789,515		796,228		811,550
Overdrafts	Level 3	2,586		2,586		4,611		4,611
Investment securities:
Available for sale	Level 1	532,645		532,645		530,342		530,342
Available for sale	Level 2	8,455,492		8,455,492		8,257,614		8,257,614
Available for sale	Level 3	126,979		126,979		127,724		127,724
Trading	Level 2	15,740		15,740		19,993		19,993
Non-marketable	Level 3	126,119		126,119		107,324		107,324
Federal funds sold	Level 1	19,525		19,525		43,845		43,845
Securities purchased under agreements to resell	Level 3	950,000		947,959		1,150,000		1,149,625
Interest earning deposits with banks	Level 1	198,417		198,417		707,249		707,249
Cash and due from banks	Level 1	530,244		530,244		518,420		518,420
Derivative instruments	Level 2	11,960		11,960		12,976		12,976
Derivative instruments	Level 3	4		4		4		4
Financial Liabilities
Non-interest bearing deposits	Level 1	$	6,552,085	$	6,552,085	$	6,750,674	$	6,750,674
Savings, interest checking and money market deposits	Level 1	10,328,912		10,328,912		10,108,236		10,108,236
Time open and certificates of deposit	Level 3	2,356,337		2,358,114		2,188,438		2,190,610
Federal funds purchased	Level 1	8,940		8,940		24,795		24,795
Securities sold under agreements to repurchase	Level 3	918,212		918,145		1,321,763		1,321,633
Other borrowings	Level 3	105,114		114,053		107,310		116,843
Derivative instruments	Level 2	12,341		12,341		13,260		13,260
Derivative instruments	Level 3	71		71		69		69

16. Legal Proceedings

In December 2013, the settlement of a multi-district interchange suit against Visa, MasterCard and credit-card issuing major banks was approved in federal court. The settlement, as proposed in 2012, included a provision to reduce credit card interchange income by 10 basis points over an eight month period. In 2012, the Company established a liability for the estimated cost of this reduction in interchange, which totaled $5.2 million . The Company's payments to Visa related to the reduction began in September 2013 and have totaled $4.0 million through March 31, 2014 . The Company's adjusted remaining liability for the final remaining payment totaled $664 thousand at March 31, 2014 .

As mentioned in the 2013 Annual Report on Form 10-K, the Company was named in a petition by Patrick J. Malloy III, Bankruptcy Trustee for the Bankruptcy Estate of George David Gordon Jr. At March 31, 2014 , the Company had established a liability of $2.5 million related to this suit.

The Company has various other lawsuits pending at March 31, 2014 , arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2013 Annual Report on Form 10-K. Results of operations for the three month period ended March 31, 2014 are not necessarily indicative of results to be attained for any other period.

Forward-Looking Information

This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, failure of litigation settlement agreements to become final in accordance with their terms, and competition with other entities that offer financial services. For more discussion about each of these factors, see Part I Item 1A - "Risk Factors" in the Company's 2013 Annual Report on Form 10-K.

Critical Accounting Policies

The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, the valuation of certain investment securities, and accounting for income taxes. A discussion of these policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2013 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2013.

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Selected Financial Data



	Three Months Ended March 31
	2014			2013
Per Share Data
Net income per common share — basic	$	.67		$	.64	*
Net income per common share — diluted	.67			.63		*
Cash dividends	.225			.214		*
Book value	23.75			22.87		*
Market price	46.42			38.89		*
Selected Ratios
(Based on average balance sheets)
Loans to deposits ⁽¹⁾	59.35		%	54.65		%
Non-interest bearing deposits to total deposits	33.40			32.79
Equity to loans ⁽¹⁾	20.36			22.00
Equity to deposits	12.09			12.02
Equity to total assets	10.06			9.92
Return on total assets	1.16			1.13
Return on total equity	11.56			11.38
(Based on end-of-period data)
Non-interest income to revenue ⁽²⁾	40.14			39.92
Efficiency ratio ⁽³⁾	63.28			61.76
Tier I risk-based capital ratio	13.98			13.63
Total risk-based capital ratio	15.16			14.94
Tangible common equity to assets ratio ⁽⁴⁾	9.36			9.26
Tier I leverage ratio	9.41			8.92

* Restated for the 5% stock dividend distributed in December 2013.

(1) Includes loans held for sale.

(2) Revenue includes net interest income and non-interest income.

(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

(4) The tangible common equity to assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity is a non-GAAP measure and represents common equity less goodwill, core deposit premium and non-controlling interest in subsidiaries. Tangible assets, also a non-GAAP measure, represents total assets less goodwill and core deposit premium. Other companies may define or calculate these measures differently. Non-GAAP measures should not be viewed as a substitute for, or superior to, data prepared in accordance with GAAP.

The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.



	March 31
(Dollars in thousands)	2014			2013
Total equity	$	2,273,511		$	2,179,191
Less non-controlling interest	3,132			4,046
Less goodwill	138,921			125,585
Less core deposit premium	7,968			4,367
Total tangible common equity (a)	$	2,123,490		$	2,045,193
Total assets	$	22,837,120		$	22,227,208
Less goodwill	138,921			125,585
Less core deposit premium	7,968			4,367
Total tangible assets (b)	$	22,690,231		$	22,097,256
Tangible common equity to assets ratio (a)/(b)	9.36		%	9.26		%

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Results of Operations

Summary



	Three Months Ended March 31						Increase (Decrease)
(Dollars in thousands)	2014			2013			Amount			% change
Net interest income	$	153,066		$	150,343		$	2,723		1.8	%
Provision for loan losses	(9,660		)	(3,285		)	6,375			N.M.
Non-interest income	102,627			99,877			2,750			2.8
Investment securities gains (losses), net	10,037			(2,165		)	12,202			N.M.
Non-interest expense	(162,340		)	(155,037		)	7,303			4.7
Income taxes	(29,609		)	(28,925		)	684			2.4
Non-controlling interest income	192			209			(17		)	(8.1	)
Net income attributable to Commerce Bancshares, Inc.	$	64,313		$	61,017		$	3,296		5.4	%

For the quarter ended March 31, 2014 , net income attributable to Commerce Bancshares, Inc. (net income) amounted to $64.3 million , an increase of $ 3.3 million , or 5.4% , compared to the first quarter of the previous year, and a decrease of $1.6 million, or 2.4%, compared to the previous quarter. For the current quarter, the annualized return on average assets was 1.16% , the annualized return on average equity was 11.56% , and the efficiency ratio was 63.28% . Diluted earnings per share was $.67 , an increase of 6.3% compared to $.63 per share in the first quarter of 2013 and a decrease of 2.9% compared to $.69 per share in the previous quarter.

Compared to the first quarter of last year, net interest income increased $2.7 million , or 1.8% , mostly due to a $2.9 million increase in interest income on loans, along with a $1.5 million decrease in deposit interest expense. The increase in net interest income was partially offset by a $1.7 million decrease in interest on long-term securities purchased under agreements to resell. The provision for loan losses totaled $9.7 million for the current quarter, representing an increase of $6.4 million over the first quarter of 2013. Non-interest income increased $2.8 million, or 2.8%, due to continued growth in bank card and trust fee income. Non-interest expense for the first quarter increased $7.3 million, or 4.7%, compared to the same quarter last year, largely due to an increase of $3.4 million, or 3.7%, in salaries and benefits expense. Additionally, a litigation provision increased non-interest expense by $1.5 million in the first quarter of 2014. Net investment securities gains increased $12.2 million in the current quarter compared to the first quarter of last year, mainly due to increases in fair value adjustments of the private equity securities portfolio.

In September 2013, the Company acquired Summit Bancshares, Inc., an Oklahoma-based franchise with $261.6 million in assets and branch locations in Tulsa and Oklahoma City. The acquisition is further discussed in Note 2 to the consolidated financial statements.

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Net Interest Income

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income



	Three Months Ended March 31, 2014 vs. 2013
	Change due to
(In thousands)	Average Volume			Average Rate			Total
Interest income, fully taxable equivalent basis:
Loans	$	11,399		$	(8,037	)	$	3,362
Loans held for sale	(85		)	—			(85		)
Investment securities:
U.S. government and federal agency securities	(144		)	2,818			2,674
Government-sponsored enterprise obligations	1,404			(380		)	1,024
State and municipal obligations	25			(382		)	(357		)
Mortgage-backed securities	(3,163		)	1,524			(1,639		)
Asset-backed securities	(809		)	(256		)	(1,065		)
Other securities	(501		)	(192		)	(693		)
Total interest on investment securities	(3,188		)	3,132			(56		)
Short-term federal funds sold and securities purchased under
agreements to resell	17			—			17
Long-term securities purchased under agreements to resell	(377		)	(1,301		)	(1,678		)
Interest earning deposits with banks	18			5			23
Total interest income	7,784			(6,201		)	1,583
Interest expense:
Deposits:
Savings	14			—			14
Interest checking and money market	65			(697		)	(632		)
Time open & C.D.'s of less than $100,000	(142		)	(487		)	(629		)
Time open & C.D.'s of $100,000 and over	269			(516		)	(247		)
Total interest on deposits	206			(1,700		)	(1,494		)
Federal funds purchased and securities sold under
agreements to repurchase	(5		)	(10		)	(15		)
Other borrowings	16			23			39
Total interest expense	217			(1,687		)	(1,470		)
Net interest income, fully taxable equivalent basis	$	7,567		$	(4,514	)	$	3,053

Net interest income for the first quarter of 2014 was $153.1 million, a $2.7 million increase over the first quarter of 2013. On a tax equivalent (T/E) basis, net interest income totaled $159.8 million in the first quarter of 2014, down $2.4 million from the previous quarter and up $3.1 million over the first quarter of 2013. The decline in net interest income compared to the previous quarter was partly due to fewer days in the current quarter, coupled with lower rates earned on loans and a decrease in interest and dividends received on the Company's private equity investments. The Consumer price index published this quarter increased somewhat, which increased inflation interest on the Company's holdings of U.S. Treasury inflation-protected securities by $844 thousand compared to the previous quarter. Additionally, premium amortization expense was reduced by $539 thousand this quarter due to an adjustment reflecting slowing prepayment speeds on mortgage-backed securities. The increase over the same period last year was mainly the result of lower rates paid on deposits and higher loan balances, partly offset by lower loan yields. The Company's net interest rate margin was 3.03% in the first quarter of 2014, compared to 3.06% in the previous quarter and 3.07% in the first quarter of 2013.

Total interest income (T/E) increased $1.6 million over the first quarter of 2013. Interest income on loans increased $3.3 million due to a 12.2% increase in average loan balances, partly offset by a 37 basis point decrease in average rates earned. The higher balances contributed $11.3 million to interest income and occurred mainly in business, consumer and personal real estate loans.

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The overall average rate earned on total loans declined to 4.12% during the current quarter compared to 4.49% in the first quarter of 2013, which resulted in an $8.0 million decrease in interest income. Most of the rate impact occurred in business, consumer, business real estate and personal real estate loans. The average rate earned on business real estate loans decreased 27 basis points, while average balances grew $92.8 million. The average yield on personal real estate loans declined 22 basis points, while the average balance increased $178.4 million, or 11.2%. Average business loans increased $686.8 million, or 21.8%, which was offset by a decline of 27 basis points in rates earned. Average consumer loans increased $190.3 million, or 14.2%, while the average yield fell 62 basis points. Most of the increase in consumer loan balances resulted from growth of $166.8 million in auto loans and $65.1 million in fixed-rate home equity loans. This growth was was partly offset by a decrease of $73.1 million in marine and RV loans, as that portfolio continues to pay down. Average consumer credit card loans increased $2.3 million compared to the first quarter of 2013 and the average rate earned on these balances increased to 11.43% from 11.38%.

Interest income on investment securities (T/E) was $49.8 million during the first quarter of 2014, which was a slight decrease in total from the first quarter of last year. A $498.3 million decline in total average balances (excluding fair value adjustments) reduced interest income by $3.2 million, while a 12 basis point rise in the overall average rate earned contributed $3.1 million. The overall average rate earned was 2.24% in the current quarter compared to 2.12% during the first quarter of 2013. This rate increase included a $2.5 million increase in inflation interest on inflation-protected securities. Also, higher average rates were earned on mortgage-backed securities, which rose 21 basis points. This increase was partly due to a $539 thousand reduction in premium amortization expense in the current quarter, as mentioned above. The decline in total average balances occurred mainly in mortgage-backed and asset-backed securities, which declined $495.2 million and $352.7 million, respectively, and was partly offset by growth of $306.1 million in government-sponsored enterprise obligations.

Interest income on long-term securities purchased under agreements to resell decreased $1.7 million from the first quarter of 2013, mainly due to a decline of 48 basis points in average rates earned.

The average tax equivalent yield on total interest earning assets was 3.16% in the first quarter of 2014 compared to 3.23% in the first quarter of 2013.

Total interest expense decreased $1.5 million, or 17.5%, compared to the first quarter of 2013, mainly due to lower interest expense on interest bearing deposits. The decrease in interest expense on deposits resulted primarily from declines of 4 basis points in average rates paid on money market accounts and 13 basis points on certificates of deposit. Total average interest bearing deposits increased $287.0 million, or 2.4%, over the first quarter of 2013, as money market account balances increased $294.4 million, while certificate of deposit balances decreased $90.2 million (mainly in certificates of deposit under $100,000). The overall average rate incurred on all interest bearing liabilities decreased to .20% in the first quarter of 2014 compared to .25% in the first quarter of 2013.

Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.

Non-Interest Income



	Three Months Ended March 31						Increase (Decrease)
(Dollars in thousands)	2014			2013			Amount			% change
Bank card transaction fees	$	41,717		$	38,550		$	3,167		8.2	%
Trust fees	26,573			25,169			1,404			5.6
Deposit account charges and other fees	18,590			18,712			(122		)	(.7	)
Capital market fees	3,870			4,391			(521		)	(11.9	)
Consumer brokerage services	2,747			2,686			61			2.3
Loan fees and sales	1,209			1,473			(264		)	(17.9	)
Other	7,921			8,896			(975		)	(11.0	)
Total non-interest income	$	102,627		$	99,877		$	2,750		2.8	%
Non-interest income as a % of total revenue*	40.1		%	39.9		%

* Total revenue includes net interest income and non-interest income.

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For the first quarter of 2014, total non-interest income amounted to $102.6 million compared with $99.9 million in the same quarter last year, which was an increase of $2.8 million, or 2.8%. Bank card fees for the current quarter increased $3.2 million, or 8.2%, over the first quarter of last year, as a result of a 12.8% increase in corporate card fees, which totaled $21.1 million this quarter. Debit card fees also grew by 5.8% and totaled $8.7 million this quarter. Trust fees for the quarter increased $1.4 million, or 5.6%, over the same quarter last year, resulting mainly from growth in personal (up 6.3%) and institutional (up 5.7%) trust fees. Deposit account fees decreased slightly compared to last year as overdraft fees declined by $718 thousand, or 9.7%, but were offset by combined growth in corporate cash management and other deposit fees of $596 thousand. Capital market fees decreased $521 thousand (totaling $3.9 million in the current quarter) as customer demand for fixed income securities was down from the previous year. Loan fees and sales revenue declined $264 thousand mainly due to lower loan commitment fees. Other income decreased $975 thousand from the same quarter last year due to a reduction in fair value of $688 thousand on certain bank-owned properties held for sale, in addition to net gains of $809 thousand related to branch facilities that were recorded in the first quarter of 2013. Growth of swap fee income and higher revenue from sales of tax credits partially offset the reductions to other non-interest income.

Investment Securities Gains (Losses), Net



	Three Months Ended March 31
(In thousands)	2014			2013
Available for sale:
U.S. government bonds	$	(5,197	)	$	—
OTTI losses on non-agency mortgage-backed bonds	(346		)	(442		)
Non-marketable:
Private equity investments	15,580			(1,723		)
Total investment securities gains (losses), net	$	10,037		$	(2,165	)

Net gains and losses on investment securities which were recognized in earnings during the three months ended March 31, 2014 and 2013 are shown in the table above. Net securities gains amounted to $10.0 million in the first quarter of 2014, while net securities losses of $2.2 million were recorded in the first quarter of 2013. Included in these net gains and losses are credit-related impairment losses on certain non-agency guaranteed mortgage-backed securities which have been identified as other-than-temporarily impaired. These identified securities had a total fair value of $66.1 million at March 31, 2014. During the current quarter, additional credit-related impairment losses of $346 thousand were recorded. The cumulative credit-related impairment loss initially recorded on these securities amounted to $13.2 million at March 31, 2014. Also shown above are net gains and losses relating to non-marketable private equity investments, which are primarily held by the Parent's majority-owned private equity subsidiaries. Most of the net gains in 2014 resulted from fair value adjustments to the investments in this portfolio and included a large gain of $18.4 million on one investment the Company has held for many years. The portion of the private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in income of $333 thousand and $350 thousand during the first three months of 2014 and 2013, respectively. During 2014, the Company also sold $36.2 million of U.S. Treasury inflation-protected bonds, realizing a loss of $5.2 million.

Non-Interest Expense



	Three Months Ended March 31				Increase (Decrease)
(Dollars in thousands)	2014		2013		Amount			% change
Salaries and employee benefits	$	94,263	$	90,881	$	3,382		3.7	%
Net occupancy	11,616		11,235		381			3.4
Equipment	4,504		4,683		(179		)	(3.8	)
Supplies and communication	5,699		5,589		110			2.0
Data processing and software	19,087		18,951		136			.7
Marketing	3,681		3,359		322			9.6
Deposit insurance	2,894		2,767		127			4.6
Other	20,596		17,572		3,024			17.2
Total non-interest expense	$	162,340	$	155,037	$	7,303		4.7	%

Non-interest expense for the first quarter of 2014 amounted to $162.3 million, an increase of $7.3 million, or 4.7%, compared with $155.0 million in the first quarter of last year. Salaries and benefits expense increased $3.4 million, or 3.7%, mainly due to

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an increase in full-time salary costs of $2.3 million, or 3.8%, and an increase in medical costs of $546 thousand, partly offset by lower retirement plan expenses. Growth in salaries and benefits expense resulted from added staffing mainly in the areas of commercial banking, wealth and commercial card, coupled with higher staffing costs of $863 thousand related to the Summit acquisition that were not present in the first quarter of 2013. Full-time equivalent employees totaled 4,745 at March 31, 2014 compared to 4,725 at March 31, 2013. Compared to the first quarter of last year, occupancy expense grew $381 thousand, or 3.4%, on higher utilities and snow removal costs, while marketing costs grew $322 thousand, or 9.6%, due to lower spending levels last year. Data processing and software costs grew by $136 thousand, or .7%, mainly due to lower software expense, partly offset by higher bank card transaction processing costs. Other non-interest expense increased $3.0 million compared to the first quarter of last year, and included a litigation provision of $1.5 million and write downs of $720 thousand on certain surplus branch properties. The current quarter included operating expenses related to Summit totaling $432 thousand (excluding salaries and benefits) which were not present in the same quarter last year. In the first quarter of 2013, the Company recorded a provision of $1.0 million on a letter of credit exposure.

Provision and Allowance for Loan Losses



	Three Months Ended
(In thousands)	Mar. 31, 2014			Dec. 31, 2013			Mar. 31, 2013
Provision for loan losses	$	9,660		$	5,543		$	3,285
Net loan charge-offs (recoveries):
Commercial:
Business	(106		)	(76		)	(50		)
Real estate-construction and land	55			(1,781		)	(532		)
Real estate-business	426			(255		)	(104		)
Personal Banking:
Real estate-personal	6			358			373
Consumer	2,505			2,311			1,709
Revolving home equity	113			596			139
Consumer credit card	6,447			6,110			6,048
Overdrafts	214			280			202
Total net loan charge-offs	$	9,660		$	7,543		$	7,785



	Three Months Ended
	Mar. 31, 2014		Dec. 31, 2013		Mar. 31, 2013
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business	(.01	)%	(.01	)%	(.01	)%
Real estate-construction and land	.05		(1.81	)	(.61	)
Real estate-business	.07		(.04	)	(.02	)
Personal Banking:
Real estate-personal	—		.08		.09
Consumer	.66		.61		.52
Revolving home equity	.11		.56		.13
Consumer credit card	3.45		3.19		3.25
Overdrafts	15.99		16.56		15.15
Total annualized net loan charge-offs	.35	%	.28	%	.32	%

* as a percentage of average loans (excluding loans held for sale)

The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of a specific allowance component based on certain individually evaluated loans and a general component based on estimates of allowances for pools of loans.

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Loans subject to individual evaluation generally consist of business, construction, business real estate and personal real estate loans on non-accrual status and include troubled debt restructurings that are on non-accrual status. These non-accrual loans are evaluated individually for impairment based on factors such as payment history, borrower financial condition, collateral, current economic conditions and loss experience. For collateral dependent loans, appraisals of collateral (including exit costs) are normally obtained annually but discounted based on date last received and market conditions. From these evaluations of expected cash flows and collateral values, specific allowances are determined.

Loans which are not individually evaluated are segregated by loan type and sub-type and are collectively evaluated. These loans include commercial loans (business, construction and business real estate) which have been graded pass, special mention or substandard and all personal banking loans, except personal real estate loans on non-accrual status. Collectively-evaluated loans include certain troubled debt restructurings with similar risk characteristics. Allowances determined for personal banking loans, which are generally smaller balance homogeneous type loans, use consistent methodologies which consider historical and current loss trends, delinquencies and current economic conditions. Allowances for commercial type loans, which are generally larger and more complex in structure with more unpredictable loss characteristics, use methods which consider historical and current loss trends, current loan grades, delinquencies, industry concentrations, economic conditions throughout the Company's markets as monitored by Company credit officers, and general economic conditions.

The Company's estimate of the allowance for loan losses and the corresponding provision for loan losses is based upon various judgments and assumptions made by management. Factors that influence these judgments include past loan loss experience, current loan portfolio composition and characteristics, trends in delinquencies, portfolio risk ratings, levels of non-performing assets, and prevailing regional and national economic conditions. The Company has internal credit administration and loan review staffs that continuously review loan quality and report the results of their reviews and examinations to the Company's senior management and Board of Directors. Such reviews also assist management in establishing the level of the allowance. In using this process and the information available, management must consider various assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these subjective factors, actual outcomes of inherent losses can differ from original estimates. The Company's subsidiary bank continues to be subject to examination by several regulatory agencies, and examinations are conducted throughout the year, targeting various segments of the loan portfolio for review. Note 1 in the 2013 Annual Report on Form 10-K contains additional discussion on the allowance and charge-off policies.

Net loan charge-offs in the first quarter of 2014 amounted to $9.7 million, compared with $7.5 million in the prior quarter and $7.8 million in the first quarter of last year. The increase in net loan charge-offs compared to the previous quarter is mainly due to a decline of $2.6 million in commercial loan recoveries received, resulting in a $2.5 million increase in net charge-offs of commercial loans. Additionally, consumer credit card loan net charge-offs increased $337 thousand. These increases were partially offset by lower net charge-offs in revolving home equity and personal real estate loans, which decreased $483 thousand and $352 thousand, respectively. For the three months ended March 31, 2014 , the ratio of annualized total net loan charge-offs to total average loans was .35% , compared to .28% in the previous quarter and .32% in the same quarter last year.

For the first quarter of 2014 , annualized net charge-offs on average consumer credit card loans amounted to 3.45%, compared with 3.19% in the previous quarter and 3.25% in the same period last year. Consumer loan net charge-offs for the quarter amounted to .66% of average consumer loans, compared to .61% in the previous quarter and .52% in the same quarter last year.

The provision for loan losses for the current quarter totaled $9.7 million, an increase of $4.1 million over the previous quarter and $6.4 million over the same period last year. The current quarter provision for loan losses matched net loan charge-offs, while in the previous quarter the provision was $2.0 million less than net loan charge-offs. At March 31, 2014 , the allowance for loan losses amounted to $161.5 million and was 1.44% of total loans and 340% of total non-accrual loans.

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Risk Elements of Loan Portfolio

The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual.



(Dollars in thousands)	March 31, 2014			December 31, 2013
Non-accrual loans	$	47,573		$	48,814
Foreclosed real estate	6,871			6,625
Total non-performing assets	$	54,444		$	55,439
Non-performing assets as a percentage of total loans	.49		%	.51		%
Non-performing assets as a percentage of total assets	.24		%	.24		%
Total loans past due 90 days and still accruing interest	$	12,487		$	13,966

Non-accrual loans, which are also classified as impaired, totaled $47.6 million at March 31, 2014, and decreased $1.2 million from December 31, 2013. The decline from December 31, 2013 occurred mainly in personal real estate, construction and land, and business real estate non-accrual loans, which decreased $748 thousand, $726 thousand, and $724 thousand, respectively. Business non-accrual loans also decreased $581 thousand. These declines in non-accrual loans were partially offset by an increase of $1.5 million in consumer non-accrual loans during the first quarter of 2014. At March 31, 2014, non-accrual loans were comprised mainly of business real estate (40.1%), business (23.1%), and construction and land (19.9%) loans. Foreclosed real estate totaled $6.9 million at March 31, 2014, an increase of $246 thousand when compared to December 31, 2013. Total loans past due 90 days or more and still accruing interest were $12.5 million as of March 31, 2014, a decrease of $1.5 million when compared to December 31, 2013. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 3 to the consolidated financial statements.

In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $109.4 million at March 31, 2014 compared with $98.3 million at December 31, 2013, resulting in an increase of $11.1 million, or 11.2%. The change in potential problem loans was largely comprised of increases of $7.0 million in business loans and $3.1 million in business real estate loans.



(In thousands)	March 31, 2014		December 31, 2013
Potential problem loans:
Business	$	30,675	$	23,691
Real estate – construction and land	21,223		21,812
Real estate – business	53,427		50,349
Real estate – personal	4,072		2,486
Total potential problem loans	$	109,397	$	98,338

At March 31, 2014, the Company had $86.0 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 3 to the consolidated financial statements. This balance includes certain commercial loans totaling $41.0 million which are classified as substandard and included in the table above because of this classification.

Loans with Special Risk Characteristics

Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 3 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally

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calculated with valuations at loan origination date. The Company does not attempt to obtain updated appraisals or valuations unless the loans become significantly delinquent or are in the process of being foreclosed upon.

Real Estate – Construction and Land Loans

The Company's portfolio of construction and land loans, as shown in the table below, amounted to 3.8% of total loans outstanding at March 31, 2014.



(Dollars in thousands)	March 31, 2014		% of Total		% of Total Loans		December 31, 2013		% of Total		% of Total Loans
Residential land and land development	$	83,090	19.6	%	.7	%	$	79,273	19.5	%	.7	%
Residential construction	102,500		24.2		1.0		86,043		21.2		.8
Commercial land and land development	79,057		18.7		.7		77,444		19.1		.7
Commercial construction	159,020		37.5		1.4		163,437		40.2		1.5
Total real estate - construction and land loans	$	423,667	100.0	%	3.8	%	$	406,197	100.0	%	3.7	%

Real Estate – Business Loans

Total business real estate loans were $2.3 billion at March 31, 2014 and comprised 20.6% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At March 31, 2014, 46.3% of business real estate loans were for owner-occupied real estate properties, which present lower risk profiles.



(Dollars in thousands)	March 31, 2014		% of Total		% of Total Loans		December 31, 2013		% of Total		% of Total Loans
Owner-occupied	$	1,072,997	46.3	%	9.6	%	$	1,074,074	46.4	%	9.8	%
Retail	269,637		11.6		2.4		271,228		11.7		2.5
Office	261,943		11.3		2.2		265,352		11.5		2.4
Multi-family	191,064		8.3		1.7		178,524		7.7		1.6
Hotels	152,602		6.6		1.4		151,483		6.5		1.4
Farm	138,422		6.0		1.2		138,842		6.0		1.3
Industrial	87,454		3.8		.8		89,045		3.9		.8
Other	141,048		6.1		1.3		145,002		6.3		1.3
Total real estate - business loans	$	2,315,167	100.0	%	20.6	%	$	2,313,550	100.0	%	21.1	%

Real Estate – Personal Loans

The Company's $1.8 billion personal real estate loan portfolio is composed mainly of residential first mortgage real estate loans. As shown on page 43, recent loss rates have remained low, and at March 31, 2014, past due loans increased $1.0 million and non-accrual loans declined $748 thousand compared to December 31, 2013. Also, as shown in Note 3, only 4.9% of this portfolio has FICO scores of less than 660, and delinquency levels have been low. Approximately $15.1 million of personal real estate loans were structured with interest only payments. These loans are typically made to high net-worth borrowers and generally have low LTV ratios at origination or have additional collateral pledged to secure the loan. Therefore, they are not perceived to represent above normal credit risk. Loans originated with interest only payments were not made to "qualify" the borrower for a lower payment amount. At March 31, 2014, loans with no mortgage insurance and an original LTV higher than 80% totaled $145.8 million compared to $146.1 million at December 31, 2013.

Revolving Home Equity Loans

The Company has $419.4 million in revolving home equity loans at March 31, 2014 that are generally collateralized by residential real estate. Most of these loans (94.2%) are written with terms requiring interest only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of March 31, 2014, the outstanding principal of loans with an original LTV higher than 80% was $52.7 million, or 12.6% of the portfolio, compared to $54.4 million as of December 31, 2013. Total revolving home equity loan balances over 30 days past due or on non-accrual status were $3.7

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million at March 31, 2014 compared to $4.0 million at December 31, 2013. The weighted average FICO score for the total current portfolio balance is 751. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2014 through 2016, approximately 43% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 83% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.

Fixed Rate Home Equity Loans

In addition to the residential real estate mortgage and the revolving home equity products mentioned above, the Company offers a third choice to those consumers desiring a fixed rate home equity loan with a fixed maturity date and a determined amortization schedule. The fixed rate home equity loan is typically used to finance a specific home repair or remodeling project. This portfolio of loans approximated $286.1 million and $284.9 million at March 31, 2014 and December 31, 2013, respectively. At the end of the first quarter of 2014, $73.4 million of this portfolio had an LTV higher than 80%, up slightly from a balance of $72.9 million at the end of 2013.

At times, these loans are written with interest only monthly payments and a balloon payoff at maturity; however, such loans totaled less than 2% of the outstanding balance of fixed rate home equity loans at March 31, 2014. The Company has limited the offering of fixed rate home equity loans with LTV ratios over 90% during the past several years, and only $416 thousand in new fixed rate home equity loans were written with these LTV ratios during the first three months of 2014.

Management does not believe these loans collateralized by real estate (personal real estate, revolving home equity, and fixed rate home equity) represent any unusual concentrations of risk, as evidenced by net charge-offs on these loans in the first three months of 2014 of $6 thousand, $113 thousand, and $542 thousand, respectively. The amount of any increased potential loss on high LTV agreements relates mainly to amounts advanced that are in excess of the 80% collateral calculation, not the entire approved line. The Company currently offers no subprime first mortgage or home equity loans, which are characterized as new loans to customers with FICO scores below 660. The Company does not purchase brokered loans.

Other Consumer Loans

Within the consumer loan portfolio are several direct and indirect product lines, comprised mainly of loans secured by automobiles, marine and RVs. Outstanding balances for these loans were $1.0 billion at March 31, 2014 and December 31, 2013. The balances over 30 days past due amounted to $10.6 million at March 31, 2014 compared to $14.4 million at the end of 2013. For the three months ended March 31, 2014, $142.9 million of new automobile loans were originated, compared to $507.7 million during the full year of 2013. The Company has curtailed new marine and RV loans since 2008, and at March 31, 2014, outstanding balances totaled $237.4 million. The loss ratios experienced for marine and RV loans have been higher than other consumer loan products in recent years, and the annualized ratios were 1.4% and 1.3% in the first three months of 2014 and 2013, respectively.

Additionally, the Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2014 of $775.0 million in consumer credit card loans outstanding, approximately $161.3 million, or 20.8%, carried a low promotional rate. Within the next six months, $45.8 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.

Shared National Credits

The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $20 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $477.5 million at March 31, 2014, compared to $406.3 million at December 31, 2013. Additional unfunded commitments at March 31, 2014 totaled $1.1 billion.

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Income Taxes

Income tax expense was $29.6 million in the first quarter of 2014, compared to $30.4 million in the fourth quarter of 2013 and $28.9 million in the first quarter of 2013. The Company's effective tax rate, including the effect of non-controlling interest, was 31.5% in both the first quarter of 2014 and fourth quarter of 2013, compared to 32.2% in the first quarter of 2013. The decrease in the effective tax rate for the first three months of 2014 compared to the same period in 2013 was primarily due to lower state and local income taxes.

Financial Condition

Balance Sheet

Total assets of the Company were $22.8 billion at March 31, 2014 and $23.1 billion at December 31, 2013 . Earning assets (excluding fair value adjustments on investment securities) amounted to $21.6 billion at March 31, 2014 , compared to $21.9 billion at December 31, 2013 , and consisted of 52% in loans and 43% in investment securities.

During the first quarter of 2014, average loans increased $287.7 million compared to the previous quarter and increased $1.2 billion, or 12.2%, compared to the same period last year. Compared to the previous quarter, the increase in average loans resulted primarily from growth in business loans, which increased $208.2 million. The increase in average loans during the quarter was supplemented by growth in consumer loans, which increased $33.1 million, construction loans, which increased $28.3 million, and business real estate loans, which increased $23.5 million. Growth in business loans mainly resulted from continued growth in commercial and industrial and tax-advantaged lending activities. Consumer loan growth was mainly driven by increased demand for consumer automobile loans, which increased by $49.8 million in the first quarter. However, average marine and RV loans, also included in the consumer loan portfolio, continued to run off this quarter by $14.5 million.

Total available for sale investment securities, at fair value, averaged $9.0 billion this quarter, an increase of $244.9 million when compared to the previous quarter. This growth resulted partly from purchases occurring late in 2013 and also from purchases of new securities, totaling $649.6 million in the first quarter of 2014. These purchases were offset by sales, maturities and pay downs of $493.6 million. At March 31, 2014, the duration of the investment portfolio was 2.8 years, and maturities and pay downs of approximately $1.5 billion are expected to occur during the next 12 months.

Total average deposits increased $292.7 million during the first quarter of 2014 compared to the previous quarter. The increase in average deposits resulted mainly from $270.2 million growth in money market accounts, growth of $30.4 million in certificates of deposit, and $21.5 million of growth in savings accounts. These increases were partly offset by a decline in non-interest bearing demand deposits, which declined $33.5 million. Compared to the previous quarter, total average consumer, private banking and commercial deposits increased $194.9 million, $42.4 million and $40.9 million, respectively. The average loans to deposits ratio in the current quarter was 59.4%, compared to 58.7% in the previous quarter.

During the first quarter of 2014, the Company’s average borrowings increased $22.8 million compared to the previous quarter, mainly due to an increase in the average balance of customer repurchase agreements.

Liquidity and Capital Resources

Liquidity Management

The Company’s most liquid assets are comprised of available for sale investment securities, federal funds sold, securities purchased under agreements to resell (resell agreements), and balances at the Federal Reserve Bank, as follows:



(In thousands)	March 31, 2014		March 31, 2013		December 31, 2013
Liquid assets:
Available for sale investment securities	$	9,115,116	$	9,572,751	$	8,915,680
Federal funds sold	19,525		7,820		43,845
Long-term securities purchased under agreements to resell	950,000		1,200,000		1,150,000
Balances at the Federal Reserve Bank	198,417		199,956		707,249
Total	$	10,283,058	$	10,980,527	$	10,816,774

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Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $19.5 million as of March 31, 2014 . Long-term resell agreements, maturing in 2014 through 2016, totaled $950.0 million at March 31, 2014 . Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safekept by a third-party custodian, as collateral. This collateral totaled $997.1 million in fair value at March 31, 2014 . Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $198.4 million at March 31, 2014 . The fair value of the available for sale investment portfolio was $9.1 billion at March 31, 2014 and included an unrealized net gain in fair value of $90.4 million. The total net unrealized gain included net gains of $56.3 million on mortgage and asset-backed securities and $33.5 million on common stock held by the Parent. Net gains of $16.1 million on U.S. government securities were offset by net losses of $16.5 million on government-sponsored enterprise obligations.

Approximately $1.5 billion of the available for sale investment portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:



(In thousands)	March 31, 2014		March 31, 2013		December 31, 2013
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	495,526	$	580,800	$	505,690
FHLB borrowings and letters of credit	54,668		34,085		58,445
Securities sold under agreements to repurchase	2,251,659		2,209,955		2,814,597
Other deposits and swaps	1,987,944		1,933,572		1,646,562
Total pledged securities	4,789,797		4,758,412		5,025,294
Unpledged and available for pledging	2,752,224		3,165,302		2,339,549
Ineligible for pledging	1,573,095		1,649,037		1,550,837
Total available for sale securities, at fair value	$	9,115,116	$	9,572,751	$	8,915,680

Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At March 31, 2014 , such deposits totaled $16.9 billion and represented 87.8% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Time open and certificates of deposit of $100,000 and over totaled $1.4 billion at March 31, 2014 . These accounts are normally considered more volatile and higher costing and comprised 7.2% of total deposits at March 31, 2014 .



(In thousands)	March 31, 2014		March 31, 2013		December 31, 2013
Core deposit base:
Non-interest bearing	$	6,552,085	$	6,170,274	$	6,750,674
Interest checking	874,125		805,960		1,113,110
Savings and money market	9,454,787		8,996,878		8,995,126
Total	$	16,880,997	$	15,973,112	$	16,858,910

Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB, as follows:



(In thousands)	March 31, 2014		March 31, 2013		December 31, 2013
Borrowings:
Federal funds purchased	$	8,940	$	36,750	$	24,795
Securities sold under agreements to repurchase	918,212		1,090,108		1,321,763
FHLB advances	105,114		102,783		105,310
Total	$	1,032,266	$	1,229,641	$	1,451,868

Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Securities sold under agreements to repurchase are secured by a portion of the

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Company's investment portfolio and are comprised of both non-insured customer funds totaling $718.2 million, which generally mature overnight, and structured repurchase agreements of $200.0 million. The structured repurchase agreements have variable rates and mature later in 2014. The Company also borrows on a secured basis through advances from the FHLB, which totaled $105.1 million at March 31, 2014 . These advances have fixed interest rates and most mature in 2017.

The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at March 31, 2014 :



	March 31, 2014
(In thousands)	FHLB			Federal Reserve		Total
Collateral value pledged	$	2,453,748		$	1,529,703	$	3,983,451
Advances outstanding	(105,114		)	—		(105,114		)
Letters of credit issued	(147,705		)	—		(147,705		)
Available for future advances	$	2,200,929		$	1,529,703	$	3,730,632

In addition to those mentioned above, several other sources of liquidity are available. The Bank has strong issuer ratings from Standard & Poor's and Moody's of A and Aa3, respectively. Additionally, the Parent's sound commercial paper rating of P-1 from Moody's would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed corporate debt. Financing may also include the issuance of common or preferred stock.

The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash and cash equivalents of $521.3 million during the first three months of 2014 , as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $121.5 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $218.6 million . These activities included $628.2 million in purchases of investment securities, offset by $488.6 million in sales, maturities and pay downs, and a net increase in loans of $275.0 million. Repayments of long-term securities purchased under agreements to resell, net of purchases, provided cash of $200.0 million. Financing activities used cash of $424.2 million , resulting from a net decrease of $419.4 million in in borrowings of federal funds purchased and securities sold under agreements to repurchase. Additionally, purchases of treasury stock of $20.9 million, and cash dividends paid of $21.6 million contributed to financing activity net outflows during the period. These outflows were partially offset by a net increase of $35.0 million in deposits. Future short-term liquidity needs arising from daily operations are not expected to vary significantly, and the Company believes it will be able to meet these cash flow needs.

Capital Management

The Company and its bank subsidiary maintain strong regulatory capital ratios, which exceed the well-capitalized guidelines under federal banking regulations. Information about the Company’s risk-based capital is shown below:



(Dollars in thousands)	March 31, 2014			December 31, 2013			Minimum Ratios for Well-Capitalized Banks
Risk-adjusted assets	$	14,963,936		$	14,660,536
Tier I risk-based capital	2,091,365			2,061,761
Total risk-based capital	2,269,067			2,239,636
Tier I risk-based capital ratio	13.98		%	14.06		%	6.00	%
Total risk-based capital ratio	15.16		%	15.28		%	10.00	%
Tier I leverage ratio	9.41		%	9.43		%	5.00	%

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The Company maintains a treasury stock buyback program, and at a July 2013 meeting, the Board of Directors approved the purchase of additional shares, bringing the total shares authorized for future purchase to 4,000,000 shares. During the quarter ended March 31, 2014 , the Company purchased 474,854 shares of stock at an average cost of $44.01 per share. At March 31, 2014 , 3,017,411 shares remained available for purchase under the current Board authorization.

The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital levels, and alternative investment options. The Company paid a $.225 per share cash dividend in the first quarter of 2014 , which was a 5% increase compared to its 2013 fourth quarter dividend.

Commitments, Off-Balance Sheet Arrangements and Contingencies

In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at March 31, 2014 totaled $8.3 billion (including approximately $3.8 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $333.3 million and $8.3 million, respectively, at March 31, 2014 . As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the balance sheet, amounted to $3.5 million at March 31, 2014 .

The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties or retained for use by the Company. During the first three months of 2014 , purchases and sales of tax credits amounted to $17.9 million and $19.0 million, respectively. At March 31, 2014 , outstanding purchase commitments totaled $177.7 million.

Other contingencies related to lawsuits are discussed in Note 16 to the consolidated financial statements.

Segment Results

The table below is a summary of segment pre-tax income results for the first three months of 2014 and 2013 .



(Dollars in thousands)	Consumer			Commercial			Wealth			Segment Totals			Other/ Elimination			Consolidated Totals
Three Months Ended March 31, 2014
Net interest income	$	66,862		$	73,401		$	9,912		$	150,175		$	2,891		$	153,066
Provision for loan losses	(9,220		)	(383		)	(41		)	(9,644		)	(16		)	(9,660		)
Non-interest income	25,644			47,117			29,989			102,750			(123		)	102,627
Investment securities gains, net	—			—			—			—			10,037			10,037
Non-interest expense	(66,287		)	(60,826		)	(24,749		)	(151,862		)	(10,478		)	(162,340		)
Income before income taxes	$	16,999		$	59,309		$	15,111		$	91,419		$	2,311		$	93,730
Three Months Ended March 31, 2013
Net interest income	$	67,213		$	70,215		$	10,174		$	147,602		$	2,741		$	150,343
Provision for loan losses	(8,211		)	489			(48		)	(7,770		)	4,485			(3,285		)
Non-interest income	26,608			44,506			28,819			99,933			(56		)	99,877
Investment securities losses, net	—			—			—			—			(2,165		)	(2,165		)
Non-interest expense	(67,904		)	(58,912		)	(24,308		)	(151,124		)	(3,913		)	(155,037		)
Income before income taxes	$	17,706		$	56,298		$	14,637		$	88,641		$	1,092		$	89,733
Increase (decrease) in income before income taxes:
Amount	$	(707	)	$	3,011		$	474		$	2,778		$	1,219		$	3,997
Percent	(4.0		)%	5.3		%	3.2		%	3.1		%	111.6		%	4.5		%

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Consumer

For the three months ended March 31, 2014, income before income taxes for the Consumer segment decreased $707 thousand, or 4.0%, compared to the first three months of 2013. This decrease was mainly due to a decline of $351 thousand in net interest income, an increase of $1.0 million in the provision for loan losses and a decrease of $964 thousand, or 3.6%, in non-interest income. These income reductions were partly offset by a decrease of $1.6 million, or 2.4%, in non-interest expense. Net interest income declined due to a $458 thousand decrease in loan interest income and a $1.0 million decrease in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios, partly offset by a decline of $1.1 million in deposit interest expense. Non-interest income decreased mainly due to a decline in mortgage banking revenue, partly offset by growth bank card fees (mainly debit card). Non-interest expense decreased from the same period in the previous year due to lower processing costs (mainly deposit account processing), corporate management fees and salaries and benefits expense (mainly incentives). The provision for loan losses totaled $9.2 million, a $1.0 million increase over the first three months of 2013, which was mainly due to higher losses on credit card, fixed rate home equity and other consumer loans.

Commercial

For the three months ended March 31, 2014 , income before income taxes for the Commercial segment increased $3.0 million, or 5.3%, compared to the same period in the previous year. This increase was mainly due to higher net interest income and higher non-interest income, partly offset by higher non-interest expense. Net interest income increased $3.2 million, or 4.5%, due to growth of $2.9 million in loan interest income. The provision for loan losses increased $872 thousand over the same period last year, as business real estate and construction and land loan net charge-offs were higher by $531 thousand and $586 thousand, respectively. Non-interest income increased by $2.6 million, or 5.9%, over the previous year due to growth in bank card fees (mainly corporate card), swap fees and tax credit sales fees, partly offset by lower capital market fees and loan commitment fees. Non-interest expense increased $1.9 million, or 3.2%, over the previous year, mainly due to higher full-time salary costs, foreclosed property expense, and corporate management and marketing expense. These increases were partly offset by lower processing costs (mainly in deposit account cash management costs) and the non-recurrence of a letter of credit loss provision recorded in 2013.

Wealth

Wealth segment pre-tax profitability for the three months ended March 31, 2014 increased $474 thousand, or 3.2%, over the same period in the previous year. Net interest income decreased $262 thousand, or 2.6%, mainly due to an $861 thousand decline in net allocated funding credits, party offset by a $391 thousand decline in deposit interest expense and a $207 thousand increase in loan interest income. Non-interest income increased $1.2 million, or 4.1%, over the prior year due to higher personal and institutional trust fees. Non-interest expense increased $441 thousand, or 1.8%, mainly due to higher full-time salary costs.

The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing policies, the difference between the total provision and total net charge-offs/recoveries is not allocated to a business segment, and is included in this category. The pre-tax profitability of this category was higher than in the same period last year by $1.2 million. This increase was mainly due to higher unallocated securities gains of $12.2 million, partly offset by higher unallocated non-interest expense of $6.6 million. In addition, the unallocated loan loss provision increased $4.5 million, due to last year's excess of total net charge-offs over total provision.

Regulatory Changes Affecting the Banking Industry

In 2011, the Federal Reserve, under the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), approved a final debit card interchange rule that significantly limited the amount of debit card interchange fees charged by banks. The rule capped an issuer’s base fee at 21 cents per transaction and allowed additional fees to help cover fraud losses. The pricing was a reduction of approximately 45% when compared to previous market rates. The rule also limited network exclusivity, requiring issuers to ensure that a debit card transaction can be carried on two unaffiliated networks: one signature-based and one PIN-based. The rules applied to bank issuers with more than $10 billion in assets and took effect in phases, with the base fee cap effective in October 2011 and the network exclusivity rule effective in April 2012. On July 31, 2013, a Federal District Court judge ruled that the Federal Reserve inflated debit interchange fees when implementing the Dodd-Frank provision in 2011. The judge ruled that the Federal Reserve erred in using criteria outside of the scope Congress intended to determine the fee cap. The judge also ruled that the network options for both signature and PIN transactions were not set appropriately in accordance with the Dodd-Frank Act. The Federal Reserve appealed this decision on August 21 and ultimately won their appeal in March 2014. As a result of winning the appeal, the interchange fee cap will remain at 21 cents. Additionally, the appeal allows

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for continuance of the current statute, which requires that each debit card have one PIN debit network choice and one signature network choice, rather than two unaffiliated PIN choices and two unaffiliated signature choices.

In October 2012, the Federal Reserve, as required by the Dodd-Frank Act, approved new stress testing regulations applicable to certain financial companies with total consolidated assets of more than $10 billion but less than $50 billion. The rule requires that these financial companies, including the Company, conduct stress tests on an annual basis. The initial stress test had an as-of date of September 30, 2013 using scenarios provided by the Federal Reserve in November 2013 (projected nine months out). The Company submitted its first regulatory report on its stress test results to the Federal Reserve in March 2014. This process will be repeated annually. In June 2015, the Company will be required to make public disclosures of the results of the 2015 stress tests performed under the severely adverse scenario.

In July 2013 the FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System approved a final rule to implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). A key goal of the Basel III agreement is to strengthen the capital resources of banking organizations during normal and challenging business environments. The Basel III final rule increases minimum requirements for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier I capital to risk-weighted assets of 4.5% and a common equity Tier I capital conservation buffer of 2.5% of risk-weighted assets. The final rule also adjusted the methodology for calculating risk-weighted assets to enhance risk sensitivity. Beginning January 1, 2015, the Company must be compliant with revised minimum regulatory capital ratios and will begin the transitional period for definitions of regulatory capital and regulatory capital adjustments and deductions established under the final rule. Compliance with the risk-weighted asset calculations is also required on January 1, 2015. Management believes that as of March 31, 2014, the Company's capital levels would remain "well-capitalized" under the new rules.

In December 2013, the Volcker Rule of the Dodd-Frank Act was approved by all five of the necessary financial regulatory agencies, and became effective on April 1, 2014. The rule places trading restrictions on financial institutions, and separates investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. Key provisions restrict banks from simultaneously entering into advisory and creditor roles with their clients, such as with private equity firms. The Volcker Rule also restricts financial institutions from investing in and sponsoring certain types of investments, which must be divested by July 21, 2015. The Company does not believe it will be significantly affected by the Volcker Rule provisions.

Impact of Recently Issued Accounting Standards

Investment Companies In June 2013, the FASB issued ASU 2013-08, "Amendments to the Scope, Measurement, and Disclosure Requirements" for investment companies. The amendments changed the assessment of whether an entity is an investment company by requiring an entity to possess certain fundamental characteristics, while allowing judgment in assessing other typical characteristics. The ASU was effective January 1, 2014, and the Company did not change the status of any subsidiary or the accounting applied to a subsidiary under the new guidelines.

Investments - Equity Method and Joint Ventures The FASB issued ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects", in January 2014. These amendments allow investors in low income housing tax credit entities to account for the investments using a proportional amortization method, provided that certain conditions are met, and recognize amortization of the investment as a component of income tax expense. In addition, disclosures are required that will enable users to understand the nature of the investments, and the effect of the measurement of the investments and the related tax credits on the investor's financial statements. This ASU is effective for interim and annual periods beginning January 1, 2015 and should be applied retrospectively to all periods presented. The adoption is not expected to have a significant effect on the Company's consolidated financial statements.

Troubled Debt Restructurings by Creditors The FASB issued ASU 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure", in January 2014. These amendments require companies to disclose the amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction. The ASU also defines when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan and thus when a loan is transferred to foreclosed property. The amendments are effective for interim and annual periods beginning January 1, 2015. The adoption is not expected to have a significant effect on the Company's consolidated financial statements.

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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Three Months Ended March 31, 2014 and 2013



	First Quarter 2014							First Quarter 2013
(Dollars in thousands)	Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance			Interest Income/Expense			Avg. Rates Earned/Paid
ASSETS:
Loans:
Business ^(A)	$	3,843,377		$	27,436	2.90	%	$	3,156,594		$	24,697		3.17	%
Real estate — construction and land	419,628			3,897		3.77		351,573			3,358			3.87
Real estate — business	2,323,208			22,333		3.90		2,230,453			22,953			4.17
Real estate — personal	1,778,573			16,937		3.86		1,600,138			16,104			4.08
Consumer	1,533,485			16,679		4.41		1,343,210			16,652			5.03
Revolving home equity	423,656			3,990		3.82		428,696			4,311			4.08
Consumer credit card	757,423			21,346		11.43		755,167			21,181			11.38
Overdrafts	5,429			—		—		5,406			—			—
Total loans	11,084,779			112,618		4.12		9,871,237			109,256			4.49
Loans held for sale	—			—		—		9,096			85			3.79
Investment securities:
U.S. government and federal agency	497,333			2,091		1.71		398,215			(583		)	(.59	)
Government-sponsored enterprise obligations	774,749			3,170		1.66		468,608			2,146			1.86
State and municipal obligations ^(A)	1,605,752			14,606		3.69		1,603,064			14,963			3.79
Mortgage-backed securities	3,019,157			20,841		2.80		3,514,370			22,480			2.59
Asset-backed securities	2,854,201			6,297		.89		3,206,907			7,362			.93
Other marketable securities ^(A)	153,068			945		2.50		193,413			1,530			3.21
Trading securities ^(A)	19,183			108		2.28		27,729			130			1.90
Non-marketable securities ^(A)	109,932			1,740		6.42		119,407			1,826			6.20
Total investment securities	9,033,375			49,798		2.24		9,531,713			49,854			2.12
Short-term federal funds sold and securities
purchased under agreements to resell	24,464			26		.43		8,680			9			.42
Long-term securities purchased
under agreements to resell	1,102,222			4,151		1.53		1,178,333			5,829			2.01
Interest earning deposits with banks	161,117			100		.25		130,357			77			.24
Total interest earning assets	21,405,957			166,693		3.16		20,729,416			165,110			3.23
Allowance for loan losses	(160,744		)					(171,926		)
Unrealized gain on investment securities	82,969							255,739
Cash and due from banks	384,951							376,421
Land, buildings and equipment, net	351,866							361,353
Other assets	380,735							374,491
Total assets	$	22,445,734						$	21,925,494
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	649,292		197		.12		$	603,644		183			.12
Interest checking and money market	9,473,680			3,109		.13		9,142,100			3,741			.17
Time open & C.D.'s of less than $100,000	975,640			1,120		.47		1,068,695			1,749			.66
Time open & C.D.'s of $100,000 and over	1,339,808			1,452		.44		1,336,952			1,699			.52
Total interest bearing deposits	12,438,420			5,878		.19		12,151,391			7,372			.25
Borrowings:
Federal funds purchased and securities sold
under agreements to repurchase	1,209,180			203		.07		1,200,818			218			.07
Other borrowings	105,187			851		3.28		103,329			812			3.19
Total borrowings	1,314,367			1,054		.33		1,304,147			1,030			.32
Total interest bearing liabilities	13,752,787			6,932		.20	%	13,455,538			8,402			.25	%
Non-interest bearing deposits	6,237,479							5,929,229
Other liabilities	198,383							366,562
Equity	2,257,085							2,174,165
Total liabilities and equity	$	22,445,734						$	21,925,494
Net interest margin (T/E)				$	159,761						$	156,708
Net yield on interest earning assets						3.03	%							3.07	%

(A) Stated on a tax equivalent basis using a federal income tax rate of 35%.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest sensitivity to movement in interest rates. The Company performs monthly simulations which model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2013 Annual Report on Form 10-K.

The table below shows the effect that gradual rising interest rates over a twelve month period would have on the Company’s net interest income given a static balance sheet.



	March 31, 2014				December 31, 2013					March 31, 2013
(Dollars in millions)	$ Change in Net Interest Income		% Change in Net Interest Income		$ Change in Net Interest Income			% Change in Net Interest Income		$ Change in Net Interest Income			% Change in Net Interest Income
300 basis points rising		$.3	.05	%		($5.0	)	(.81	)%		($6.1	)	(1.03	)%
200 basis points rising	4.1		.68		1.0			.17		.3			.05
100 basis points rising	5.7		.93		3.4			.56		3.2			.54

Under the above scenarios at March 31, 2014, a gradual increase in interest rates of 100 basis points is expected to increase net interest income from the base calculation by $5.7 million, or .93%, and a rise of 200 basis points is expected to increase net interest income by $4.1 million, or .68%. Under a 300 basis points rising rate scenario, net interest income would increase by $300 thousand, or .05%. Due to the already low interest rate environment, the Company did not model falling rate scenarios. The change in net interest income from the base calculation at March 31, 2014 for the three scenarios shown was higher than projections made at December 31, 2013, largely due to a change in the mix of interest bearing liabilities. Short-term borrowings of federal funds purchased and repurchase agreements, which are generally more rate-sensitive, declined from the previous quarter's simulation results and were replaced by higher balances of interest checking and savings deposits, which are less rate-sensitive. In addition, non-maturity deposit rate assumptions were updated and this resulted in money market deposit rates increasing slower. These changes resulted in a more asset-sensitive risk pattern and improving income projections. As shown in the above scenarios, as rates rise from 100 to 300 basis points, the effect on projected net interest income generally becomes more negative. This occurs because, in the higher rate scenarios, the non-contractual deposits are modeled to become more rate sensitive, resulting in margin compression. Also, these scenarios project deposit run-off which is replaced by higher costing short-term borrowings.

The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimized impacts to overall interest rate risk.

Item 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2014 . Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

There are no material legal proceedings currently pending or threatened against the Company.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information about the Company's purchases of its $5 par value common stock, its only class of stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.



Period	Total Number of Shares Purchased	Average Price Paid per Share			Total Number of Shares Purchased as part of Publicly Announced Program	Maximum Number that May Yet Be Purchased Under the Program
January 1 — 31, 2014	90,013		$	44.94	90,013	3,402,252
February 1 — 28, 2014	271,886		$	43.31	271,886	3,130,366
March 1 — 31, 2014	112,955		$	44.98	112,955	3,017,411
Total	474,854		$	44.01	474,854	3,017,411

The Company's stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in July 2013 of 4,000,000 shares, 3,017,411 shares remained available for purchase at March 31, 2014.

Item 6. EXHIBITS

See Index to Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



C OMMERCE B ANCSHARES, I NC.

By	/s/ T HOMAS J. N OACK
	Thomas J. Noack
	Vice President & Secretary

Date: May 7, 2014



By	/s/ J EFFERY D . A BERDEEN
	Jeffery D. Aberdeen
	Controller
	(Chief Accounting Officer)

Date: May 7, 2014

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INDEX TO EXHIBITS

3(a) - Restated Articles of Incorporation of Commerce Bancshares, Inc.

10(o) - Form of Notice of Grant of Award and Award Agreement for Restricted Stock for Executive Officers, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan

10(p) - Form of Notice of Grant of Award and Award Agreement for Restricted Stock for Employees other than Executive Officers, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan

10(q) - Form of Notice of Grant of Award and Award Agreement for Stock Appreciation Rights, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan

31.1 — Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 — Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 — Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 — Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail

Exhibit 3(a)

RESTATED ARTICLES OF INCORPORATION

COMMERCE BANCSHARES, INC.

A Missouri Corporation

ARTICLE I

The name of this corporation is Commerce Bancshares, Inc.

ARTICLE II

The address of the corporation's registered office is in care of T. Alan Peschka, 1000 Walnut Street, Kansas City, Missouri, and the name of the corporation's registered agent at such address is Commerce Bank of Kansas City, National Association.

ARTICLE III

The total number of shares of all classes of stock which the corporation shall have authority to issue is 14,000,000 shares, consisting of

(i) 2,000,000 shares of Preferred Stock of the par value of $1 per share, and

(ii) 12,000,000 shares of Common Stock of the par value of $5 per share.

The voting powers, designations, preferences and relative participating, optional or other special rights, and the qualifications, limitations, or restrictions thereof, of the classes of stock of the corporation which are fixed by these Articles of Incorporation, and the authority vested in the Board of Directors to fix by resolution or resolutions providing for the issue of preferred stock the voting powers, if any, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of Preferred Stock which are not fixed by these Articles of Incorporation are as follows:

(a) The Preferred Stock may be issued from time to time in one or more series of any number of shares, provided that the aggregate number of shares issued and not canceled of any and all such series shall not exceed the total number of shares of Preferred Stock hereinabove authorized. Each series of Preferred Stock shall be distinctively designated by letter or descriptive words. All series of Preferred Stock shall rank equally and be identical in all respects except as permitted by the provisions of paragraph (b) of this Article III. Different series of

Preferred Stock shall not be construed to constitute different classes of shares for the purpose of voting by classes.

(b) Authority is hereby vested in the Board of Directors from time to time to issue the Preferred Stock as Preferred Stock of any series and in connection with the creation of each such series to fix by resolution or resolutions providing for the issue of shares thereof the voting powers, if any, the designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of such series to the full extent now or hereafter permitted by these Articles of Incorporation and the laws of the State of Missouri, in respect of the matters set forth in the following subparagraphs (1) to (9), inclusive:

(1) the distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors;

(2) the dividend rate of such series and any limitations, restrictions or conditions on the payment of dividends, subject to paragraph (c) of this Article III;

(3) the price or prices at which, and the terms and conditions on which, the shares of such series may be redeemed by the corporation;

(4) the amount or amounts payable upon the shares of such series in the event of any liquidation, dissolution or winding up of the corporation;

(5) whether or not the shares of such series shall be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of shares of such series and, if so entitled, the amount of such fund and the manner of its application;

(6) whether or not the shares of such series shall be made convertible into, or exchangeable for, shares of any other class or classes of stock of the corporation or shares of any other series of Preferred Stock, and, if made so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;

(7) whether or not the shares of such series shall have any voting powers and, if voting powers are so granted, the extent of such voting powers;

(8) whether or not the shares of such series shall be entitled to the benefit of conditions and restrictions upon the creation of indebtedness of the corporation or any subsidiary, upon the issue of any additional Preferred Stock (including additional shares of such series or of any other series), and upon the payment of dividends (in addition to those provided in paragraphs (c) and (d) of this Article III) or the making of other

distributions on, and the purchase, redemption or other acquisition by the corporation or any subsidiary of, any outstanding stock of the corporation; and

(9) such other preferences, rights, restrictions and qualifications as shall not be inconsistent herewith.

(c) The holders of Preferred Stock of each series shall be entitled to receive, when and as declared by the Board of Directors, dividends in cash at the rate for such series fixed by the Board of Directors as provided in paragraph (b) of this Article III, and no more, payable quarterly on the first days of January, April, July and October or of such other months as may be designated by the Board of Directors (each of the quarterly periods ending on the first day of January, April, July and October in each year, or on the first days of such other months, respectively, being hereinafter called a dividend period), in each case from the date of cumulation (as defined in paragraph (h) of this Article III) of such series. Except as may otherwise be provided in the resolution or resolutions providing for the issue of any given series of Preferred Stock, dividends on Preferred Stock shall be cumulative (whether or not there shall be net profits or net assets of the corporation legally available for the payment of such dividends) so that, if at any time full cumulative dividends (as defined in paragraph (h) of this Article III) upon the Preferred Stock of all series to the end of the last completed dividend period shall not have been paid or declared and a sum sufficient for payment thereof set apart, the amount of the deficiency shall be fully paid, but without interest, or dividends in such amount shall have been declared on each such series and a sum sufficient for the payment thereof shall have been set apart for such payment, before any sum or sums shall be set aside for or applied to the purchase or redemption of Preferred Stock of any series (either pursuant to any applicable sinking fund provisions or any redemption authorized pursuant to paragraph (g) of this Article III or otherwise) or set aside for or applied to the purchase of Common Stock and before any dividend shall be paid or any other distribution made upon the Common Stock (other than a dividend payable in Common Stock); provided, however, that any moneys deposited in the sinking fund provided for any series of Preferred Stock in the resolution or resolutions providing for the issue of shares of said series, in compliance with the provisions of such sinking fund and of this paragraph (c), may thereafter be applied to the purchase or redemption of Preferred Stock in accordance with the terms of such sinking fund whether or not at the time of such application full cumulative dividends upon the outstanding Preferred Stock of all series to the end of the last completed dividend period shall have been paid or declared and set apart for payment. All dividends declared upon the Preferred Stock of the respective series outstanding shall be declared pro rata, so that the amounts of dividends declared per share on the Preferred Stock of different series shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of such respective series bear to each other.

(d) Before any sum or sums shall be set aside for or applied to the purchase of Common Stock and before any dividends shall be paid or any distribution ordered or made upon the Common Stock (other than a dividend payable in Common Stock), the corporation shall comply with the sinking fund provisions, if any, of any resolution or resolutions providing for the issue of any series of Preferred Stock any shares of which shall at the time be outstanding.

(e) Subject to the provisions of paragraph (c) and (d) of this Article III, the holders of Common Stock shall be entitled, to the exclusion of the holders of Preferred Stock of any and all series, to receive such dividends as from time to time may be declared by the Board of Directors.

(f) In the event of any liquidation, dissolution or winding up of the corporation, the holders of Preferred Stock of each series then outstanding shall be entitled to be paid out of the assets of the corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made to the holders of Common Stock, an amount determined as provided in paragraph (b) of this Article III for every share of their holdings of Preferred Stock of such series. If upon any liquidation, dissolution or winding up of the corporation the assets of the corporation available for distribution to its stockholders shall be insufficient to pay the holders of Preferred Stock of all series the full amounts to which they respectively shall be entitled, the holders of Preferred Stock of all series shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares of Preferred Stock held by them upon such distribution if all amounts payable on or with respect to Preferred Stock of all series were paid in full. In the event of any liquidation, dissolution or winding up of the corporation, after payment shall have been made to the holders of Preferred Stock of the full amount to which they shall be entitled as aforesaid, the holders of Common Stock shall be entitled, to the exclusion of the holders of Preferred Stock of any and all series, to share, ratably according to the number of shares of Common Stock held by them, in all remaining assets of the corporation available for distribution to its stockholders. Neither the merger or consolidation of the corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the corporation, nor the sale, transfer or lease of all or substantially all of the assets of the corporation, shall be deemed to be a liquidation, dissolution or winding up of the corporation.

(g) Subject to any requirements which may be applicable to the redemption of any given series of Preferred Stock as provided in any resolution or resolutions providing for the issue of such series of Preferred Stock, the Preferred Stock of all series, or of any series thereof, or any part of any series thereof, at any time outstanding, may be redeemed by the corporation at its election expressed by resolution of the Board of Directors, at any time or from time to time, upon not less than 30 days' previous notice to the holders of record of Preferred Stock to be redeemed, given by mail in such manner as may be prescribed by resolution or resolutions of the Board of Directors:

(1) if such redemption shall be otherwise than by the application of moneys in any sinking fund referred to in paragraph (d) of this Article III, at the redemption price, fixed as provided in paragraph (b) of this Article III, at which shares of Preferred Stock of the particular series may then be redeemed at the option of the corporation, and

(2) if such redemption shall be by the application of moneys in any sinking fund referred to in paragraph (d) of this Article III, at the redemption price, fixed as provided in paragraph (b) of this Article III, at which shares of Preferred Stock of the particular series may then be redeemed for such sinking fund;

provided, however, that, before any Preferred Stock of any series shall be redeemed at said redemption price thereof specified in clause (1) of this paragraph (g), all moneys at the time in the sinking fund, if any, for Preferred Stock of that series shall first be applied, as nearly as may be, to the purchase or redemption of Preferred Stock of that series as provided in the resolution or resolutions of the Board of Directors providing for such sinking fund. If less than all the outstanding shares of Preferred Stock of any series are to be redeemed, the redemption may be made either by lot or pro rata in such manner as may be prescribed by resolution of the Board of Directors. The corporation may, if it shall so elect, provide moneys for the payment of the redemption price by depositing the amount thereof for the account of the holders of Preferred Stock entitled thereto with a bank or trust company doing business in Kansas City, Missouri and having capital and surplus of at least $5,000,000. The date upon which such deposit may be made by the corporation (hereinafter called the "date of deposit") shall be prior to the date fixed as the date of redemption but not earlier than the date on which notice thereof shall be given. In any such case there shall be included in the notice of redemption a statement of the date of deposit and of the name and address of the bank or trust company with which the deposit has been or will be made. On and after the date fixed in any such notice of redemption as the date of redemption (unless default shall be made by the corporation in providing moneys for the payment of the redemption price pursuant to such notice) or, if the corporation shall have made such deposit on or before the date specified therefor in the notice, then on and after the date of deposit, all rights of the holders of the Preferred Stock to be redeemed as stockholders of the corporation, except the right to receive the redemption price as hereinafter provided, and, in the case of such deposit, any conversion rights not theretofore expired, shall cease and terminate. Such conversion rights, however, in any event shall cease and terminate upon the date fixed for redemption or upon any earlier date fixed by the Board of Directors pursuant to paragraph (b) of this Article III for termination of such conversation rights. Anything herein contained to the contrary notwithstanding, said redemption price shall include an amount equal to accrued dividends on the Preferred Stock to be redeemed to the date fixed for the redemption thereof and the corporation shall not be required to declare or pay on such Preferred Stock to be redeemed, and the holders thereof shall not be entitled to receive, any dividends in addition to those thus included in the redemption price, provided, however, that the corporation may pay in regular course any dividends thus included in the redemption price either to the holders of record on the record date fixed for the determination of stockholders entitled to receive such dividends (in which event anything to the contrary notwithstanding, the amount so deposited need not include any dividends so paid or to be paid) or as a part of the redemption price upon surrender of the certificates for the shares redeemed. At any time on or after the date fixed as aforesaid for such redemption or, if the corporation shall elect to deposit the moneys for such redemption as herein provided, then at any time on or after the date of deposit, and without awaiting the date fixed as aforesaid for such redemption, the respective holders of record of the Preferred Stock to be redeemed shall be entitled to receive the redemption price upon actual delivery to the corporation, or, in the event of such deposit, to the bank or trust company with which such deposit shall be made, of certificates for the shares to be redeemed, such certificates, if required, to be properly stamped for transfer and duly endorsed in blank or accompanied by proper instruments of assignment and transfer thereof duly executed in blank. Any funds deposited as aforesaid which shall not be required for such redemption, because of the exercise of any right of conversion or otherwise subsequent to the date of such deposit, shall be returned to the

corporation forthwith. Any moneys so deposited which shall remain unclaimed by the holders of such Preferred Stock at the end of four years after the redemption date shall be paid by such bank or trust company to the corporation, after which such holders shall be deemed to be unsecured creditors of the corporation for a period of two years (after which all rights of such holders as unsecured creditors or otherwise shall cease) and any interest accrued on moneys so deposited shall belong to the corporation and shall be paid to it from time to time. Preferred stock redeemed pursuant to the provisions of this paragraph (g) shall be canceled and shall thereafter have the status of authorized and unissued shares of Preferred Stock.

(h) The term "date of cumulation" as used with reference to any series of Preferred Stock shall be deemed to mean the date fixed by the Board of Directors as the date of cumulation of such series at the time of the creation thereof or, if no date shall have been so fixed, the date on which shares of such series are first issued. Whenever used with reference to any share of any series of Preferred Stock, the term "full cumulative dividends" shall be deemed to mean (whether or not in any dividend period, or any part thereof, in respect of which such term is used there shall have been net profits or net assets of the corporation legally available for the payment of such dividends) that amount which shall be equal to dividends at the full rate fixed for such series as provided in paragraph (b) of this Article III for the period of time elapsed from the date of cumulation of such series to the date as of which full cumulative dividends are to be computed (including an amount equal to the dividend at such rate for any fraction of a dividend period included in such period of time); and the term "accrued dividends" shall be deemed to mean full cumulative dividends to the date as of which accrued dividends are to be computed, less the amount of all dividends paid, or deemed paid as hereinafter in this paragraph (h) provided, upon said share. In the event of the issue of additional shares of Preferred Stock of any series after the original issue of shares of Preferred Stock of such series, all dividends paid or accrued on Preferred Stock of such series prior to the date of issue of such additional Preferred Stock shall be deemed to have been paid on the additional Preferred Stock so issued.

(i) Subject to the provisions of these Articles of Incorporation and except as otherwise provided by law, the shares of stock of the corporation, regardless of class, may be issued for such consideration and for such corporation purposes as the Board of Directors may from time to time determine.

(j) Except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of Preferred Stock, the holders of shares of Preferred Stock, as such holders, shall not have any right to vote, and are hereby specifically excluded from the right to vote, in the election of directors or for any other purpose. Except when entitled to vote as aforesaid, the holders of Preferred Stock, as such holders, shall not be entitled to notice of any meeting of stockholders.

(k) Subject to the provisions of any applicable law, or of the By‑Laws of the corporation as from time to time amended, with respect to the closing of the transfer books or the fixing of a record date for the determination of stockholders entitled to vote and except as otherwise provided by law, or by these Articles of Incorporation or by the resolution or resolutions providing for the issue of any series of Preferred Stock, the holders of outstanding shares of

Common Stock shall exclusively possess voting power for the election of directors and for all other purposes, each holder of record of shares of Common Stock being entitled to one vote for each share of Common Stock standing in his name on the books of the corporation.

(l) Anything in this Article III to the contrary notwithstanding, dividends upon shares of any class of stock of the corporation shall be payable only out of assets legally available for the payment of such dividends, and the rights of the holders of the Preferred Stock of all series and of the holders of the Common Stock in respect of dividends shall at all times be subject to the power of the Board of Directors, which is hereby expressly vested in said Board, from time to time to set aside such reserves and to make such other provisions, if any, as said Board shall deem to be necessary or advisable, respecting the amount of working capital to be maintained.

ARTICLE IV

No holder of stock of the corporation of any class shall be entitled as a matter of right to subscribe for or purchase any part of any new or additional issue of stock, or securities convertible into stock, of any class whatsoever, whether now or hereafter authorized, and all such additional shares of stock or other securities convertible into stock may be issued and disposed of by the Board of Directors to such person or persons and on such terms and for such consideration (so far as may be permitted by law) as the Board of Directors, in their absolute discretion, may deem advisable.

ARTICLE V

The number and class of shares to be issued before the corporation shall commence business is Fifty (50) shares of common stock with a par value of Ten Dollars ($10) per share. The consideration to be paid therefor and the capital with which the corporation shall commence business is Five Hundred Dollars ($500). The corporation will not commence business until consideration of the value of at least Five Hundred Dollars has been received for the issuance of shares.

ARTICLE VI

The names and places of residence of the incorporators are as follows

Name Residence

James M. Kemper, Jr. 6612 Wyoming

Kansas City, Missouri

P. V. Miller, Jr. 2001 West 61st Terr.

Shawnee Mission, Kansas

T. Alan Peschka 5744 Grand

Kansas City, Missouri

ARTICLE VII

The number of directors constituting the first board of directors of the corporation was three (3) and the number constituting the board at the time of the effectiveness of this amendment is twelve (12). The number of directors to constitute subsequent boards of directors shall be fixed by, or in the manner provided in, the By‑Laws of the corporation. Any changes in the number of directors shall be reported to the Secretary of State of the State of Missouri within thirty (30) calendar days of such change.

Unless the By‑Laws otherwise provide, the directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, each consisting of one‑third of the whole number of the board of directors, and all directors of the corporation shall hold office until their successors are elected and qualified. At the meeting held for the election of the first board, the directors of the first class should be elected for a term of one year; the directors of the second class for a term of two years; and the directors of the third class for a term of three years; and at each annual election the successors to the class of directors whose terms shall expire that year shall be elected to hold office for the term of three years, so that the term of office of one class of directors shall expire in each year.

Notwithstanding any other provisions of these Articles of Incorporation and notwithstanding the fact that some lesser percentage may be specified by law, the entire Board of Directors of the Corporation may be removed at any time but only by the affirmative vote of the holders of 80% or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) at a meeting of the shareholders called for that purpose.

ARTICLE VIII

The duration of the corporation is perpetual.

ARTICLE IX

The corporation is formed for the following purposes:

(a) To purchase, subscribe for or otherwise acquire and own, hold as an investment or otherwise, use, sell, assign, deal in, transfer, mortgage, pledge, exchange or otherwise dispose of, alone or in syndicates or otherwise in conjunction with others, shares of capital stock, bonds, debentures, notes, evidences of indebtedness and other securities, contracts or obligations of any corporation, association, partnership, entity, or governmental, municipal or public authority, domestic or foreign, and to pay therefor in whole or in part, in cash or by exchanging therefor shares of the capital stock, bonds, debentures, debenture stock, notes or other obligations of this corporation or any other corporation, and while the owner or holder of any such property to receive, collect and dispose of the interest, dividends and income arising from such property, and to possess and exercise in respect thereof all the rights, powers and privileges of ownership, including all voting powers of any securities so owned;

(b) To purchase or otherwise acquire the whole or any part of the property, assets, business, goodwill or rights and to undertake or assume the whole or any part of the bonds, mortgages, franchises, leases, contracts, indebtedness, guaranties, liabilities and obligations of any person, firm, association, corporation or organization, and to pay for the same or any part or combination thereof in cash, shares of the capital stock, bonds, debentures, debenture stock, notes, and other obligations of this corporation or otherwise, or by undertaking and assuming the whole or any part of the liabilities or obligations of the transferor; and to hold or in any manner dispose of the whole or any part of the property and assets so acquired or purchased, and to conduct in any lawful manner the whole or any part of the business so acquired and to exercise all the powers necessary or convenient in and about the conduct, management and carrying on of such business;

(c) To purchase or otherwise acquire, hold, sell, pledge, transfer or otherwise dispose of, and to reissue or cancel the shares of its own capital stock or any securities or other obligations of this corporation;

(d) To promote or assist financially, by loan, subsidy, guaranty, contribution to capital or surplus, or otherwise, corporations, syndicates, partnerships, individuals or associations of all kinds, foreign or domestic, and in connection therewith to execute mortgages, deeds of trust, other forms of encumbrances, contracts and other types of written instruments;

(e) To purchase or otherwise acquire and own, hold, lease, develop, sell, exchange, or otherwise use, deal in or dispose of, mortgage or otherwise encumber, real property or any interest therein, and to purchase or otherwise acquire and own, hold, build, construct, erect,

manage, operate, repair, restore, and to dispose of by sale, lease, mortgage or otherwise, buildings and structures of all types;

(f) To purchase or otherwise acquire and own, hold, lease, sell or otherwise use, deal in or dispose of, mortgage or otherwise encumber personal property of every kind and description or any interest therein, and to operate, manage and maintain the same;

(g) To acquire, own, hold, buy sell, transfer and otherwise dispose of patents and patent rights, trademarks and trade names, copyrights, licenses, franchises, permits and other evidences of right;

(h) In general to carry on any other lawful business whatsoever in connection with the foregoing or which is calculated, directly or indirectly, to promote the interest of the corporation or to enhance the value of its properties;

(i) To have and to exercise all powers necessary or incident to carrying out its corporate purposes, to exercise all other powers permitted by law, and to possess and enjoy all rights and powers which now or at any time hereafter may be granted to or exercised by a corporation of this character.

ARTICLE X

The board of directors shall have the power to make, alter, amend or repeal the By‑Laws of the corporation from time to time.

ARTICLE XI

The corporation reserves the right to amend, alter, change or repeal any provisions contained in these Articles of Incorporation in the manner now or hereafter prescribed by law, and all rights conferred upon shareholders herein are granted subject to this reservation:

ARTICLE XII

The affirmative vote of the holders of not less than 75 percent of the outstanding shares of "Voting Stock" (as hereinafter defined) of the corporation and the affirmative vote of the holders of not less than 67 percent of the outstanding shares of Voting Stock held by stockholders other than a "Related Person" (as hereinafter defined) shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) of the corporation with any Related Person; provided however, that the 75 percent and 67 percent voting requirements shall not be applicable if:

(1) The "Continuing Directors" of the corporation (as hereinafter defined) by a two‑thirds vote (a) have expressly approved in advance the acquisition of outstanding shares of Voting Stock of the corporation that caused the Related Person to become a Related Person, or (b) have approved the Business Combination prior to the Related Person involved in the Business Combination having become a Related Person;

(2) The Business Combination is solely between the corporation and another corporation, 100 percent of the Voting Stock of which is owned directly or indirectly by the corporation; or

(3) The Business Combination is a merger or consolidation and the cash or fair market value of the property, securities or other consideration to be received per share by holders of common stock of the corporation in the Business Combination is not less than the highest per share price (with appropriate adjustments for recapitalizations and for stock splits, stock dividends and like distributions), paid by the Related Person in acquiring any of its holdings of the corporation's common stock.

For the purposes of this Article Twelfth:

(i) The term "Business Combination" shall mean (a) any merger or consolidation of the corporation or a subsidiary with or into a Related Person, (b) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device, of all or any "Substantial Part" (as hereinafter defined) of the assets either of the corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Related Person, (c) any merger or consolidation of a Related Person with or into the corporation or a subsidiary of the corporation, (d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the corporation or a subsidiary of the corporation, (e) the issuance of any securities of the corporation or a subsidiary of the corporation to a Related Person, (f) any recapitalization that would have the effect of increasing the voting power of a Related Person, and (g) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination.

(ii) The term "Related Person" shall mean and include any individual corporation, partnership or other person or entity which, together with its "Affiliates" and "Associates" (as defined on February 1, 1983 at Rule 12b‑2 under the Securities Exchange Act of 1934), "Beneficially Owns" (as defined on February 1, 1983 at Rule 13d‑3 under the Securities Exchange Act of 1934) in the aggregate 20 percent or more of the outstanding Voting Stock of the corporation, and any Affiliate or Associate of any such individual corporation, partnership or other person or entity.

(iii) The term "Substantial Part" shall mean more than 30 percent of the fair market value of the total assets of the corporation in question, as of the end of its most recent fiscal year ending prior to the time the determination is being made.

(iv) Without limitation, any shares of common stock of the corporation that any Related Person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants, or options, or otherwise, shall be deemed beneficially owned by the Related Person.

(v) For the purposes of subparagraph (3) of this Article XII, the term "other consideration to be received" shall include, without limitation, common stock of the corporation retained by its existing public stockholders in the event of a Business Combination in which the corporation is the surviving corporation.

(vi) The term "Voting Stock" shall mean all outstanding shares of capital stock of the corporation or another corporation entitled to vote generally in the election of directors and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares.

(vii) The term "Continuing Director" shall mean a Director who was a member of the Board of Directors of the corporation immediately prior to the time that the Related Person involved in a Business Combination became a Related Person.

ARTICLE XIII

The provisions set forth at this ARTICLE XIII and at ARTICLES VII, XI, and XII herein may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of not less than 75 percent of the outstanding shares of Voting Stock (as defined in ARTICLE XII) of the corporation; provided, however, that if there is a Related Person (as defined in ARTICLE XII), such action must also be approved by the affirmative vote of the holders of not less than 67 percent of the outstanding shares of Voting Stock held by stockholders other than the Related Person.

FIRST AMENDMENT TO

RESTATED ARTICLES OF INCORPORATION

COMMERCE BANCSHARES, INC.

A Missouri Corporation

(As of April 15, 1987)

The first paragraph of Article III is amended to read as follows:

The total number of shares of all classes of stock which the corporation shall have the authority to issue is 26,000,000 shares, consisting of

(i) 2,000,000 shares of Preferred Stock of the par value of $1 per share, and

(ii) 24,000,000 shares of Common Stock of the par value of $5 per share.

SECOND AMENDMENT TO

RESTATED ARTICLES OF INCORPORATION

COMMERCE BANCSHARES, INC.

A Missouri Corporation

(As of January 26, 1990)

The first paragraph of Article III is amended to read as follows:

The total number of shares of all classes of stock which the corporation shall have the authority to issue is 42,000,000 shares, consisting of

(i) 2,000,000 shares of Preferred Stock of the par value of $1 per share, and

(ii) 40,000,000 shares of Common Stock of the par value of $5 per share.

THIRD AMENDMENT TO

RESTATED ARTICLES OF INCORPORATION

COMMERCE BANCSHARES, INC.

A Missouri Corporation

(As of May 12, 1993)

The first paragraph of Article III is amended to read as follows:

The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 62,000,000 shares, consisting of

(i) 2,000,000 shares of Preferred Stock of the par value of $1 per share, and

(ii) 60,000,000 shares of Common Stock of the par value of $5 per share.

FOURTH AMENDMENT TO

RESTATED ARTICLES OF INCORPORATION

COMMERCE BANCSHARES, INC.

A Missouri Corporation

(As of April 17, 1996)

The first paragraph of Article III is amended to read as follows:

The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 82,000,000 shares, consisting of

(i) 2,000,000 shares of Preferred Stock of the par value of $1 per share, and

(ii) 80,000,000 shares of Common Stock of the par value of $5 per share.

FIFTH AMENDMENT TO

RESTATED ARTICLES OF INCORPORATION

COMMERCE BANCSHARES, INC.

A Missouri Corporation

(As of April 21, 1999)

The first paragraph of Article III is amended to read as follows:

The total number of shares of all classes of stock which the Corporation shall have authority to issue is 102,000,000 shares, consisting of

(i) 2,000,000 shares of preferred stock of the par value of $1 per share and

(ii) 100,000,000 shares of common stock of the par value of $5 per share.

SIXTH AMENDMENT TO

RESTATED ARTICLES OF INCORPORATION

COMMERCE BANCSHARES, INC.

A Missouri Corporation

(As of April 16, 2014)

The first paragraph of Article III is amended to read as follows:

The total number of shares of all classes of stock which the Corporation shall have authority to issue is 122,000,000 shares, consisting of

(i) 2,000,000 shares of preferred stock of the par value of $1 per share and

(ii) 120,000,000 shares of common stock of the par value of $5 per share.

Exhibit 10(o)

Notice of Grant of Award Commerce Bancshares, Inc.

And Award Agreement ID: 43-0889454

For Executive Officers 1000 Walnut Street Kansas City, MO 64106

<City, State and Zip Code> <Award Number: ######>

Effective <##/##/####> (the "Grant Date"), under the Commerce Bancshares, Inc. (the “Company”) 2005 Equity Incentive Plan (as amended and/or restated from time to time, the “Plan”), you (the “Grantee”) have been granted an award of <####> Shares of Restricted Stock of Company $5.00 par value Common Stock (“Common Stock”). The terms and conditions of this award are discussed below.

The current total value of the award is: <$##,####.##>

Subject to the other terms of this Agreement, the award shall become fully vested and all restrictions shall lapse according to the date(s) shown below:

Shares Full Vest

<####> <##/##/##>

ADDITIONAL TERMS AND CONDITIONS


1.	Definitions . Capitalized terms used in this Agreement but not defined herein shall have the meaning set forth in the Plan.


2.	Sale or Transfer Restrictions. Except as set forth in Paragraph 8 and Paragraph 13, the Shares of Restricted Stock shall be owned by the Grantee without the rights of sale or transfer and subject to forfeiture as provided in Paragraph 3 until the date shown above when such restrictions shall lapse.


3.	Forfeiture.

Service Requirement. Except as provided in Paragraph 8, Paragraph 12, and Paragraph 13, in the event the Grantee's continuous employment with the Company or any of its Subsidiaries terminates prior to the full vesting date, the Shares of Restricted Stock will be forfeited by the Grantee and become the property of the Company. The Compensation and Human Resources Committee of the Board of Directors of the Company (the “Committee”) shall determine the effect of an approved leave of absence and all questions related to "continuous employment" hereunder.

Performance Requirement. Except as provided in Paragraph 8 and Paragraph 13, in the event the Company does not have positive, cumulative net income for the period beginning on 1/1/20## and ending on the December 31 immediately preceding the applicable full vesting date, then the shares that would otherwise be vested on the full vesting date will be forfeited by the Grantee and become the property of the Company.

Revised: Feb 2014


4.	Non‑Solicitation Agreement. As a condition precedent to and in consideration of this award Grantee agrees to the following non‑solicitation provision. For purposes of this provision, the term “Company” includes the Company and all of Company’s direct and indirect subsidiaries and affiliates.

Acknowledgments. Grantee acknowledges that the Company's relationships with its respective customers, clients, employees, and other business associations are among the Company’s most important assets, and that developing, maintaining and continuing these relationships is one of the Company's highest priorities. Grantee further understands that Grantee will be relied upon to develop and maintain the goodwill of these relationships on behalf of Company throughout the course of the employment relationship.


b.	Non‑Solicitation of Employees. Grantee agrees that during the term of employment, and for a period of twelve (12) months following termination of employment, Grantee will not nor will Grantee assist others to recruit, solicit, or induce, or attempt to induce, any employees of Company to terminate their employment or otherwise cease a relationship with Company.

Non‑Solicitation of Customers. Grantee agrees that during the term of employment and for a period of twelve (12) months following termination of employment, Grantee will not solicit, divert or take away, or attempt or assist others to divert, solicit or take away, either directly or indirectly the business or patronage of any of the clients, customers or accounts of Company as of the date of the termination of employment (i) to which Grantee was assigned at any time during the course of employment at Company; (ii) that Grantee called on or solicited during the course of employment at Company; or (iii) that Grantee serviced or assisted others in servicing during the course of employment at Company. The phrase “assisted others in servicing” shall include directing the servicing or solicitation and/or participation in management decisions relating to the client, customer or account.

Legal and Equitable Relief. The restrictions contained in this Paragraph 4 are necessary for the protection of the legitimate business interests and goodwill of Company, and are considered by the Grantee to be reasonable for such purposes. The Grantee agrees that any breach of this Paragraph 4 will cause Company substantial and irrevocable damage. In the event of any such breach, in addition to such other remedies that may be available, including the recovery of damages from Grantee, Company shall have the right to injunctive relief to restrain or enjoin any actual or threatened breach of the provisions of this Paragraph 4.


e.	Severability. The terms and provisions of this Paragraph 4 are severable in whole or in part, and if, notwithstanding the judicial modification provision below, any term or provision of this Agreement should be deemed invalid, illegal or unenforceable, the remaining terms and provisions shall remain in full force and effect.

Judicial Modification. Company and Grantee have attempted to limit Grantee’s activity only to the extent permitted by applicable law and necessary to protect Company from unfair competition. If a Court of competent jurisdiction determines the restrictions contained in this Paragraph 4 and its subparts are too long in duration or too broad in scope to be reasonable and enforceable, then the parties irrevocably request the Court to amend such provision only so much as shall be necessary for the restrictions contained herein to be enforceable.


g.	Change in Control. In the event there shall be a Change in Control, the provisions of this Paragraph 4 shall become null and void.

Revised: Feb 2014


h.	Disclosure of Agreement. In the event that Grantee shall seek or obtain employment with any other person, firm or entity, Grantee acknowledges and consents that this Agreement may be disclosed by Company, without risk of liability, to such current or prospective employer of Grantee.


i.	Survival. The obligations contained in this Agreement survive the termination, for any reason whatsoever, of Grantee's employment with Company; provided, however the provisions contained in Paragraph 4c (Non‑Solicitation of Customers) shall not apply in the event Grantee’s employment terminates by reason of the elimination of Grantee’s position with Company.

Prohibition of Certain Securities Transactions. As a further condition upon Grantee’s acceptance of the award described in this Agreement, Grantee agrees to refrain from short selling of Company securities, and agrees to refrain from trading in any derivatives of Company securities for hedging purposes or otherwise, including, but not limited to, trading in put or call options or similar types of transactions related to Company securities.

Shares of Record. The Company will cause the number of awarded shares to be recorded in book entry format in the name of the Grantee on the shareholder records of the Company. No certificate or certificates evidencing the Shares of Restricted Stock will be issued in the name of the Grantee until such time as the restrictions shall lapse. By execution of this agreement and the acceptance of the Shares of Restricted Stock, Grantee authorizes the Company to cause the cancellation of the Shares of Restricted Stock in the event of forfeiture. If requested by Company, the Grantee will deliver to the Company a stock power, executed in blank, covering the Shares of Restricted Stock. When the prohibited sale and transfer restrictions lapse under Paragraph 2, with respect to the Shares of Restricted Stock, provided the Shares of Restricted Stock have not been forfeited under Paragraph 3, the Company shall deliver to the Grantee a stock certificate for the Shares of Restricted Stock.

Voting and Other Rights of Shares of Restricted Stock. Upon the book entry in the records of the Registrar representing the Shares of Restricted Stock, the Grantee shall have all of the rights of a stockholder of the Company, including the right to receive dividends (excluding stock dividends during the restriction period) and to vote the Shares of Restricted Stock until such shares may have been forfeited to the Company as provided in Paragraph 3.

Acceleration of Release of Restrictions. In the event the Grantee's employment shall be terminated by reason of death or disability (as defined in the Plan), the forfeiture and prohibited sale and transfer restrictions of the Shares of Restricted Stock shall immediately lapse as to that part of an Award which equals the portion of the Restriction Period, measured in full and partial months, completed before the date of death or disability of the Grantee. In such case, Grantee shall forfeit the remainder of the Award in accordance with Paragraph 3.


9.	Taxes . The Grantee will be solely responsible for any federal, state, local or payroll taxes imposed in connection with the granting of the Shares of Restricted Stock or the delivery of the shares pursuant thereto, and the Grantee authorizes the Company or any Subsidiary to make any withholding for taxes which the Company or any Subsidiary deems necessary or proper in connection therewith.

The Grantee may satisfy the withholding requirements by electing to have the Company withhold shares having a value equal to the amount required to be withheld with such value based on the last sale price of the Common Stock reported by NASDAQ on the date the amount of tax to be withheld is to be determined.

Revised: Feb 2014

10.

Beneficiary . The Grantee may designate a beneficiary or beneficiaries and may change such designation from time to time by filing a written designation thereof with the Secretary of the Company. No such designation shall be effective unless received prior to the death of the Grantee. In the absence of such designation or if the beneficiary so designated shall not survive the Grantee, the certificate or certificates shall be delivered to the estate of the Grantee.


11.	Changes in Circumstances. It is expressly understood and agreed that the Grantee assumes all risks incident to any change hereafter in the applicable laws or regulations or incident to any change in the market value of the Shares of Restricted Stock after the date hereof.

12.

Retirement . If the Grantee retires prior to the full vesting date, and if such retirement constitutes Retirement as defined in the Plan, and if the Grantee complies with the “Covenant Not to Compete” set forth in this Paragraph 12, and if the performance requirement set forth in Paragraph 3(b) is satisfied, then on the full vesting date, Grantee will become fully vested in that part of an Award which equals the portion of the Restriction Period (measured in full and partial months) completed before the date of Retirement. In such case, the Grantee shall forfeit the remainder of the Award in accordance with Paragraph 3 at the time of the Retirement. The sale or transfer restrictions shall continue to apply until the full vesting date. If the Grantee does not comply with the Covenant Not to Compete (discussed below) the portion of the Award which may vest upon the full vesting date shall be forfeited, and the Company shall have no other remedy arising out of such failure to comply. If the performance requirement set forth in Paragraph 3(b) is not satisfied, the portion of the Award which may vest upon the full vesting date shall be forfeited.

Should the Grantee die or become disabled (as defined in the Plan) after the date of Grantee's Retirement but prior to the full vesting date, Grantee will immediately vest in the portion that Grantee would otherwise receive under this Paragraph 12.

“Covenant Not to Compete.” Grantee agrees that for the period beginning on the date of Grantee's Retirement and ending on the full vesting date, Grantee will not directly or indirectly compete with the Company or a Subsidiary, become employed as an agent, consultant, employee, officer, or director of (i) a commercial bank, savings and loan association, savings bank, trust company, investment banking firm, stock brokerage company, financial services company, or insurance company with an office located within thirty‑five (35) miles of any facility of the Company or a Subsidiary of the Company located in the Standard Metropolitan Statistical Area in which the Grantee’s office was located at the time of the Retirement (the “Defined Area”), or (ii) a bank holding company (as defined in the Bank Holding Company Act, 12 U.S.C. Section 1841) or other company which is in the business of lending money which has an office, or a subsidiary with an office, located in the Defined Area.


13.	Change in Control. In the event there shall be a Change in Control, the forfeiture and prohibited sale and transfer restrictions shall immediately lapse as to Shares of Restricted Stock that were not forfeited prior to the occurrence of the Change in Control.


14.	Committee Authority. Any questions concerning the interpretation of this Agreement or the Plan, and any controversy which arises under this Agreement or the Plan shall be settled by the Committee in its sole discretion. All determinations and decisions of the Committee shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law.

Revised: Feb 2014


15.	Plan Controls. The terms of this Agreement are governed by the terms of the Plan and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control.

16.

Notice. Whenever any notice is required or permitted hereunder, such notice must be in writing and personally delivered or sent by mail. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered on the date which it was personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address which such person has theretofore specified by written notice delivered in accordance herewith. The Company or Grantee may change, at any time and from time to time, by written notice to the other, the address previously specified for receiving notices. Until changed in accordance herewith, the Company and the Grantee specify their respective addresses as shown above.

17.

Information Confidential. As partial consideration for the granting of this Shares of Restricted Stock Award, the Grantee agrees that the Grantee will keep confidential all information and knowledge that Grantee has relating to the manner and amount of Grantee's participation in the Plan, provided, however, that such information may be disclosed as required by law and may be given in confidence to the Grantee's spouse, tax and financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan.

By your signature and the Company's signature below, you and the Company agree that this Award is granted under and governed by the terms and conditions of the Plan and the Award Agreement.

Commerce Bancshares, Inc.

By: Date:

Grantee: Date:

Revised: Feb 2014

Exhibit 10 (p)

Notice of Grant of Award Commerce Bancshares, Inc.

And Award Agreement ID: 43-0889454

1000 Walnut Street

Kansas City, MO 64106

<City, State and Zip Code> <Award Number: ######>

The current total value of the award is: <$##,####.##>

Subject to the other terms of this Agreement, the award shall become fully vested and all restrictions shall lapse according to the date(s) shown below:

Shares Full Vest

<####> <##/##/##>

ADDITIONAL TERMS AND CONDITIONS


1.	Definitions . Capitalized terms used in this Agreement but not defined herein shall have the meaning set forth in the Plan.


2.	Sale or Transfer Restrictions. Except as set forth in Paragraph 8 and Paragraph 13, the Shares of Restricted Stock shall be owned by the Grantee without the rights of sale or transfer and subject to forfeiture as provided in Paragraph 3 until the date shown above when such restrictions shall lapse.


3.	Forfeiture.

Revised: Feb 2014


4.	Non‑Solicitation Agreement. As a condition precedent to and in consideration of this award Grantee agrees to the following non-solicitation provision. For purposes of this provision, the term “Company” includes the Company and all of Company’s direct and indirect subsidiaries and affiliates.


b.	Non‑Solicitation of Employees. Grantee agrees that during the term of employment, and for a period of twelve (12) months following termination of employment, Grantee will not nor will Grantee assist others to recruit, solicit, or induce, or attempt to induce, any employees of Company to terminate their employment or otherwise cease a relationship with Company.


e.	Severability. The terms and provisions of this Paragraph 4 are severable in whole or in part, and if, notwithstanding the judicial modification provision below, any term or provision of this Agreement should be deemed invalid, illegal or unenforceable, the remaining terms and provisions shall remain in full force and effect.


g.	Change in Control. In the event there shall be a Change in Control, the provisions of this Paragraph 4 shall become null and void.

Revised: Feb 2014


h.	Disclosure of Agreement. In the event that Grantee shall seek or obtain employment with any other person, firm or entity, Grantee acknowledges and consents that this Agreement may be disclosed by Company, without risk of liability, to such current or prospective employer of Grantee.


i.	Survival. The obligations contained in this Agreement survive the termination, for any reason whatsoever, of Grantee's employment with Company; provided, however the provisions contained in Paragraph 4c (Non‑Solicitation of Customers) shall not apply in the event Grantee’s employment terminates by reason of the elimination of Grantee’s position with Company.


9.	Taxes . The Grantee will be solely responsible for any federal, state, local or payroll taxes imposed in connection with the granting of the Shares of Restricted Stock or the delivery of the shares pursuant thereto, and the Grantee authorizes the Company or any Subsidiary to make any withholding for taxes which the Company or any Subsidiary deems necessary or proper in connection therewith.

Revised: Feb 2014

10.


11.	Changes in Circumstances. It is expressly understood and agreed that the Grantee assumes all risks incident to any change hereafter in the applicable laws or regulations or incident to any change in the market value of the Shares of Restricted Stock after the date hereof.

12.


13.	Change in Control. In the event there shall be a Change in Control, the forfeiture and prohibited sale and transfer restrictions shall immediately lapse as to Shares of Restricted Stock that were not forfeited prior to the occurrence of the Change in Control.


14.	Committee Authority. Any questions concerning the interpretation of this Agreement or the Plan, and any controversy which arises under this Agreement or the Plan shall be settled by the Committee in its sole discretion. All determinations and decisions of the Committee shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law.

Revised: Feb 2014


15.	Plan Controls. The terms of this Agreement are governed by the terms of the Plan and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control.

16.

17.

By your signature and the Company's signature below, you and the Company agree that this Award is granted under and governed by the terms and conditions of the Plan and the Award Agreement.

Commerce Bancshares, Inc.

By: Date:

Grantee: Date:

Revised: Feb 2014

Exhibit 10(q)

Notice of Grant of Award Commerce Bancshares, Inc.

And Award Agreement ID: 43-0889454

1000 Walnut Street

Kansas City, MO 64106

<City, State and Zip Code> <Award Number: ######>

Effective <##/##/####> (the "Grant Date"), under the Commerce Bancshares, Inc. (the “Company”) 2005 Equity Incentive Plan (as amended and/or restated from time to time, the “Plan”), you (the "Grantee") have been granted Stock Appreciation Rights (SAR) pertaining to <####> shares of Company $5.00 par value Common Stock (“Common Stock”) at a Plan Exercise Price of <$##.##> per share, which is the closing price on the grant date.

The total exercise cost of the fully vested SAR granted is: <$#,###.##>

This SAR will become vested and subject to exercise, in whole or in part, and will expire, according to the schedule shown below:

Shares Full Vest

<####> <##/##/##>

This SAR will expire ten (10) years from the Grant Date.


1.	Definitions . Capitalized terms used in this Agreement but not defined herein shall have the meaning set forth in the Plan.

Grant and Exercise of SAR . Subject to the terms and conditions set forth in this Agreement and in the Plan, the Company hereby grants to the Grantee a SAR that relates to the stock appreciation, if any, as described above. The stock appreciation for the SAR is the amount by which the Fair Market Value of the underlying Shares on the date of exercise of this SAR exceeds the Exercise Price of the SAR.

Upon exercise of all or any portion of the SAR, the Grantee shall receive the stock appreciation with respect to the portion of the SAR exercised, payable to the Grantee in Shares. This SAR shall vest and become exercisable as follows:


a.	25% of the SAR on and after one year from the grant date;


b.	an additional 25% of the SAR on and after two years from the grant date;


c.	an additional 25% of the SAR on and after three years from the grant date; and

Revised: Feb 2014


d.	the remaining 25% of the SAR on and after four years from the grant date, so that all of the SAR granted in this Paragraph 2 and not previously exercised shall become exercisable, provided however that this SAR shall expire ten years from the grant date or upon other events as otherwise provided in the Plan or this Agreement after which no portion of the SAR shall be exercisable.

If however, the Grantee terminates employment with the Company for any reason, including death, disability or retirement, any unvested SARs are forfeited as of the termination date.


3.	Notice of Exercise.


a.	Subject to the provisions of Paragraph 2 above, the Grantee may exercise part or all of the exercisable SAR by giving written notice to the Company at the address provided above, specifying the number of rights as to which the SAR is to be exercised.

All obligations of the Company under this Agreement shall be subject to the rights of the Company to withhold amounts required for any taxes, if applicable. The Grantee may elect to satisfy any tax withholding obligation of the Company with respect to the SAR by reimbursing the Company in cash for the related tax withholdings or by having Shares withheld up to an amount that does not exceed the minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities.


4.	Non‑Solicitation Agreement. As a condition precedent to and in consideration of this award Grantee agrees to the following non‑solicitation provision. For purposes of this provision, the term “Company” includes the Company and all of Company’s direct and indirect subsidiaries and affiliates.


b.	Non‑Solicitation of Employees. Grantee agrees that during the term of employment, and for a period of twelve (12) months following termination of employment, Grantee will not nor will Grantee assist others to recruit, solicit, or induce, or attempt to induce, any employees of Company to terminate their employment or otherwise cease a relationship with Company.


d.	Legal and Equitable Relief. The restrictions contained in this Paragraph 4 are necessary for the protection of the legitimate business interests and goodwill of Company, and are considered by the Grantee to be reasonable for such purposes. The Grantee agrees that any breach of this

Revised: Feb 2014

Paragraph 4 will cause Company substantial and irrevocable damage. In the event of any such breach, in addition to such other remedies that may be available, including the recovery of damages from Grantee, Company shall have the right to injunctive relief to restrain or enjoin any actual or threatened breach of the provisions of this Paragraph 4.


e.	Severability. The terms and provisions of this Paragraph 4 are severable in whole or in part, and if, notwithstanding the judicial modification provision below, any term or provision of this Agreement should be deemed invalid, illegal or unenforceable, the remaining terms and provisions shall remain in full force and effect.


g.	Change in Control. In the event there shall be a Change in Control, the provisions of this paragraph 4 shall become null and void.


h.	Disclosure of Agreement. In the event that Grantee shall seek or obtain employment with any other person, firm or entity, Grantee acknowledges and consents that this Agreement may be disclosed by Company, without risk of liability, to such current or prospective employer of Grantee.


i.	Survival. The obligations contained in this Agreement survive the termination, for any reason whatsoever, of Grantee's employment with Company; provided, however the provisions contained in Paragraph 4c (Non‑Solicitation of Customers) shall not apply in the event Grantee’s employment terminates by reason of the elimination of Grantee’s position with Company.


6.	Restrictions on Transfer or Other Dispositions. No SAR may be transferred or otherwise disposed of except as provided in the Plan.


7.	Issue of Shares. The Company shall not be required to issue or transfer any certificates for Shares upon exercise of this SAR until all applicable requirements of law have been complied with and such Shares shall have been duly listed on any securities exchange on which the Shares may then be listed.

Beneficiary. The Grantee may designate a beneficiary or beneficiaries and may change such designation from time to time by filing a written designation thereof with the Secretary of the Company. No such designation shall be effective unless received prior to the death of the Grantee. In the absence of such designation or if the beneficiary so designated shall not survive the Grantee, the certificate or certificates shall be delivered to the estate of the Grantee.

Revised: Feb 2014


9.	Change in Circumstances. It is expressly understood and agreed that the Grantee assumes all risks incident to any change hereinafter in the applicable laws or regulations or incident to any change in the market value of the SAR after the date hereof.


10.	Change in Control. In the event there is a Change of Control, any unexercised portion of this SAR shall become immediately exercisable and all restrictions shall be removed at the time of a Change in Control.


11.	Committee Authority. Any questions concerning the interpretation of this Agreement or the Plan, and any controversy which arises under this Agreement or the Plan shall be settled by the Committee in its sole discretion. All determinations and decisions of the Committee shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law.


12.	Plan Controls. The terms of this Agreement are governed by the terms of the Plan and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control.

13.

14.

Information Confidential. As partial consideration for the granting of this SAR, the Grantee agrees that Grantee will keep confidential all information and knowledge that Grantee has relating to the manner and amount of Grantee's participation in the Plan, provided, however, that such information may be disclosed as required by law and may be given in confidence to the Grantee’s spouse, tax and financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan.

By your signature and the Company's signature below, you and the Company agree that this SAR is granted under and governed by the terms and conditions of the Plan and the SAR Agreement.

Commerce Bancshares, Inc.

By: Date:

Grantee: Date:

Revised: Feb 2014

Exhibit 31.1

CERTIFICATION

I, David W. Kemper, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Commerce Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



	/s/ D AVID W. K EMPER
	David W. Kemper Chairman and Chief Executive Officer

May 7, 2014

Exhibit 31.2

CERTIFICATION

I, Charles G. Kim, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Commerce Bancshares, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



	/s/ C HARLES G. K IM
	Charles G. Kim Executive Vice President and Chief Financial Officer

May 7, 2014

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Commerce Bancshares, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David W. Kemper and Charles G. Kim, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



	/s/ D AVID W. K EMPER
	David W. Kemper Chief Executive Officer

	/s/ C HARLES G. K IM
	Charles G. Kim Chief Financial Officer

May 7, 2014

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.