Table of Contents



 

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, 2019

OR
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 every Interactive Data File required to be submitted 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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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 £
Emerging growth company £
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 May 1, 2019 , the registrant had outstanding 110,507,831  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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
14,120,722

 
$
14,140,298

  Allowance for loan losses
(160,682
)
 
(159,932
)
Net loans
13,960,040

 
13,980,366

Loans held for sale (including $8,908,000 and $13,529,000 of residential mortgage loans carried at fair value at March 31, 2019 and December 31, 2018, respectively)
20,085

 
20,694

Investment securities:
 
 
 

Available for sale debt ($312,276,000 and $463,325,000 pledged at March 31, 2019 and
 
 
 
    December 31, 2018, respectively, to secure swap and repurchase agreements)
8,627,890

 
8,538,041

Trading debt
30,427

 
27,059

Equity
4,694

 
4,409

Other
129,504

 
129,157

Total investment securities
8,792,515

 
8,698,666

Federal funds sold and short-term securities purchased under agreements to resell
250

 
3,320

Long-term securities purchased under agreements to resell
700,000

 
700,000

Interest earning deposits with banks
166,077

 
689,876

Cash and due from banks
428,018

 
507,892

Premises and equipment, net
362,679

 
333,119

Goodwill
138,921

 
138,921

Other intangible assets, net
8,511

 
8,794

Other assets
456,375

 
382,194

Total assets
$
25,033,471

 
$
25,463,842

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
6,298,724

 
$
6,980,298

   Savings, interest checking and money market
11,799,346

 
11,685,239

   Certificates of deposit of less than $100,000
599,289

 
586,091

   Certificates of deposit of $100,000 and over
1,276,994

 
1,072,031

Total deposits
19,974,353

 
20,323,659

Federal funds purchased and securities sold under agreements to repurchase
1,722,751

 
1,956,389

Other borrowings
2,022

 
8,702

Other liabilities
291,132

 
237,943

Total liabilities
21,990,258

 
22,526,693

Commerce Bancshares, Inc. stockholders’ equity:
 
 
 

   Preferred stock, $1 par value
 
 
 
      Authorized 2,000,000 shares; issued 6,000 shares
144,784

 
144,784

   Common stock, $5 par value
 
 
 

 Authorized 120,000,000 shares;
 
 
 
   issued 111,886,450 shares
559,432

 
559,432

   Capital surplus
2,074,912

 
2,084,824

   Retained earnings
307,193

 
241,163

   Treasury stock of 985,029 shares at March 31, 2019
 
 
 
     and 555,100 shares at December 31, 2018, at cost
(60,547
)
 
(34,236
)
   Accumulated other comprehensive income (loss)
11,981

 
(64,669
)
Total Commerce Bancshares, Inc. stockholders' equity
3,037,755

 
2,931,298

Non-controlling interest
5,458

 
5,851

Total equity
3,043,213

 
2,937,149

Total liabilities and equity
$
25,033,471

 
$
25,463,842

See accompanying notes to consolidated financial statements.

3
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
 
For the Three Months Ended March 31
(In thousands, except per share data)
2019
2018
 
(Unaudited)
INTEREST INCOME
 
 
Interest and fees on loans
$
166,432

$
147,015

Interest and fees on loans held for sale
334

304

Interest on investment securities
55,422

53,242

Interest on federal funds sold and short-term securities purchased under
 
 
   agreements to resell
33

180

Interest on long-term securities purchased under agreements to resell
3,758

4,114

Interest on deposits with banks
1,886

1,140

Total interest income
227,865

205,995

INTEREST EXPENSE
 
 
Interest on deposits:
 
 
   Savings, interest checking and money market
9,602

5,589

   Certificates of deposit of less than $100,000
1,259

662

   Certificates of deposit of $100,000 and over
6,002

2,839

Interest on federal funds purchased and securities sold under
 
 
   agreements to repurchase
7,509

4,001

Interest on other borrowings
5

12

Total interest expense
24,377

13,103

Net interest income
203,488

192,892

Provision for loan losses
12,463

10,396

Net interest income after provision for loan losses
191,025

182,496

NON-INTEREST INCOME
 
 
Bank card transaction fees
39,644

41,453

Trust fees
37,256

36,062

Deposit account charges and other fees
23,018

22,982

Capital market fees
1,879

2,291

Consumer brokerage services
3,747

3,768

Loan fees and sales
3,309

2,862

Other
12,387

10,272

Total non-interest income
121,240

119,690

INVESTMENT SECURITIES GAINS (LOSSES), NET
(925
)
5,410

NON-INTEREST EXPENSE
 
 
Salaries and employee benefits
122,128

115,894

Net occupancy
11,501

11,584

Equipment
4,471

4,431

Supplies and communication
5,162

5,313

Data processing and software
22,260

20,690

Marketing
5,900

4,805

Deposit insurance
1,710

3,457

Community service
803

729

Other
17,490

15,374

Total non-interest expense
191,425

182,277

Income before income taxes
119,915

125,319

Less income taxes
22,860

23,258

Net income
97,055

102,061

Less non-controlling interest expense (income)
(83
)
1,077

Net income attributable to Commerce Bancshares, Inc.
97,138

100,984

Less preferred stock dividends
2,250

2,250

Net income available to common shareholders
$
94,888

$
98,734

Net income per common share — basic
$
.85

$
.88

Net income per common share — diluted
$
.85

$
.88

See accompanying notes to consolidated financial statements.

4
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
For the Three Months Ended March 31
(In thousands)
 
 
2019
2018
 
 
(Unaudited)
Net income
 
 
$
97,055

$
102,061

Other comprehensive income (loss):
 
 
 
 
Net unrealized gains on securities for which a portion of an other-than-temporary impairment has been recorded in earnings
 
 
41

45

Net unrealized gains (losses) on other securities
 
 
73,441

(73,721
)
Pension loss amortization
 
 
389

393

Unrealized gains on cash flow hedge derivatives
 
 
2,779

—

Other comprehensive income (loss)
 
 
76,650

(73,283
)
Comprehensive income
 
 
173,705

28,778

Less non-controlling interest expense (income)
 
 
(83
)
1,077

Comprehensive income attributable to Commerce Bancshares, Inc.
 
$
173,788

$
27,701

See accompanying notes to consolidated financial statements.














5
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
Commerce Bancshares, Inc. Shareholders
 
 
 
 

(In thousands, except per share data)
Preferred Stock
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
 
(Unaudited)
Balance December 31, 2018
$
144,784

$
559,432

$
2,084,824

$
241,163

$
(34,236
)
$
(64,669
)
$
5,851

$
2,937,149

Net income
 




97,138





(83
)
97,055

Other comprehensive income
 








76,650



76,650

Distributions to non-controlling interest
 










(310
)
(310
)
Purchases of treasury stock
 






(39,699
)




(39,699
)
Issuance of stock under purchase and equity compensation plans
 


(13,392
)


13,388





(4
)
Stock-based compensation
 


3,480









3,480

Cash dividends on common stock ($.260 per share)
 




(28,858
)






(28,858
)
Cash dividends on preferred stock ($.375 per depositary share)
 




(2,250
)






(2,250
)
Balance March 31, 2019
$
144,784

$
559,432

$
2,074,912

$
307,193

$
(60,547
)
$
11,981

$
5,458

$
3,043,213

Balance December 31, 2017
$
144,784

$
535,407

$
1,815,360

$
221,374

$
(14,473
)
$
14,108

$
1,624

$
2,718,184

Adoption of ASU 2018-02






(2,932
)


2,932



—

Adoption of ASU 2016-01






33,320



(33,320
)


—

Net income






100,984





1,077

102,061

Other comprehensive loss










(73,283
)


(73,283
)
Distributions to non-controlling interest












(95
)
(95
)
Purchases of treasury stock








(17,067
)




(17,067
)
Issuance of stock under purchase and equity compensation plans




(15,865
)


15,859





(6
)
Stock-based compensation




3,290









3,290

Cash dividends on common stock ($.224 per share)






(25,106
)






(25,106
)
Cash dividends on preferred stock ($.375 per depositary share)






(2,250
)






(2,250
)
Balance March 31, 2018
$
144,784

$
535,407

$
1,802,785

$
325,390

$
(15,681
)
$
(89,563
)
$
2,606

$
2,705,728

See accompanying notes to consolidated financial statements.



6
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended March 31
(In thousands)
2019
 
2018
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
97,055

 
$
102,061

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
12,463

 
10,396

  Provision for depreciation and amortization
9,966

 
9,620

  Amortization of investment security premiums, net
9,998

 
7,233

  Investment securities (gains) losses, net (A)
925

 
(5,410
)
  Net gains on sales of loans held for sale
(1,929
)
 
(1,147
)
  Originations of loans held for sale
(46,454
)
 
(44,066
)
  Proceeds from sales of loans held for sale
48,506

 
49,255

  Net (increase) decrease in trading debt securities
4,632

 
(18,543
)
  Stock-based compensation
3,480

 
3,290

  (Increase) decrease in interest receivable
(1,568
)
 
744

  Increase (decrease) in interest payable
2,708

 
(732
)
  Increase in income taxes payable
20,479

 
22,076

  Other changes, net
(18,080
)
 
9,212

Net cash provided by operating activities
142,181

 
143,989

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities (A)
150,756

 
148,652

Proceeds from maturities/pay downs of investment securities (A)
252,824

 
358,690

Purchases of investment securities (A)
(432,645
)
 
(298,554
)
Net decrease in loans
7,758

 
78,838

Purchases of premises and equipment
(11,283
)
 
(4,982
)
Sales of premises and equipment
1,268

 
718

Net cash provided by (used in) investing activities
(31,322
)
 
283,362

FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
(620,589
)
 
54,986

Net increase (decrease) in certificates of deposit
218,161

 
(9,961
)
Net decrease in federal funds purchased and securities sold under agreements to repurchase
(233,638
)
 
(374,809
)
Repayment of long-term borrowings
(54
)
 
(74
)
Net increase (decrease) in short-term borrowings
(6,736
)
 
7,530

Purchases of treasury stock
(39,699
)
 
(17,067
)
Issuance of stock under equity compensation plans
(4
)
 
(6
)
Cash dividends paid on common stock
(28,858
)
 
(25,106
)
Cash dividends paid on preferred stock
(2,250
)
 
(2,250
)
Net cash used in financing activities
(713,667
)
 
(366,757
)
Increase (decrease) in cash, cash equivalents and restricted cash
(602,808
)
 
60,594

Cash, cash equivalents and restricted cash at beginning of year
1,209,240

 
524,352

Cash, cash equivalents and restricted cash at March 31
$
606,432

 
$
584,946

Income tax payments, net
$
1,350

 
$
147

Interest paid on deposits and borrowings
$
21,668

 
$
13,835

Loans transferred to foreclosed real estate
$
54

 
$
1,028

(A) Available for sale debt securities, equity securities, and other securities.
See accompanying notes to consolidated financial statements.

Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $12.1 million and $10.2 million at March 31 , 2019 and 2018 , respectively.


7
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019 (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 by an independent registered public accounting firm, but 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. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2018 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three month period ended March 31, 2019 are not necessarily indicative of results to be attained for the full year or any other interim period.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.


2. Loans and Allowance for Loan Losses
Major classifications within the Company’s held for investment loan portfolio at March 31, 2019 and December 31, 2018 are as follows:

(In thousands)
 
March 31, 2019
 
December 31, 2018
Commercial:
 
 
 
 
Business
 
$
5,175,541

 
$
5,106,427

Real estate – construction and land
 
925,269

 
869,659

Real estate – business
 
2,859,614

 
2,875,788

Personal Banking:
 
 
 
 
Real estate – personal
 
2,125,087

 
2,127,083

Consumer
 
1,893,212

 
1,955,572

Revolving home equity
 
364,010

 
376,399

Consumer credit card
 
772,396

 
814,134

Overdrafts
 
5,593

 
15,236

Total loans
 
$
14,120,722

 
$
14,140,298


At March 31, 2019 , loans of $3.8 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 $1.6 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.


8

Allowance for loan losses    
A summary of the activity in the allowance for loan losses during the three months ended March 31, 2019 and 2018 , respectively, follows:
 
 
 
For the Three Months Ended March 31
(In thousands)
 
 
Commercial
Personal Banking

Total
Balance at January 1
 
$
92,869

$
67,063

$
159,932

Provision
 
1,168

11,295

12,463

Deductions:
 
 
 
 
   Loans charged off
 
527

14,204

14,731

   Less recoveries on loans
 
133

2,885

3,018

Net loan charge-offs
 
394

11,319

11,713

Balance March 31, 2019
 
$
93,643

$
67,039

$
160,682

Balance at January 1
 
$
93,704

$
65,828

$
159,532

Provision
 
(894
)
11,290

10,396

Deductions:
 
 
 
 
   Loans charged off
 
366

13,365

13,731

   Less recoveries on loans
 
621

2,714

3,335

Net loan charge-offs (recoveries)
 
(255
)
10,651

10,396

Balance March 31, 2018
 
$
93,065

$
66,467

$
159,532


The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2019 and December 31, 2018 , disaggregated on the basis of impairment methodology. Impaired loans evaluated under Accounting Standards Codification (ASC) 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics, which 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, 2019
 
 
 
 
 
Commercial
$
1,720

$
66,739

 
$
91,923

$
8,893,685

Personal Banking
923

17,433

 
66,116

5,142,865

Total
$
2,643

$
84,172

 
$
158,039

$
14,036,550

December 31, 2018
 
 
 
 
 
Commercial
$
1,780

$
61,496

 
$
91,089

$
8,790,378

Personal Banking
916

17,120

 
66,147

5,271,304

Total
$
2,696

$
78,616

 
$
157,236

$
14,061,682


Impaired loans
The table below shows the Company’s investment in impaired loans at March 31, 2019 and December 31, 2018 . 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. 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 below.
(In thousands)
 
Mar. 31, 2019
 
Dec. 31, 2018
Non-accrual loans
 
$
12,167

 
$
12,536

Restructured loans (accruing)
 
72,005

 
66,080

Total impaired loans
 
$
84,172

 
$
78,616



9

The following table provides additional information about impaired loans held by the Company at March 31, 2019 and December 31, 2018 , 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, 2019
 
 
 
With no related allowance recorded:
 
 
 
Business
$
8,381

$
14,376

$
—

 
$
8,381

$
14,376

$
—

With an allowance recorded:
 
 
 
Business
$
46,736

$
46,873

$
1,241

Real estate – construction and land
414

419

11

Real estate – business
11,208

11,809

468

Real estate – personal
4,380

5,902

243

Consumer
5,365

5,365

34

Revolving home equity
39

39

1

Consumer credit card
7,649

7,649

645

 
$
75,791

$
78,056

$
2,643

Total
$
84,172

$
92,432

$
2,643

December 31, 2018
 
 
 
With no related allowance recorded:
 
 
 
Business
$
8,725

$
14,477

$
—

 
$
8,725

$
14,477

$
—

With an allowance recorded:
 
 
 
Business
$
40,286

$
40,582

$
1,223

Real estate – construction and land
416

421

11

Real estate – business
12,069

12,699

546

Real estate – personal
4,461

6,236

266

Consumer
5,510

5,510

38

Revolving home equity
40

40

1

Consumer credit card
7,109

7,109

611

 
$
69,891

$
72,597

$
2,696

Total
$
78,616

$
87,074

$
2,696



Total average impaired loans for the three month periods ended March 31, 2019 and 2018 , respectively, are shown in the table below.

(In thousands)
Commercial
Personal Banking
Total
Average Impaired Loans:
 
 
 
For the three months ended March 31, 2019
 
 
 
Non-accrual loans
$
10,347

$
1,973

$
12,320

Restructured loans (accruing)
53,607

15,437

69,044

Total
$
63,954

$
17,410

$
81,364

For the three months ended March 31, 2018
 
 
 
Non-accrual loans
$
8,523

$
2,928

$
11,451

Restructured loans (accruing)
79,258

18,773

98,031

Total
$
87,781

$
21,701

$
109,482



10

The table below shows interest income recognized during the three month periods ended March 31, 2019 and 2018 , respectively, for impaired loans held at the end of each period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section below.
 
 
For the Three Months Ended March 31
(In thousands)
 
2019
2018
Interest income recognized on impaired loans:
 
 
 
Business
 
$
1,008

$
760

Real estate – construction and land
 
6

24

Real estate – business
 
151

113

Real estate – personal
 
35

111

Consumer
 
80

80

Revolving home equity
 
1

2

Consumer credit card
 
146

128

Total
 
$
1,427

$
1,218


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, 2019 and December 31, 2018 .




(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, 2019
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
5,154,124

$
12,178

$
670

$
8,569

$
5,175,541

Real estate – construction and land
924,028

1,237

—

4

925,269

Real estate – business
2,844,335

13,412

121

1,746

2,859,614

Personal Banking:
 
 
 
 
 
Real estate – personal
2,113,316

7,335

2,588

1,848

2,125,087

Consumer
1,866,038

24,905

2,269

—

1,893,212

Revolving home equity
362,373

1,167

470

—

364,010

Consumer credit card
751,639

10,220

10,537

—

772,396

Overdrafts
5,315

278

—

—

5,593

Total
$
14,021,168

$
70,732

$
16,655

$
12,167

$
14,120,722

December 31, 2018
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
5,086,912

$
10,057

$
473

$
8,985

$
5,106,427

Real estate – construction and land
867,692

1,963

—

4

869,659

Real estate – business
2,867,347

6,704

22

1,715

2,875,788

Personal Banking:
 
 
 
 
 
Real estate – personal
2,118,045

6,041

1,165

1,832

2,127,083

Consumer
1,916,320

35,608

3,644

—

1,955,572

Revolving home equity
374,830

875

694

—

376,399

Consumer credit card
792,334

11,140

10,660

—

814,134

Overdrafts
14,937

299

—

—

15,236

Total
$
14,038,417

$
72,687

$
16,658

$
12,536

$
14,140,298


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

11

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, 2019
 
 
 
 
Pass
$
4,954,297

$
876,805

$
2,761,215

$
8,592,317

Special mention
119,582

47,397

49,151

216,130

Substandard
93,093

1,063

47,502

141,658

Non-accrual
8,569

4

1,746

10,319

Total
$
5,175,541

$
925,269

$
2,859,614

$
8,960,424

December 31, 2018
 
 
 
 
Pass
$
4,915,042

$
866,527

$
2,777,374

$
8,558,943

Special mention
84,391

1,917

51,845

138,153

Substandard
98,009

1,211

44,854

144,074

Non-accrual
8,985

4

1,715

10,704

Total
$
5,106,427

$
869,659

$
2,875,788

$
8,851,874


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 section on "Delinquent and non-accrual loans" . 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 real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $196.4 million at March 31, 2019 and $201.7 million at December 31, 2018 . The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled  $167.2 million  at  March 31, 2019  and  $170.3 million  at  December 31, 2018 . As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and consumer loans excluded below totaled less than  8%  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, 2019 and December 31, 2018 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
March 31, 2019
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.1
%
3.4
%
1.2
%
5.4
%
600 - 659
1.7

5.3

1.9

14.0

660 - 719
9.9

18.0

9.5

35.6

720 - 779
25.3

24.3

22.8

26.3

780 and over
62.0

49.0

64.6

18.7

Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2018
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.1
%
3.1
%
0.8
%
4.4
%
600 - 659
1.8

4.8

1.7

14.0

660 - 719
9.4

16.1

9.1

34.8

720 - 779
24.7

25.7

24.0

26.4

780 and over
63.0

50.3

64.4

20.4

Total
100.0
%
100.0
%
100.0
%
100.0
%



12

Troubled debt restructurings
As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings, as shown in the table below. 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. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard, but renewed at rates judged to be non- market. These 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 and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company also classified as consumer bankruptcy certain personal real estate, revolving home equity, and consumer loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.
(In thousands)
March 31, 2019
December 31, 2018
Accruing restructured loans:
 
 
 
Commercial
$
56,524

$
50,904

 
Assistance programs
7,960

7,410

 
Consumer bankruptcy
3,946

4,103

 
Other consumer
3,575

3,663

Non-accrual loans
9,352

9,759

Total troubled debt restructurings
$
81,357

$
75,839


The table below shows the balance of troubled debt restructurings by loan classification at March 31, 2019 , 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, 2019
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
54,928

$
—

Real estate - construction and land
411

—

Real estate - business
9,462

—

Personal Banking:
 
 
Real estate - personal
3,503

217

Consumer
5,365

47

Revolving home equity
39

—

Consumer credit card
7,649

685

Total troubled debt restructurings
$
81,357

$
949


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. However, the effects of modifications to loans under various debt management and assistance programs were estimated to decrease interest income by approximately $1.0 million on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.

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 having no other concessions granted other than being renewed at

13

non-market interest rates are judged to 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 $2.7 million at March 31, 2019 to lend additional funds to borrowers with restructured loans.

Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 11. The loans are primarily sold to FNMA, FHLMC, and GNMA. At March 31, 2019 , the fair value of these loans was $8.9 million , and the unpaid principal balance was $8.5 million .

The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at March 31, 2019 totaled $11.2 million .

At March 31, 2019 , none of the loans held for sale were on non-accrual status or 90 days past due and still accruing.
 
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $737 thousand and $1.4 million at March 31, 2019 and December 31, 2018 , respectively. Personal property acquired in repossession, generally autos, marine and recreational vehicles (RV), totaled $2.6 million and $2.0 million at March 31, 2019 and December 31, 2018 , respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.

3. Investment Securities
Investment securities consisted of the following at March 31, 2019 and December 31, 2018 .
 
(In thousands)
March 31, 2019
December 31, 2018
Available for sale debt securities
$
8,627,890

$
8,538,041

Trading debt securities
30,427

27,059

Equity securities:
 
 
   Readily determinable fair value
2,808

2,585

   No readily determinable fair value
1,886

1,824

Other:


 
   Federal Reserve Bank stock
33,627

33,498

   Federal Home Loan Bank stock
10,000

10,000

   Private equity investments
85,877

85,659

Total investment securities
$
8,792,515

$
8,698,666


The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. The Company did not record any impairment or other adjustments to the carrying amount of these investments during the period.
Other investment securities include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, and investments in portfolio concerns held by the Company's private equity subsidiaries. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB

14

stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. The private equity investments, in the absence of readily ascertainable market values, are carried at estimated fair value.
The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of March 31, 2019 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
 
 
Within 1 year
$
29,484

$
29,341

After 1 but within 5 years
588,651

597,792

After 5 but within 10 years
249,143

250,788

Total U.S. government and federal agency obligations
867,278

877,921

Government-sponsored enterprise obligations:
 
 
Within 1 year
36,442

36,176

After 1 but within 5 years
85,155

84,759

After 5 but within 10 years
34,986

34,974

After 10 years
42,913

42,070

Total government-sponsored enterprise obligations
199,496

197,979

State and municipal obligations:
 
 
Within 1 year
87,817

88,067

After 1 but within 5 years
663,990

675,122

After 5 but within 10 years
440,363

454,085

After 10 years
56,231

56,926

Total state and municipal obligations
1,248,401

1,274,200

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
3,416,497

3,412,399

  Non-agency mortgage-backed securities
1,056,738

1,060,008

  Asset-backed securities
1,470,541

1,470,516

Total mortgage and asset-backed securities
5,943,776

5,942,923

Other debt securities:
 
 
Within 1 year
22,497

22,412

After 1 but within 5 years
245,030

244,892

After 5 but within 10 years
67,995

67,563

Total other debt securities
335,522

334,867

Total available for sale debt securities
$
8,594,473

$
8,627,890


Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $446.9 million , at fair value, at March 31, 2019 . 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 $14.5 million , at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates.


15

For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in AOCI, by security type.
 
 
(In thousands)
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
March 31, 2019
 
 
 
 
U.S. government and federal agency obligations
$
867,278

$
11,844

$
(1,201
)
$
877,921

Government-sponsored enterprise obligations
199,496

258

(1,775
)
197,979

State and municipal obligations
1,248,401

26,485

(686
)
1,274,200

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,416,497

19,977

(24,075
)
3,412,399

  Non-agency mortgage-backed securities
1,056,738

9,833

(6,563
)
1,060,008

  Asset-backed securities
1,470,541

5,536

(5,561
)
1,470,516

Total mortgage and asset-backed securities
5,943,776

35,346

(36,199
)
5,942,923

Other debt securities
335,522

645

(1,300
)
334,867

Total
$
8,594,473

$
74,578

$
(41,161
)
$
8,627,890

December 31, 2018
 
 
 
 
U.S. government and federal agency obligations
$
914,486

$
4,545

$
(11,379
)
$
907,652

Government-sponsored enterprise obligations
199,470

55

(3,747
)
195,778

State and municipal obligations
1,322,785

10,284

(5,030
)
1,328,039

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,253,433

9,820

(48,268
)
3,214,985

  Non-agency mortgage-backed securities
1,053,854

6,641

(12,779
)
1,047,716

  Asset-backed securities
1,518,976

3,849

(11,211
)
1,511,614

Total mortgage and asset-backed securities
5,826,263

20,310

(72,258
)
5,774,315

Other debt securities
339,595

72

(7,410
)
332,257

Total
$
8,602,599

$
35,266

$
(99,824
)
$
8,538,041


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 Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or who have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2019 , the fair value of securities on this watch list was $55.0 million compared to $57.7 million at December 31, 2018 .

As of March 31, 2019 , the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities with a current par value of $22.2 million . These securities, which are part of the watch list mentioned above, had an aggregate fair value of $17.3 million at March 31, 2019 . The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.1 million . The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at March 31, 2019 included the following:

Significant Inputs
Range
Prepayment CPR
0%
-
37%
Projected cumulative default
8%
-
50%
Credit support
0%
-
20%
Loss severity
11%
-
63%


16

The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.
 
For the Three Months Ended March 31
(In thousands)
2019
2018
Cumulative OTTI credit losses at January 1
$
14,092

$
14,199

Credit losses on debt securities for which impairment was not previously recognized
—

58

Credit losses on debt securities for which impairment was previously recognized
—

10

Increase in expected cash flows that are recognized over remaining life of security
(33
)
(54
)
Cumulative OTTI credit losses at March 31
$
14,059

$
14,213


Debt securities with unrealized losses recorded in AOCI 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, 2019
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
3,200

$
26

 
$
114,835

$
1,175

 
$
118,035

$
1,201

Government-sponsored enterprise obligations
34,974

12

 
139,959

1,763

 
174,933

1,775

State and municipal obligations
13,907

3

 
110,737

683

 
124,644

686

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
156,031

326

 
1,706,133

23,749

 
1,862,164

24,075

   Non-agency mortgage-backed securities
47,338

41

 
639,311

6,522

 
686,649

6,563

   Asset-backed securities
219,611

931

 
726,118

4,630

 
945,729

5,561

Total mortgage and asset-backed securities
422,980

1,298

 
3,071,562

34,901

 
3,494,542

36,199

Other debt securities
35,967

32

 
170,424

1,268

 
206,391

1,300

Total
$
511,028

$
1,371

 
$
3,607,517

$
39,790

 
$
4,118,545

$
41,161

December 31, 2018
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
317,699

$
6,515

 
$
116,728

$
4,864

 
$
434,427

$
11,379

Government-sponsored enterprise obligations
—

—

 
188,846

3,747

 
188,846

3,747

State and municipal obligations
157,838

704

 
257,051

4,326

 
414,889

5,030

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
330,933

1,502

 
1,927,268

46,766

 
2,258,201

48,268

   Non-agency mortgage-backed securities
207,506

1,085

 
657,685

11,694

 
865,191

12,779

   Asset-backed securities
147,997

728

 
813,427

10,483

 
961,424

11,211

Total mortgage and asset-backed securities
686,436

3,315

 
3,398,380

68,943

 
4,084,816

72,258

Other debt securities
51,836

564

 
260,682

6,846

 
312,518

7,410

Total
$
1,213,809

$
11,098

 
$
4,221,687

$
88,726

 
$
5,435,496

$
99,824


The available for sale debt portfolio included $4.1 billion of securities that were in a loss position at March 31, 2019 , compared to $5.4 billion at December 31, 2018 .  The total amount of unrealized loss on these securities was $41.2 million at March 31, 2019 , a decrease of $58.7 million compared to the loss at December 31, 2018 .  This decrease in losses was mainly due to a declining interest rate environment at March 31, 2019. 

    

17

The following tables present proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
 
For the Three Months Ended March 31
(In thousands)
2019
2018
Proceeds from sales of securities:
 
 
Available for sale debt securities
$
150,756

$
148,637

Equity securities
—

15

Total proceeds
$
150,756

$
148,652

 
 
 
Investment securities gains (losses), net:
 
 
Available for sale debt securities:
 
 
Gains realized on sales
$
1,386

$
212

Losses realized on sales
(692
)
—

Other-than-temporary impairment recognized on debt securities
—

(68
)
Equity securities:
 
 
Gains realized on sales
—

14

 Fair value adjustments, net
223

947

Other:
 
 
Fair value adjustments, net
(1,842
)
4,305

Total investment securities gains (losses), net
$
(925
)
$
5,410


Net gains and losses on investment securities for the three months ended March 31, 2019 included losses in fair value of $1.8 million on private equity investments, gains of $223 thousand on equity securities, and net gains of $694 thousand realized on sales of available for sale securities.

At March 31, 2019 , securities totaling $4.0 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $312.3 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.

18

4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
 
March 31, 2019
 
December 31, 2018
 
 
(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

$
(29,100
)
$
—

$
2,170

 
$
31,270

$
(28,954
)
$
—

$
2,316

Mortgage servicing rights
10,658

(4,057
)
(260
)
6,341

 
10,339

(3,861
)
—

6,478

Total
$
41,928

$
(33,157
)
$
(260
)
$
8,511

 
$
41,609

$
(32,815
)
$
—

$
8,794


Aggregate amortization expense on intangible assets was $342 thousand and $321 thousand for the three month periods ended March 31, 2019 and 2018 , respectively. 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, 2019 . 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)
 
2019
$
1,381

2020
1,215

2021
1,032

2022
882

2023
736


Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2019 are as follows:
(In thousands)
Goodwill
Core Deposit Premium
Mortgage Servicing Rights
Balance January 1, 2019
$
138,921

$
2,316

$
6,478

Originations
—

—

319

Amortization
—

(146
)
(196
)
Impairment
—

—

(260
)
Balance March 31, 2019
$
138,921

$
2,170

$
6,341


Goodwill allocated to the Company’s operating segments at March 31, 2019 and December 31, 2018 is shown below.
(In thousands)
 
Consumer segment
$
70,721

Commercial segment
67,454

Wealth segment
746

Total goodwill
$
138,921


5. 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.

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, 2019 , that net liability was $2.2 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 $325.6 million at March 31, 2019 .

19


The Company periodically enters into credit 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, 2019 , 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 2 to 11 years. At March 31, 2019 , the fair value of the Company's guarantee liabilities for RPAs was $110 thousand , and the notional amount of the underlying swaps was $86.6 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.

6. Leases
The Company adopted ASU 2016-02, "Leases", and its related amendments on January 1, 2019 using a modified retrospective approach. The Company's leasing activities include leasing certain real estate and equipment, providing lease financing to commercial customers, and leasing office space to third parties. The Company adopted the package of practical expedients permitted within the new standard, along with the lease component expedient for all lease classes and the disclosure expedient. The Company uses the FHLB fixed-advance rate at lease commencement or remeasurement event based on the remaining lease term to calculate the liability for each lease.

Lessee
The Company primarily has operating leases for branches, office space, ATM locations, and certain equipment. As of March 31, 2019 , the right-of-use asset, reported within premises and equipment, net, and lease liability, reported within other liabilities, recognized on the Company's consolidated balance sheets totaled $27.1 million and $27.8 million , respectively. For leases with a term of 12 months or less, an election was made not to recognize lease assets and lease liabilities for all asset classes, and to recognize lease expense for these leases on a straight-line basis over the lease term. Total lease cost for the three months ended March 31, 2019 was $1.8 million . The Company's leases have remaining terms of 1 year to 35 years, most of which contain renewal options. However, the renewal options are generally not included in the leased asset or liability because exercising the options are uncertain.

The maturities of operating leases are included in the table below.
(in thousands)
Operating Leases (a)
2019 (excluding the three months ended March 31, 2019)
$
4,279

2020
5,034

2021
4,203

2022
3,725

2023
3,406

After 2023
14,878

Total lease payments
$
35,525

Less: Interest (b)
7,719

Present value of lease liabilities
$
27,806

(a) Excludes $2.1 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(b) Calculated using the interest rate for each lease.

The following table presents the average lease term and discount rate of operating leases.
 
March 31, 2019
Weighted-average remaining lease term
12.1 years

Weighted-average discount rate
3.76
%


20

Supplemental cash flow information related to operating leases is included in the table below.
 
For the Three Months Ended March 31
(in thousands)
2019
Operating cash paid toward lease liabilities
$
1,491

Leased assets obtained in exchange for new lease liabilities
$
1,022


The Company adopted the new lease standard using the effective date as the date of initial application as noted above, and as required, the table below provides the disclosure for periods prior to adoption. Future minimum lease payments as of December 31, 2018 are shown below, which include leases that have not yet commenced.
(in thousands)
 
Year Ended December 31
Total
2019
$
5,763

2020
4,817

2021
4,055

2022
3,598

2023
3,273

After
15,161

Total minimum lease payments
$
36,667


Lessor
The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options to renew or for the lessee to purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space in buildings owned by the Company to third parties and are classified as operating leases. The leases may include options to expand the leased space or renew the lease, and currently the leases have remaining terms of 1 year to 9 years.

The following table provides the components of lease income.
 
For the Three Months Ended March 31
(in thousands)
2019
Direct financing and sales-type leases
5,862

Operating leases (a)
1,906

Total lease income
$
7,768

     (a) Includes rent of $19 thousand from Tower Properties Company, a related party.

The following table presents the components of the net investments in direct financing and sales-type leases.
(in thousands)
March 31, 2019
Lease payment receivable
$
716,103

Unguaranteed residual assets
49,347

Total net investments in direct financing and sales-type leases
$
765,450

Deferred origination cost
3,071

Total net investment included within business loans
$
768,521



21

The maturities of lease receivables are included in the table below.
(in thousands)
Direct Financing and Sale-Type Leases
Operating Leases
Total
2019 (excluding the three months ended March 31, 2019)
$
164,086

$
5,555

$
169,641

2020
182,611

7,051

189,662

2021
139,036

6,994

146,030

2022
101,070

13,329

114,399

2023
70,967

5,127

76,094

After 2023
121,057

13,467

134,524

Total lease receipts
778,827

$
51,523

$
830,350

Less: Net present value adjustment
62,724

 

Present value of lease receipts
$
716,103

 


7. Pension
The amount of net pension cost is shown in the table below:
 
 
For the Three Months Ended March 31
(In thousands)
 
2019
2018
Service cost - benefits earned during the period
 
$
159

$
153

Interest cost on projected benefit obligation
 
1,065

950

Expected return on plan assets
 
(1,196
)
(1,437
)
Amortization of prior service cost
 
(68
)
(68
)
Amortization of unrecognized net loss
 
586

592

Net periodic pension cost
 
$
546

$
190


All benefits accrued under the Company’s defined benefit pension plan have been frozen since January 1, 2011. During the first three months of 2019 , 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.


22

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)
 
2019
2018
Basic income per common share:
 
 
 
Net income attributable to Commerce Bancshares, Inc.
 
$
97,138

$
100,984

Less preferred stock dividends
 
2,250

2,250

Net income available to common shareholders
 
94,888

98,734

Less income allocated to nonvested restricted stock
 
944

1,121

  Net income allocated to common stock
 
$
93,944

$
97,613

Weighted average common shares outstanding
 
110,011

110,916

   Basic income per common share
 
$
.85

$
.88

Diluted income per common share:
 
 
 
Net income available to common shareholders
 
$
94,888

$
98,734

Less income allocated to nonvested restricted stock
 
943

1,118

  Net income allocated to common stock
 
$
93,945

$
97,616

Weighted average common shares outstanding
 
110,011

110,916

  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
 
290

348

  Weighted average diluted common shares outstanding
 
110,301

111,264

    Diluted income per common share
 
$
.85

$
.88


Unexercised stock appreciation rights of 282 thousand and 276 thousand were excluded from the computation of diluted income per common share for the three month periods ended March 31, 2019 and 2018 , respectively, because their inclusion would have been anti-dilutive.

In the Annual Meeting of the Shareholders, held on April 17, 2019, 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 120,000,000 to 140,000,000 .
* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2018.
  

23

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 debt 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. Another 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. The remaining component is gains and losses in fair value on certain interest rate floors that have been designated as cash flow hedging instruments.
 
Unrealized Gains (Losses) on Securities (1)
Pension Loss
Unrealized Gains (Losses) on Cash Flow Hedge Derivatives (2)
Total Accumulated Other Comprehensive Income (Loss)
(In thousands)
OTTI
Other
Balance January 1, 2019
$
3,861

$
(52,278
)
$
(23,107
)
$
6,855

$
(64,669
)
Other comprehensive income before reclassifications to current earnings
55

98,614

—

3,027

101,696

Amounts reclassified to current earnings from accumulated other comprehensive income
—

(694
)
518

678

502

 Current period other comprehensive income, before tax
55

97,920

518

3,705

102,198

Income tax expense
(14
)
(24,479
)
(129
)
(926
)
(25,548
)
 Current period other comprehensive income, net of tax
41

73,441

389

2,779

76,650

Balance March 31, 2019
$
3,902

$
21,163

$
(22,718
)
$
9,634

$
11,981

Balance January 1, 2018
$
3,411

$
30,326

$
(19,629
)
$
—

$
14,108

ASU 2018-02 Reclassification of tax rate change
715

6,359

(4,142
)
—

2,932

ASU 2016-01 Reclassification of unrealized gain on equity securities
—

(33,320
)
—

—

(33,320
)
Other comprehensive loss before reclassifications to current earnings
(8
)
(98,081
)
—

—

(98,089
)
Amounts reclassified to current earnings from accumulated other comprehensive income
68

(212
)
524

—

380

Current period other comprehensive income (loss), before tax
60

(98,293
)
524

—

(97,709
)
Income tax (expense) benefit
(15
)
24,572

(131
)
—

24,426

Current period other comprehensive income (loss), net of tax
45

(73,721
)
393

—

(73,283
)
Transfer of unrealized gain on securities for which impairment was not previously recognized
12

(12
)
—

—

—

Balance March 31, 2018
$
4,183

$
(70,368
)
$
(23,378
)
$
—

$
(89,563
)
(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings 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 to current earnings are included in "interest and fees on loans" in the consolidated statements of income.

The requirement to revalue deferred tax assets and liabilities in the period of enactment stranded the effects of the tax rate change, mandated by the Tax Cuts and Jobs Act, in accumulated other comprehensive income. In response, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which the Company adopted on January 1, 2018. This ASU allowed the reclassification of the stranded tax effects from accumulated other comprehensive income (as shown in the table above) to retained earnings.
New accounting guidance, which was effective January 1, 2018, required the reclassification of unrealized gains on equity securities from accumulated other comprehensive income to retained earnings (also shown above).

24

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 consists of various consumer loan and deposit products offered through its retail branch network of approximately 170 locations.  This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses.  Residential mortgage origination, sales and servicing functions are included in this Consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment.  The Commercial segment provides corporate lending, leasing, and international services, along with business and governmental deposit products and commercial cash management services.  This segment includes both merchant and commercial bank card products. It also includes the Capital Markets Group which sells fixed income securities and provides safekeeping and accounting services to its business and correspondent bank customers.  The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services.  This segment also provides various loan and deposit related services to its private banking customers.

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, 2019
 
 
 
 
 
 
Net interest income
$
76,897

$
85,848

$
11,676

$
174,421

$
29,067

$
203,488

Provision for loan losses
(11,049
)
(618
)
33

(11,634
)
(829
)
(12,463
)
Non-interest income
29,171

47,915

44,332

121,418

(178
)
121,240

Investment securities losses, net
—

—

—

—

(925
)
(925
)
Non-interest expense
(73,508
)
(76,838
)
(30,892
)
(181,238
)
(10,187
)
(191,425
)
Income before income taxes
$
21,511

$
56,307

$
25,149

$
102,967

$
16,948

$
119,915

Three Months Ended March 31, 2018
 
 
 
 
 
 
Net interest income
$
71,021

$
82,584

$
11,445

$
165,050

$
27,842

$
192,892

Provision for loan losses
(10,373
)
180

(64
)
(10,257
)
(139
)
(10,396
)
Non-interest income
30,216

49,209

42,103

121,528

(1,838
)
119,690

Investment securities gains, net
—

—

—

—

5,410

5,410

Non-interest expense
(69,919
)
(72,778
)
(31,825
)
(174,522
)
(7,755
)
(182,277
)
Income before income taxes
$
20,945

$
59,195

$
21,659

$
101,799

$
23,520

$
125,319


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 procedures and methods, which have been developed to reflect the underlying economics of the businesses. The methodologies are 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.


25

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. At March 31, 2019 , with the exception of the interest rate floors (discussed below), the Company’s derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.

(In thousands)
March 31, 2019
December 31, 2018
Interest rate swaps
$
2,007,799

$
2,006,280

Interest rate floors
1,000,000

1,000,000

Interest rate caps
61,696

62,163

Credit risk participation agreements
142,266

143,460

Foreign exchange contracts
6,710

6,206

 Mortgage loan commitments
22,496

14,544

Mortgage loan forward sale contracts
2,657

5,768

Forward TBA contracts
33,503

16,500

Total notional amount
$
3,277,127

$
3,254,921


The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. The customers are engaged in a variety of businesses, including real estate, manufacturing, retail product distribution, education, and retirement communities. These customer swaps are offset by matching contracts purchased by the Company from other financial dealer institutions. Contracts with dealers that require central clearing 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.

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 instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.

As of March 31, 2019 , the Company has entered into interest rate floors with a combined notional value of $1.0 billion , to hedge the risk of declining interest rates on certain floating rate commercial loans. The premiums paid for these floors totaled $20.7 million with purchased strike rates that ranged from 2.50% to 2.25% . As of March 31, 2019 , the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is approximately 6.4 years, and the floors are forward starting, beginning in 2020. The interest rate floors qualified and were designated as cash flow hedges and were assessed for effectiveness using regression analysis. The change in the fair value of the interest rate floors are recorded in AOCI, net of the amortization of the premium paid, which is recorded against interest and fees on loans in the consolidated statements of income. As of March 31, 2019 , net deferred gains on the interest rate floors totaled $12.8 million (pre-tax) and was recorded in AOCI in the consolidated balance sheet. As of March 31, 2019 , it is expected that $2.8 million (pre-tax) of interest rate floor premium amortization will be reclassified from AOCI into earnings over the next twelve months.

In April 2019, the Company entered into an additional interest rate floor with a notional value of $500.0 million and a premium paid of $10.7 million with a purchased strike rate of 2.0% . The floor is forward starting, beginning in 2020 and matures in 2026.

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 5 on Guarantees. In addition, 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.

Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale contracts. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date.

26


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 16 on Fair Value Measurements in the 2018 Annual Report on Form 10-K.

The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets, and these are reported in other assets and other liabilities. Effective January 2017, certain collateral posted to and from the Company's clearing counterparty has been offset against the fair values of cleared swaps, such that at March 31, 2019 in the table below, the positive fair values of cleared swaps were reduced by $3.8 million and the negative fair values of cleared swaps were reduced by $12.4 million . At December 31, 2018 , the positive fair values of cleared swaps were reduced by $8.1 million and the negative fair values of cleared swaps were reduced by $6.5 million .
 
Asset Derivatives
 
Liability Derivatives
 
Mar. 31, 2019
Dec. 31, 2018
 
Mar. 31, 2019
Dec. 31, 2018
(In thousands )    
  Fair Value
 
  Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
   Interest rate floors
$
32,058

$
29,031

 
$
—

$
—

Total derivatives designated as hedging instruments
$
32,058

$
29,031

 
$
—

$
—

Derivative instruments not designated as hedging instruments:
 
 
 
 
   Interest rate swaps
$
18,641

$
11,537

 
$
(9,970
)
$
(13,110
)
   Interest rate caps
8

24

 
(8
)
(24
)
   Credit risk participation agreements
92

47

 
(110
)
(93
)
   Foreign exchange contracts
44

20

 
(16
)
(8
)
   Mortgage loan commitments
823

536

 
—

—

   Mortgage loan forward sale contracts
22

15

 
—

(8
)
   Forward TBA contracts
3

—

 
(196
)
(178
)
Total derivatives not designated as hedging instruments
$
19,633

$
12,179

 
$
(10,300
)
$
(13,421
)
 Total
$
51,691

$
41,210

 
$
(10,300
)
$
(13,421
)

27


The pre-tax effects of derivative instruments on the consolidated statements of income are shown in the tables below.




Amount of Gain or (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into Income
 
For the Three Months Ended
 
For the Three Months Ended
 
March 31, 2019
 
March 31, 2019
(In thousands)
Total
Included Component
Excluded Component
 
Total
Included Component
Excluded Component
Derivatives in cash flow hedging relationships:
Interest rate floors*
$
3,027

$
10,873

$
(7,846
)
Interest and fees on loans
$
(678
)
$
—

$
(678
)
Total
$
3,027

$
10,873

$
(7,846
)
 
$
(678
)
$
—

$
(678
)
* No hedging relationship existed during the three months ended March 31, 2018.




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)
 
2019
2018
Derivative instruments:
 
 
 
  Interest rate swaps
Other non-interest income
$
303

$
505

  Credit risk participation agreements
Other non-interest income
28

164

  Foreign exchange contracts
Other non-interest income
16

9

  Mortgage loan commitments
Loan fees and sales
287

1

  Mortgage loan forward sale contracts
Loan fees and sales
16

—

  Forward TBA contracts
Loan fees and sales
(266
)
542

Total
 
$
384

$
1,221


The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides 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 is generally cash or marketable securities. The collateral amounts in this table 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 derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.


28

Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consists of marketable securities. By contract, these 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 or securities to its clearing agent. 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.
 
 
 
 
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 Available for Offset
Collateral Received/Pledged
Net Amount
March 31, 2019
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Derivatives subject to master netting agreements
50,792

—

50,792

(4,695
)
(28,385
)
17,712

Derivatives not subject to master netting agreements
899

—

899

 
 
 
Total derivatives
51,691

—

51,691

 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives subject to master netting agreements
10,203

—

10,203

(4,695
)
(199
)
5,309

Derivatives not subject to master netting agreements
97

—

97

 
 
 
Total derivatives
10,300

—

10,300

 
 
 
December 31, 2018
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Derivatives subject to master netting agreements
$
40,613

$
—

$
40,613

$
(2,992
)
$
(26,174
)
$
11,447

Derivatives not subject to master netting agreements
597

—

597

 
 
 
Total derivatives
41,210

—

41,210

 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives subject to master netting agreements
$
13,333

$
—

$
13,333

$
(2,992
)
$
(261
)
$
10,080

Derivatives not subject to master netting agreements
88

—

88

 
 
 
Total derivatives
13,421

—

13,421

 
 
 

12. Resale and Repurchase Agreements
The following table shows the extent to which assets and liabilities relating to securities purchased under agreements to resell (resale agreements) and securities sold under agreements to repurchase (repurchase agreements) have been offset in the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus, amounts of excess collateral are not shown. The agreements in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.

Resale 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 resale 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.


29

The Company is party to several agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $300.0 million at March 31, 2019 and $450.0 million at December 31, 2018 . At March 31, 2019 , the Company had posted collateral of $312.2 million in marketable securities, consisting of agency mortgage-backed bonds and treasuries, and had accepted $302.3 million in investment grade asset-backed, commercial mortgage-backed, and corporate bonds.
 
 
 
 
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 Available for Offset
Securities Collateral Received/Pledged
Net Amount
March 31, 2019
 
 
 
 
 
 
Total resale agreements, subject to master netting arrangements
$
1,000,000

$
(300,000
)
$
700,000

$
—

$
(700,000
)
$
—

Total repurchase agreements, subject to master netting arrangements
1,760,376

(300,000
)
1,460,376

—

(1,460,376
)
—

December 31, 2018
 
 
 
 
 
 
Total resale agreements, subject to master netting arrangements
$
1,150,000

$
(450,000
)
$
700,000

$
—

$
(700,000
)
$
—

Total repurchase agreements, subject to master netting arrangements
2,393,219

(450,000
)
1,943,219

—

(1,943,219
)
—


The table below shows the remaining contractual maturities of repurchase agreements outstanding at March 31, 2019 and December 31, 2018 , in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings.
 
Remaining Contractual Maturity of the Agreements
 
(In thousands)
Overnight and continuous
Up to 90 days
Greater than 90 days
Total
March 31, 2019
 
 
 
 
Repurchase agreements, secured by:
 
 
 
 
  U.S. government and federal agency obligations
$
280,854

$
101,727

$
—

$
382,581

  Government-sponsored enterprise obligations
47,900

—

—

47,900

  Agency mortgage-backed securities
702,596

75,702

211,750

990,048

  Non-agency mortgage-backed securities
135,495

—

—

135,495

  Asset-backed securities
67,987

40,000

—

107,987

  Other debt securities
96,365

—

—

96,365

   Total repurchase agreements, gross amount recognized
$
1,331,197

$
217,429

$
211,750

$
1,760,376

December 31, 2018
 
 
 
 
Repurchase agreements, secured by:
 
 
 
 
  U.S. government and federal agency obligations
$
387,541

$
150,000

$
100,000

$
637,541

  Government-sponsored enterprise obligations
18,466

—

—

18,466

  Agency mortgage-backed securities
882,744

31,774

213,752

1,128,270

  Non-agency mortgage-backed securities
187,740

—

—

187,740

  Asset-backed securities
322,680

—

—

322,680

  Other debt securities
98,522

—

—

98,522

   Total repurchase agreements, gross amount recognized
$
1,897,693

$
181,774

$
313,752

$
2,393,219



30

13. Stock-Based Compensation
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Most of the awards are issued during the first quarter of each year. The stock-based compensation expense that has been charged against income was $3.5 million and $3.3 million in the three months ended March 31, 2019 and 2018 , respectively.

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, 2019 , and changes during the three month period then ended, is presented below.
 
 
 

Shares
 Weighted Average Grant Date Fair Value
Nonvested at January 1, 2019
1,180,940

$43.24
Granted
178,446

61.87
Vested
(291,519
)
32.68
Forfeited
(3,246
)
49.41
Nonvested at March 31, 2019
1,064,621

$49.23

SARs 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. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs 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

$11.92

Assumptions:
 
Dividend yield
1.7
%
Volatility
19.8
%
Risk-free interest rate
2.6
%
Expected term
6.0 years


A summary of SAR activity during the first three months of 2019 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, 2019
1,066,438

$40.22
 
 
Granted
186,825

61.76
 
 
Forfeited
(1,479
)
51.16

 
 
Expired
(682
)
41.81

 
 
Exercised
(95,934
)
34.27
 
 
Outstanding at March 31, 2019
1,155,168

$44.19
7.1 years
$
16,717


14. Revenue from Contracts with Customers
The core principle of ASU 2014-09, "Revenue from Contracts with Customers," is that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the three months ended March 31, 2019 , approximately 63% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.


31

The following table disaggregates non-interest income subject to ASU 2014-09 by major product line.
 
 
Three Months Ended March 31
(In thousands)
 
2019
2018
Bank card transaction fees
 
$
39,644

$
41,453

Trust fees
 
37,256

36,062

Deposit account charges and other fees
 
23,018

22,982

Consumer brokerage services
 
3,747

3,768

Other non-interest income
 
8,372

7,311

Total non-interest income from contracts with customers
 
112,037

111,576

Other non-interest income (a)
 
9,203

8,114

Total non-interest income
 
$
121,240

$
119,690

(a) This revenue is not within the scope of ASU 2014-09, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.
For bank card transaction fees, the majority of debit and credit card fees are earned in the Consumer segment, while corporate card and merchant fees are earned in the Commercial segment. The Consumer and Commercial segments each contribute approximately half of the Company's deposit account charge revenue. All trust fees and nearly all of the consumer brokerage services income are earned in the Wealth segment.    

The following table presents the opening and closing receivable balances for the three month periods ended March 31, 2019 and 2018 for the Company’s significant revenue categories subject to ASU 2014-09.
(In thousands)
March 31, 2019
December 31, 2018
 
March 31, 2018
December 31, 2017
Bank card transaction fees
$
11,016

$
13,035

 
$
10,978

$
13,315

Trust fees
2,720

2,721

 
3,116

2,802

Deposit account charges and other fees
5,265

6,107

 
4,682

5,597

Consumer brokerage services
526

559

 
690

380


For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period.

15. 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 debt securities, equity securities, trading debt securities, certain investments 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 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.

32

The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's 2018 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.

Instruments Measured at Fair Value on a Recurring Basis

The table below presents the March 31, 2019 and December 31, 2018 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 2019 or the year ended December 31, 2018 .
 
 
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, 2019
 
 
 
 
Assets:
 
 
 
 
  Residential mortgage loans held for sale
$
8,908

$
—

$
8,908

$
—

  Available for sale debt securities:
 
 
 
 
     U.S. government and federal agency obligations
877,921

877,921

—

—

     Government-sponsored enterprise obligations
197,979

—

197,979

—

     State and municipal obligations
1,274,200

—

1,259,671

14,529

     Agency mortgage-backed securities
3,412,399

—

3,412,399

—

     Non-agency mortgage-backed securities
1,060,008

—

1,060,008

—

     Asset-backed securities
1,470,516

—

1,470,516

—

     Other debt securities
334,867

—

334,867

—

  Trading debt securities
30,427

—

30,427

—

  Equity securities
2,808

2,808

—

—

  Private equity investments
85,877

—

—

85,877

  Derivatives *
51,691

—

50,776

915

  Assets held in trust for deferred compensation plan
14,897

14,897

—

—

  Total assets
8,822,498

895,626

7,825,551

101,321

Liabilities:
 
 
 
 
   Derivatives *
10,300

—

10,190

110

Liabilities held in trust for deferred compensation plan
14,897

14,897

—

—

  Total liabilities
$
25,197

$
14,897

$
10,190

$
110

December 31, 2018
 
 
 
 
Assets:
 
 
 
 
  Residential mortgage loans held for sale
$
13,529

$
—

$
13,529

$
—

  Available for sale debt securities:
 
 
 
 
     U.S. government and federal agency obligations
907,652

907,652

—

—

     Government-sponsored enterprise obligations
195,778

—

195,778

—

     State and municipal obligations
1,328,039

—

1,313,881

14,158

     Agency mortgage-backed securities
3,214,985

—

3,214,985

—

     Non-agency mortgage-backed securities
1,047,716

—

1,047,716

—

     Asset-backed securities
1,511,614

—

1,511,614

—

     Other debt securities
332,257

—

332,257

—

  Trading debt securities
27,059

—

27,059

—

  Equity securities
2,585

2,585

—

—

  Private equity investments
85,659

—

—

85,659

  Derivatives *
41,210

—

40,627

583

  Assets held in trust for deferred compensation plan
12,968

12,968

—

—

  Total assets
8,721,051

923,205

7,697,446

100,400

Liabilities:
 
 
 
 
   Derivatives *
13,421

—

13,328

93

Liabilities held in trust for deferred compensation plan
12,968

12,968

—

—

  Total liabilities
$
26,389

$
12,968

$
13,328

$
93

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


33

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, 2019
 
 
 
 
Balance January 1, 2019
$
14,158

$
85,659

$
490

$
100,307

Total gains or losses (realized/unrealized):
 
 
 
 
   Included in earnings
—

(1,842
)
315

(1,527
)
   Included in other comprehensive income *
364

—

—

364

Discount accretion
7

—

—

7

Purchases of private equity investments
—

2,060

—

2,060

Balance March 31, 2019
$
14,529

$
85,877

$
805

$
101,211

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, 2019
$
—

$
(1,842
)
$
851

$
(991
)
For the three months ended March 31, 2018
 
 
 
 
Balance January 1, 2018
$
17,016

$
55,752

$
503

$
73,271

Total gains or losses (realized/unrealized):
 
 
 
 
   Included in earnings
—

4,305

165

4,470

   Included in other comprehensive income *
133

—

—

133

Discount accretion
9

—

—

9

Purchases of private equity investments
—

4,879

—

4,879

Sale/pay down of private equity investments
—

(20
)
—

(20
)
Capitalized interest/dividends
—

35

—

35

Sale of risk participation agreement
—

—

(148
)
(148
)
Balance March 31, 2018
$
17,158

$
64,951

$
520

$
82,629

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, 2018
$
—

$
4,305

$
745

$
5,050

* 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)
Loan Fees and Sales
Other Non-Interest Income
Investment Securities Gains (Losses), Net
Total
For the three months ended March 31, 2019
 
 
 
 
Total gains or losses included in earnings
$
287

$
28

$
(1,842
)
$
(1,527
)
Change in unrealized gains or losses relating to assets still held at March 31, 2019
$
823

$
28

$
(1,842
)
$
(991
)
For the three months ended March 31, 2018
 
 
 
 
Total gains or losses included in earnings
$
2

$
163

$
4,305

$
4,470

Change in unrealized gains or losses relating to assets still held at March 31, 2018
$
582

$
163

$
4,305

$
5,050



34

Level 3 Inputs

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, investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $14.5 million at March 31, 2019 , while private equity investments, included in other securities, totaled $85.9 million .
Information about these inputs is presented in the table and discussions below.
Quantitative Information about Level 3 Fair Value Measurements
 
 
 
Weighted
 
Valuation Technique
Unobservable Input
Range
 
Average
Auction rate securities
Discounted cash flow
Estimated market recovery period
4
-
5 years
 
 
 
 
Estimated market rate
3.4%
-
4.3%
 
 
Private equity investments
Market comparable companies
EBITDA multiple
4.0
-
6.0
 
 
Mortgage loan commitments
Discounted cash flow
Probability of funding
50.8%
-
99.1%
 
79.3%
 
 
Embedded servicing value
.6%
-
2.4%
 
1.3%

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 2019 and 2018 , and still held as of March 31, 2019 and 2018 , 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, 2019 and 2018 .
 
 
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, 2019
 
 
 
 
 
  Collateral dependent impaired loans
$
129

$
—

$
—

$
129

$
170

  Mortgage servicing rights
6,341

—

—

6,341

(260
)
  Long-lived assets
134

—

—

134

(14
)
 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
  Collateral dependent impaired loans
$
39

$
—

$
—

$
39

$
(12
)
  Mortgage servicing rights
5,105

—

—

5,105

9

  Long-lived assets
914

—

—

914

(552
)

16. 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 Company prospectively adopted ASU 2016-01 on January 1, 2018. In accordance with its requirements, the fair value of loans as of March 31, 2019 and December 31, 2018 were measured using an exit price notion.


35

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 at March 31, 2019 and December 31, 2018 :

 
Carrying Amount
 
Estimated Fair Value at March 31, 2019

(In thousands)
 
Level 1
Level 2
Level 3
Total
Financial Assets
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
Business
$
5,175,541

 
$
—

$
—

$
5,110,404

$
5,110,404

Real estate - construction and land
925,269

 
—

—

922,877

922,877

Real estate - business
2,859,614

 
—

—

2,847,793

2,847,793

Real estate - personal
2,125,087

 
—

—

2,076,475

2,076,475

Consumer
1,893,212

 
—

—

1,851,010

1,851,010

Revolving home equity
364,010

 
—

—

359,856

359,856

Consumer credit card
772,396

 
—

—

720,563

720,563

Overdrafts
5,593

 
—

—

3,994

3,994

Total loans
14,120,722

 
—

—

13,892,972

13,892,972

Loans held for sale
20,085

 
—

20,085

—

20,085

Investment securities
8,792,515

 
880,729

7,765,867

145,919

8,792,515

Federal funds sold
250

 
250

—

—

250

Securities purchased under agreements to resell
700,000

 
—

—

700,588

700,588

Interest earning deposits with banks
166,077

 
166,077

—

—

166,077

Cash and due from banks
428,018

 
428,018

—

—

428,018

Derivative instruments
51,691

 
—

50,776

915

51,691

Assets held in trust for deferred compensation plan
14,897

 
14,897

—

—

14,897

       Total
$
24,294,255

 
$
1,489,971

$
7,836,728

$
14,740,394

$
24,067,093

Financial Liabilities
 
 
 
 
 
 
Non-interest bearing deposits
$
6,298,724

 
$
6,298,724

$
—

$
—

$
6,298,724

Savings, interest checking and money market deposits
11,799,346

 
11,799,346

—

—

11,799,346

Certificates of deposit
1,876,283

 
—

—

1,887,103

1,887,103

Federal funds purchased
262,375

 
262,375

—

—

262,375

Securities sold under agreements to repurchase
1,460,376

 
—

—

1,461,343

1,461,343

Other borrowings
1,932

 
—

1,035

897

1,932

Derivative instruments
10,300

 
—

10,190

110

10,300

Liabilities held in trust for deferred compensation plan
14,897

 
14,897

—

—

14,897

       Total
$
21,724,233

 
$
18,375,342

$
11,225

$
3,349,453

$
21,736,020



36

 
Carrying Amount
 
Estimated Fair Value at December 31, 2018

(In thousands)
 
Level 1
Level 2
Level 3
Total
Financial Assets
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
Business
$
5,106,427

 
$
—

$
—

$
5,017,694

$
5,017,694

Real estate - construction and land
869,659

 
—

—

868,274

868,274

Real estate - business
2,875,788

 
—

—

2,846,095

2,846,095

Real estate - personal
2,127,083

 
—

—

2,084,370

2,084,370

Consumer
1,955,572

 
—

—

1,916,627

1,916,627

Revolving home equity
376,399

 
—

—

365,069

365,069

Consumer credit card
814,134

 
—

—

756,651

756,651

Overdrafts
15,236

 
—

—

11,223

11,223

Total loans
14,140,298

 
—

—

13,866,003

13,866,003

Loans held for sale
20,694

 
—

20,694

—

20,694

Investment securities
8,698,666

 
910,237

7,643,290

145,139

8,698,666

Federal funds sold
3,320

 
3,320

—

—

3,320

Securities purchased under agreements to resell
700,000

 
—

—

693,228

693,228

Interest earning deposits with banks
689,876

 
689,876

—

—

689,876

Cash and due from banks
507,892

 
507,892

—

—

507,892

Derivative instruments
41,210

 
—

40,627

583

41,210

Assets held in trust for deferred compensation plan
12,968

 
12,968

—

—

12,968

       Total
$
24,814,924

 
$
2,124,293

$
7,704,611

$
14,704,953

$
24,533,857

Financial Liabilities
 
 
 
 
 
 
Non-interest bearing deposits
$
6,980,298

 
$
6,980,298

$
—

$
—

$
6,980,298

Savings, interest checking and money market deposits
11,685,239

 
11,685,239

—

—

11,685,239

Certificates of deposit
1,658,122

 
—

—

1,663,748

1,663,748

Federal funds purchased
13,170

 
13,170

—

—

13,170

Securities sold under agreements to repurchase
1,943,219

 
—

—

1,944,458

1,944,458

Other borrowings
8,702

 
—

7,751

951

8,702

Derivative instruments
13,421

 
—

13,328

93

13,421

Liabilities held in trust for deferred compensation plan
12,968

 
12,968

—

—

12,968

       Total
$
22,315,139

 
$
18,691,675

$
21,079

$
3,609,250

$
22,322,004


17. Legal and Regulatory Proceedings
The Company has various legal proceedings pending at March 31, 2019 , 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 and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.



37

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 2018 Annual Report on Form 10-K. Results of operations for the three month period ended March 31, 2019 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, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2018 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 2018 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2018 .


38
Table of Contents

Selected Financial Data

 
 
Three Months Ended March 31
 
 
2019
2018
Per Share Data
 
 
 
   Net income per common share — basic
 
$
.85

$
.88
*
   Net income per common share — diluted
 
.85

.88
*
   Cash dividends on common stock
 
.260

.224
*
   Book value per common share
 
26.18

22.88
*
   Market price
 
58.06

57.06
*
Selected Ratios
 
 
 
(Based on average balance sheets)
 
 
 
   Loans to deposits (1)
 
70.96
%
69.09
%
   Non-interest bearing deposits to total deposits
 
31.88

33.85

   Equity to loans (1)
 
21.06

19.49

   Equity to deposits
 
14.95

13.47

   Equity to total assets
 
11.93

11.02

   Return on total assets
 
1.58

1.66

   Return on common equity
 
13.64

15.58

(Based on end-of-period data)
 
 
 
   Non-interest income to revenue (2)
 
37.34

38.29

   Efficiency ratio (3)
 
58.76

58.21

   Tier I common risk-based capital ratio
 
14.39

13.26

   Tier I risk-based capital ratio
 
15.15

14.02

   Total risk-based capital ratio
 
16.00

14.87

   Tangible common equity to tangible assets ratio (4)
 
11.06

9.88

   Tier I leverage ratio  
 
11.67

10.83


* Restated for the 5% stock dividend distributed in December 2018 .
(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 tangible 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 and tangible assets are non-GAAP measures and should not be viewed as substitutes 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)
2019
2018
Total equity
$
3,043,213

$
2,705,728

Less non-controlling interest
5,458

2,606

Less preferred stock
144,784

144,784

Less goodwill
138,921

138,921

Less core deposit premium
2,170

2,788

Total tangible common equity (a)
$
2,751,880

$
2,416,629

Total assets
$
25,033,471

$
24,611,242

Less goodwill
138,921

138,921

Less core deposit premium
2,170

2,788

Total tangible assets (b)
$
24,892,380

$
24,469,533

Tangible common equity to tangible assets ratio (a)/(b)
11.06
%
9.88
%

39
Table of Contents

Results of Operations

Summary
  
Three Months Ended March 31
 
Increase (Decrease)
(Dollars in thousands)
2019
2018
 
Amount
% change
Net interest income
$
203,488

$
192,892

 
$
10,596

5.5
 %
Provision for loan losses
(12,463
)
(10,396
)
 
2,067

19.9

Non-interest income
121,240

119,690

 
1,550

1.3

Investment securities gains (losses), net
(925
)
5,410

 
(6,335
)
N.M.

Non-interest expense
(191,425
)
(182,277
)
 
9,148

5.0

Income taxes
(22,860
)
(23,258
)
 
(398
)
(1.7
)
Non-controlling interest (expense) income
83

(1,077
)
 
(1,160
)
N.M.

Net income attributable to Commerce Bancshares, Inc.
97,138

100,984

 
(3,846
)
(3.8
)
Preferred stock dividends
(2,250
)
(2,250
)
 
—

—

Net income available to common shareholders
$
94,888

$
98,734

 
$
(3,846
)
(3.9
)%
N.M. - Not meaningful.

For the quarter ended March 31, 2019 , net income attributable to Commerce Bancshares, Inc. (net income) amounted to $97.1 million , a decrease of $3.8 million , or 3.8% , compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.58% , the annualized return on average common equity was 13.64% , and the efficiency ratio was 58.76% . Diluted earnings per common share was $.85 , a decrease of 3.4% compared to $.88 per share in the first quarter of 2018 and a decrease of 11.5% compared to $.96 per share in the previous quarter.

Compared to the first quarter of last year, net interest income increased $10.6 million , or 5.5% , mainly due to growth of $19.4 million in interest income on loans, coupled with an increase of $2.2 million in interest income on investment securities. These increases in net interest income were partly offset by an increase of $11.3 million in deposits and borrowings interest expense. The provision for loan losses totaled $12.5 million for the current quarter, representing an increase of $2.1 million over the first quarter of 2018 . Non-interest income increased $ 1.6 million , or 1.3 %, compared to the first quarter of 2018 , mainly due to growth in trust, cash sweep and loan fee income, partly offset by lower net bank card fees. Non-interest expense increased $9.1 million , or 5.0 %, over the first quarter of 2018 primarily due to increases in salaries and benefits, data processing and marketing expense, partly offset by lower deposit insurance expense.

Net investment securities losses totaled $925 thousand in the current quarter compared to gains of $5.4 million in the same quarter last year. Current quarter losses were primarily comprised of $1.8 million in unrealized fair value losses on the Company's private equity investment portfolio, partly offset by net gains of $694 thousand from sales of investment securities.


40

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, 2019 vs. 2018
 
 
Change due to
 
 
(In thousands)
 
Average
Volume
Average
Rate

Total
Interest income, fully taxable equivalent basis:
 
 
 
 
Loans:
 
 
 
 
  Business
 
$
1,340

$
7,409

$
8,749

  Real estate - construction and land
 
(519
)
2,318

1,799

  Real estate - business
 
1,305

3,890

5,195

  Real estate - personal
 
537

1,003

1,540

  Consumer
 
(1,498
)
2,250

752

  Revolving home equity
 
(228
)
837

609

  Consumer credit card
 
698

224

922

  Overdrafts
 
—

—

—

     Total interest on loans
 
1,635

17,931

19,566

Loans held for sale
 
10

20

30

Investment securities:
 
 
 
 
  U.S. government and federal agency securities
 
(38
)
(3,007
)
(3,045
)
  Government-sponsored enterprise obligations
 
(935
)
256

(679
)
  State and municipal obligations
 
(1,732
)
432

(1,300
)
  Mortgage-backed securities
 
2,808

1,422

4,230

  Asset-backed securities
 
292

2,222

2,514

  Other securities
 
51

130

181

     Total interest on investment securities
 
446

1,455

1,901

Federal funds sold and short-term securities purchased under
 
 
 
 
   agreements to resell
 
(161
)
14

(147
)
Long-term securities purchased under agreements to resell
 
—

(356
)
(356
)
Interest earning deposits with banks
 
177

569

746

Total interest income
 
2,107

19,633

21,740

Interest expense:
 
 
 
 
Deposits:
 
 
 
 
  Savings
 
17

(15
)
2

  Interest checking and money market
 
54

3,957

4,011

  Certificates of deposit of less than $100,000
 
(27
)
624

597

  Certificates of deposit of $100,000 and over
 
433

2,730

3,163

     Total interest on deposits
 
477

7,296

7,773

Federal funds purchased and securities sold under
 
 
 
 
   agreements to repurchase
 
593

2,915

3,508

Other borrowings
 
(5
)
(2
)
(7
)
Total interest expense
 
1,065

10,209

11,274

Net interest income, tax equivalent basis
 
$
1,042

$
9,424

$
10,466


Net interest income in the first quarter of 2019 was $ 203.5 million , an increase of $10.6 million over the first quarter of 2018 . On a tax equivalent (T/E) basis, net interest income totaled $207.1 million in the first quarter of 2019 , up $10.5 million over the same period last year and down $9.2 million from the previous quarter. The increase in net interest income compared to the first quarter of 2018 was mainly due to higher interest income on loans (T/E) of $19.6 million. The increase in interest on loans was mainly a result of higher yields on all loan products, especially commercial loans, many of which have variable rates. Total interest

41

income on investment securities (T/E) increased $1.9 million over the first quarter of 2018 due to increases in the average rate earned and average investment securities balances, partly offset by a decline of $4.0 million in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). The Company's net yield on earning assets (T/E) was 3.52% in the current quarter compared to 3.37% in the first quarter of 2018 .
 
Total interest income (T/E) increased $21.7 million over the first quarter of 2018. Interest income on loans (T/E) was $168.0 million during the first quarter of 2019 , and increased $19.6 million, or 13.2%, over the same quarter last year. The increase was primarily due to an increase of 52 basis points in average rates earned, supplemented by growth of $151.4 million, or 1.1%, in average loan balances. Most of the increase in interest income occurred in the business, business real estate, construction, and personal real estate l oan categories. The largest increase to interest income occurred in business loan interest, which grew $8.7 million due to a 59 basis point increase in the average rate earned, coupled with higher average balances of $150.3 million, or 3.0%. Construction loan interest grew $1.8 million due to a 104 basis point increase in the average rate earned, partly offset by a decrease in average balances of $44.9 million, or 4.7%. Business real estate loan interest increased $5.2 million due to an increase of 55 basis points in the average rate earned and an increase in average balances of $130.4 million, or 4.8%. Personal real estate loan interest increased $1.5 million due to an increase of $57.3 million, or 2.8%, in average balances, and an increase of 20 basis points in the average rate earned. Interest on consumer loans increased $752 thousand over the same period last year as the average rate increased 48 basis points, but was partly offset by a decline of $143.0 million in average balances (mainly auto loans). In addition, interest on consumer credit card loans grew $922 thousand over the same quarter last year, as average balances increased $23.5 million and the average rate earned increased 12 basis points.

Interest income on investment securities (T/E) was $57.5 million during the first quarter of 2019 , which was an increase of $1.9 million over the same quarter last year. The largest increase in interest income occurred in mortgage-backed securities, which grew $4.2 million and resulted from an increase of $434.5 million in average balances and a 14 basis point increase in the average rate earned. Interest income on asset-backed securities increased $2.5 million due to growth in the average rate earned of 59 basis points and higher average balances of $56.1 million. Adjustments to premium amortization expense, due to slowing prepayment speeds on various mortgage-backed and asset-backed securities, increased interest income $72 thousand in the current quarter, compared to $1.5 million in the same quarter last year. These increases were partly offset by lower interest income on U.S. government & federal agency obligations, which declined $3.0 million mainly due to lower TIPS interest income. Interest income related to TIPS, which is tied to the Consumer Price Index, decreased $4.0 million in the first quarter of 2019 from interest income of $2.0 million in the prior quarter. Interest income on state & municipal obligations declined $1.3 million due to lower average balances of $229.9 million, partly offset by an increase in the average rate earned of 13 basis points. Interest income on government-sponsored enterprise obligations declined $679 thousand mainly due to a decline of $206.2 million in average balances, partly offset by growth of 51 basis points in the average rate earned. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $8.8 billion in the first quarter of 2019 , compared to $8.7 billion in the first quarter of 2018 .

Interest income on long-term securities purchased under agreements to resell decreased $356 thousand from the first quarter of 2018, due to a decline in the average rate earned of 20 basis points. Interest income on balances at the Federal Reserve increased $746 thousand due to a 73 basis point increase in the average rate earned and a $42.7 million increase in the average balance invested.

The average tax equivalent yield on total interest earning assets was 3.93% in the first quarter of 2019 , up from 3.59% in the first quarter of 2018 .

Total interest expense increased $11.3 million compared to the first quarter of 2018 due to a $7.8 million increase in interest expense on interest bearing deposits and a $3.5 million increase in interest expense on borrowings. The increase in deposit expense resulted mainly from a 23 basis point increase in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts increased $4.0 million mainly due an increase of 15 basis points in the average rate paid. In addition, interest expense on C.D.'s of $100,000 and over rose $3.2 million due to a 90 basis point increase in average rates paid coupled with higher average balances. Interest expense on borrowings increased due to higher rates paid on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .65% and .36% in the first quarters of 2019 and 2018 , respectively.

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


42

Non-Interest Income
  
Three Months Ended March 31
 
Increase (Decrease)
(Dollars in thousands)
2019
2018
 
Amount
% change
Bank card transaction fees
$
39,644

$
41,453

 
$
(1,809
)
(4.4
)%
Trust fees
37,256

36,062

 
1,194

3.3

Deposit account charges and other fees
23,018

22,982

 
36

.2

Capital market fees
1,879

2,291

 
(412
)
(18.0
)
Consumer brokerage services
3,747

3,768

 
(21
)
(.6
)
Loan fees and sales
3,309

2,862

 
447

15.6

Other
12,387

10,272

 
2,115

20.6

Total non-interest income
$
121,240

$
119,690

 
$
1,550

1.3
 %
Non-interest income as a % of total revenue*
37.3
%
38.3
%
 
 
 
* Total revenue includes net interest income and non-interest income.

For the first quarter of 2019 , total non-interest income amounted to $121.2 million compared with $119.7 million in the same quarter last year, which was an increase of $1.6 million, or 1.3%. The increase was mainly due to growth in trust, cash sweep and loan fee income, partly offset by lower net bank card fees.

Bank card transaction fees for the current quarter decreased $1.8 million, or 4.4%, from the same period last year. Net corporate card fees declined $1.3 million, or 5.5%, from the same quarter last year mainly due to higher rewards and network expense. Net debit card fees declined $260 thousand, or 2.8%, due to lower interchange income. Overall net merchant income declined $287 thousand due to lower interchange fees and higher network expense, while net credit card fees increased slightly on higher interchange revenue. Total net bank card fees this quarter were comprised of fees on corporate card ($22.8 million), debit card ($9.1 million), merchant ($4.5 million) and credit card ($3.2 million) transactions. The table below is a summary of bank card transaction fees for the three month periods ended March 31, 2019 and 2018.
 
Three Months Ended March 31
 
Increase (Decrease)
(Dollars in thousands)
2019
2018
 
Amount
% change
Net debit card fees
$
9,131

$
9,391

 
$
(260
)
(2.8
)%
Net credit card fees
3,157

3,101

 
56

1.8

Net merchant fees
4,507

4,793

 
(286
)
(6.0
)
Net corporate card fees
22,849

24,168

 
(1,319
)
(5.5
)
Total bank card transaction fees
$
39,644

$
41,453

 
$
(1,809
)
(4.4
)%

Trust fees for the quarter increased $1.2 million, or 3.3%, over the same quarter last year, resulting mainly from growth in private client trust fees, which were up $1.3 million, or 4.7%. Compared to the same period last year, deposit account fees increased slightly due to growth in corporate cash management fees, offset by lower overdraft and return item fees. Capital market fees declined $412 thousand on lower trading securities income, while loan fees and sales increased $447 thousand, or 15.6%, mainly due to higher mortgage banking revenue. Other non-interest income increased $2.1 million compared to the same quarter last year, mainly due to higher cash sweep fees, which increased $1.3 million, or 59.0%, to $3.4 million. In addition, fair value adjustments on the Company's deferred compensation plan assets, which are held in a trust and recorded as both an asset and a liability, increased $1.4 million over the same quarter last year, affecting both other income and other expense. These increases were partly offset by lower interest rate swap and tax credit sales fees.

Investment Securities Gains (Losses), Net
 
Three Months Ended March 31
(In thousands)
2019
2018
Net gains (losses) on sales of available for sale debt securities
$
694

$
212

Fair value adjustments of private equity investments, net
(1,842
)
4,305

Fair value adjustments on equity securities, net
223

947

Other
—

(54
)
Total investment securities gains (losses), net
$
(925
)
$
5,410


43


Net gains and losses on investment securities which were recognized in earnings during the three months ended March 31 , 2019 and 2018 are shown in the table above. Net securities losses of $925 thousand were reported in the first quarter of 2019 , compared to net gains of $5.4 million in the same period last year. The net losses in the first quarter of 2019 were mainly comprised of $1.8 million of net losses in fair value on the Company’s private equity investments, partly offset by net gains of $692 thousand on sales of available for sale debt securities. The net gains on investment securities for the same quarter last year resulted from $4.3 million of net gains in fair value on the Company’s holdings of private equity investments and net gains in fair value of $947 thousand on equity securities. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in income of $306 thousand during the first three months of 2019 and expense of $861 thousand during the first three months of 2018 .

Included in 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. There were no impairment losses on these securities in the first three months of 2019 , compared to an impairment of $68 thousand in the same period last year. 

Non-Interest Expense
  
Three Months Ended March 31
 
Increase (Decrease)
(Dollars in thousands)
2019
2018
 
Amount
% change
Salaries and employee benefits
$
122,128

$
115,894

 
$
6,234

5.4
 %
Net occupancy
11,501

11,584

 
(83
)
(.7
)
Equipment
4,471

4,431

 
40

.9

Supplies and communication
5,162

5,313

 
(151
)
(2.8
)
Data processing and software
22,260

20,690

 
1,570

7.6

Marketing
5,900

4,805

 
1,095

22.8

Deposit insurance
1,710

3,457

 
(1,747
)
(50.5
)
Community service
803

729

 
74

10.2

Other
17,490

15,374

 
2,116

13.8

Total non-interest expense
$
191,425

$
182,277

 
$
9,148

5.0
 %

Non-interest expense for the first quarter of 2019 amounted to $191.4 million, an increase of $9.1 million, or 5.0%, compared with $182.3 million in the first quarter of last year. The increase in expense over the same period last year was primarily due to higher salaries and benefits expense but also included several non-recurring items totaling $3.2 million, mainly recorded in other non-interest expense. Excluding these non-recurring items, non-interest expense reflected a core growth rate of 3.2% this quarter over the first quarter of 2018.

Salaries expense increased $5.0 million, or 5.3%, mainly due to higher full-time salary costs. Employee benefits expense totaled $22.1 million, reflecting growth of $1.2 million, or 5.8%, mainly as a result of higher medical costs. Full-time equivalent employees totaled 4,841 at March 31, 2019 compared to 4,799 at March 31, 2018 . Supplies and communication expense declined $151 thousand, or 2.8%, mainly due to lower data network expense, while data processing expense increased $1.6 million, or 7.6%, due to higher costs for service providers and software expense. Marketing costs increased $1.1 million, or 22.8%, mainly due to increased marketing efforts for consumer deposit customers and healthcare banking initiatives. Deposit insurance expense declined $1.7 million, or 50.5%, from the first quarter of last year due to reduced FDIC insurance rates. Additionally, other non-interest expense increased $2.1 million, or 13.8%, compared to the previous year mainly due to the previously mentioned fair value equity adjustments of $1.4 million on the deferred compensation plan assets and other non-recurring items. Higher costs were also recorded in professional fees, while loan collection and repossessed property costs were lower.


44

Provision and Allowance for Loan Losses
 
Three Months Ended
(In thousands)
Mar. 31, 2019
Dec. 31, 2018
Mar. 31, 2018
Provision for loan losses
$
12,463

$
12,256

$
10,396

Net loan charge-offs (recoveries):
 
 
 
Commercial:
 
 
 
  Business
447

1,748

(14
)
  Real estate-construction and land
(16
)
(183
)
(36
)
  Real estate-business
(37
)
(91
)
(205
)
Commercial net loan charge-offs (recoveries)
394

1,474

(255
)
Personal Banking:
 
 
 
  Real estate-personal
101

(144
)
57

  Consumer
1,924

2,805

2,528

  Revolving home equity
19

—

56

  Consumer credit card
8,958

7,421

7,566

  Overdrafts
317

500

444

Personal banking net loan charge-offs
11,319

10,582

10,651

Total net loan charge-offs
$
11,713

$
12,056

$
10,396


 
Three Months Ended
 
Mar. 31, 2019
Dec. 31, 2018
Mar. 31, 2018
Annualized net loan charge-offs (recoveries)*:
 
 
 
Commercial:
 
 
 
  Business
.04
 %
.14
 %
—
 %
  Real estate-construction and land
(.01
)
(.08
)
(.02
)
  Real estate-business
(.01
)
(.01
)
(.03
)
Commercial net loan charge-offs (recoveries)
.02

.07

(.01
)
Personal Banking:
 
 
 
  Real estate-personal
.02

(.03
)
.01

  Consumer
.40

.57

.49

  Revolving home equity
.02

—

.06

  Consumer credit card
4.65

3.73

4.05

  Overdrafts
30.57

37.59

38.91

Personal banking net loan charge-offs
.88

.80

.82

Total annualized net loan charge-offs
.34
 %
.34
 %
.30
 %
* 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. The Company's policies and processes for determining the allowance for loan losses are discussed in Note 1 to the consolidated financial statements and in the Allowance for Loan Losses discussion in Item 7 of the 2018 Annual Report on Form 10-K.

Net loan charge-offs in the first quarter of 2019 amounted to $11.7 million , compared with $12.1 million in the prior quarter and $10.4 million in the first quarter of last year. During the first quarter of 2019 , the Company recorded net charge-offs on commercial loans of $394 thousand, compared to net loan charge-offs of $1.5 million in the prior quarter. The decrease in commercial net loan charge-offs was primarily driven by a $1.3 million decrease in net charge-offs on business loans this quarter compared to the fourth quarter of 2018. In addition to declines in commercial net loan charge-offs, net charge-offs on consumer loans decreased $881 thousand in the first quarter of 2019 compared to the prior quarter. These decreases were partially offset by an increase of $1.5 million in net charge-offs on consumer credit card loans in the first quarter of 2019 compared to the prior

45

quarter. Also, the Company recorded net loan charge-offs on personal real estate loans of $101 thousand, compared to net recoveries of $144 thousand in the prior quarter.

For the three months ended March 31, 2019 , annualized net charge-offs on average consumer credit card loans totaled 4.65% , compared to 3.73% in the previous quarter and 4.05% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .40% , compared to .57% in the prior quarter and .49% in the same period last year.  Annualized net charge-offs on personal real estate loans also remained low this quarter.  In the first quarter of 2019 , total annualized net loan charge-offs were .34% , unchanged from the previous quarter, and were .30% in the same period last year.

In the current quarter, the provision for loan losses totaled $12.5 million , a $207 thousand increase over a provision of $12.3 million in the prior quarter, and increased $2.1 million compared to the first quarter of 2018. The provision for loan losses in the current quarter and the previous quarter exceeded net loan charge-offs by $750 thousand and $200 thousand, respectively. During the first quarter of 2018 , the provision for loan losses totaled $10.4 million and equaled net loan charge-offs for the same period.

At March 31, 2019 , the allowance for loan losses amounted to $160.7 million , compared to $159.9 million at December 31, 2018 , and was 1.14% of total loans at March 31, 2019 compared to 1.13% of total loans at December 31, 2018. The Company considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at March 31, 2019 .

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, 2019
December 31, 2018
Non-accrual loans
$
12,167

$
12,536

Foreclosed real estate
737

1,413

Total non-performing assets
$
12,904

$
13,949

Non-performing assets as a percentage of total loans
.09
%
.10
%
Non-performing assets as a percentage of total assets
.05
%
.05
%
Total loans past due 90 days and still accruing interest
$
16,655

$
16,658


Non-accrual loans, which are also classified as impaired, totaled $12.2 million at March 31, 2019 , a decrease of $369 thousand from the balance at December 31, 2018 . The decrease occurred mainly in business loans, which decreased $416 thousand but was partly offset by increases in business real estate and personal real estate loans of $31 thousand and $16 thousand, respectively. At March 31, 2019 , non-accrual loans were comprised mainly of business (70.4%), personal real estate (15.2%), and business real estate (14.4%) loans. Foreclosed real estate totaled $ 737 thousand at March 31, 2019 , a decrease of $676 thousand when compared to December 31, 2018 . Total loans past due 90 days or more and still accruing interest were $16.7 million as of March 31, 2019 , unchanged from December 31, 2018 . 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 2 to the consolidated financial statements.


46

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 $142.3 million at March 31, 2019 compared with $145.7 million at December 31, 2018 , resulting in a decrease of $3.4 million , or 2.3% .


(In thousands)
March 31, 2019
December 31, 2018
Potential problem loans:
 
 
  Business
$
92,993

$
98,009

  Real estate – construction and land
1,063

1,211

  Real estate – business
47,502

44,854

  Real estate – personal
737

1,586

Total potential problem loans
$
142,295

$
145,660


At March 31, 2019 , the Company had $81.4 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 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $56.5 million which are classified as substandard and included in the table above because of this classification. In April 2019, the Company received full payment of $24.4 million on a substandard commercial loan included in the table above.

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 2 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 calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is 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 6.6% of total loans outstanding at March 31, 2019 . The largest component of construction and land loans was commercial construction, which increased $47.7 million during the three months ended March 31, 2019 . At March 31, 2019 , multi-family residential construction loans totaled approximately $183.1 million, or 27.4%, of the commercial construction loan portfolio, compared to $146.6 million, or 23.5%, at December 31, 2018 .
(Dollars in thousands)
March 31, 2019


% of Total
% of
Total
Loans
December 31, 2018
    

% of Total
% of
Total
Loans
Residential land and land development
$
80,520

8.7
%
.6
%
$
81,740

9.4
%
.6
%
Residential construction
133,505

14.4

1.0

123,369

14.2

.9

Commercial land and land development
44,207

4.8

.3

45,180

5.2

.3

Commercial construction
667,037

72.1

4.7

619,370

71.2

4.4

Total real estate - construction and land loans
$
925,269

100.0
%
6.6
%
$
869,659

100.0
%
6.2
%


47

Real Estate – Business Loans
Total business real estate loans were $2.9 billion at March 31, 2019 and comprised 20.3% 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, 2019 , 36.6% of business real estate loans were for owner-occupied real estate properties, which present lower risk profiles.
(Dollars in thousands)
March 31, 2019


% of Total
% of
Total
Loans
December 31, 2018


% of Total
% of
Total
Loans
Owner-occupied
$
1,045,191

36.6
%
7.4
%
$
1,038,589

36.1
%
7.3
%
Multi-family
371,404

13.0

2.6

408,151

14.2

2.9

Office
312,387

10.9

2.2

356,733

12.4

2.5

Retail
320,254

11.2

2.3

307,915

10.7

2.2

Hotels
209,390

7.3

1.5

209,693

7.3

1.5

Farm
155,197

5.4

1.1

160,935

5.6

1.1

Senior living
135,036

4.7

1.0

117,635

4.1

.8

Industrial
128,840

4.5

.9

109,391

3.8

.8

Other
181,915

6.4

1.3

166,746

5.8

1.2

Total real estate - business loans
$
2,859,614

100.0
%
20.3
%
$
2,875,788

100.0
%
20.3
%

Revolving Home Equity Loans
The Company had $364.0 million in revolving home equity loans at March 31, 2019 that were generally collateralized by residential real estate. Most of these loans (91.9%) 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, 2019 , the outstanding principal of loans with an original LTV higher than 80% was $43.4 million, or 11.9% of the portfolio, compared to $45.1 million as of December 31, 2018 . Total revolving home equity loan balances over 30 days past due or on non-accrual status were $1.6 million at March 31, 2019 compared to $1.7 million at December 31, 2018 .  The weighted average FICO score for the total current portfolio balance is 792. 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 2019 through 2021, approximately 7.3% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 91% 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.

Other Consumer Loans
Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Outstanding balances for auto loans were $887.2 million and $910.5 million at March 31, 2019 and December 31, 2018 , respectively. The balances over 30 days past due amounted to $12.9 million at March 31, 2019 compared to $17.8 million at December 31, 2018 , and comprised 1.5% and 2.0% of the outstanding balances of these loans at March 31, 2019 and December 31, 2018 , respectively. For the three months ended March 31, 2019 , $83.4 million of new auto loans were originated, compared to $100.8 million during the first three months of 2018 .  At March 31, 2019 , the automobile loan portfolio had a weighted average FICO score of 754.

Outstanding balances for motorcycle loans were $80.5 million at March 31, 2019 , compared to $89.4 million at December 31, 2018 . The balances over 30 days past due amounted to $1.8 million and $2.1 million at March 31, 2019 and December 31, 2018 , respectively, and comprised 2.3% of the outstanding balance of these loans at March 31, 2019 , compared to 2.4% at December 31, 2018 . During the first three months of 2019 , new motorcycle loan originations totaled $2.4 million compared to $5.2 million during the first three months of 2018 .

The Company's balance of marine and RV loans totaled $46.1 million at March 31, 2019 , compared to $50.9 million at December 31, 2018 , and the balances over 30 days past due amounted to $2.2 million and $2.5 million at March 31, 2019 and December 31, 2018 , respectively. The net charge-offs on marine and RV loans decreased from $198 thousand in the first three months of 2018 to $152 thousand in the first three months of 2019 .

Additionally, the Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2019 of $772.4 million in consumer credit card loans outstanding, approximately $175.2 million, or 23%, carried a low promotional rate. Within the next six months, $66.8 million of these loans are scheduled to convert to the ongoing higher contractual

48

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.

Energy Lending
The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $129.0 million at March 31, 2019 , as shown in the table below.
(In thousands)
March 31, 2019
December 31, 2018
 
Unfunded commitments at March 31, 2019
Extraction
$
111,255

$
114,152

 
$
60,316

Support activities
7,869

8,892

 
23,542

Downstream distribution and refining

5,964

17,300

 
33,767

Mid-stream shipping and storage
3,926

3,483

 
56,578

Total energy lending portfolio
129,014

143,827

 
174,203


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 $100 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 $848.5 million at March 31, 2019 , compared to $830.2 million at December 31, 2018. Additional unfunded commitments at March 31, 2019 totaled $1.3 billion.

Income Taxes
Income tax expense was $22.9 million in the first quarter of 2019 , compared to $26.5 million in the fourth quarter of 2018 and $23.3 million in the first quarter of 2018 . The Company's effective tax rate, including the effect of non-controlling interest, was 19.1% in the first quarter of 2019 , compared to 19.5% in the fourth quarter of 2018 and 18.7% in the first quarter of 2018 . The effective tax rate in the first quarter is typically lower than other quarters due to the recognition of share-based excess tax benefits as a reduction to income tax expense. These benefits result from transactions relating to equity award vesting, most of which occur in the first quarter of each year.


49

Financial Condition

Balance Sheet
Total assets of the Company were $25.0 billion at March 31, 2019 and $25.5 billion at December 31, 2018 . Earning assets (excluding the allowance for loan losses and fair value adjustments on debt securities) amounted to $23.8 billion at March 31, 2019 and $24.3 billion at December 31, 2018 , and consisted of 60% in loans and 37% in investment securities at March 31, 2019 .

During the first quarter of 2019, average loans totaled $14.1 billion, an increase of $68.9 million over the prior quarter, and grew $150.6 million, or 1.1%, over the same period last year. Period-end loans, however, declined slightly from the prior quarter. Compared to the previous quarter, average business real estate and business loans grew $106.6 million and $56.3 million, respectively. This growth was partly offset by declines in average construction (decline of $46.1 million) and auto (decline of $24.3 million) lending activities. Business real estate loans continued to grow this quarter from new lending in a number of our markets. Growth in business loans was the result of increased leasing activities, new commercial and industrial lending, and seasonal agribusiness borrowings. This growth was partly offset by other seasonal loan paydowns. The decline in construction loans resulted mainly from paydowns on completed projects, partly offset by additional loan draws on existing projects. Auto loans declined $24.3 million due mainly to paydowns on existing loans exceeding new loan originations during the quarter. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $45.6 million, compared to $49.7 million in the prior quarter.

During the first quarter of 2019, the fair value of total average available for sale debt securities decreased $6.7 million from the previous quarter to $8.6 billion. The decline in investment securities was mainly the result of lower municipal, mortgage-backed, U.S. government and federal agency, and government-sponsored enterprise obligation securities. Purchases of securities during the quarter totaled $406.5 million and were offset by sales, maturities and pay downs of $404.6 million. At March 31, 2019, the duration of the investment portfolio was 2.9 years, and maturities and pay downs of approximately $1.0 billion are expected to occur during the next 12 months.

Total average deposits decreased $211.6 million this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from lower balances of business demand deposits (decline of $457.8 million) and money market accounts (decline of $282.7 million). These declines were partly offset by increases in interest checking deposits, certificates of deposit, government demand deposits, personal demand deposits, and savings deposits of $205.2 million, $182.3 million, $64.1 million, $55.0 million, and $25.5 million, respectively. Compared to the previous quarter, total average consumer and wealth (including private banking) deposits increased $127.9 million and $31.4 million, respectively, while average commercial banking deposits declined $274.1 million. The average loans to deposits ratio was 71.0% in the current quarter and 69.9% in the prior quarter. The Company’s average borrowings, which includes customer repurchase agreements, totaled $1.8 billion in the current quarter, an increase of $115.5 million compared to the prior quarter.

Liquidity and Capital Resources

Liquidity Management
The Company’s most liquid assets are comprised of available for sale debt securities, federal funds sold, securities purchased under agreements to resell (resale agreements), and balances at the Federal Reserve Bank, as follows:
(In thousands)
 
March 31, 2019
 
March 31, 2018
 
December 31, 2018
Liquid assets:
 
 
 
 
 
 
  Available for sale debt securities
 
$
8,627,890

 
$
8,432,180

 
$
8,538,041

  Federal funds sold
 
250

 
17,000

 
3,320

  Long-term securities purchased under agreements to resell
 
700,000

 
700,000

 
700,000

  Balances at the Federal Reserve Bank
 
166,077

 
134,697

 
689,876

  Total
 
$
9,494,217

 
$
9,283,877

 
$
9,931,237


Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $250 thousand as of March 31, 2019 . Long-term resale agreements, maturing through 2022, totaled $700.0 million at March 31, 2019 . Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $731.9 million in fair value at March 31, 2019 . Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $166.1 million at March 31, 2019 . The fair value of the available for sale debt portfolio was $8.6 billion at March 31, 2019 and included

50

an unrealized net gain in fair value of $33.4 million. The total net unrealized gain included net gains of $25.8 million on state and municipal obligations and $10.6 million on U.S. government and federal agency obligations, and total net unrealized losses of $1.5 million on government-sponsored enterprise obligations, $853 thousand on mortgage-backed and asset-backed securities, and $655 thousand on other debt securities.

Approximately $1.0 billion of the available for sale debt 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, 2019
March 31, 2018
December 31, 2018
Investment securities pledged for the purpose of securing:
    
 
 
  Federal Reserve Bank borrowings
$
64,702

$
81,419

$
67,675

  FHLB borrowings and letters of credit
9,502

12,247

9,974

  Securities sold under agreements to repurchase *
1,820,190

1,719,583

2,469,432

  Other deposits and swaps
2,069,215

1,856,778

1,784,020

  Total pledged securities
3,963,609

3,670,027

4,331,101

  Unpledged and available for pledging
3,405,046

3,332,768

2,872,562

  Ineligible for pledging
1,259,235

1,429,385

1,334,378

  Total available for sale debt securities, at fair value
$
8,627,890

$
8,432,180

$
8,538,041

* Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements.

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, 2019 , such deposits totaled $18.1 billion and represented 90.6% 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. Certificates of deposit of $100,000 and over totaled $1.3 billion at March 31, 2019 . These accounts are normally considered more volatile and higher costing and comprised 6.4% of total deposits at March 31, 2019 .
(In thousands)
March 31, 2019
March 31, 2018
December 31, 2018
Core deposit base:
 
 
 
 Non-interest bearing
$
6,298,724

$
6,953,430

$
6,980,298

 Interest checking
2,035,476

1,447,556

2,090,936

 Savings and money market
9,763,870

10,380,582

9,594,303

 Total
$
18,098,070

$
18,781,568

$
18,665,537


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 and repurchase agreements, as follows:
(In thousands)
March 31, 2019
March 31, 2018
December 31, 2018
Borrowings:
 
 
 
 Federal funds purchased
$
262,375

$
104,940

$
13,170

 Securities sold under agreements to repurchase
1,460,376

1,027,389

1,943,219

 Other debt
2,022

9,214

8,702

 Total
$
1,724,773

$
1,141,543

$
1,965,091


Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are collateralized by securities in the Company's investment portfolio and are comprised of non-insured customer funds totaling $1.5 billion, which generally mature overnight.


51

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 and permits 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, 2019 .
 
March 31, 2019
(In thousands)

FHLB
Federal Reserve

Total
Collateral value pledged
$
2,516,341

$
1,300,517

$
3,816,858

Letters of credit issued
(182,752
)
—

(182,752
)
Available for future advances
$
2,333,589

$
1,300,517

$
3,634,106


In addition to those mentioned above, several other sources of liquidity are available. 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. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows:
 
Standard & Poor’s
Moody’s
Commerce Bancshares, Inc.


Issuer rating
A-

Rating outlook
Stable
Stable
Preferred stock
BBB-
Baa1
Commerce Bank


Issuer rating
A
A2
Rating outlook
Stable
Stable
Baseline credit assessment

a1
Short-term rating
A-1
P-1

The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $602.8 million during the first three months of 2019 , 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 $142.2 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 $31.3 million . Activity in the investment securities portfolio used cash of $29.1 million for purchases (net of sales, maturities and pay downs). Financing activities used cash of $713.7 million , largely resulting from a net decrease in deposit balances of $402.4 million, a decrease of $233.6 million in federal funds purchased and securities sold under agreements to repurchase, and dividend payments of $31.1 million on common and preferred stock. Additionally, treasury stock purchases used cash of $39.7 million in the first three months of 2019. 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.


52

Capital Management
The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at March 31, 2019 and December 31, 2018 , as shown in the following table.

(Dollars in thousands)
March 31, 2019
December 31, 2018
Minimum Ratios under Capital Adequacy Guidelines
Minimum Ratios
for
Well-Capitalized
Banks *
Risk-adjusted assets
$
19,082,784

$
19,103,966

 
 
Tier I common risk-based capital
2,746,308

2,716,232

 
 
Tier I risk-based capital
2,891,092

2,861,016

 
 
Total risk-based capital
3,052,849

3,022,023

 
 
Tier I common risk-based capital ratio
14.39
%
14.22
%
7.00
%
6.50
%
Tier I risk-based capital ratio
15.15
%
14.98
%
8.50
%
8.00
%
Total risk-based capital ratio
16.00
%
15.82
%
10.50
%
10.00
%
Tier I leverage ratio
11.67
%
11.52
%
4.00
%
5.00
%
*under Prompt Corrective Action requirements

The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. The Company purchased 647,054 shares at an average price of $61.35 during the three months ended March 31, 2019 , which were related to both open market purchases and stock-based compensation transactions. At March 31, 2019 , 1,602,509 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 and liquidity levels, and alternative investment options. The Company paid a $.26 per share cash dividend on its common stock in the first quarter of 2019 , which was a 16.1% increase compared to the same period in 2018 .

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, 2019 totaled $10.9 billion (including approximately $5.1 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $325.6 million and $3.9 million, respectively, at March 31, 2019 . 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 consolidated balance sheet, amounted to $2.2 million at March 31, 2019 .

The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first three months of 2019 , purchases and sales of tax credits amounted to $25.1 million and $18.4 million, respectively. Fees from sales of tax credits were $861 thousand for the three months ended March 31, 2019 , compared to $1.2 million in the same period last year. At March 31, 2019 , the Company expected to fund outstanding purchase commitments of $157.9 million during the remainder of 2019 .


53

Segment Results

The table below is a summary of segment pre-tax income results for the first three months of 2019 and 2018 .

(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals    
Other/ Elimination
Consolidated Totals
Three Months Ended March 31, 2019
    
    
    
    
    
    
Net interest income
$
76,897

$
85,848

$
11,676

$
174,421

$
29,067

$
203,488

Provision for loan losses
(11,049
)
(618
)
33

(11,634
)
(829
)
(12,463
)
Non-interest income
29,171

47,915

44,332

121,418

(178
)
121,240

Investment securities losses, net
—

—

—

—

(925
)
(925
)
Non-interest expense
(73,508
)
(76,838
)
(30,892
)
(181,238
)
(10,187
)
(191,425
)
Income before income taxes
$
21,511

$
56,307

$
25,149

$
102,967

$
16,948

$
119,915

Three Months Ended March 31, 2018
    
    
    
    
    
    
Net interest income
$
71,021

$
82,584

$
11,445

$
165,050

$
27,842

$
192,892

Provision for loan losses
(10,373
)
180

(64
)
(10,257
)
(139
)
(10,396
)
Non-interest income
30,216

49,209

42,103

121,528

(1,838
)
119,690

Investment securities gains, net
—

—

—

—

5,410

5,410

Non-interest expense
(69,919
)
(72,778
)
(31,825
)
(174,522
)
(7,755
)
(182,277
)
Income before income taxes
$
20,945

$
59,195

$
21,659

$
101,799

$
23,520

$
125,319

Increase (decrease) in income before income taxes:
 
 
 
 
 
 
   Amount
$
566

$
(2,888
)
$
3,490

$
1,168

$
(6,572
)
$
(5,404
)
   Percent
2.7
%
(4.9
)%
16.1
%
1.1
%
(27.9
)%
(4.3
)%

Consumer
For the three months ended March 31, 2019 , income before income taxes for the Consumer segment increased $566 thousand, or 2.7%, compared to the first three months of 2018 . This increase in income before taxes was mainly due to higher net interest income of $5.9 million, or 8.3%. The increase was partly offset by a decline in non-interest income of $1.0 million, or 3.5%, and an increase in non-interest expense of $3.6 million, or 5.1%. Net interest income increased due to a $6.6 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and growth of $1.1 million in loan interest income, partly offset by a $1.8 million increase in deposit interest expense. Non-interest income decreased mainly due to declines in deposit fees (mainly overdraft fees and deposit account service fees), debit card fees, and mortgage banking revenue. Non-interest expense increased over the same period in the previous year due to higher salaries expense and higher allocated servicing and support costs (mainly marketing and information technology fees), partly offset by a decline in deposit insurance expense. The provision for loan losses totaled $11.0 million, a $676 thousand increase over the first three months of 2018 , which was mainly due to higher consumer credit card loan net charge-offs, partly offset by lower personal loan net charge-offs.

Commercial
For the three months ended March 31, 2019 , income before income taxes for the Commercial segment decreased $2.9 million, or 4.9%, compared to the same period in the previous year. This decrease was mainly due to lower non-interest income, higher non-interest expense and an increase in the provision for loan losses. These decreases to income were partly offset by higher net interest income. Net interest income increased $3.3 million, or 4.0%, due to a $16.4 million increase in loan interest income, partly offset by a decline of $5.2 million in net allocated funding credits. In addition, deposit interest expense increased $4.9 million and customer repurchase agreement interest expense increased $3.0 million. Non-interest income decreased $1.3 million, or 2.6%, from the previous year due to lower bank card fee income (mainly corporate card fees) and capital market fees, partly offset by higher deposit account fees (mainly corporate cash management fees). Non-interest expense increased $4.1 million, or 5.6%, mainly due to increases in salaries expense and allocated commercial banking support costs, partly offset by a decrease in deposit insurance expense. The provision for loan losses increased $798 thousand over the same period last year, due to higher net charge-offs on commercial card, business and personal real estate loans and lower net recoveries on business real estate loans.


54

Wealth
Wealth segment pre-tax profitability for the three months ended March 31, 2019 increased $3.5 million, or 16.1%, over the same period in the previous year. Net interest income increased $231 thousand, or 2.0%, mainly due to a $1.8 million increase in loan interest income, partly offset by a $1.0 million increase in deposit interest expense and a $544 thousand decrease in net allocated funding credits. Non-interest income increased $2.2 million, or 5.3%, over the prior year largely due to higher private client trust fees and cash sweep commissions. Non-interest expense decreased $933 thousand, or 2.9%, mainly due to trust losses recorded in the prior year. The provision for loan losses decreased $97 thousand, mainly due to lower personal real estate loan net charge-offs and recoveries on revolving home equity loans.

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 procedures, 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 lower than in the same period last year by $6.6 million. This decrease was mainly due higher non-interest expense of $2.4 million, partly offset by higher net interest income of $1.2 million and higher non-interest income of $1.7 million. Unallocated securities losses were $925 thousand in the first three months of 2019 compared to gains of $5.4 million in 2018 . Also, the unallocated loan loss provision increased $690 thousand, as the provision was $750 thousand in excess of charge-offs in the first three months of 2019 , while the provision was equal to net charge-offs during the first three months of 2018 .

Impact of Recently Issued Accounting Standards

Leases In February 2016, the FASB issued ASU 2016-02, "Leases", in order to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU primarily affects lessee accounting, which requires the lessee to recognize a right-of-use (ROU) asset and a liability to make lease payments for those leases classified as operating leases under previous GAAP. The ASU provides guidance as to the definition of a lease, identification of lease components, and sale and leaseback transactions. The FASB issued elections and expedients within the original ASU and additional amendments, clarifying the lease guidance for certain implementation issues. The Company has adopted the package of expedients, the lease component expedient as well as the disclosure expedient. Additionally, for leases with a term of 12 months of less, an election was made not to recognize lease assets and lease liabilities. The Company adopted the new accounting standard as of January 1, 2019, and a lease liability of $28.1 million and a ROU asset of $27.5 million were recognized. The impact of the adoption and required disclosures are discussed in Note 6 to the consolidated financial statements.
 
Premium Amortization The FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities", in March 2017. Under former guidance, many entities amortize the premium on purchased callable debt securities over the contractual life of the instrument. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium to the earliest call date, and more closely align the amortization period to expectations incorporated in market pricing of the instrument. The amendments are effective January 1, 2019 and did not have a significant effect on the Company's consolidated financial statements.

Financial Instruments ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", better known as the current expected credit loss model (CECL), was issued in June 2016. CECL requires the calculation of expected life-time credit losses on both loans and held-to-maturity securities. The new standard will require significant operational changes, especially in data collection and analysis. The ASU is effective for interim and annual periods beginning January 1, 2020.

The Company continues to work with a software partner in implementing the new CECL standard. Software development and data collection has continued through the current quarter since the partnership commenced and it is expected that the preliminary CECL model will be ready for detailed review and testing during the second quarter of 2019. The Company expects that testing, control design and model validation will continue throughout the rest of 2019. Further, the Company will continue to evaluate the impact the adoption of ASU 2016-13 will have on the Company's consolidated financial statements. 

Intangible Assets The FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", in January 2017. Under current guidance, a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill by following procedures that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new amendments, the goodwill impairment test compares the fair value of a reporting unit with its carrying amount and an impairment charge is measured as the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments are effective for impairment tests beginning January 1, 2020 and are not expected to have a significant effect on the Company's consolidated financial statements.

55


Financial Instruments The FASB issued ASU 2018-13, "Changes to the Disclosure Requirements of Fair Value Measurement", in August 2018. The amendments in the ASU eliminate or modify certain disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement . In addition, the amendments in the ASU also require the addition of new disclosure requirements on fair value measurement, including the disclosure of changes in unrealized gains and losses for the period included in AOCI for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is effective January 1, 2020, but early adoption is permitted. The Company is still assessing the impact on the Company's consolidated financial statements.

Retirement Benefits The FASB issued ASU 2018-14, "Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)", in August 2018. The amendments in the ASU eliminate disclosures that are no longer considered cost beneficial and clarify specific requirements of disclosures. In addition, the amendments in the ASU also add new disclosures, including the explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments are effective January 1, 2020 and are not expected to have a significant effect on the Company's consolidated financial statements.

Intangible Assets The FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", in August 2018. Under current guidance, the accounting for implementation costs of a hosting arrangement that is a service contract is not specifically addressed. Under the new amendments, the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract are aligned with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software or hosting arrangements that include internal-use software license. The guidance is effective January 1, 2020, but early adoption is permitted. The Company is still assessing the impact on the Company's consolidated financial statements.




56

AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Three Months Ended March 31, 2019 and 2018
 
First Quarter 2019
 
First Quarter 2018
(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)
$
5,084,920

$
51,044

4.07
%
 
$
4,934,621

$
42,295

3.48
%
Real estate — construction and land
907,062

12,813

5.73

 
951,930

11,014

4.69

Real estate — business
2,864,177

32,579

4.61

 
2,733,812

27,384

4.06

Real estate — personal
2,119,365

20,882

4.00

 
2,062,083

19,342

3.80

Consumer
1,929,202

22,484

4.73

 
2,072,168

21,732

4.25

Revolving home equity
370,962

4,728

5.17

 
392,727

4,119

4.25

Consumer credit card
781,167

23,461

12.18

 
757,692

22,539

12.06

Overdrafts
4,205

—

—

 
4,628

—

—

Total loans
14,061,060

167,991

4.85

 
13,909,661

148,425

4.33

Loans held for sale
18,350

334

7.38

 
19,115

304

6.45

Investment securities:
  
 
 
 
 
 
 
U.S. government and federal agency obligations
909,466

1,743

.78

 
916,655

4,788

2.12

Government-sponsored enterprise obligations
199,480

1,157

2.35

 
405,681

1,836

1.84

State and municipal obligations (A)
1,283,349

10,106

3.19

 
1,513,243

11,406

3.06

Mortgage-backed securities
4,360,428

29,625

2.76

 
3,925,904

25,395

2.62

Asset-backed securities
1,525,623

10,157

2.70

 
1,469,488

7,643

2.11

Other debt securities
335,612

2,229

2.69

 
341,821

2,232

2.65

Trading debt securities (A)
25,411

203

3.24

 
21,966

148

2.73

Equity securities (A)
4,568

423

37.55

 
50,507

454

3.64

Other securities (A)
130,057

1,836

5.73

 
100,993

1,676

6.73

Total investment securities
8,773,994

57,479

2.66

 
8,746,258

55,578

2.58

Federal funds sold and short-term securities
 
 
 
 
 
 
 
purchased under agreements to resell
4,797

33

2.79

 
44,339

180

1.65

Long-term securities purchased
 
 
 
 
 
 
 
under agreements to resell
700,000

3,758

2.18

 
700,000

4,114

2.38

Interest earning deposits with banks
316,660

1,886

2.42

 
273,977

1,140

1.69

Total interest earning assets
23,874,861

231,481

3.93

 
23,693,350

209,741

3.59

Allowance for loan losses
(159,275
)
 
 
 
(158,779
)
 
 
Unrealized loss on debt securities
(48,925
)
 
 
 
(43,238
)
 
 
Cash and due from banks
367,146

 
 
 
363,520

 
 
Premises and equipment, net
375,771

 
 
 
344,952

 
 
Other assets
454,344

 
 
 
436,728

 
 
Total assets
$
24,863,922

 
 
 
$
24,636,533

 
 
LIABILITIES AND EQUITY:
 
 
 
 
 
 
 
Interest bearing deposits:
 
 
 
 
 
 
 
Savings
$
896,378

247

.11

 
$
838,900

245

.12

Interest checking and money market
10,762,550

9,355

.35

 
10,737,829

5,344

.20

Certificates of deposit of less than $100,000
590,200

1,259

.87

 
625,319

662

.43

Certificates of deposit of $100,000 and over
1,267,517

6,002

1.92

 
1,134,194

2,839

1.02

Total interest bearing deposits
13,516,645

16,863

.51

 
13,336,242

9,090

.28

Borrowings:
 
 
 
 
 
 
 
Federal funds purchased and securities sold
 
 
 
 
 
 
 
under agreements to repurchase
1,771,534

7,509

1.72

 
1,560,573

4,001

1.04

Other borrowings
1,248

5

1.62

 
1,913

12

2.54

Total borrowings
1,772,782

7,514

1.72

 
1,562,486

4,013

1.04

Total interest bearing liabilities
15,289,427

24,377

.65
%
 
14,898,728

13,103

.36
%
Non-interest bearing deposits
6,324,738

 
 
 
6,824,700

 
 
Other liabilities
284,018

 
 
 
198,398

 
 
Equity
2,965,739

 
 
 
2,714,707

 
 
Total liabilities and equity
$
24,863,922

 
 
 
$
24,636,533

 
 
Net interest margin (T/E)
 
$
207,104

 
 
 
$
196,638

 
Net yield on interest earning assets
 
 
3.52
%
 
 
 
3.37
%
(A) Stated on a tax equivalent basis using a federal income tax rate of 21%.


57

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 income 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 2018 Annual Report on Form 10-K.

The tables below compute the effects of gradual shifts in interest rates over a twelve month period on the Company’s net interest income.  Simulation A presents two rising rate scenarios and a falling rate scenario and net interest income was calculated and compared to a base scenario in which all assets, liabilities and rates remained constant over a twelve month period.  In Simulation A, interest rates applicable to each earning asset or interest bearing liability were ratably increased or decreased during the year according to each scenario.  The balances contained in the balance sheet were assumed not to change over the twelve month period, except as presented in the table below, it was assumed that changes in rates would affect deposit balances and result in either additional short-term investments or borrowings. 

Simulation B provides additional rising rate scenarios with higher levels of deposit attrition assumed to provide added perspective on potential effects of higher rates.  The Company utilizes these simulations both for monitoring interest rate risk and for liquidity planning purposes.  While the future effects of rising rates on deposit balances cannot be known, the Company maintains a practice of running multiple rate scenarios to better understand interest rate risk and its effect on the Company’s performance.  The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising rates and falling rates and has adopted strategies which minimize impacts to overall interest rate risk.

Simulation A
March 31, 2019
 
December 31, 2018
 (Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
 
Assumed Deposit Attrition
 
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
 
Assumed Deposit Attrition
200 basis points rising
$
5.5

.66
 %
 
$
(247.3
)
 
$
5.2

.62
 %
 
$
(237.9
)
100 basis points rising
3.7

.44

 
(128.0
)
 
3.8

.45

 
(120.3
)
100 basis points falling
(9.7
)
(1.16
)
 
137.5

 
(10.0
)
(1.18
)
 
142.8


Simulation B
March 31, 2019
 
December 31, 2018
 (Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
 
Assumed Deposit Attrition
 
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
 
Assumed Deposit Attrition
200 basis points rising
$
(10.7
)
(1.29
)%
 
$
(725.2
)
 
$
(15.3
)
(1.81
)%
 
$
(829.2
)
100 basis points rising
(10.7
)
(1.28
)
 
(609.8
)
 
(14.2
)
(1.68
)
 
(715.4
)

Under Simulation A, in the rising rate scenarios, interest income grows faster than funding costs as loan and investment balances remain constant but rates increase. Additionally, deposit balances are assumed to be lower, reducing interest expense, but are offset by higher short-term federal fund borrowings which carry higher rates. Overall, net interest income increases under the rising rate scenarios in Simulation A. In Simulation B, the assumed higher levels of deposit attrition are also offset by short-term borrowed federal funds with higher interest rates, which results in a reduction in net interest income under the rising rate scenarios.

In the falling interest rate scenario shown in Simulation A, it is assumed that deposits would increase .7%, which results in higher earning assets but also increased funding costs. The lower rate scenario results in a decline in interest income on loans and investments and results in an overall decrease in net interest income of $9.7 million from the base scenario. In a falling rate environment, there was no difference in deposit assumptions, and the overall result was the same. Therefore, the falling rate scenario is only shown in Simulation A.

Projecting deposit activity in a period of historically low interest rates is difficult, and the Company cannot predict how deposits will actually react to shifting rates.  The comparisons above provide insight into potential effects of changes in rates and deposit levels on net interest income.  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 minimize the impact of interest rate risk.


58
Table of Contents



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, 2019 . 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.


Table of Contents

PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The information required by this item is set forth in Part I, Item 1 under Note 17, Legal and Regulatory Proceedings.


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 common 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, 2019
173,686

 
$
60.67

173,686

2,075,877

February 1 — 28, 2019
289,943

 
$
61.59

289,943

1,785,934

March 1 — 31, 2019
183,425

 
$
61.63

183,425

1,602,509

Total
647,054

 
$
61.35

647,054

1,602,509


The Company's stock purchases shown above were made under authorizations by the Board. Under the most recent authorization in October 2015 of 5,000,000 shares, 1,602,509 shares remained available for purchase at March 31, 2019 .


Item 6. EXHIBITS


3.1 — Restated Articles of Incorporation for Commerce Bancshares, Inc.

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


60
Table of Contents

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, 2019
By 
/s/  PAUL A. STEINER
 
Paul A. Steiner
 
Controller
 
(Chief Accounting Officer)

Date: May 7, 2019


61


RESTATED ARTICLES OF INCORPORATION
OF
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 (f/k/a 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 122,000,000 shares, consisting of

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

(ii) 140,000,000 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 para-graph (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 dis-posed 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 govern-mental, 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 other-wise 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 herein-after 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 ARTI-CLES 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.






Exhibit 31.1

CERTIFICATION

I, John 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 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 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/ J OHN  W. K EMPER
 
John W. Kemper
President and
Chief Executive Officer
 
 
May 7, 2019
 
        
            







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.;
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 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 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/ C HARLES  G. K IM
 
Charles G. Kim
Executive Vice President and
Chief Financial Officer
 
 
May 7, 2019
 
            
        
            






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, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, John 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/ J OHN  W. K EMPER
 
John W. Kemper
Chief Executive Officer
 
 
 
/s/ C HARLES  G. K IM
 
Charles G. Kim
Chief Financial Officer
 
 
May 7, 2019
 

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.