Commerce Bancshares Inc Annual Report 2014

Plain-text annual report

S T R E N G T H | C O M M U N I T Y | I N N O V A T I O N 2 0 1 4 A N N U A L R E P O R T A N D F O R M 1 0 - K C O M M E R C E B A N C S H A R E S , I N C . 2 0 1 4 A N N U A L R E P O R T A N D F O R M 1 0 - K COMMER CE BA NCSH ARES, IN C. 1000 WALNUT P.O. BOX 419248 KANSAS CITY, MO 64141-6248 Phone: (816) 234-2000 (800) 892-7100 Email: mymoney@commercebank.com Website: www.commercebank.com An Equal Opportunity Employer C O M P A N Y P R O F I L E Commerce Bancshares, Inc. operates as a super-community bank offering an array of sophisticated ﬁnancial products delivered with high-quality, personal customer service. The Company’s customer promise we ask, listen and solve is not just its brand, but also its corporate focus. With this platform, Commerce is continually building its long-term franchise while paying strict attention to asset quality and expense management. Commerce provides a full range of ﬁnancial products to consumer and commercial customers including: lending, payment processing, trust, brokerage and capital markets services. Commerce uses a variety of delivery platforms including an expansive ATM network, full-featured online banking, a central contact center, and has a nation- wide presence in the commercial payments industry. • $24.0 billion in assets • 37th largest U.S. bank based on asset size1 • 195 branches • 392 ATMs • 357,000 online banking customers2 • 45.7 million online banking sessions3 • 88,000 mobile customers • 4,744 full-time equivalent (FTE) employees Data as of December 2014 unless otherwise noted 1Source: SNL Financial as of 9/30/2014 2Includes active Retail and Small Business customers 3Retail sessions in 2014 C O M M E R C E B A N C S H A R E S A T A G L A N C E E I G H T K E Y M A R K E T S C O M M E R C I A L O F F I C E S C O M M E R C E U S P R E S E N C E 1. Cincinnati 2. Nashville 3. Dallas Branch Footprint Extended Commercial Market Area Commercial Payments Services 1. St. Louis 2. Kansas City 3. Springﬁeld 4. Central Missouri 5. Central Illinois 6. Wichita 7. Tulsa/Oklahoma City 8. Denver 8 6 2 4 1 3 5 1 2 7 3 C O N T I N U O U S I M P R O V E M E N T A B O U T T H E C O V E R Commerce is dedicated to continuous improvement and innovation. That requires listening to customer needs and investing in products that provide superior solutions. We continuously look for new ways to deepen our customer relationships and improve our business processes for greater cost-efﬁciency. s u o u n i t pro v e m e n t Im n o C In n o v t n e m t s e v a tion & In Mercy, one of the nation’s largest health care systems, serves millions of patients each year from its 32 hospitals. Commerce Bank is making it easier for those patients to pay their medical bills with new zero-percent interest rate loans. The Health Services Financing program is one of many solutions Commerce has developed over the years to support Mercy’s mission. From left, Tammy Krebel, Commerce senior vice president, commercial banking; Mark Huebner, director of health services ﬁnancing; Bruce Fernandez, Mercy’s director of treasury services; and Steve Walden, Mercy’s manager of treasury operations. Financial Highlights 1 | Message to Our Shareholders 2 | Strength • Community • Innovation 10 Success Stories 11 | Community Advisors 20 | Ofﬁcers and Directors 24 T A B L E O F C O N T E N T S We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 1 (In thousands, except per share data) O P E R AT I N G R ES U LT S F I N A N C I A L H I G H L I G H T S 2010 2011 2012 2013 2014 Net interest income Provision for loan losses Non-interest income Investment securities gains (losses), net Non-interest expense Net income attributable to Commerce Bancshares, Inc. Net income available to common shareholders Cash dividends on common stock $ 645,932 100,000 405,111 (1,785) 631,134 221,710 221,710 78,231 $ 646,070 51,515 392,917 10,812 617,249 256,343 256,343 79,140 $ 639,906 27,287 399,630 4,828 618,469 269,329 269,329 211,608** $ 619,372 20,353 418,386 (4,425) 629,633 260,961 260,961 82,104 $ 620,204 29,531 435,978 14,124 657,775 261,754 257,704 84,241 AT YEAR END Total assets Loans, including held for sale Investment securities Deposits Equity Non-performing assets Common shares outstanding* Tier I risk-based capital ratio Total risk-based capital ratio Leverage ratio Tangible common equity to tangible assets ratio Efﬁciency ratio OTHER FINAN CIA L DATA (based on average balances) Return on total assets Return on common equity Loans to deposits Equity to assets Net yield on interest earning assets (T/E) Wtd. average common shares outstanding-diluted* PER SHARE DATA Net income - basic* Net income - diluted* Market price* Book value* Cash dividends* Cash dividend payout ratio * Restated for the 5% stock dividend distributed December 2014. ** Includes a special dividend paid in the fourth quarter of 2012. $ 18,502,339 9,474,733 7,409,534 15,085,021 2,023,464 97,320 105,292 14.38% 15.75 10.17 10.27 59.71 1.22% 11.15 70.02 10.91 3.89 106,214 $ 20,649,367 9,208,554 9,358,387 16,799,883 2,170,361 93,803 102,973 $ 22,159,589 9,840,211 9,669,735 18,348,653 2,171,574 64,863 100,784 14.71% 16.04 9.55 9.91 59.10 1.32% 12.15 59.15 10.87 3.65 104,420 13.60% 14.93 9.14 9.25 59.26 1.30% 12.00 55.80 10.84 3.41 101,313 $ 23,072,036 10,956,836 9,042,997 19,047,348 2,214,397 55,439 100,675 14.06% 15.28 9.43 9.00 60.49 $ 23,994,280 11,469,238 9,645,792 19,475,778 2,334,246 46,251 96,327 13.74% 14.86 9.36 8.55 62.08 1.19% 1.15% 11.99 57.12 9.95 3.11 99,732 11.65 59.91 10.10 3.00 97,384 $ $ 2.09 2.08 32.69 19.22 .737 35.29% $ 2.45 2.44 32.93 21.08 .757 30.87% $ 2.64 2.63 31.80 21.55 2.090** 78.57%** 2.60 2.59 42.77 22.00 .816 31.46% $ 2.62 2.61 43.49 22.73 .857 32.69% R E T U R N O N A V E R A G E C O M M O N E Q U I T Y R E T U R N O N A V E R A G E A S S E T S 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Source: SNL Financial Commerce 10-Year Average: 12.7% Peers’ 10-Year Average: 8.4% 05 06 07 08 09 10 11 12 13 14 2.00% 1.50% 1.00% 05.0% 00.0% -05.0% -1.00% Source: SNL Financial Commerce 10-Year Average: 1.3% Peers’ 10-Year Average: 0.8% 05 06 07 08 09 10 11 12 13 14 Commerce Peers Large Banks Commerce Peers Large Banks We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 2 To Our Shareholders In 2015 Commerce Bank will be celebrating its 150th anniversary — a milestone that should be a source of pride for the entire Commerce family, employees, share- holders and customers alike. This year we celebrate the culture, agility and planning that have allowed us to serve our customers for a century and a half and be a steady and proﬁtable investment for our shareholders. Commercial banking and ﬁnancial services will continue to change rapidly, while technology and communications improve and evolve. Your Company is committed to understanding and adapting to customers’ changing needs while maintaining a culture of stability and intelligent risk-taking. D a vi d W. Ke m p e r, C ha i r ma n We have added such products as Commerce enjoyed solid ﬁnancial performance in 2014 as the United States economy continued to expand. Moderate loan growth and excellent credit performance offset continued interest margin pressure caused by ongoing extraordinarily low short-term interest rates and competitive pricing pressure. Our asset management and commercial card businesses enjoyed excellent fee income growth in 2014 with increases of 9% for both. We also experienced good growth in our newer commercial ofﬁces in Denver, Tulsa, Oklahoma City, customized health services for health care providers. ﬁnancing and automated payments Dallas, Nashville and Cincinnati with loans growing 11%, to $1.1 billion, and additional revenue earned from non-credit products. Slower but steady growth in our traditional banking markets resulted in solid, proﬁtable performance. Our longer-term strategy is to continue to invest in products and services that differentiate us to our customer. We are very excited about our ﬁve-year plans for expanding our commercial payments business, where we have added such products as customized health services ﬁnancing and automated payments processing for healthcare providers; as well as specialized trade ﬁnancing, which allows our customers to pay vendors and manage cash ﬂows and trade discounts. Our commercial payments business has become a national business with major customers from coast to coast. Our wealth management business had excellent growth this year, with our personal money management business continuing to expand our client base and services. We continue to increase our market penetration in Kansas City, St. Louis and our community markets and expect to bring these services to some of our expansion markets over the next several years. We will continue to focus on the long-term growth and health of our Company by making investments for the future. We anticipate 2015 will be a challenging operating year with continued historically low interest rates and intense loan competition, but we are conﬁdent the products we have and markets we are in will payoff with strong growth in the future. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 3 PERFORMANCE HIGHLIGHTS • Commerce reported earnings per share of $2.61, up slightly over 2013. The return on average assets totaled 1.2% while return on average common equity was 11.7%. This compares to the top 50 bank industry average of .8%* for return on assets and 7.5%* for return on average equity in 2014. • Net income attributable to Commerce totaled $262 million versus $261 million last year. • We paid a regular cash dividend of $.857 per share (restated) in 2014, making this the 46th consecutive year in which regular cash dividends were increased. We have also paid a 5% stock dividend for the 21st year in a row. • For the ﬁrst time, the Company issued $150 million in perpetual preferred stock in 2014, with a 6% dividend. Proceeds were used to repurchase common shares. In 2014, the Company paid $211 million to purchase shares of common stock. T O T A L L O A N S $11.5 $11.0 • Company equity totaled $2.3 billion, and the Tier I risk-based capital ratio totaled 13.7%. In 2015, the Company’s capital levels are expected to exceed all required amounts under the new Basel III regulations. • Average loans, year to date, grew 9%, or $944 million. Average commercial loans grew by $642 million, or 11%, on strong growth in business-type loans, while consumer banking loans grew $302 million, or 7%, on strong residential and auto loan growth. Loan growth in our expansion markets continued to be robust, as total average loans grew by 35%, to $1.1 billion. • Our wealth management business grew trust revenues 9%, to $112 million. Trust assets also grew 11% to $39 billion. • Our national commercial card business grew revenue 9%, to $88 million, in 2014, as a result of strong new customer sales and continued growth in usage by our existing customers. • Net loan charge-offs remained low, totaling $35 million in 2014, an increase of $3 million over last year. The increase was mostly due to higher loan recoveries in the prior year. Net loan charge-offs totaled .31% of total loans in 2014, compared to .30% in 2013. Non-performing assets declined $9 million this year. $9.8 CUSTOMER PROMISE VALUE PROPOSITION $9.5 $9.2 10 11 12 13 14 T O T A L D E P O S I T S $18.3 $16.8 $19.0 $19.5 $15.1 10 11 12 13 14 Over our 150-year history, Commerce has remained dedicated to providing high levels of customer service and innovative new products. Between 1920 and 1950, the bank built strong businesses in trust and check processing and developed a large correspondent banking network. In the 1960s, investments in the credit card business paved the way for larger investments down the road in payments systems. Today, Commerce operates as a super-community banking organization, dedicated to providing high customer service while offering sophisticated products and solutions to our business, wealth management and retail customer base. We listen to our customers, ask about their banking needs and offer solutions, many of which are customized to make banking even easier. We have created a culture for sales, service and risk management that is highly valued and constantly reﬁned and updated. We measure customer satisfaction for all business *As of September 30, 2014 Commerce Bancshares Company History 1865 - 1899 1850 - Kansas City is incorporated. 1863-64 - Congress passed two acts that create national banks and set up a national currency. 1881 - Dr. William S. Woods 1887 - Bank is granted buys into the bank and becomes president. national charter under the name National Bank of Commerce. 1893 - Bank survives ﬁnancial panic. 1821 - Missouri becomes ﬁrst state west of the Mississippi to be admitted into United States. 1865 - Kansas City Savings Association is organized with $10,000 in capital. Francis Long is president. 1877 - Missouri passes ﬁrst general incorporation law for banks. 1882 - Name of bank changes to Bank of Commerce. 1895 - Missouri passes law requiring annual bank examinations. s n o i l l i B n i $ s n o i l l i B n i $ $11.5 $11.0 $10.5 $10.0 $ 9.5 $ 9.0 $ 8.5 $ 8.0 $20 $19 $18 $17 $16 $15 $14 $13 $12 We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 4 segments regularly to ensure we provide valuable and relevant services at the highest quality levels. Employees are surveyed regularly, and their engagement scores continually rank above those of other high-performance companies, suggesting our employees are committed to Commerce’s success. Commerce also consistently offers above-average, risk-adjusted returns to our shareholders. Over the last 10 years, the annualized total shareholder return on the Company’s common stock amounted to 6.2%, compared to the NASDAQ Bank total return of .6%. Over this ten-year period, we have consistently outperformed our peer banks in both returns on assets and equity, while maintaining strong capital and reserves. Further, as noted above, we have increased our cash dividend paid on common shares for 46 consecutive years and in 2014, for the ﬁrst time, we successfully issued perpetual preferred stock with an attractive 6% dividend rate. INDUSTRY RECOGNITION AND INNOVATION The Company’s ongoing focus on providing solid, consistent returns while delivering innovative products with high service levels continues to generate industry recognition each year. • With total assets of $24 billion, Commerce ranks 37th For the sixth year in a row, Commerce was ranked among the top ten on Forbes’ list of America’s among U.S. banks and had market capital- ization of greater than $4 billion at December 31, 2014. Best Banks. Commerce ranked ninth • For the sixth on the list for 2015. year in a row, Commerce was ranked among the top ten on Forbes’ list of America’s Best Banks. Commerce ranked ninth on the list for 2015. • In September 2014, SNL Financial ranked Commerce Trust Company the 25th largest in the U.S. based on assets under management. • In December 2014, Moody’s Investors Service reafﬁrmed Commerce’s credit rating. Commerce is one of only four banks in the country with Moody’s highest assigned Bank Financial Strength rating. • In 2014, The Nilson Report ranked Commerce the 35th largest debit card issuer, 18th largest consumer credit card bank issuer, 7th largest purchasing card issuer and 17th largest commercial card issuer. • In December 2014, Commerce was among the ﬁrst banks in the country to begin offering a new service, Apple PayTM, which gives customers a new, easy, secure and private way to make mobile payments tied to our debit and credit cards. • Commerce continues to add new features and services to its online and mobile banking platforms. For example, customers can now deposit checks using mobile devices, and a new innovative credit card service, toggle®, can improve the way customers can manage their spending and borrowing. BLUE CHIP INITIATIVES Over the past several years, Commerce focused on new initiatives to grow revenue and improve overall proﬁtability, leveraging our existing product platforms to keep pace with increasing customer demands. Some important Blue Chip initiatives we will work on in 2015 include: • Building out expansion markets • Developing new lending and payment products • Transforming our retail model to generate new proﬁts • Accelerating wealth management opportunities While we have made investments in these new initiatives over the last several years and will continue to invest in people and technology in 2015, we expect to see tangible results begin to emerge in the coming year. These initiatives are described more fully below in the business line discussions. PAYMENTS SYSTEM Commerce is focused on investing in our payments system businesses. Operated within both our retail and commercial segments, these businesses offer the Company strong revenue growth opportunities, consistent earnings and less volatility from economic and interest rate cycles. These businesses also provide our customers with a comprehensive suite of highly competitive products and technologies to help them process payments more efﬁciently and effectively. Commerce Bancshares Company History 1900 - 1919 1903 - Future President Harry Truman is employed at Commerce as a clerk. 1907 - National Bank of Commerce is closed by The Ofﬁce of the Comptroller of the Currency, who resigns position to run bank. 1912 - National Bank of Commerce absorbs Southwest National Bank and becomes Southwest National Bank of Commerce. 1919 - “Southwest” is dropped from the company name. Deposits reach $60 million. 1900 - Bank becomes largest bank west of Chicago with more than $36 million in deposits. 1906 - Commerce Trust Co. is organized. 1908 - Bank reopens, and Dr. Woods regains control of bank. 1913 - Federal Reserve System 1916 - Southwest National Bank is formed. Missouri becomes only state with two Federal Reserve banks. purchases assets of Commerce Trust, but two banks continue to operate separately. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 5 Our payments system businesses include products and services for both consumer and business customers, such as deposit processing, commercial cash management, bankcard activities, and international services. These businesses generated $275 million in fee income in 2014 and grew 3% over the previous year. Commercial card revenues, which totaled $88 million this year, represent our largest single source of fee income and have grown rapidly over the last ﬁve years. Fees from debit card transactions, challenged four years ago by new banking laws, grew 5% in 2014, totaling $37 million. Our commercial cash management business consists of numerous services, including remittance processing and payables solutions to many companies in our markets across the Midwest and, increasingly, to companies in our rapidly growing expansion markets. In 2014, this business provided $43 million in customer billings, which are paid for with both fees and compensating deposit balances of $4.1 billion at year end. COMMERCIAL BANKING ACTIVITIES Our commercial banking group offers many traditional lending products, such as working capital lines of credit, owner-occupied and investment real estate loans, tax- advantaged ﬁnancing programs, and equipment ﬁnancing and leases. In addition to the payments system products mentioned above, we offer international services to companies that import or export to facilitate international payments and mitigate the associated risks. We also sell ﬁxed-income securities to both correspondent banks and commercial customers. All of these products and solutions are managed by commercial bankers who take the time to understand each customer’s unique needs. During 2014, average commercial banking loans grew $659 million, or 11%, to $6.8 billion on strong growth in commercial and industrial loans, tax-advantaged lending and leases. Commercial deposits also showed solid growth as average balances grew 7% to $7.3 billion, a sign that corporate customers still maintain high cash levels. While low interest rates continued to squeeze lending margins and competition remains strong among banks for new loans, we continued to grow our net interest income from both loan growth and increased earning assets related to deposit growth this year. Fees from commercial and merchant bank card activities contributed an additional $7 million in new revenue. Blue Chip Initiative – Building Out Expansion Markets While still relatively small, our expansion markets, including Tulsa, Oklahoma City, Denver, Dallas, Nashville and Cincinnati, represent important new growth opportunities for Commerce. In these higher-growth expansion markets that have experienced banking consolidation, our super- community banking model resonates with both commercial customers and the talented bankers we need to grow our business. Loan growth has been much stronger in expansion markets than in our more established markets. In 2014, average loans grew 35%, while fee income grew 9% and pre-tax proﬁts increased 11%. Our addition of Summit Bank in 2013 provided new opportunities to expand existing and develop new commercial relationships, especially in Oklahoma City and Tulsa markets where we have attracted several new bankers who are familiar with those cities. We also see good opportunities to grow both loans and revenues in the Denver and Dallas markets, which performed well this year, along with Nashville and Cincinnati. Blue Chip Initiative – Developing New Lending and Payment Products Over the past few years, we have developed a number of new lending products and expertise in the areas of leasing, health care, energy lending, ﬂoor plan ﬁnancing, tax-advantaged lending and international services. h t w o r G n a o L % 10% 8% 6% 4% 2% 0% L O A N G R O W T H - 2014 V E R S U S 2013 Expansion Markets Offering Growth Opportunities 9% 5% Expansion Markets 23% Total Company Commerce Bancshares Company History 1920 - 1939 1922 - W.T. Kemper sells interest in bank at $200 a share. 1925 - James Kemper Sr. 1928 - Commerce begins ﬁrst 1932 - W.T. Kemper reacquires bank becomes president of the bank. 24-hour transit department in the country. for $86 a share. 11% 1938 - W.T. Kemper dies, and James Kemper Sr. becomes chairman of the board. 1921 - National Bank and Commerce 1925 - W.T. Kemper buys Trust merge operations. Women’s Department is established. Kansas City, Mexico & Orient Railway for $3 million. 1928 - W.T. Kemper sells railroad for $14.5 million, shortly before beginning of Great Depression. 1933 - Bank survives run during Great Depression. Banking Act of 1933 creates the FDIC system. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 6 This past year, we spent considerable time on new lending initiatives, including health services ﬁnancing, medical claims payments, customer accounts payable processing and supply chain ﬁnancing. In health care, we now offer new ﬁnancing alternatives to our hospital customers and new medical claims processing services for providers. We also invested in developing our AP Automation product, which will enable us to process more of our customers’ payments and provide new revenue sources in the future. This product also allows us entry into future supply chain ﬁnancing opportunities. With our recent expansion in Oklahoma, we are carefully expanding our energy lending business, well aware of the recent market stress created by low oil prices. We believe this sector will continue to be an important part of our national economy. CONSUMER BANKING Our consumer banking business is comprised of 195 branches spread through Missouri, Kansas, Illinois, Oklahoma and Colorado with total consumer deposits of $9.5 billion. In addition to offering traditional deposit products, including checking, money market, savings and certiﬁcates of deposit, we also offer debit and credit cards, personal banking loans for vehicles, construction and home improvement loans and lines of credit, and residential mortgages. During 2014, consumer loans within this business grew by 5% to $2.7 billion, while deposits grew by 2%. Blue Chip Initiative – Transforming the Retail Model A combination of changes in the regulatory environment and customer behaviors made it imperative we examine our retail branch banking network with a focus on improving both our customers’ experience and our proﬁtability in this segment. With falling revenues over the last ﬁve years and signiﬁcant costs to operate our branch locations, proﬁts have been squeezed. Further, new online banking and mobile technologies have meant greater ﬂexibility and options to our customers, who no longer rely solely on branches to serve their banking needs fully, but still need to visit them for advice or new services. We have been focused on new ways to serve our customers To address these issues, we have been focused on new ways to service our customers with greater efﬁciency. Branch managers now oversee multiple locations. In many of our locations, branch associates handle all customer needs, acting as both tellers and ﬁnancial service represen- tatives. Using video conferencing technologies, we are able to connect our customers to experts within our bank to address their needs immediately. While these are important steps, more enhancements are planned. In November 2014, we opened a new branch concept in St. Louis, with advanced technologies and a new approach to customer service. In 2015, two more new branches will open with similar concepts as we try to create new and better customer experiences. Further, we have closely examined our current branch locations and over the last 12 months have closed or sold seven locations that offered limited growth opportunities. We continue to look for new ways to interact with our customers and meet their changing needs, while improving productivity and proﬁtability in this segment. with greater efﬁciency. New initiatives are underway to expand our residential mortgage business to better leverage our infrastructure and strengthen our customer relationships, which should also create new sources of fee income. We have also invested resources to upgrade our online and mobile banking channels, adding new features such as remote check deposit, and we were among the ﬁrst banks to roll out the new Apple PayTM product for use on iPhone 6® smart phones. In early 2015, we rolled out a new credit card feature, toggle®, which will provide consumers with ﬂexibility in scheduling payments, while enabling them to earn reward points. We will also be issuing new credit and debit cards with chips, offering greater security against fraud. Clearly, we are focused on providing our customers with the latest in products and technology to make their banking easier, while also working hard to improve productivity and proﬁts. Commerce Bancshares Company History 1940 - 1959 1946 - James Kemper Jr. begins work at the 1947 - James Kemper Sr. and Arthur Eisenhower First National Bank of Independence, controlled by the family. help TWA underwrite the bond for the future Kansas City international airport. 1955 - James Kemper Jr. becomes president of the bank. 1944 - James Kemper Sr. and Commerce directors begin Midwest Research Institute to help Kansas City community develop new industries. 1955 - Commerce leads ﬁnancing for TWA terminal that helps Kansas City land international ﬂights. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 7 WEALTH AND ASSET MANAGEMENT Our Commerce Trust Company is a leading regional provider of private banking and wealth management products and services. Through Commerce Trust, we provide trust, investment management and a broad range of ﬁnancial advisory services to individuals, businesses and other institutional clients. Our Commerce Family Ofﬁce also offers highly customized advice to customers who require more specialized assistance in areas such as investment consulting, risk management, family administrative services and advice on family-owned businesses. Commerce Trust manages a family of mutual funds, The Commerce Funds, with $2.0 billion in assets under management. We also operate a retail brokerage business, Commerce Brokerage Services, Inc., with approximately $300 million in our Horizons managed account product. In 2014, trust and asset management revenues grew 9%, to $112 million, as a result of new business development and expansion of existing client relationships. Client assets also grew 11%, to a record $39 billion. Loans to private banking clients increased 8%, while private banking deposits grew 10%. Our brokerage business also had a solid year as revenue grew 9%. In 2014, Commerce Family Ofﬁce was ranked 21st in the U.S. by customer assets with the second fastest asset growth in the country by Bloomberg News. Blue Chip Initiative – Accelerating Wealth Management Opportunities After ﬁve years of strong growth in revenues and proﬁts, our asset management business is in a position of strength to continue this pace and add new customer relationships. We are focused on a number of initiatives to achieve our goals. With success in our Family Ofﬁce business over the last several years, especially in our St. Louis market, we have added senior staff to focus and grow our Kansas City market, where we see good potential. We are expanding our sales staff and calling programs and are investing in expanded marketing resources to identify new customers and increase future sales. We are also focused on expanding our presence in our newer markets with added staff and calling efforts, and are looking at new technologies to achieve product s n o i l l i B n i s t e s s A t s u r T $40 $35 $30 $25 $20 $15 $10 $5 $0 T R U S T A S S E T S A N D F E E S $120 $110 $ 100 $ 90 $ 80 $ 70 $ 60 $ 50 $ 40 s n o i l l i M n i s e e F t s u r T 10 11 12 13 14 Trust Assets Trust Fees enhancements and expense savings. We continue to emphasize our Horizons managed account product, which generated signiﬁcant new revenues this year. We believe solid returns will continue to attract new business in the future. COMMERCIAL CARD AND MERCHANT ACTIVITIES Our national commercial card payments business, which is included in our commercial banking segment, is unique and deserves to be highlighted. This business covers 48 states and is the largest of all our payments activities. We were recognized as the 17th largest commercial card provider in the U.S. according to Nilson. Revenue growth has been strong, especially in commercial card fees, which have grown over the last ﬁve years at an average rate of 23%. Commercial card activities include processing accounts payable payments for our commercial customers, which C O M M E R C I A L C A R D F E E S 5 - Y e a r 5 - Y e a r C A G R = 2 2 %2 2 % C A G R = 2 2 % $71 $81 $88 $58 $48 10 11 12 13 14 s n o i l l i M n i $ $90 $80 $70 $60 $50 $40 $30 $20 $10 $ 0 Commerce Bancshares Company History 1960 - 1979 1965 - Commerce Tower opens at 911 Main. 1967- Deposits surpass $500 million. 1971 - Stock begins publicly trading on NASDAQ. Assets surpass $1 billion. 11% 1978 - Commerce acquires Manchester Financial of St. Louis. 1966 - Commerce organizes bank holding company. The next year, it starts acquiring banks in Missouri. 1969 - First ATMs introduced in United States. 1972 - Federal Reserve approves Commerce plan to open bank in St. Louis. 1979 - Installation of ﬁrst Commerce Bank ATM We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 8 C A S H D I V I D E N D S P E R S H A R E N E T L O A N C H A R G E- O F F S e r a h S r e p s d n e d i v i D $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 1 0 -Ye a r C A G R = 5 % 1 0 -Ye a r C A G R = 5 % 05 06 07 08 09 10 11 12 13 14 Excludes special dividend of $1.30 per share in 2012. s n o i l l i M n i $ $160 $140 $120 $100 $ 80 $ 60 $ 40 $ 20 $ 0 05 06 07 08 09 10 11 12 13 14 allows them to reduce manual processing and lower overhead costs. We offer this product through our commercial bankers in our markets and with a dedicated sales force throughout the country. While we service customers in many industries, we have developed specialties in servicing healthcare, education and governmental customers. During 2014, revenues grew to $88 million, or an increase of 9%, on customer-generated sales volumes of $6.8 billion. In 2014, we added 171 new customers with projected sales volumes of approximately $1.4 billion. Revenue growth has been strong, especially in commercial card fees, which have grown over the last five years at an average rate of 23%. We have invested signiﬁ- cant time and energy in developing new products and services to enhance this payments business and increase our share of our corporate transactions. After several years in development, in 2015 we expect to roll out our AP automation and supply chain ﬁnancing products and begin to grow new revenues and proﬁts. Merchant processing is also an important payments business with revenues of $27 million in 2014. We processed payments for more than 10,000 merchants this year on sales of more than $8.6 billion. RISK MANAGEMENT We focus on strong underwriting and credit management practices, and results in 2014 continue to be among the best in the banking industry. Net loan charge-offs totaled $35 million in 2014, a slight increase over the prior year, mainly the result of lower commercial loan recoveries this year. Net loan charge-offs totaled .31% in 2014 and .30% in 2013 — historically low loss rates — and compare to the industry average for the top 50 banks of .34%.* Non-performing assets totaled .40% of loans, the lowest level in ﬁve years, and compares to an industry average of .87%.* Gross commercial loan losses totaled $4.5 million in 2014 compared to $5.2 million last year. However, commercial loan recoveries were $4.6 million lower this year, as many of these recoveries related to loan losses during the ﬁnancial crisis have been declining. Consumer net loan losses were down slightly in 2014, mainly due to lower personal real estate and credit card loan losses, which are at historically low levels. These decreases were partly offset by higher credit losses on our automobile loan portfolio, which has seen good growth over the last three years. Overall, loss rates on automobile loans remain low, as do 30-day and older delinquency rates for consumer loans. OUTLOOK FOR 2015 The outlook for the U.S. economy is for moderate growth in a very low interest rate environment. Fed monetary policy will depend on the pace of domestic growth and global conditions; it is clear that the extraordinary period of very *As of September 30, 2014 Commerce Bancshares Company History 1980 - 1997 1983 - Missouri changes bank laws to make it possible to merge banks in same county. 1984 - Commerce 1986 - Assets 1989-90 - Commerce survives acquires County Tower in St. Louis. surpass $5 billion. savings and loan crises. 1991 - Commerce launches its debit card system. 1994 - Interstate banking approved by Congress and President Clinton. 1982 - David Kemper 1985 - Commerce Bank of 1985 - Commerce 1987 - Missouri allows 1995 - Commerce becomes president and chief operating ofﬁcer. Brother Jonathan Kemper joins bank. Omaha established for credit card business. It rolls out ﬁrst card having both credit and ATM functions later that year. acquires First National Bank of St. Joseph. limited branching by banks. 1992 - Commerce creates SBIC operation to invest in businesses. 1991 - Missouri switches to statewide branch banking system. 1994 - Commerce introduces mutual fund products. acquires People’s Bank in Bloomington, Ill, and Union Bancshares in Wichita, Kan. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 9 G R O W T H I N E P S A N D S T O C K P R I C E T E N- Y E A R C U M U L AT I V E T O T A L R E T U R N e c i r P k c o t S $60 $50 $40 $30 $20 $10 $0 05 06 07 08 09 10 11 12 13 14 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 e r a h S r e p s g n i n r a E $ 240 $ 200 $ 160 $ 120 $ 80 $ 40 $ 0 2004 2006 2008 2010 2012 2014 Stock Price Earnings per Share Commerce (CBSH) NASDAQ Bank S&P 500 low interest rates will continue to put pressure on industry earnings for 2015. The U.S. banking industry is well capitalized and proﬁtable, but continues to suffer from over-capacity and excessive regulation, both of which have added cost and limited lending, especially to consumers. There is growing political and market recognition that midsized banks like Commerce are performing well for their customers and communities. We hope that the regulatory environment will continue to improve to reduce unnecessary cost and red tape, which result in needless costs to our customers. The ﬁnancial industry continues to rapidly evolve with new technology and communications. Your Company has prospered for a century and a half precisely because we have been adaptive and responsive to our customers’ changing needs. Our key measurements of employee and customer satisfaction remain well above industry standards, reﬂecting both of our top priorities, which are working together as a team and listening to what our customers want. We are very pleased with the progress we have made over the past year on our key areas of focus – the Blue Chip priorities mentioned in this letter. We are excited about our national payments business and its new products, our accelerating wealth management business and our excellent growth in our new geographical markets. We also continue to solidify our core market positions and streamline our retail distribution to be sure we continue to be an efﬁcient quality provider of our core banking services. The hallmark of Commerce from our inception in 1865 has been to The hallmark of Commerce from our inception in 1865 has been to focus on the long run. Our ﬁnancial returns continue to outpace the market and our strategic initiatives should accelerate that performance over the next 10 years. In January 2015, your Company increased its cash dividend 5% to $.90 per share – our 47th consecutive annual increase. Our steady, sound stock performance has outpaced the overall bank stock market by 6% and 28% over the last 10 and 20 years. We thank our loyal shareholders for their support and look forward to a successful future. focus on the long run. D a vi d W. Ke m p e r, C ha i r m a n C O M M E R C E B A N C S H A R E S , I N C . F E B R U A R Y 2 4 , 2 0 1 5 Commerce Bancshares Company History 1998 - 2015 1998 - CBI assets surpass $11 billion. 2001 - Commerce employees donate $25,000 to NYC United Way after 9/11 terrorist attacks. 2008 - Commerce opens commercial lending ofﬁces in Cincinnati and Nashville. 2009 - Commerce becomes one of the largest banks in the country not to accept TARP funding from federal government. 2013 - John Kemper named president and chief operating ofﬁcer. 1999 - Last parts of Glass-Steagall Act repealed. 2007 - Commerce acquires banks in Oklahoma and Colorado. 2008 - Commerce remains 2012 - Commerce opens ofﬁce in Dallas. 2015 - 150th year of Commerce. strong through the Great Recession by avoiding subprime lending and demonstrates solid underwriting. 2013 - Commerce acquires Tulsa-based Summit Bank with presence in Oklahoma City. S T R E N G T H , C O M M U N I T Y, I N N O V A T I O N It is unusual for an institution to endure for 150 years, much less ﬂourish. As Commerce reaches this milestone in 2015, we do so positioned solidly as one of the country’s most successful banks. We measure this success not only by the strength of our balance sheet, but also by the strong relationships we have built in the communities we serve and the continual innova- tion we deliver to address our customers’ changing needs. From solutions that support the mission of a non-proﬁt hospital system, to investment strategies that help a state university boost graduation rates, to technologies that allow people to bank when and how they prefer, we are committed to helping our customers succeed. That requires asking them questions, listening to their needs and offering solutions that address them. Their success is our success — for 150 years running. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 10 2 0 1 4 C O M M E R C E C U S T O M E R S U C C E S S S T O R I E S 11 | Just what the doctor ordered Patients took notice when Mercy announced a zero-percent interest rate loan that they could use to consolidate their medical bills into a lump sum they could repay over time. 12 | A championship team The Kansas City Royals may be the 2014 American League Champions, but their winning relationship with Commerce dates back to 1968. 13 | Safe and sound Missouri Employers Mutual works to create injury-free workplaces. But when accidents happen, they pay claims quickly — with a little help from Commerce. 14 | A slice of success IPHFHA doesn’t serve pizza; it serves the franchise owners who operate more than 90 percent of the nation’s Pizza Hut restaurants. 15 | A Midwestern retailing legend Nebraska Furniture Mart has more than 5,000 vendors. Thanks to Commerce, it receives cash back every time it pays an invoice to many of them. 16 | A foundation for higher learning Many University of Central Missouri students depend on scholarships to make education affordable. UCM depends on The Commerce Trust Company to help make scholarships possible. 17 | The world is their lab A manufacturer serving 110 countries needs a bank that knows international business. That’s one reason Labconco has banked with Commerce for more than 40 years. 18 | Fueling growth In 2014, Cardinal River Energy began its banking relationship with Commerce. Commerce had expanded its energy banking business the year before. 19 | High-tech branch banking Banking in a branch without a teller line isn’t as impersonal as you might think. Just ask the customers in Commerce’s new Vandeventer location. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 11 Just what the doctor ordered MERCY ST. LOUIS, MISSOURI One of the nation’s largest Catholic heath care systems The last thing a patient needs after a hospital stay is the stress of medical bills piling up. Patients discharged from any of the 32 hospitals in Mercy’s health system now have a more compassionate alternative. With a special zero-percent interest rate loan from Commerce, they can consolidate those bills into one lump sum that they repay over time. “A zero-interest loan is not a product you ﬁnd many places,” says Bruce Fernandez, Mercy’s director of treasury services. “But Commerce understood patient needs and developed a truly humanitarian solution that helps ease their minds and support their recovery.” The Health Services Financing program is one of many solutions Commerce has developed over the years to support Mercy’s non-proﬁt Catholic mission, according to Steve Walden, Mercy’s manager of treasury operations. “Many banking services are commodi- ties,” says Steve. “When we want to do something different, we’ve found that larger banks can’t respond as quickly or nimbly as Commerce. That’s where we go when we want to look outside the box.” A zero-percent interest rate loan is one of many solutions Commerce has developed to support Mercy’s non-proﬁt Catholic mission. From left: Steven Walden, manager, treasury operations; Brian Day, vice president and deputy treasurer; Anthony Waskiewicz, Jr., chief investment ofﬁcer; Bruce Fernandez, director, treasury services; and Shannon Sock, executive vice president, strategy and chief ﬁnancial ofﬁcer. Mercy also looks to Commerce for ﬁnancing and to The Commerce Trust Company for investment fund management, among many other things. “ It’s our responsibility to hire the best bank for the job. Period. The fact that we choose Commerce so often is a testament to their across-the-board excellence.” “I can’t tell you the number of times we’ve gone to Commerce with a need, and they’ve designed a solution to meet it,” says Anthony Waskiewicz, Jr., Mercy’s chief investment ofﬁcer. “Our relationship works Other Commerce innovations include a purchasing card program — the largest under the bank’s management — that has been tailored multiple times to address specialty needs within the Mercy system. so well because we both exist, in large part, to serve our communities,” he says. “That extends into Commerce’s support of our charitable efforts, which means a lot.” We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 12 A championship team KANSAS CITY ROYALS KANSAS CITY, MISSOURI back in 1968. The long, deep partnership the two organizations have built has helped to strengthen the Royals’ performance, both on and off the ﬁeld. The Kansas City Royals have banked with Commerce since the franchise was founded in 1968. From left: David Laverentz, vice president, ﬁnance; Kevin Uhlich, senior vice president,business operations; and Dan Glass, president. 2014 American League Baseball Champions “In just the last few years, Commerce When a major league baseball team wins a league championship, few people stop to thank the team’s bankers. The front ofﬁce of the Kansas City Royals may be the exception. “Baseball is a seasonal business,” explains David Laverentz, the Royals’ vice president of ﬁnance. “We couldn’t fund player salaries or acquire new talent late in the season without a substantial line of credit. Our commercial bankers are an important part of our team.” Those bankers come from Commerce, which has been the Royals’ bank since the franchise was ﬁrst awarded to pharmaceutical executive Ewing Kauffman helped us transform our back ofﬁce operations,” says Adam Tyhurst, director of ﬁnance. That includes introducing every- thing from merchant processing for ticket “ No matter what we need, Commerce has always been there, supporting our efforts to put a competitive team on the ﬁeld.” quick cash from Commerce ATMs located throughout Kauffman Stadium, or win the opportunity to throw out the ﬁrst pitch when using their Royals-branded credit cards. “Most teams do their banking through Major League Baseball, which works with large multi-national banks,” says David. “But we’ve sales, to corporate purchasing cards, to an electronic accounts payable solution, all of which, Adam says, “dramatically reduce the amount of paper we push around.” decided to stick with Commerce. Their solutions match our needs. The credit process is simpler. And the service is impeccable.” The Royals-Commerce partnership also “They’re also great Royals’ fans,” adds extends to the team’s fans, who can get Adam. “That never hurts.” We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 13 Safe and sound MISSOURI EMPLOYERS MUTUAL COLUMBIA, MISSOURI Missouri’s largest provider of workers’ compensation insurance Safety is job one for Missouri Employers Mutual, which provides workers’ compensation insurance to more than 14,000 Missouri employers. “In our world, a good day is one when every worker makes it home safely,” says CEO Jim Owen. Innovation and service also matter. Thanks in part to the insurer’s pioneering loss prevention and safety programs, more than 80 percent of its policyholders are injury-free in a typical year. In Commerce Bank, Missouri Employers Mutual found a bank with similar values. “We need partners who understand our mission and help us achieve it,” Jim says. That includes helping the company collect insurance premiums efﬁciently, invest them effectively and, when accidents happen, pay claims quickly and accurately. Before Commerce introduced Missouri Employers Mutual to lockbox services, for example, slower payment processing meant more policies were in danger of cancellation due to late payment. “Now, payments are processed faster, and we can protect our policyholders’ coverage by providing same-day resolution of any exceptions,” explains Rhonda Colley, customer service director. In addition, the electronic payment system Commerce implemented makes it easier — and safer — for the insurer to process thousands of claims-related payments each week. The Commerce Trust Company, meanwhile, manages half of its sizable investment portfolio, the income from which “is the lifeblood of our company,” says Doug Phillips, chief ﬁnancial ofﬁcer. “Commerce takes a genuine interest in our business,” says Perry Heckemeyer, controller. “Any time a question comes up, they are quick to offer solutions.” “The word that comes to mind is partnership,” adds Doug. “Because we can depend on Commerce, our policyholders can depend on us.” “Commerce regularly brings us ideas that give us competitive advantages by making our services more user-friendly.” Missouri Employers Mutual uses an electronic payment solution from Commerce to process thousands of payments a week. From left: James C. “Jim” Owen, president and chief executive ofﬁcer; Doug Phillips, vice president, ﬁnance and chief ﬁnancial ofﬁcer; Rhonda Colley, customer service director; and Perry Heckemeyer, controller. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 14 A slice of success INTERNATIONAL PIZZA HUT FRANCHISE HOLDERS ASSOCIATION WICHITA, KANSAS Financial services organization for the nation’s largest pizza franchising organization Mary Adolf takes her ﬁduciary responsibilities seriously — as seriously as her customers take their pizza. Mary is executive director of the International Pizza Hut Franchise Holders Association (IPHFHA), which provides ﬁnancial services to the 130 franchisees that operate more than 90 percent of the nation’s 6,300 Pizza Hut restaurants. Each year, IPHFHA collects hundreds of millions of dollars in fees from these franchisees, which it then pays out for insurance, advertising and other shared services. In the interim, it entrusts those funds to Commerce. Mary says IPHFHA’s efﬁciency has improved since the organization moved its business to Commerce in June 2014. “We need to drop funds into 12 different accounts,” explains Mary. “Commerce designed a sophisticated treasury package that not only gets the checks to the right place efﬁciently, but then consolidates the accounts into one to maximize cash availability and returns.” “Because of the way money ﬂows in A sophisticated treasury package designed by Commerce enables IPHFHA Executive Director Mary Adolf and Vice President and Chief Financial Ofﬁcer Tom Kennalley to manage the millions of dollars in fees the organization collects from 130 Pizza Hut franchisees each year. business and provided the line of credit we need to fund major media buys and other large seasonal expenses,” says Tom. “ Thanks to Commerce, we are better stewards of our customers’ money.” and out of our organization, we don’t have the large balance sheet you might expect from an organization that buys Super Bowl ads,” says Tom Kennalley, IPHFHA’s vice president and chief ﬁnancial ofﬁcer. “We also can’t take risks with other people’s money.” “Commerce Bank spent the time to understand the unique nature of our “The Commerce Trust Company, meanwhile, tailored risk-appropriate investment strategies that increase our yield,” says Tom. “We like the personal attention we get from Commerce,” says Mary. “It all comes down to great personal service and knowledgeable people.” We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 15 5,000, according to Doug Hamlin, chief ﬁnancial ofﬁcer. That’s a lot of invoices to track and pay. So in 2006 when Commerce proposed a new automated approach to bill paying, Doug listened. Instead of cutting checks, the company was soon paying participating vendors electronically. The vendors received funds quickly, and Nebraska Furniture Mart got a revenue share in return. The program has grown by leaps and bounds ever since. In 2015, Nebraska Furniture Mart will open a new 560,000-square-foot store near Dallas, its largest ever. From left: Ron Blumkin, president; Doug Hamlin, chief ﬁnancial ofﬁcer; and Matt Diggle, treasury manager. cards on ﬁle, for example, Commerce developed a single-use card alternative. Following the bank’s suggestion, the company now funds an internal employee recognition program using reloadable, declining balance cards. As for the revenue share: it has grown every year. And it’s expected to jump again in 2015, when the company opens a new store in the Dallas area — its largest ever — with 560,000 square feet of retail showroom space. “Commerce came in with an innovative approach and continues to bring us new solutions that help our business,” says Doug. “It’s a great partnership.” “ One thing I value about Commerce is their ability to grow the business with us. We wouldn’t have the volume we have today without the legwork they put in.” “Commerce constantly looks for opportunities to maximize card use,” says Matt Diggle, treasury manager. To appeal to vendors who don’t keep credit A Midwestern retailing legend NEBRASKA FURNITURE MART OMAHA, NEBRASKA The largest home furnishing store in North America “Sell cheap and tell the truth!” declared Russian immigrant Rose Blumkin when she began selling furniture at a slight markup from the basement of her husband’s pawn shop in 1937. Her strategy worked. Today her legendary company — Nebraska Furniture Mart — is owned by Warren Buffett-led Berkshire Hathaway. Its furniture stores in Omaha and Kansas City each house about one-half million square feet — that’s 11-plus acres — of retail showroom space, including furniture, ﬂooring, appliances and electronics under their very considerable roofs. Factor in the company’s large online presence, and its vendor base exceeds We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 16 16 A foundation for higher learning UNIVERSITY OF CENTRAL MISSOURI WARRENSBURG, MISSOURI The fastest growing university in Missouri Dr. Charles Ambrose doesn’t mince words. “College is broken,” he says. “It costs too much, it takes too long, and too many students leave without a degree.” But Dr. Ambrose, president of the University of Central Missouri, has a strategy for ﬁxing it. He intends to reshape higher education by lowering costs and increasing graduation rates — no small feat, consider- ing UCM today receives the same level of state funding it received 15 years ago. The new model relies more on private contributions and effective asset manage- ment. “Our university hasn’t historically relied heavily on endowment support,” notes Dr. Jason Drummond, vice president for university advancement and executive director of the UCM Foundation. “Our Foundation needed to be transformed to deliver what the university now needs.” For that, UCM turned to a longtime partner. “The Commerce Trust Company helped us completely reshape our invest- ment strategy,” says Jason. “Then they rolled up their sleeves and went to work.” Since 2009, the Foundation’s assets have grown from $30 million to $51 million, even with more than $18 million distributed to UCM for scholarships and other mission- critical needs. Five-year investment returns have placed UCM in the top quartile of institutional endowments nationwide.* UCM enrollment, meanwhile, is up 20 percent, graduation rates are improving and tuition increases are running below the rate of inﬂation. To keep pace, the university is building a new $50 million mixed-use residential development with Commerce helping with bond ﬁnancing. “Commerce is a critical business resource and partner in making all this happen,” says Dr. Ambrose. “Three words describe the UCM-Commerce relationship: leadership, trust and performance.” *National Association of College and University Business Ofﬁcers rankings. Commerce Trust has managed all of the University of Central Missouri Foundation’s investment assets since 1991. From left: Dr. Jason S. Drummond, vice president for university advancement and executive director, UCM Foundation; and Dr. Charles Ambrose, UCM president. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 17 years; about one third of its sales are now outside the U.S. “To compete globally, we need to spend our time getting to know local requirements and designing products to meet them,” explains Labconco Chairman Steve Gound. “We need a bank that supports us, while letting us focus on what we do best.” Labconco manufactures hundreds of scientiﬁc products that it distributes in 110 countries worldwide. From left: Pat Anderson, president; Steve Gound, chairman; and Jeff Stanton, vice president, ﬁnance. Day to day, Commerce works more behind the scenes, assisting Labconco with everything from credit card processing and online banking, to international letters of credit and lockbox services. “ If we have a special need, we call Commerce. Because of the long-term relationship we’ve cultivated, it’s easy to get things done.” “It’s great to have touch points throughout the organization,” says Jeff Stanton, vice president, For the past 40 years, that bank has been Commerce. “Looking back, whenever we had a signiﬁcant transaction — whether it was a building expansion or going through an ownership transition — Commerce was there,” says Steve. ﬁnance, “and to ﬁnd the same responsive and proactive attitude wherever we go.” Adds Steve, “The fact that we have a 40-year relationship speaks highly of our satisfaction with Commerce and what the bank means to us.” The world is their lab LABCONCO CORPORATION KANSAS CITY, MISSOURI A leading manufacturer and global supplier of laboratory equipment In 1925, in a small garage in downtown Kansas City, two young entrepreneurs developed a device they called the Kjeldahl Nitrogen Determination Apparatus. They sold it to agricultural laboratories, which used it to test the protein content of feeds and grains. Ninety years later, the company they founded — Labconco Corporation — is still making Kjeldahl apparatuses, along with hundreds of other scientiﬁc products that are distributed in 110 countries worldwide. Labconco’s international business, in fact, has more than doubled over the past 10 We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 18 Fueling growth CARDINAL RIVER ENERGY OKLAHOMA CITY, OKLAHOMA A diversiﬁed energy company with more than 1,200 wells in eight states When oil prices drop, it may be a boon to consumers at the pump. But to the companies whose products ﬁll those tanks, ﬂuctuating oil and natural gas prices are a risk that must be managed. “Hedging is a big part of our business,” says Brian Cardell, chief ﬁnancial ofﬁcer of Oklahoma City-based Cardinal River Energy, whose services include oil and gas exploration and production. “By locking into long-term price agreements, we reduce our exposure to price ﬂuctuations.” Those price agreements, like the energy business itself, can be complicated, says Cardinal River President Jay Jimerson. “A working knowledge of energy markets is a very important part of our banking relationship,” he says. “We need a partner who ‘gets it.’” Jay and Brian say they found such a partner in early 2014 when they established a banking relationship with Commerce. A year earlier, Commerce had enhanced its energy banking business with the acquisition of Summit Bancshares, an Oklahoma bank with experience serving oil and gas customers, who beneﬁt from Commerce’s greater lending capacity and broad product and service mix. Since making the move to Commerce, Cardinal River has looked to the bank for both traditional banking and specialty lending services, including a complex, three-party intercreditor agreement that allows Cardinal River to use its energy assets as collateral for both borrowing and hedging activities. “Commerce has a reputation for knowing how to mitigate the risks in commodity ﬁnancing,” says Jay. “And for us, it has worked really well. I can’t overstate the importance of having knowledgeable bankers who can help us through this process.” A three-party intercreditor agreement from Commerce helps Cardinal River Energy Chief Financial Ofﬁcer Brian Cardell (left) and President Jay Jimerson mitigate the risks in commodity ﬁnancing. We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 19 speak privately with loan ofﬁcers, investment brokers or other ﬁnancial experts. “Our goal is that, eventually, customers will be able to access virtually everything Commerce offers, at this location,” explains Patty Kellerhals, director of core retail. “Customers have complete choice. It they want technology, we have technology. If they prefer old-fashioned banking, that is available too.” “It’s not just the physical space that is changing, but the entire banking Thanks to video conferencing and other technologies, customers can access virtually any retail or business banking service Commerce offers at its newest branch. From left: Patty Kellerhals, director of core retail; Jamie Huch, branch manager; Michael Ntow, personal banker; Fran Fanara, St. Louis retail group manager; and Darryl Collins, St. Louis retail market director. typically have more complex banking needs. Today’s personal bankers are being trained to accommodate those needs, whatever they may be.” “You’d think a high-tech branch might be more impersonal,” says Mark Fishel, third generation owner of Vandeventer Truck Sales, a longtime Commerce customer who is now a regular at the new branch. “But that hasn’t been my experience at all. In the business center, I’ve gotten to know people I’ve seen in line for years. It’s wonderful.” “ The design of the new branch and the technology it offers are intriguing, but it’s the customer experience – how they interact with our personal bankers – that is truly unique.” experience,” adds Darryl Collins, St. Louis retail market director. “Today, many easy transactions take place outside our branches. The people who visit branches High-tech branch banking COMMERCE BANK’S NEW VANDEVENTER BRANCH ST. LOUIS, MISSOURI The prototype for the next generation of Commerce Bank Walk inside the new Commerce branch at the corner of Chouteau and Vandeventer in St. Louis, and you won’t ﬁnd any teller lines. You’ll be welcomed instead by a friendly concierge who’ll simply ask what you need. You might then be led to an exploration center to access your account online. Or, you could enter a semi-private video transaction station to complete your transaction. If you’re a small business owner, you might swipe a card to gain access to a private business center and meet face to face with a personal banker. Video conferencing will make it possible to We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 20 C O M M U N I T Y A D V I S O R S A fundamental element of Commerce Bank’s super- fabric of the market. Local civic and business leaders, community strategy is the role of our Community serving as Community Advisors, provide the insight Advisors. We believe that a deep understanding and to local needs that ensures Commerce delivers on a close relationship with the communities we serve its promise. Following are the names of these can be achieved only when we are interwoven in the ambassadors within each of our markets. Missouri BARRY COUNTY Donald Cupps Ellis, Cupps & Cole William A. Easley, Jr. Retired, Commerce Bank JoAnne Ellis Retired Educator Phil Hutchens Hutchens Construction Mike McCracken Commerce Bank Eugene Miekley Miekley and Cupps, DVM Ofﬁce Mike Petrie Commerce Bancshares, Inc. Commerce Bank Keith Shumaker Shumaker Tire, Inc. Clive C. Veri Commerce Bank Jerry Watley Able 2 Products Co. BOLIVAR Jannis Keeling Keeling Accounting & Financial Services Craig Lehman Shelter Insurance Agency Robert Moreland Commerce Bank Douglas D. Neff Commerce Bank Ed Peterson Century 21 Peterson Real Estate Dr. C. Pat Taylor Southwest Baptist University R.D. Vestal Retired, Vestal Equipment Co., Inc. Ron Hopkins Commerce Bank George M. Huffman Pearl Motor Company Jack W. Knipp Knipp Enterprises Rick Kruse Retired Boone National Savings & Loan Assoc. Dr. Mike Lutz Mike Lutz, DDS Teresa Maledy Commerce Bank Dr. Clifford J. Miller Green Hills Veterinary Clinic Todd Norton Commerce Bank Mike Petrie Commerce Bancshares, Inc. Commerce Bank Robert K. Pugh MBS Textbook Exchange Jim Rolls Retired, Associated Electric Cooperative James Schatz Commerce Bank Valerie Shaw Commerce Bank Steve Sowers Commerce Bank Mel Toellner Gold Crest Distributing & Songbird Station David Townsend Agents National Title Insurance Company Larry Webber Webber Pharmacy Dr. John S. Williams Retired, Horton Animal Hospital CAPE GIRARDEAU Leon Eftink The Remodeling Room Alan Gregory Gregory Construction, Inc. Gregg E. Hollabaugh Commerce Bancshares, Inc. Mike Kasten University of Missouri Richard R. Kennard Coad Chevrolet, Inc. Coad Toyota Adam Kidd Kidd’s Gas & Convenience Store Frank Kinder Red Letter Communications, Inc. John Layton Layton and Southard, LLC Roger Tolliver Retired, Commerce Bank Allen Toole Cape Electrical Supply, Inc. Timothy D. Woodard Commerce Bank CENTRAL MISSOURI Mike Alden University of Missouri Dan Atwill Atwill & Montgomery, Attorneys Brent Beshore AdVentures, LLC Brent Bradshaw Orscheln Management Company Philip Burger Burger’s Country Cured Hams Brad Clay Commerce Bank Joe Hartman Retired, Commerce Bank Gregg E. Hollabaugh Commerce Bancshares, Inc. EASTERN JACKSON COUNTY HARRISONVILLE Kevin G. Barth Commerce Bancshares, Inc. Commerce Bank Jason E. Boyer Commerce Bank Gayle Evans Chinnery, Evans & Nail Todd E. Gafney Commerce Bank Gary Hawkins HSMC Certiﬁed Public Accountants, P.C. Kelly Hooker Commerce Bank Robert Hormann Durvet, Inc. Robert Lund Realty Trust Group Jeanne Rau-Flattery Millenium International, LLC Edward J. Reardon, II Commerce Bank Robert C. Thompson Thompson Properties, LLC HANNIBAL C. Todd Ahrens Hannibal Regional Hospital David M. Bleigh Bleigh Construction Company, Bleigh Ready Mix Company Gregg E. Hollabaugh Commerce Bancshares, Inc. Jim Humphreys Luck, Humphreys and Associates, CPA, P.C. Darin D. Redd Commerce Bank Mike Scholes Reliable Termite & Pest Control, Inc. Aaron Aurand Crouch, Spangler & Douglas Connie Aversman Commerce Bank Larry Dobson Real Estate Investments Mark Hense Iﬁl USA, LLC Scott Milner Milner O’Quinn Ford, Lincoln, Mercury Brent Probasco Cass Regional Medical Center, Inc. Aaron Rains Commerce Bank Laurence Smith Reece & Nichols Smith Realty Larry Snider Insight Eyecare Specialties Timothy Soulis Gas Light Properties JOPLIN Jerrod Hogan Anderson Engineering David C. Humphreys TAMKO Building Products, Inc. Dr. Richard E. LaNear Missouri Southern State University Barbara J. Majzoub Yorktown Properties Fred Osborn Mercy Mike Petrie Commerce Bancshares, Inc. Commerce Bank Eric Schnelle S&H Farm Supply, Inc. Todd Stout Standard Transportation Services, Inc. Clive C. Veri Commerce Bank We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 21 Missouri Continued KANSAS CITY POPLAR BLUFF ST. LOUIS METRO ST. LOUIS SOUTH ST. CHARLES COUNTY/NORTH Kevin G. Barth Commerce Bancshares, Inc. Commerce Bank Clay C. Blair, III Clay Blair Services Corp. Ellen Z. Darling Zimmer Companies Stephen D. Dunn J. E. Dunn Construction Co., Inc. Jon Ellis Paradise Park, Inc. Joe Freeman Pioneer Financial Services, Inc. Stephen Gound Labconco Corp. C. L. William Haw Haw Ranch Jonathan M. Kemper Commerce Bancshares, Inc. Commerce Bank David Kiersznowski DEMDACO Stephen G. Mos Central States Beverage Company Edward J. Reardon, II Commerce Bank Dr. Nelson R. Sabates Sabates Eye Centers Kirk H. Schulz, Ph.D Kansas State University Charles S. Sosland Sosland Publishing Company Thomas R. Willard Tower Properties LEBANON Jerry N. Benson Retired, Commerce Bank Hugh V. Corry Hardware Electric & Plumbing Supply Company Brian Esther Commerce Bank Lester M. Evans Cattleman Douglas D. Neff Commerce Bank Harold Storck Cattleman Dan M. Waterman CPA Bill R. Brandt Commerce Bank John A. Clark Attorney at Law Bob Greer Retired Charles R. Hampton, Jr. Charles R. Hampton & Son Construction Co. Gregg E. Hollabaugh Commerce Bancshares, Inc. Richard Landers Commerce Bank James P. McLane McLane Livestock Transport, Inc. Mark Melloy Briggs & Stratton Corp. Ben Traxel Dille and Traxel, LLC Gregory West Mills Iron & Supply Timothy D. Woodard Commerce Bank ST. JOSEPH Robert J. Brown, Jr. Robert J. Brown Lumber Company James H. Counts Attorney at Law Brett Carolus Hillyard, Inc. Richard N. DeShon Civic Leader Pat Dillon Heartland Health Pete Gray Gray Automotive Products Co. Corky Marquart Commerce Bank Brad McAnally Hy-Vee Food Store Todd Meierhoffer Meierhoffer Funeral Home & Crematory Dr. Scott Murphy Murphy-Watson-Burr Eye Center Mike Petrie Commerce Bancshares, Inc. Commerce Bank Edward J. Reardon, II Commerce Bank Matt Robertson CliftonLarsonAllen LLP Judy Sabbert Heartland Foundation Michael D. Allen Hoya Optical Phillip J. Amato Councilman Ward 3, City of Arnold Scott Lively CliftonLarsonAllen LLP Thomas E. Muzzey Orchard Farm School District Louis J. Naeger Semi-retired, Crouch, Farley & Heuring, P.C. Lee Thurman Thurman, Shinn and Company ST. LOUIS WEST Cyrus Blackmore Blackmore & Glunt, Inc. Richard K. Brunk Attorney at Law James N. Foster McMahon Berger Jack Hoffmann Milestone Solutions Richard E. Hrabko Retired Stephen Mattis Allied Industrial Equipment Corporation Richard C. Mueller, Jr. Bopp Funeral Chapel Greg W. Schmittgens CliftonLarsonAllen LLP ST. LOUIS EAST Tino DiFranco Tropicana Bowling Lanes J. L. (Juggie) Hinduja Sinclair Industries, Inc. Myron J. Klevens Organizational Development Strategies Patrick N. Lawlor Lawlor Corporation Lisa McLaughlin Polsinelli McGraw Milhaven Talk Show Host KTRS Sue Prapaisilp Global Foods Market Dennis Scharf Scharf Tax Services Richard C. Ward Zimmer Real Estate Services, L.C./ONCOR International Ronald D. Chesbrough St. Charles Community College James D. Evans President, Lindenwood University Peter J. Mihelich, Jr. Goellner Promotions Duane A. Mueller Cissell Mueller Construction Company Howard A. Nimmons CPA, CFP Nimmons Wealth Management Tarlton J. Pitman Pitman Funeral Home, Inc. William J. Zollmann, III Attorney at Law Don Zykan Zykan Properties SPRINGFIELD Roger Campbell, Jr. Campbell Ford-Mercury, Inc. James P. Ferguson Heart of America Beverage Co. Charles R. Greene Husch Blackwell, LLP Bunch Greenwade Rancher Robert A. Hammerschmidt, Jr. Commerce Bank John Himmel Retired, Commerce Bank Seth M. Leadbeater Commerce Bancshares, Inc. Commerce Bank Michael Meek Meek Lumber Yard, Inc. Alvin D. Meeker Retired, Commerce Bank James F. Moore Investments David Murray R.B. Murray Company Douglas D. Neff Commerce Bank Keith Noble Commerce Bank Richard Ollis Ollis & Company Insurers Mike Petrie Commerce Bancshares, Inc. Commerce Bank B. Glenn Robinson Grand Country Square Blackford F. Brauer Hunter Engineering Co. Kyle Chapman Forsyth Capital Investors Charles L. Drury, Jr. Drury Hotels Joseph Forshaw, IV Forshaw of St. Louis James G. Forsyth, III Moto, Inc. David S. Grossman Grossman Iron and Steel Juanita Hinshaw H & H Advisors Donald A. Jubel Spartan Light Metal Products David W. Kemper Commerce Bancshares, Inc. John W. Kemper Commerce Bancshares, Inc. Alois J. Koller, III Koller Enterprises, Inc. Kristopher G. Kosup Buckeye International, Inc. Seth M. Leadbeater Commerce Bancshares, Inc. Commerce Bank James B. Morgan Subsurface Constructors, Inc. Victor L. Richey, Jr. ESCO Technologies, Inc. Steven F. Schankman Contemporary Productions, LLC James E. Schiele St. Louis Screw & Bolt Co. John (Jack) A. Schreiber Commerce Bank Thomas H. Stillman Summit Distributing Christine Taylor-Broughton Enterprise Holdings Gregory Twardowski Whelan Security Company Kelvin R. Westbrook KRW Advisors, LLC Patricia D. Whitaker Arcturis ST. LOUIS METRO EAST William Courtney Helitech Concrete & Structural Repair Thomas Lippert Liese Lumber Company, Inc. Robert McClellan Retired, Hortica James Rauckman Rauckman High Voltage Sales, LLC Dr. James T. Rosborg McKendree University Jack Schmitt Jack Schmitt Family of Dealerships Joe Wiley Quest Management Consultants Dr. Charles J. Willey Innovare Health Advocates We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 22 PITTSBURG WICHITA Dr. Thomas W. Bryant Retired, Pittsburg State University Todd Coleman Miller’s Professional Imaging Harvey R. Dean Pitsco, Inc. Joe Dellasega U.S. Awards Jeff Elliott Commerce Bank Adam Endicott Unique Metal Fabrication, Inc. Mike Petrie Commerce Bancshares, Inc. Commerce Bank Ronald L. Rhodes Rhodes Grocery, Inc. Steve W. Sloan Midwest Minerals, Inc. Brian Sutton Commerce Bank Clive C. Veri Commerce Bank Judith A. Westhoff Retired, Commerce Bank Wendell L. Wilkinson Retired, Commerce Bank RENO COUNTY (HUTCHINSON) John C. Clevenger Commerce Bank Steven B. Harper Network Management Group, Inc. Brett Mattison Decker & Mattison Company John Munds V&M Transport, Inc. Dr. John Bardo Wichita State University Michael P. Brown College Hill OB/GYN Michael E. Bukaty Retired, Latshaw Enterprises, Inc. John C. Clevenger Commerce Bank Ray L. Connell Connell & Connell Monte A. Cook Commerce Bank Thomas E. Dondlinger Dondlinger & Sons Construction Co., Inc. Ronald W. Holt Sedgwick County Eric E. Ireland Commerce Bank Fran D. Jabara Jabara Ventures Group Paul D. Jackson Vantage Point Properties, Inc. Seth M. Leadbeater Commerce Bancshares, Inc. Commerce Bank Gaylyn K. McGregor Commerce Bank Derek L. Park Law Ofﬁce of Derek Park, LLC Marilyn B. Pauly Commerce Bank Mike Petrie Commerce Bancshares, Inc. Commerce Bank Barry L. Schwan House of Schwan, Inc. Collin Stieben Commerce Bank Thomas D. White White & Ellis Drilling, Inc. Kansas BUTLER COUNTY (EL DORADO) Eugene S. Adams Retired Marilyn B. Pauly Commerce Bank Mark Utech Commerce Bank Dr. Jackie Vietti Butler Community College COLUMBUS Jay Hatﬁeld Jay Hatﬁeld Chevrolet Wesley C. Houser Retired, Commerce Bank Don Kirk H & K Campers Inc. Mike Petrie Commerce Bancshares, Inc. Commerce Bank Jane Rhinehart Commerce Bank Darrel Shumake Attorney at Law Clive C. Veri Commerce Bank GARDEN CITY Richard Harp Commerce Bank Dr. Gloria Hopkins Fry Eye Associates Gerald Miller Commerce Bank Mike Petrie Commerce Bancshares, Inc. Commerce Bank Lee Reeve Reeve Cattle Company Patrick Rooney Rooney Farms Pat Sullivan Sullivan Analytical Service, Inc. Bob Tempel WindRiver Grain, LLC HAYS D.G. Bickle, Jr. Warehouse, Inc. Kurt David Eagle Communications, Inc. Earnest A. Lehman Midwest Energy, Inc. Stuart Lowry Sunﬂower Electric Power Corporation Deron O’Connor Commerce Bank Marty Patterson Rome Corporation Mike Petrie Commerce Bancshares, Inc. Commerce Bank Kevin Royer Midland Marketing Co-op Thomas L. Thomas Commerce Bank JOHNSON COUNTY Kevin G. Barth Commerce Bancshares, Inc. Commerce Bank Andrew Fogt Commerce Bank Todd E. Gafney Commerce Bank Lance W. Hart DEMDACO Chris Herre Rose Construction Co., Inc. Pat Olney Commerce Bank Edward J. Reardon, II Commerce Bank Thomas K. Rogge Cramer Products Kevin Winters CBIZ LAWRENCE J. Scot Buxton Willis Group Martin B. Dickinson, Jr. Schroeder Professor of Law, University of Kansas Mark Heider Commerce Bank Evan Ice Stephens & Brand, LLP Eugene W. Meyer Lawrence Memorial Hospital Martin W. Moore Advanco, Inc. Kevin J. O’Malley O’Malley Beverages of Kansas, Inc. Edward J. Reardon, II Commerce Bank Dan C. Simons The World Company Michael Treanor Treanor Architects, P.A. LEAVENWORTH J. Sanford Bushman DeMaranville & Associate, CPAs, LLC Norman B. Dawson Retired, Commerce Bancshares, Inc. Sherry DeMaranville DeMaranville & Associate, CPAs, LLC Mark Denney J.F. Denney Plumbing & Heating Jeremy Greenamyre The Greenamyre Companies Lawrence W. O’Donnell, Jr. Lawrence W. O’Donnell, Jr., CPA Chartered Bill Petrie Commerce Bank Edward J. Reardon, II Commerce Bank Robert D. Schmitt, II Mama Mia’s, Inc. Kurt Seelbach President, Armed Forces Insurance Exchange MANHATTAN Kelly Briggs Bayer Construction Tom Giller Commerce Bank Dr. Jackie L. Hartman Kansas State University Neal Helmick Grifﬁth Lumber Co. Rich Jankovich Commerce Bank Dr. Ali Malekzadeh Kansas State University Dr. David Pauls Surgical Associates Mike Petrie Commerce Bancshares, Inc. Commerce Bank We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 23 Ed Keller Titan Resources Teresa Knox Community Care College P. Ken Lackey The NORDAM Group, Inc. Dr. George Mauerman Eastern Oklahoma Orthopedic Center Tom Maxwell Flintco, LLC Sanjay Meshri Advanced Research Chemicals John Neas Neas Investments Shannon O’Doherty Commerce Bank D. Lindsay Perkins Lindsay Development Tracy Poole New Gulf Energy John Turner First Stuart Corporation John Williams John Williams Company Daryl Woodard SageNet Colorado DENVER Robert L. Cohen The IMA Financial Group, Inc. Thomas A. Cycyota AlloSource Mark Danzo, O.D. 20/20 Institute Joseph Freund, Jr. Running Creek Ranch R. Allan Fries i2 Construction, LLP Darren Lemkau Commerce Bank James C. Lewien Retired, Commerce Bank Randall H. Lortscher, M.D. Rocky Mountain Gamma Knife Center, LLC Sherman R. Miller University of Colorado – Real Estate Department Robin H. Wise Junior Achievement – Rocky Mountain, Inc. Jason Zickerman The Alternative Board Illinois BLOOMINGTON-NORMAL Julie Dobski Little Jewels Learning Center McDonald’s Brent A. Eichelberger Commerce Bank Ron Greene Afni, Inc. Gregg E. Hollabaugh Commerce Bancshares, Inc. Parker Kemp Kemp Farms, Inc. Robert Lakin Commerce Bank Seth M. Leadbeater Commerce Bancshares, Inc. Commerce Bank Thomas Mercier Bloomington Offset Process, Inc. Dennis Myers Myers, Inc. Aaron Quick Farnsworth Group, Inc. Jay Reece Mueller, Reece & Hinch, LLC Alan Sender Chestnut Health Systems CHAMPAIGN-URBANA Mark Arends Arends Brothers, Inc. Paul Donohue Presence Covenant Brian Egeberg Commerce Bank Tim Harrington Devonshire Group Gregg E. Hollabaugh Commerce Bancshares, Inc. Robert Lakin Commerce Bank Kim Martin Martin, Hood, Friese & Associates, LLC Roger Rhodes Horizon Hobby, Inc. PEORIA Bruce L. Alkire Coldwell Banker Commercial Devonshire Realty Daniel J. Altorfer United Facilities, Inc. Peter T. Coyle Gallagher Coyle Brent A. Eichelberger Commerce Bank Lowell G. “Bud” Grieves Mark Twain Hotel Gregg E. Hollabaugh Commerce Bancshares, Inc. Seth M. Leadbeater Commerce Bancshares, Inc. Commerce Bank Dr. James W. Maxey Great Plains Orthopaedics Edward J. Scott Caterpillar, Inc. Janet M. Wright Central Illinois Business Publishers, Inc. Oklahoma OKLAHOMA CITY Ron Atchley Atchley Resources Gary Bridwell Ditch Witch of Oklahoma Steve Brown Red Rock Distributing, Inc. Jeb Cook Commerce Bank Charlie Crouse Commerce Bank Zane Fleming Eagle Drilling Fluids Mike McDonald Triad Energy Dr. Gabe Pitman Neurologic Specialist Reeder Ratliff Mason Harrison Ratliff Enterprises Kelly Sachs Commerce Bank Joe Warren Cimarron Production Jim Young Commerce Bank TULSA Jack Allen HUB International CFR R. Scott Case Case & Associates Properties, Inc. Gary Christopher Christoper Energy Jeffery Davis U.S. Beef Corporation Wade Edmundson Commerce Bank Dr. John Frame Breast Health Specialists of Oklahoma Gip Gibson Commerce Bank Kent Harrell Harrell Energy Carl Hudgins Commerce Bank Bruce Humphrey Commerce Bank We ask, listen and solve. COMMERCE BANCSHARES, INC. 2014 ANNUAL REPORT 24 Ofﬁcers David W. Kemper Chairman of the Board and Chief Executive Ofﬁcer Jonathan M. Kemper Vice Chairman Seth M. Leadbeater Vice Chairman Directors Terry D. Bassham* Chairman of the Board, Chief Executive Ofﬁcer and President Great Plains Energy, KCP&L, and Greater Missouri Operations John R. Capps* Vice President, BCJ Motors, Inc. John W. Kemper President and Chief Operating Ofﬁcer Charles G. Kim Chief Financial Ofﬁcer and Executive Vice President Kevin G. Barth Executive Vice President Daniel D. Callahan Executive Vice President and Chief Credit Ofﬁcer Sara E. Foster Executive Vice President V. Raymond Stranghoener Executive Vice President Jeffery M. Burik Senior Vice President Michael J. Petrie Senior Vice President Robert J. Rauscher Senior Vice President Thomas J. Noack Vice President, Secretary and General Counsel Jeffery D. Aberdeen Controller Keith E. Baker Auditor Earl H. Devanny, III Retired Chairman, Chief Executive Ofﬁcer and President, The TriZetto Group, President of Healthcare, Nuance Communications, Inc. W. Thomas Grant, II President, SelectQuote Senior Insurance Services James B. Hebenstreit* Chairman of the Board Terry O. Meek President, Andrew C. Taylor Executive Chairman, and Chief Executive Ofﬁcer, Meek Lumber Yard, Inc Enterprise Holdings, Inc. Bartlett and Company David W. Kemper Chairman of the Board and Chief Executive Ofﬁcer, Commerce Bancshares, Inc. Jonathan M. Kemper Vice Chairman, Commerce Bancshares, Inc. Benjamin F. Rassieur, III* President, Paulo Products Company Todd R. Schnuck* Chairman of the Board and Chief Executive Ofﬁcer, Schnuck Markets, Inc. Kimberly G. Walker* Chief Investment Ofﬁcer, Washington University in St. Louis *Audit Committee Members UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2014 — Commission File No. 0-2989 COMMERCE BANCSHARES, INC. (Exact name of registrant as specified in its charter) Missouri (State of Incorporation) 1000 Walnut, Kansas City, MO (Address of principal executive offices) (816) 234-2000 (Registrant’s telephone number, including area code) 43-0889454 (IRS Employer Identification No.) 64106 (Zip Code) Securities registered pursuant to Section 12(b) of the Act: Title of class $5 Par Value Common Stock Name of exchange on which registered NASDAQ Global Select Market Depositary Shares, each representing a 1/1000th interest in a share of 6.0% Series B Non-Cumulative Perpetual Preferred Stock NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No 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 No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No As of June 30, 2014, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $3,788,000,000. As of February 6, 2015, there were 96,443,657 shares of Registrant’s $5 Par Value Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive proxy statement for its 2015 annual meeting of shareholders, which will be filed within 120 days of December 31, 2014, are incorporated by reference into Part III of this Report. Commerce Bancshares, Inc. Form 10-K INDEX PART I Item 1. Business Item 1a. Risk Factors Item 1b. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7a. Quantitative and Qualitative Disclosures about Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9a. Controls and Procedures Item 9b. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services Item 15. Exhibits and Financial Statement Schedules PART IV Signatures Index to Exhibits Page 3 7 10 11 11 11 13 14 15 56 56 113 113 115 115 115 115 115 115 116 117 E-1 2 Item 1. BUSINESS General PART I Commerce Bancshares, Inc., a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Missouri on August 4, 1966. Through a second tier wholly-owned bank holding company, it owns all of the outstanding capital stock of Commerce Bank (the “Bank”), which is headquartered in Missouri. The Bank engages in general banking business, providing a broad range of retail, corporate, investment, trust, and asset management products and services to individuals and businesses. Commerce Bancshares, Inc. also owns, directly or through the Bank, various non-banking subsidiaries. Their activities include underwriting credit life and credit accident and health insurance, selling property and casualty insurance (relating to consumer loans made by the Bank), private equity investment, securities brokerage, mortgage banking, and leasing activities. A list of Commerce Bancshares, Inc.'s subsidiaries is included as Exhibit 21. Commerce Bancshares, Inc. and its subsidiaries (collectively, the "Company") is one of the nation’s top 50 bank holding companies, based on asset size. At December 31, 2014, the Company had consolidated assets of $24.0 billion, loans of $11.5 billion, deposits of $19.5 billion, and equity of $2.3 billion. All of the Company’s operations conducted by its subsidiaries are consolidated for purposes of preparing the Company’s consolidated financial statements. The Company’s goal is to be the preferred provider of targeted financial services in its communities, based on strong customer relationships. It believes in building long-term relationships based on top quality service, a strong risk management culture, and a strong balance sheet with industry-leading capital levels. The Company operates under a super-community banking format which incorporates large bank product offerings coupled with deep local market knowledge, augmented by experienced, centralized support in select critical areas. The Company’s focus on local markets is supported by an experienced team of managers assigned to each market and is also reflected in its financial centers and regional advisory boards, which are comprised of local business persons, professionals and other community representatives, who assist the Company in responding to local banking needs. In addition to this local market, community-based focus, the Company offers sophisticated financial products available at much larger financial institutions. The Company's banking facilities are located throughout Missouri, Kansas, and central Illinois, as well as Tulsa and Oklahoma City, Oklahoma and Denver, Colorado. Its two largest markets include St. Louis and Kansas City, which serve as the central hubs for the entire Company. The markets the Bank serves, being located in the lower Midwest, provide natural sites for production and distribution facilities and also serve as transportation hubs. The economy has been well-diversified in these markets with many major industries represented, including telecommunications, automobile, aircraft and general manufacturing, health care, numerous service industries, food production, and agricultural production and related industries. The real estate lending operations of the Bank are centered in its lower Midwestern markets. Historically, these markets have tended to be less volatile than in other parts of the country. Management believes the diversity and nature of the Bank’s markets has a mitigating effect on real estate loan losses in these markets and were key factors in the Bank’s relatively lower loan loss levels stemming from the 2008 financial crisis. From time to time, the Company evaluates the potential acquisition of various financial institutions. In addition, the Company regularly considers the potential disposition of certain assets and branches. The Company seeks merger or acquisition partners that are culturally similar, have experienced management and either possess significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. On September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. The Company employed 4,328 persons on a full-time basis and 538 persons on a part-time basis at December 31, 2014. The Company provides a variety of benefit programs including a 401(k) plan, as well as group life, health, accident, and other insurance. The Company also maintains training and educational programs designed to address the significant and changing regulations facing the financial services industry and prepare employees for positions of increasing responsibility. Competition The Company faces intense competition from hundreds of financial service providers. It competes with national and state banks for deposits, loans and trust accounts, and with savings and loan associations and credit unions for deposits and consumer lending products. In addition, the Company competes with other financial intermediaries such as securities brokers and dealers, personal loan companies, insurance companies, finance companies, and certain governmental agencies. With the passage of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB Act), competition has increased over time from institutions not 3 subject to the same regulatory restrictions as domestic banks and bank holding companies. The Company generally competes by providing sophisticated financial products with a strong commitment to customer service, convenience of locations, reputation, and price of service, including interest rates on loan and deposit products. The Company has approximately 14% of the deposit market share in Kansas City and approximately 8% of the deposit market share in St. Louis. Operating Segments The Company is managed in three operating segments. The Consumer segment includes the retail branch network, consumer installment lending, personal mortgage banking, consumer debit and credit bank card activities. It provides services through a network of 195 full-service branches, a widespread ATM network of 392 machines, and the use of alternative delivery channels such as extensive online banking, mobile, and telephone banking services. In 2014, this retail segment contributed 21% of total segment pre-tax income. The Commercial segment provides a full array of corporate lending, merchant and commercial bank card products, leasing, and international services, as well as business and government deposit and cash management services. Fixed- income investments are sold to individuals and institutional investors through the Capital Markets Group, which is also included in this segment. In 2014, the Commercial segment contributed 60% of total segment pre-tax income. The Wealth segment provides traditional trust and estate tax planning services, brokerage services, and advisory and discretionary investment portfolio management services to both personal and institutional corporate customers. At December 31, 2014, the Trust group managed investments with a market value of $22.5 billion and administered an additional $16.6 billion in non-managed assets. This segment also manages the Company’s family of proprietary mutual funds, which are available for sale to both trust and general retail customers. Additional information relating to operating segments can be found on pages 46 and 90. Government Policies The Company's operations are affected by federal and state legislative changes, by the United States government, and by policies of various regulatory authorities, including those of the numerous states in which they operate. These include, for example, the statutory minimum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, the U.S. Patriot Act, and capital adequacy and liquidity constraints imposed by federal and state bank regulatory agencies. Supervision and Regulation The following information summarizes existing laws and regulations that materially affect the Company's operations. It does not discuss all provisions of these laws and regulations, and it does not include all laws and regulations that affect the Company presently or may affect the Company in the future. General The Company, as a bank holding company, is primarily regulated by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956 (BHC Act). Under the BHC Act, the Federal Reserve Board’s prior approval is required in any case in which the Company proposes to acquire all or substantially all of the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. With certain exceptions, the BHC Act also prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any non-banking company. Under the BHC Act, the Company may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries and may not acquire voting control of non-banking companies unless the Federal Reserve Board determines such businesses and services to be closely related to banking. When reviewing bank acquisition applications for approval, the Federal Reserve Board considers, among other things, the Bank’s record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended (CRA). Under the terms of the CRA, banks have a continuing obligation, consistent with safe and sound operation, to help meet the credit needs of their communities, including providing credit to individuals residing in low- and moderate-income areas. The Bank has a current CRA rating of “outstanding”. The Company is required to file with the Federal Reserve Board various reports and additional information the Federal Reserve Board may require. The Federal Reserve Board also makes regular examinations of the Company and its subsidiaries. The Company’s banking subsidiary is a state chartered Federal Reserve member bank and is subject to regulation, supervision and examination by the Federal Reserve Bank of Kansas City and the State of Missouri Division of Finance. The Bank is also subject to regulation by the Federal Deposit Insurance Corporation (FDIC). In addition, there are numerous other federal and state laws and regulations which control the activities of the Company and the Bank, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuance of securities, dividend payments, and extensions of credit. If the Company fails to comply with these or other applicable laws and regulations, it may be subject to civil monetary penalties, imposition of cease and desist orders or other written directives, removal of management and, in certain circumstances, criminal penalties. This regulatory framework is intended 4 primarily for the protection of depositors and the preservation of the federal deposit insurance funds, not for the protection of security holders. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to employ assets and maximize income. In addition to its regulatory powers, the Federal Reserve Bank affects the conditions under which the Company operates by its influence over the national supply of bank credit. The Federal Reserve Board employs open market operations in U.S. government securities and oversees changes in the discount rate on bank borrowings, changes in the federal funds rate on overnight inter-bank borrowings, and changes in reserve requirements on bank deposits in implementing its monetary policy objectives. These methods are used in varying combinations to influence the overall level of the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets, and the level of inflation. The monetary policies of the Federal Reserve have a significant effect on the operating results of financial institutions, most notably on the interest rate environment. In view of changing conditions in the national economy and in the money markets, as well as the effect of credit policies of monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels or loan demand, or their effect on the financial statements of the Company. The financial industry operates under laws and regulations that are under constant review by various agencies and legislatures and are subject to sweeping change. The Company currently operates as a bank holding company, as defined by the GLB Act, and the Bank qualifies as a financial subsidiary under the Act, which allows it to engage in investment banking, insurance agency, brokerage, and underwriting activities that were not available to banks prior to the GLB Act. The GLB Act also included privacy provisions that limit banks’ abilities to disclose non-public information about customers to non-affiliated entities. The Company must also comply with the requirements of the Bank Secrecy Act (BSA). The BSA is designed to help fight drug trafficking, money laundering, and other crimes. Compliance is monitored by the Federal Reserve. The BSA was enacted to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. Since its passage, the BSA has been amended several times. These amendments include the Money Laundering Control Act of 1986. which made money laundering a criminal act, as well as the Money Laundering Suppression Act of 1994 which required regulators to develop enhanced examination procedures and increased examiner training to improve the identification of money laundering schemes in financial institutions. The USA PATRIOT Act, established in 2001, substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent, and report money laundering and terrorist financing. The regulations include significant penalties for non-compliance. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2011 (Dodd-Frank Act) was sweeping legislation intended to overhaul regulation of the financial services industry. Among its many provisions, the Dodd-Frank Act established a new council of “systemic risk” regulators, empowers the Federal Reserve to supervise the largest, most complex financial companies, allows the government to seize and liquidate failing financial companies, and gives regulators new powers to oversee the derivatives market. The Dodd-Frank Act also established the Consumer Financial Protection Bureau (CFPB) and authorized it to supervise certain consumer financial services companies and large depository institutions and their affiliates for consumer protection purposes. Subject to the provisions of the Act, the CFPB has responsibility to implement, examine for compliance with, and enforce “Federal consumer financial law.” As a depository institution, the Company is subject to examinations by the CFPB, which focus on the Company’s ability to detect, prevent, and correct practices that present a significant risk of violating the law and causing consumer harm. Subsidiary Bank Under Federal Reserve policy, the bank holding company, Commerce Bancshares, Inc. (the "Parent"), is expected to act as a source of financial strength to its bank subsidiary and to commit resources to support it in circumstances when it might not otherwise do so. In addition, loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Deposit Insurance Substantially all of the deposits of the Bank are insured up to the applicable limits by the Bank Insurance Fund of the FDIC, generally up to $250,000 per depositor, for each account ownership category. The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund member institutions. The FDIC classifies 5 institutions under a risk-based assessment system based on their perceived risk to the federal deposit insurance funds. The current assessment base is defined as average total assets minus average tangible equity, with other adjustments for heavy use of unsecured liabilities, secured liabilities, brokered deposits, and holdings of unsecured bank debt. For banks with more than $10 billion in assets, the FDIC uses a scorecard designed to measure financial performance and ability to withstand stress, in addition to measuring the FDIC’s exposure should the bank fail. The Company's FDIC insurance expense was $11.6 million in 2014, $11.2 million in 2013, and $10.4 million in 2012. Payment of Dividends The Federal Reserve Board may prohibit the payment of cash dividends to shareholders by bank holding companies if their actions constitute unsafe or unsound practices. The principal source of the Parent's cash revenues is cash dividends paid by the Bank. The amount of dividends paid by the Bank in any calendar year is limited to the net profit of the current year combined with the retained net profits of the preceding two years, and permission must be obtained from the Federal Reserve Board for dividends exceeding these amounts. The payment of dividends by the Bank may also be affected by factors such as the maintenance of adequate capital. Capital Adequacy The Company is required to comply with the capital adequacy standards established by the Federal Reserve. The current capital adequacy guidelines generally require bank holding companies to maintain a minimum Tier I risk-based capital ratio of 4% and a total risk-based capital ratio of 8%, based on total risk-adjusted assets and off-balance sheet items. Tier I capital for bank holding companies generally consists of the sum of common shareholders’ equity, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and other non-qualifying intangible assets. Tier II capital generally consists of hybrid capital instruments, term subordinated debt and, subject to limitations, general allowances for loan losses. Assets and certain off-balance sheet items are adjusted under the risk-based guidelines to take into account different risk characteristics. In addition, the Federal Reserve also requires bank holding companies to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier I capital to its total consolidated quarterly average assets (as defined for regulatory purposes), net of the allowance for loan losses, goodwill and certain other intangible assets. The minimum leverage ratio for bank holding companies is 4%. At December 31, 2014, the Company was “well-capitalized” under regulatory capital adequacy standards, as further discussed on page 93. In July 2013 the FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System approved a final rule to implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. A key goal of the Basel III agreement is to strengthen the capital resources of banking organizations during normal and challenging business environments. The Basel III final rule increases minimum requirements for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rule also adjusted the methodology for calculating risk-weighted assets to enhance risk sensitivity. Beginning January 1, 2015, the Company must be compliant with revised minimum regulatory capital ratios and will begin the transitional period for definitions of regulatory capital and regulatory capital adjustments and deductions established under the final rule. Compliance with the risk-weighted asset calculations is also required on January 1, 2015. Management believes that as of December 31, 2014, the Company's capital levels are well above minimum requirements and would be considered "well-capitalized" under the new rules. Significant Regulation Affecting the Company In October 2012, the Federal Reserve, as required by the Dodd-Frank Act, approved new stress testing regulations applicable to certain financial companies with total consolidated assets of more than $10 billion but less than $50 billion. The rule requires that these financial companies, including the Company, conduct stress tests on an annual basis. The initial stress test had an as- of date of September 30, 2013 using scenarios provided by the Federal Reserve in November 2013 (projected nine months out). The Company submitted its first regulatory report on its stress test results to the Federal Reserve in March 2014. This process will be repeated annually. In June 2015, the Company will be required to make public disclosures of the results of the 2015 stress tests performed under the severely adverse scenario. The Volcker Rule of the Dodd-Frank Act, effective on April 1, 2014, places trading restrictions on financial institutions and separates investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. Key provisions restrict banks from simultaneously entering into advisory and creditor roles with their clients, such as with private equity firms. The Volcker Rule also restricts financial institutions from investing in and sponsoring 6 certain types of investments, which must be divested by July 21, 2016. The Company does not believe it will be significantly affected by the Volcker Rule provisions. Available Information The Company’s principal offices are located at 1000 Walnut, Kansas City, Missouri (telephone number 816-234-2000). The Company makes available free of charge, through its Web site at www.commercebank.com, reports filed with the Securities and Exchange Commission as soon as reasonably practicable after the electronic filing. These filings include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. Statistical Disclosure The information required by Securities Act Guide 3 — “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below. Page I. II. III. IV. V. VI. VII. Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential . . 21, 52-55 Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-37, 75-79 Loan Portfolio Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturities and Sensitivities of Loans to Changes in Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Loan Loss Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on Equity and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 26 31-35 29-31 52, 81 16 82 Item 1a. RISK FACTORS Making or continuing an investment in securities issued by Commerce Bancshares, Inc., including its common and preferred stock, involves certain risks that you should carefully consider. If any of the following risks actually occur, its business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Commerce Bancshares, Inc. Difficult market conditions may affect the Company’s industry. The concentration of the Company’s banking business in the United States particularly exposes it to downturns in the U.S. economy. While current economic conditions are favorable, there remain risks in that environment. In particular, the Company may face the following risks in connection with market conditions: • • • In the current environment, accelerated job growth, lower unemployment levels, and improving credit conditions are expected to continue. However, adverse changes in this environment may affect consumer confidence levels and may cause declines in consumer credit usage, adverse changes in payment patterns, and higher loan delinquencies and default rates. These could impact the Company’s future loan losses and provision for loan losses, as a significant part of the Company’s business includes consumer and credit card lending. Reduced levels of economic activity may cause declines in financial service transactions, including bank card, corporate cash management and other fee businesses, as well as the fees earned by the Company on such transactions. The process used to estimate losses inherent in the Company’s loan portfolio requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of its borrowers to repay their loans. If an instance occurs that renders these predictions no longer capable of accurate estimation, this may in turn impact the reliability of the process. 7 • • Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions, thereby reducing market prices for various products and services which could in turn reduce Company revenues. The U.S. economy is also affected by foreign economic events and conditions. Although the Company does not hold foreign debt, global economic conditions and political tensions affecting interest rates, business export activity, capital expenditures by businesses, and investor confidence may negatively affect the Company by means of reduced loan demand or reduced transaction volume with the Company. Significant changes in banking laws and regulations could materially affect the Company’s business. Over the past several years, a significant increase in bank regulation has occurred. A number of new laws and regulations have already been implemented, including those which reduced overdraft fees and credit card revenues, and eliminated the student loan business. Other major changes involved lending transparency, risk-based FDIC insurance assessments, and derivative clearing processes. These regulations generally resulted in lower revenues and higher compliance burdens. Regulatory focus continues today with emphasis on stress-testing and Basel III regulatory capital reform. Future regulation, along with possible changes in tax laws and accounting rules, may have a significant impact on the way the Company conducts business, implements strategic initiatives, engages in tax planning and makes financial disclosures. Compliance with such regulation may divert resources from other areas of the business and limit the ability to pursue other opportunities. The performance of the Company is dependent on the economic conditions of the markets in which the Company operates. The Company’s success is heavily influenced by the general economic conditions of the specific markets in which it operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides financial services primarily throughout the states of Missouri, Kansas, and central Illinois, and in its expansion markets in Oklahoma, Colorado and other surrounding states. As the Company does not have a significant banking presence in other parts of the country, a prolonged economic downturn in these markets could have a material adverse effect on the Company’s financial condition and results of operations. Significant changes in federal monetary policy could materially affect the Company’s business. The Federal Reserve System regulates the supply of money and credit in the United States. Its polices determine in large part the cost of funds for lending and interest rates earned on loans and paid on borrowings and interest bearing deposits. Credit conditions are influenced by its open market operations in U.S. government securities, changes in the member bank discount rate, and bank reserve requirements. Changes in Federal Reserve Board policies are beyond the Company’s control and difficult to predict, and such changes may result in lower interest margins and a continued lack of demand for credit products. The soundness of other financial institutions could adversely affect the Company. The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institution counterparties. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual funds, and other institutional clients. Transactions with these institutions include overnight and term borrowings, interest rate swap agreements, securities purchased and sold, short-term investments, and other such transactions. As a result of this exposure, defaults by, or rumors or questions about, one or more financial services institutions or the financial services industry in general, could lead to market-wide liquidity problems and defaults by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client, while other transactions expose the Company to liquidity risks should funding sources quickly disappear. In addition, the Company’s credit risk may be exacerbated when the collateral held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the exposure due to the Company. Any such losses could materially and adversely affect results of operations. The Company’s asset valuation may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to asset valuations that may materially adversely affect its results of operations or financial condition. The Company uses estimates, assumptions, and judgments when certain financial assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party sources, when available. When such third-party information 8 is not available, fair value is estimated primarily by using cash flow and other financial modeling techniques utilizing assumptions such as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying factors, assumptions, or estimates in any of these areas could materially impact the Company’s future financial condition and results of operations. During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, certain asset valuations may require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of assets as reported within the Company’s consolidated financial statements, and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on results of operations or financial condition. The Company’s investment portfolio values may be adversely impacted by deterioration in the credit quality of underlying collateral within the various categories of investment securities it owns. The Company generally invests in securities issued by municipal entities, government-backed agencies or privately issued securities that are highly rated and evaluated at the time of purchase, however, these securities are subject to changes in market value due to changing interest rates and implied credit spreads. While the Company maintains rigorous risk management practices over bonds issued by municipalities, credit deterioration in these bonds could occur and result in losses. Certain mortgage and asset-backed securities (which are collateralized by residential mortgages, credit cards, automobiles, mobile homes or other assets) may decline in value due to actual or expected deterioration in the underlying collateral. Under accounting rules, when the impairment is due to declining expected cash flows, some portion of the impairment, depending on the Company’s intent to sell and the likelihood of being required to sell before recovery, must be recognized in current earnings. This could result in significant non-cash losses. Future loan losses could increase. The Company maintains an allowance for loan losses that represents management’s best estimate of probable losses that have been incurred at the balance sheet date within the existing portfolio of loans. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Although the loan losses have been stable in 2014 and 2013, an unforeseen deterioration of financial market conditions could result in larger loan losses, which may negatively affect the Company's results of operations and could further increase levels of its allowance. In addition, the Company’s allowance level is subject to review by regulatory agencies, and that review could result in adjustments to the allowance. See the section captioned “Allowance for Loan Losses” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report for further discussion related to the Company’s process for determining the appropriate level of the allowance for possible loan loss. The Company is subject to both interest rate and liquidity risk. With oversight from its Asset-Liability Management Committee, the Company devotes substantial resources to monitoring its liquidity and interest rate risk on a monthly basis. The Company's net interest income is the largest source of overall revenue to the Company, representing 59% of total revenue at December 31, 2014. The interest rate environment in which the Company operates fluctuates in response to general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, will influence loan originations, deposit generation, demand for investments and revenues and costs for earning assets and liabilities. Additionally the Company manages its balance sheet in order to maximize its net interest income from its net earning assets while insuring that there is ample liquidity to meet fluctuating cash flows coming from either funding sources or its earning assets. Since the financial crisis of 2008, there has been significant growth in deposits from both consumers and businesses, and much of this growth has been invested in the investment securities portfolio. For the past several years, the Federal Reserve has maintained interest rates at unprecedented low levels, and as the securities portfolio has grown, interest margins have been pressured. The securities portfolio, which has averaged 45% of total earning assets over the past three years, generally carries lower rates than loans, Furthermore the Company attempts to diversify its securities portfolio while keeping duration short, in order to ensure it is always able to meet liquidity needs for future changes in loans or deposit balances. Loan demand has recently strengthened, growing 10% on average in 2013 and 9% in 2014, versus just 2% in 2012. During 2014, growth in loans was mainly funded by maturities of investment securities, and growth in deposits were mostly reinvested in the securities portfolio. At December 31, 2014, the Company's loan to deposit rate was 60%, a sign of strong liquidity. 9 While further loan growth is expected under a strengthening economy, it is expected that interest margins will continue to be pressured if rates remain low. Should the demand for loans increase in the future while deposit balances decline significantly, the Company's liquidity risk could change, as it is dependent on the Company's ability to manage maturities within its investment portfolio to fund these changing cash flows. The Company operates in a highly competitive industry and market area. The Company operates in the financial services industry, and has numerous competitors including other banks and insurance companies, securities dealers, brokers, trust and investment companies and mortgage bankers. Consolidation among financial service providers and new changes in technology, product offerings and regulation continue to challenge the Company's marketplace position. As consolidation occurs, larger regional banks may enter our market and add to existing competition. These new banks may lower fees in an effort to grow market share, which could result in a loss of customers and lower fee revenue for the Company. The Company must continue to make investments in its products and delivery systems to stay competitive with the industry as a whole, or its financial performance may suffer. The Company’s reputation and future growth prospects could be impaired if events occur which breach its customers’ privacy. The Company relies heavily on communications and information systems to conduct its business, and as part of its business, the Company maintains significant amounts of data about its customers and the products they use. Additionally, customers rely on online bank products. While the Company has policies and procedures and safeguards designed to prevent or limit the effect of failure, interruption or security breach of its information systems, there can be no assurances that any such failures, interruptions or security breaches will not occur; or if they do occur, that they will be adequately addressed. In addition to unauthorized access, denial-of-service attacks could overwhelm Company Web sites and prevent the Company from adequately serving customers. Should any of the Company's systems become compromised, the reputation of the Company could be damaged, relationships with existing customers may be impaired, the compromise could result in lost business, and as a result, the Company could incur significant expenses trying to remedy the incident. Similarly, because the Company is an issuer of both debit and credit cards, it is periodically exposed to losses related to security breaches which occur at retailers that are unaffiliated with Company (e.g., customer card data being compromised at retail stores). These include, but are not limited to, costs and expenses for card reissuance as well as losses resulting from fraudulent card transactions. The Company may not attract and retain skilled employees. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense, and the Company spends considerable time and resources attracting and hiring qualified people for its various business lines and support units. The unexpected loss of the services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel. Item 1b. UNRESOLVED STAFF COMMENTS None 10 Item 2. PROPERTIES The main offices of the Bank are located in the larger metropolitan areas of its markets in various multi-story office buildings. The Bank owns its main offices and leases unoccupied premises to the public. The larger offices include: Building 922 Walnut Kansas City, MO 1000 Walnut Kansas City, MO 811 Main Kansas City, MO 8000 Forsyth Clayton, MO 1551 N. Waterfront Pkwy Wichita, KS Net rentable square footage % occupied in total % occupied by bank 256,000 403,000 237,000 178,000 120,000 95% 93% 82 100 97 97 39 100 97 32 Various installment loan, credit card, trust and safe deposit functions operate out of leased offices in downtown Kansas City, Missouri. The Company has an additional 190 branch locations in Missouri, Illinois, Kansas, Oklahoma and Colorado which are owned or leased, and 158 off-site ATM locations. Item 3. LEGAL PROCEEDINGS The information required by this item is set forth in Item 8 under Note 20, Commitments, Contingencies and Guarantees on page 107. Item 4. MINE SAFETY DISCLOSURES Not applicable 11 Executive Officers of the Registrant The following are the executive officers of the Company as of February 24, 2015, each of whom is designated annually. There are no arrangements or understandings between any of the persons so named and any other person pursuant to which such person was designated an executive officer. Name and Age Jeffery D. Aberdeen, 60 Kevin G. Barth, 54 Jeffrey M. Burik, 56 Daniel D. Callahan, 58 Sara E. Foster, 54 David W. Kemper, 64 John W. Kemper, 37 Jonathan M. Kemper, 61 Charles G. Kim, 54 Seth M. Leadbeater, 64 Michael J. Petrie, 58 Robert J. Rauscher, 57 Positions with Registrant Controller of the Company since December 1995. He is also Controller of the Company's subsidiary bank, Commerce Bank. Executive Vice President of the Company since April 2005 and Executive Vice President of Commerce Bank since October 1998. Senior Vice President of the Company and Officer of Commerce Bank prior thereto. Senior Vice President of the Company since February 2013. Executive Vice President of Commerce Bank since November 2007. Executive Vice President and Chief Credit Officer of the Company since December 2010 and Senior Vice President of the Company prior thereto. Executive Vice President of Commerce Bank since May 2003. Executive Vice President of the Company since February 2012 and Senior Vice President of the Company since February 1998. Chairman of the Board of Directors of the Company since November 1991, Chief Executive Officer of the Company since June 1986. He was President of the Company from April 1982 until February 2013. He is Chairman of the Board and Chief Executive Officer of Commerce Bank. He is the son of James M. Kemper, Jr. (a former Director and former Chairman of the Board of the Company), the brother of Jonathan M. Kemper, Vice Chairman of the Company, and father of John W. Kemper, President and Chief Operating Officer of the Company. President and Chief Operating Officer of the Company since February 2013, and Executive Vice President and Chief Administrative Officer of the Company prior thereto. President of Commerce Bank since March 2013 and Senior Vice President of Commerce Bank prior thereto. Prior to his employment with Commerce Bank in August 2007, he was employed as an engagement manager with a global management consulting firm, managing strategy and operations projects primarily focused in the financial service industry. He is the son of David W. Kemper, Chairman and Chief Executive Officer of the Company and nephew of Jonathan M. Kemper, Vice Chairman of the Company. Vice Chairman of the Company since November 1991 and Vice Chairman of Commerce Bank since December 1997. Prior thereto, he was Chairman of the Board, Chief Executive Officer, and President of Commerce Bank. He is the son of James M. Kemper, Jr. (a former Director and former Chairman of the Board of the Company), the brother of David W. Kemper, Chairman and Chief Executive Officer of the Company, and uncle of John W. Kemper, President and Chief Operating Officer of the Company. Chief Financial Officer of the Company since July 2009. Executive Vice President of the Company since April 1995 and Executive Vice President of Commerce Bank since January 2004. Prior thereto, he was Senior Vice President of Commerce Bank. Vice Chairman of the Company since January 2004. Prior thereto he was Executive Vice President of the Company. Vice Chairman of Commerce Bank since September 2004. Prior thereto he was Executive Vice President of Commerce Bank. Senior Vice President of the Company since April 1995. Prior thereto, he was Vice President of the Company. Senior Vice President of the Company since October 1997. Senior Vice President of Commerce Bank prior thereto. V. Raymond Stranghoener, 63 Executive Vice President of the Company since July 2005 and Senior Vice President of the Company prior thereto. 12 Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES PART II Commerce Bancshares, Inc. Common Stock Data The following table sets forth the high and low prices of actual transactions in the Company’s common stock and cash dividends paid for the periods indicated (restated for the 5% stock dividend distributed in December 2014). 2014 2013 2012 Quarter High Low Cash Dividends First Second Third Fourth First Second Third Fourth First Second Third Fourth $ $ $ 45.06 $ 39.68 $ 45.19 45.38 44.30 40.09 42.23 38.10 37.09 $ 32.11 $ 40.47 43.10 43.59 34.88 38.13 38.86 35.66 $ 32.45 $ 35.42 36.92 35.10 31.25 32.58 31.46 .214 .214 .214 .214 .204 .204 .204 .204 .199 .199 .199 1.494* * Includes a special dividend of $1.295 per share Commerce Bancshares, Inc. common shares are listed on the Nasdaq Global Select Market (NASDAQ) under the symbol CBSH. The Company had 4,051 common shareholders of record as of December 31, 2014. 13 Performance Graph The following graph presents a comparison of Company (CBSH) performance to the indices named below. It assumes $100 invested on December 31, 2009 with dividends invested on a cumulative total shareholder return basis. Commerce (CBSH) 100.00 110.33 113.80 116.78 160.33 166.24 NASDAQ OMX Global-Bank 100.00 111.35 83.04 111.88 152.85 170.93 S&P 500 100.00 115.06 117.49 136.29 180.44 205.14 2009 2010 2011 2012 2013 2014 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 Exchange Act, during the fourth quarter of 2014. Period October 1—31, 2014 November 1—30, 2014 December 1—31, 2014 Total 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 40,262 3,145 1,713 45,120 $42.63 $45.33 $43.95 $42.87 40,262 3,145 1,713 45,120 1,902,865 1,899,720 1,898,007 1,898,007 The Company’s stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in June 2014 of 5,000,000 shares, 1,898,007 shares remained available for purchase at December 31, 2014. Item 6. SELECTED FINANCIAL DATA The required information is set forth below in Item 7. 14 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements 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 Commerce Bancshares, Inc. and its subsidiaries (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 which 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 the risk factors identified in Item 1a Risk Factors and the following: changes in economic conditions in the Company’s market area; changes in policies by regulatory agencies, governmental legislation and regulation; fluctuations in interest rates; changes in liquidity requirements; demand for loans in the Company’s market area; changes in accounting and tax principles; estimates made on income taxes; failure of litigation settlement agreements to become final in accordance with their terms; and competition with other entities that offer financial services. Overview The Company operates as a super-community bank and offers a broad range of financial products to consumer and commercial customers, delivered with a focus on high-quality, personalized service. It is the largest bank holding company headquartered in Missouri, with its principal offices in Kansas City and St. Louis, Missouri. Customers are served from over 350 locations in Missouri, Kansas, Illinois, Oklahoma and Colorado and commercial offices throughout the nation's midsection. A variety of delivery platforms are utilized, including an extensive network of branches and ATM machines, full-featured online banking, and a central contact center. The core of the Company’s competitive advantage is its focus on the local markets in which it operates, its offering of competitive, sophisticated financial products, and its concentration on relationship banking and high touch service. In order to enhance shareholder value, the Company targets core revenue growth. To achieve this growth, the Company focuses on strategies that will expand new and existing customer relationships, offer opportunities for controlled expansion in additional markets, utilize improved technology, and enhance customer satisfaction. Various indicators are used by management in evaluating the Company’s financial condition and operating performance. Among these indicators are the following: • • • • Net income and earnings per share — Net income attributable to Commerce Bancshares, Inc. was $261.8 million, an increase of .3% compared to the previous year. The return on average assets was 1.15% in 2014, and the return on average common equity was 11.65%. Diluted earnings per share increased .8% in 2014 compared to 2013. Total revenue — Total revenue is comprised of net interest income and non-interest income. Total revenue in 2014 increased $18.4 million over 2013, mainly from growth in non-interest income of $17.6 million. Growth in non-interest income was driven by increases in trust fees, bank card transaction fees, and brokerage fees, partly offset by a decline in capital market fees. Net interest income increased slightly over 2013 due in part to higher average earning assets, including average loan growth of 9.2%. However, low interest rates continued to pressure the net interest margin, which declined to 3.00% in 2014, an 11 basis point decline from 2013. Non-interest expense — Total non-interest expense grew 4.5% this year compared to 2013 as a result of higher costs for salaries and employee benefits and an increase in other operating costs, including higher foreclosed property costs (higher gains on sales were recorded in 2013) and an increase in certain credit card operational expenses. Costs for occupancy, equipment, supplies and communication, and data processing and software showed little change from the previous year. Asset quality — Net loan charge-offs in 2014 increased $3.2 million over those recorded in 2013 and averaged .31% of loans compared to .30% in the previous year. Total non-performing assets, which include non-accrual loans and foreclosed real estate, amounted to $46.3 million at December 31, 2014, a decrease of $9.2 million from balances at the previous year end, and represented .40% of loans outstanding. 15 • Shareholder return — Total shareholder return, including the change in stock price and dividend reinvestment, was 3.7% over the past year. Shareholder return over the past 10 years was 6.2%. During 2014, the Company paid cash dividends of $.857 per share, representing an increase of 5% over the previous year. The Company also issued a 5% stock dividend. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. The historical trends reflected in the financial information presented below are not necessarily reflective of anticipated future results. Key Ratios (Based on average balances) Return on total assets Return on common equity Equity to total assets Loans to deposits (1) Non-interest bearing deposits to total deposits Net yield on interest earning assets (tax equivalent basis) (Based on end of period data) Non-interest income to revenue (2) Efficiency ratio (3) Tier I risk-based capital ratio Tier I common capital ratio (4) Total risk-based capital ratio Tier I leverage ratio Tangible common equity to tangible assets ratio (4) Common cash dividend payout ratio (1) Includes loans held for sale. (2) Revenue includes net interest income and non-interest income. 2014 2013 2012 2011 2010 1.15% 1.19% 1.30% 1.32% 1.22% 11.65 10.10 59.91 33.73 3.00 41.28 62.08 13.74 12.81 14.86 9.36 8.55 32.69 11.99 9.95 57.12 33.01 3.11 40.32 60.49 14.06 14.06 15.28 9.43 9.00 31.46 12.00 10.84 55.80 32.82 3.41 38.44 59.26 13.60 13.60 14.93 9.14 9.25 78.57 12.15 10.87 59.15 30.26 3.65 37.82 59.10 14.71 14.70 16.04 9.55 9.91 30.87 11.15 10.91 70.02 28.65 3.89 38.54 59.71 14.38 14.38 15.75 10.17 10.27 35.29 (3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue. (4) The Tier I common capital to risk-weighted assets ratio and the tangible common equity to tangible assets ratio are measurements which management believes are useful indicators of capital adequacy and utilization. They provide meaningful bases for period to period and company to company comparisons, and also assist regulators, investors and analysts in analyzing the financial position of the Company. Tier I common capital, 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 measure of Tier I risk-based capital to the non-GAAP measure of Tier I common capital. (Dollars in thousands) Tier I risk-based capital Less qualifying non-controlling interest Less preferred stock Tier I common capital (a) Total risk-weighted assets (b) Tier I common capital to risk-weighted assets ratio (a)/(b) 2014 $ 2,131,169 321 144,784 $ 1,986,064 $ 15,509,144 2013 2012 $ 2,061,761 315 — 2,061,446 $ $ 14,660,536 $ 1,906,203 321 — 1,905,882 $ $ 14,015,648 $ 2011 1,928,690 330 — 1,928,360 $ $ 13,115,261 2010 $ 1,828,965 319 — 1,828,646 $ $ 12,717,868 12.81% 14.06% 13.60% 14.70% 14.38% 16 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. (Dollars in thousands) Total equity Less non-controlling interest Less preferred stock Less goodwill Less core deposit premium Total tangible common equity (a) Total assets Less goodwill Less core deposit premium Total tangible assets (b) Tangible common equity to tangible assets ratio (a)/(b) 2014 $ 2,334,246 4,053 144,784 138,921 6,572 $ 2,039,916 $ 23,994,280 138,921 6,572 $ 23,848,787 2013 $ 2,214,397 3,755 — 138,921 8,489 $ 2,063,232 $ 23,072,036 138,921 8,489 $ 22,924,626 2012 $ 2,171,574 4,447 — 125,585 4,828 $ 2,036,714 $ 22,159,589 125,585 4,828 $ 22,029,176 2011 $ 2,170,361 4,314 — 125,585 6,970 $ 2,033,492 $ 20,649,367 125,585 6,970 $ 20,516,812 2010 $ 2,023,464 1,477 — 125,585 9,612 $ 1,886,790 $ 18,502,339 125,585 9,612 $ 18,367,142 8.55% 9.00% 9.25% 9.91% 10.27% Selected Financial Data (In thousands, except per share data) Net interest income Provision for loan losses Non-interest income Investment securities gains (losses), net Non-interest expense 2014 2013 2012 2011 2010 $ 620,204 $ 29,531 435,978 14,124 657,775 619,372 $ 20,353 418,386 (4,425) 629,633 639,906 $ 27,287 399,630 4,828 618,469 646,070 $ 51,515 392,917 10,812 617,249 645,932 100,000 405,111 (1,785) 631,134 Net income attributable to Commerce Bancshares, Inc. Net income available to common shareholders Net income per common share-basic* Net income per common share-diluted* Cash dividends on common stock Cash dividends per common share* Market price per common share* Book value per common share* Common shares outstanding* Total assets Loans, including held for sale Investment securities Deposits Long-term debt Equity Non-performing assets 261,754 257,704 2.62 2.61 84,241 .857 43.49 22.73 96,327 23,994,280 11,469,238 9,645,792 19,475,778 104,058 2,334,246 46,251 260,961 260,961 2.60 2.59 82,104 .816 42.77 22.00 100,675 23,072,036 10,956,836 9,042,997 19,047,348 455,310 2,214,397 55,439 269,329 269,329 2.64 2.63 211,608 2.090 31.80 21.55 100,784 22,159,589 9,840,211 9,669,735 18,348,653 503,710 2,171,574 64,863 256,343 256,343 2.45 2.44 79,140 .757 32.93 21.08 102,973 20,649,367 9,208,554 9,358,387 16,799,883 511,817 2,170,361 93,803 221,710 221,710 2.09 2.08 78,231 .737 32.69 19.22 105,292 18,502,339 9,474,733 7,409,534 15,085,021 512,273 2,023,464 97,320 * Restated for the 5% stock dividend distributed in December 2014. 17 Results of Operations (Dollars in thousands) Net interest income Provision for loan losses Non-interest income Investment securities gains (losses), net Non-interest expense Income taxes Non-controlling interest expense Net income attributable to Commerce Bancshares, Inc. Preferred stock dividends Net income available to common shareholders $ 2014 620,204 $ (29,531) 435,978 14,124 (657,775) (120,216) 2013 619,372 $ (20,353) 418,386 (4,425) (629,633) (122,230) 2012 639,906 $ (27,287) 399,630 4,828 (618,469) (127,169) (1,030) (156) (2,110) 261,754 (4,050) 260,961 — 269,329 — $ Change % Change '14-'13 '13-'12 '14-'13 '13-'12 832 $ 9,178 17,592 18,549 28,142 (2,014) 874 793 (4,050) (20,534) (6,934) 18,756 (9,253) 11,164 (4,939) (1,954) (8,368) — .1 % (3.2)% 45.1 4.2 N.M. 4.5 (1.6) N.M. .3 N.M. (25.4) 4.7 N.M. 1.8 (3.9) (92.6) (3.1) N.M. $ 257,704 $ 260,961 $ 269,329 $ (3,257) $ (8,368) (1.2)% (3.1)% Net income attributable to Commerce Bancshares, Inc. for 2014 was $261.8 million, an increase of $793 thousand, or .3%, compared to $261.0 million in 2013. Diluted income per share was $2.61 in 2014 compared to $2.59 in 2013. The increase in net income resulted from increases of $17.6 million in non-interest income and $18.5 million in investment securities gains. These increases in net income were partly offset by a $28.1 million increase in non-interest expense, as well as an increase of $9.2 million in the provision for loan losses. The return on average assets was 1.15% in 2014 compared to 1.19% in 2013, and the return on average common equity was 11.65% compared to 11.99% in 2013. At December 31, 2014, the ratio of tangible common equity to assets was 8.55% compared to 9.00% at year end 2013. During 2014, net interest income increased $832 thousand compared to 2013. This slight increase reflected growth of $8.1 million in loan interest income, due to higher loan balances which were partly offset by lower rates earned, coupled with a decline in deposit interest expense of $3.2 million due to lower rates paid. These increases were mostly offset by an $8.6 million decline in interest income on long-term securities purchased under agreements to resell. The provision for loan losses increased $9.2 million over the previous year, totaling $29.5 million in 2014, and was $5.0 million lower than net loan charge-offs. Net charge- offs increased by $3.2 million in 2014 compared to 2013, mainly in consumer, construction and business loans. Non-interest income for 2014 was $436.0 million, an increase of $17.6 million, or 4.2%, compared to $418.4 million in 2013. This increase resulted mainly from continued growth in trust fees and bank card fees, which increased $9.6 million and $9.2 million, respectively. Bank card fees included a $7.2 million increase in corporate card fees, a product line upon which the Company has placed significant focus during the past few years and which continues to show good growth. Consumer brokerage services revenue increased $1.0 million due to growth in advisory fees, while capital market fees declined $1.5 million as sales volume remained lower. During 2014, investment securities net gains totaled $14.1 million, compared to net losses of $4.4 million during 2013. Gains and losses in both years resulted mainly from activity in the private equity investment portfolio, and included fair value adjustments and gains/losses realized upon sale or disposition. Gains in 2014 included $19.6 million related to the sale of a private equity investment, partly offset by a loss of $5.2 million on the sale of U.S. Treasury inflation-protected bonds. Non-interest expense for 2014 was $657.8 million, an increase of $28.1 million over $629.6 million in 2013. The increase in non-interest expense included a $17.2 million increase in salaries and benefits expense, due to higher full-time salaries expense and medical costs. Expense for occupancy, supplies and communication, equipment and data processing were all well controlled during 2014, with growth of 1% or less in each of those categories. Non-interest expense also increased due to a $1.5 million increase in marketing expense, as well as several other items which included higher bank card rewards cost and lower gains on sales of foreclosed property. Income tax expense was $120.2 million in 2014 compared to $122.2 million in 2013, resulting in effective tax rates of 31.5% in 2014 and 31.9% in 2013. Net income attributable to Commerce Bancshares, Inc. for 2013 was $261.0 million, a decrease of $8.4 million, or 3.1%, compared to $269.3 million in 2012. Diluted income per share was $2.59 in 2013 compared to $2.63 in 2012. The decrease in net income resulted from a $20.5 million decrease in net interest income, as well as an increase of $11.2 million in non-interest expense and a decrease of $9.3 million in net securities gains. These decreases to net income were partly offset by an increase in non-interest income of $18.8 million and a decline of $6.9 million in the provision for loan losses. The return on average assets 18 was 1.19% in 2013 compared to 1.30% in 2012, and the return on average common equity was 11.99% compared to 12.00% in 2012. At December 31, 2013, the ratio of tangible common equity to assets was 9.00% compared to 9.25% at year end 2012. During 2013, net interest income decreased $20.5 million, or 3.2%, compared to 2012. This decrease was largely due to lower rates earned on the investment security and loan portfolios, partly offset by higher loan balances and lower rates paid on deposits. The provision for loan losses decreased $6.9 million from the previous year, totaling $20.4 million in 2013, and was $11.0 million lower than net loan charge-offs in 2013. Net charge-offs declined by $7.9 million in 2013 compared to 2012, mainly in construction, business real estate, consumer, and revolving home equity loans. Non-interest income for 2013 was $418.4 million, an increase of $18.8 million, or 4.7%, compared to $399.6 million in 2012. This increase resulted mainly from growth of $7.9 million in trust fees and $12.4 million in bank card fees. Capital market fees declined $6.9 million due to weak demand from correspondent and commercial customers. Non-interest expense for 2013 was $629.6 million, an increase of $11.2 million over $618.5 million in 2012. The increase in non-interest expense included a $6.0 million increase in salaries and benefits expense, as well as a $4.4 million increase in data processing and software expense. Occupancy, supplies and communications, marketing and deposit insurance expense increased on a combined basis by only $94 thousand. Partly offsetting these increases in non-interest expense during 2013 was a $1.7 million decrease in equipment expense. Income tax expense was $122.2 million in 2013 compared to $127.2 million in 2012, resulting in effective tax rates of 31.9% in 2013 and 32.1% in 2012. In September 2013, the Company acquired Summit Bancshares, Inc., an Oklahoma-based franchise with $261.6 million in assets and branch locations in Tulsa and Oklahoma City. In July 2014, the Company sold certain loans, deposits, and premises of three banking branches located in eastern Missouri. These transactions are further discussed in Note 2 to the consolidated financial statements. In June 2014, the Company issued $150.0 million in perpetual preferred stock with a 6% dividend; its first issuance of preferred stock. The proceeds were used to repurchase common shares. During 2014, the Company purchased $211.0 million in shares of its common stock. The Company also distributed a 5% stock dividend for the 21st consecutive year on December 15, 2014. All per share and average share data in this report has been restated to reflect the 2014 stock dividend. Critical Accounting Policies The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company's reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Current economic conditions may require the use of additional estimates, and some estimates may be subject to a greater degree of uncertainty due to the current instability of the economy. 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. Allowance for Loan Losses The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company's estimate of the losses inherent in the loan portfolio at any point in time. While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, construction and business real estate loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal banking loans, including personal real estate, credit card and consumer loans, are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Further discussion of the methodology used in establishing the allowance is provided in the Allowance for Loan Losses section of Item 7 and in Note 1 to the consolidated financial statements. 19 Valuation of Investment Securities The Company carries its investment securities at fair value and employs valuation techniques which utilize observable inputs when those inputs are available. These observable inputs reflect assumptions market participants would use in pricing the security and are developed based on market data obtained from sources independent of the Company. When such information is not available, the Company employs valuation techniques which utilize unobservable inputs, or those which reflect the Company’s own assumptions about market participants, based on the best information available in the circumstances. These valuation methods typically involve cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, estimates, or other inputs to the valuation techniques could have a material impact on the Company's future financial condition and results of operations. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Under the fair value measurement hierarchy, fair value measurements are classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on unobservable, internally-derived inputs), as discussed in more detail in Note 16 on Fair Value Measurements. Most of the available for sale investment portfolio is priced utilizing industry-standard models that consider various assumptions observable in the marketplace or which can be derived from observable data. Such securities totaled approximately $8.9 billion, or 93.5% of the available for sale portfolio at December 31, 2014, and were classified as Level 2 measurements. The Company also holds $95.1 million in auction rate securities. These were classified as Level 3 measurements, as no liquid market currently exists for these securities, and fair values were derived from internally generated cash flow valuation models which used unobservable inputs significant to the overall measurement. Changes in the fair value of available for sale securities, excluding credit losses relating to other-than-temporary impairment, are reported in other comprehensive income. The Company periodically evaluates the available for sale portfolio for other-than- temporary impairment. Evaluation for other-than-temporary impairment is based on the Company’s intent to sell the security and whether it is likely that it will be required to sell the security before the anticipated recovery of its amortized cost basis. If either of these conditions is met, the entire loss (the amount by which the amortized cost exceeds the fair value) must be recognized in current earnings. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company must determine whether a credit loss has occurred. This credit loss is the amount by which the amortized cost basis exceeds the present value of cash flows expected to be collected from the security. The credit loss, if any, must be recognized in current earnings, while the remainder of the loss, related to all other factors, is recognized in other comprehensive income. The estimation of whether a credit loss exists and the period over which the security is expected to recover requires significant judgment. The Company must consider available information about the collectability of the security, including information about past events, current conditions, and reasonable forecasts, which includes payment structure, prepayment speeds, expected defaults, and collateral values. Changes in these factors could result in additional impairment, recorded in current earnings, in future periods. At December 31, 2014, certain non-agency guaranteed mortgage-backed securities with a fair value of $54.6 million were identified as other-than-temporarily impaired. The cumulative credit-related impairment loss recorded on these securities amounted to $13.7 million, which was recorded in the consolidated statements of income. The Company, through its direct holdings and its private equity subsidiaries, has numerous private equity investments, categorized as non-marketable securities in the accompanying consolidated balance sheets. These investments are reported at fair value and totaled $60.2 million at December 31, 2014. Changes in fair value are reflected in current earnings and reported in investment securities gains (losses), net, in the consolidated statements of income. Because there is no observable market data for these securities, fair values are internally developed using available information and management’s judgment, and the securities are classified as Level 3 measurements. Although management believes its estimates of fair value reasonably reflect the fair value of these securities, key assumptions regarding the projected financial performance of these companies, the evaluation of the investee company’s management team, and other economic and market factors may affect the amounts that will ultimately be realized from these investments. Accounting for Income Taxes Accrued income taxes represent the net amount of current income taxes which are expected to be paid attributable to operations as of the balance sheet date. Deferred income taxes represent the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Current and deferred income taxes are reported as either a component of other assets or other liabilities in the consolidated balance sheets, depending on whether the balances are assets or liabilities. Judgment is required in applying generally accepted accounting principles in accounting for income taxes. The Company regularly monitors taxing authorities for changes in laws and regulations and their interpretations by the judicial systems. The aforementioned changes, as well as any changes that may result from the resolution of income tax examinations by federal and state taxing authorities, may impact the estimate of accrued income taxes and could materially impact the Company’s financial position and results of operations. 20 Net Interest Income Net interest income, the largest source of revenue, results from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. 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. (In thousands) Interest income, fully taxable equivalent basis Loans Loans held for sale Investment securities: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Mortgage-backed securities Asset-backed securities Other securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Total interest income Interest expense Interest bearing deposits: Savings Interest checking and money market Time open and C.D.’s of less than $100,000 Time open and C.D.’s of $100,000 and over Federal funds purchased and securities sold under agreements to repurchase Other borrowings Total interest expense Net interest income, fully taxable equivalent basis 2014 Change due to Average Volume Average Rate Total 2013 Change due to Average Volume Average Rate Total $ 34,572 $ (176) (25,530) $ — 9,042 $ (176) 42,759 $ (194) (49,138) $ 9 (6,379) (185) 2,105 5,100 3,533 (5,677) (2,047) (2,376) 2,870 (547) (462) (1,617) (452) (916) 4,975 4,553 3,071 (7,294) (2,499) (3,292) 2,538 3,556 9,459 (18,553) 1,484 1,671 (6,023) (551) (4,993) (1,451) (5,949) (3,099) (3,485) 3,005 4,466 (20,004) (4,465) (1,428) 31 (36) (5) 41 (17) 24 (3,409) 162 31,818 (5,237) 6 (31,921) (8,646) 168 (103) 6,062 51 48,874 (4,117) (3) (75,332) 1,945 48 (26,458) 54 442 (530) 688 35 (1,364) (1,335) (1,145) 89 (922) (1,865) (457) 72 1,245 (557) 571 (108) (5,536) (1,359) (1,362) (74) 328 908 30,910 $ 284 (208) (3,733) (28,188) $ 210 120 (2,825) 2,722 $ 144 (160) 1,315 47,559 $ (143) 43 (8,465) (66,867) $ $ (36) (4,291) (1,916) (791) 1 (117) (7,150) (19,308) Net interest income totaled $620.2 million in 2014, increasing slightly compared to $619.4 million in 2013. On a tax equivalent basis, net interest income totaled $648.6 million in 2014 and increased $2.7 million over the previous year. This increase was mainly the result of higher interest earned on loans, due to higher loan balances, and lower rates paid on deposits. In addition, inflation-adjusted interest on the Company's holdings of U.S. Treasury inflation-protected securities (TIPS) was higher by $4.3 million compared to 2013, while interest earned on long-term securities purchased under agreements to resell declined $8.6 million due to lower balances and lower rates earned. The net yield on earning assets (tax equivalent) was 3.00% in 2014 compared with 3.11% in the previous year. During 2014, tax equivalent interest income on loans grew $9.0 million over 2013 due to an increase of $948.6 million, or 9.2%, in average balances, partly offset by a 28 basis point decrease in average rates earned. The average tax equivalent rate earned on the loan portfolio was 4.04% in 2014 compared to 4.32% in 2013. The higher average balances contributed interest income of $34.6 million; however, the lower rates depressed interest income by $25.5 million, which together resulted in a $9.0 million net increase in interest income. The largest increase occurred in business loan interest, which was higher by $7.9 million as a result of growth in average balances of $552.9 million, or 16.4%, partly offset by a decline in rates of 22 basis points. Interest on personal real estate loans grew $2.7 million due to a $123.2 million increase in average balances coupled with an 11 basis point decrease in average rates. Higher levels of interest were earned on consumer and construction and land loans, which increased $1.1 million and $790 thousand, respectively. These increases were due to higher average balances, which increased 12.5% in consumer and 10.5% in construction and land loans, partly offset by lower average rates earned. Average consumer loan balances increased $179.8 million, which was mainly the result of increases of $180.8 million in loans secured by passenger vehicles and 21 $33.5 million in fixed rate home equity loans. These increases were partially offset by a $67.2 million decrease in marine and recreational vehicle (RV) loans as that portfolio continues to pay down. Interest earned on consumer credit card loans increased by $1.5 million due to a 16 basis point increase in the average rate earned and a slight increase in average balances. Partially offsetting the increases in interest earned was lower interest earned on business real estate loans. Interest on these loans decreased $4.3 million due to a 28 basis point decline in rates, partly offset by growth in average balances of $49.7 million, or 2.2%. Tax equivalent interest income on total investment securities during 2014 was flat compared to 2013, as the total average balance and the average rate earned in 2014 were relatively unchanged from 2013. The average rate earned on the total investment securities portfolio was 2.30% and the total portfolio balance averaged $9.1 billion in both 2014 and 2013. Interest income on the Company's portfolio of U.S. government securities, which consist mainly of TIPS, increased $5.0 million over 2013, largely due to growth of $4.3 million in inflation-adjusted interest earned on these securities. Interest income on state and municipal obligations and government-sponsored enterprise obligations increased $3.1 million and $4.6 million, respectively, due to higher average invested balances, partly offset by declines in rates earned. State and municipal average balances rose $97.7 million, or 6.0%, partly offset by a rate decline of 3 basis points. Average balances of government-sponsored enterprise obligations rose $294.8 million, or 59.0%, offset by a rate decline of 7 basis points. Interest income on mortgage-backed securities decreased $7.3 million in 2014 mainly due to a $206.4 million, or 6.5%, decline in average balances, in addition to a rate decline of 6 basis points. Interest income on asset-backed securities was down by $2.5 million, largely due to a 7.4% decline in average balances. Other declines occurred in interest on corporate debt issues and non-marketable private equity investments, which declined $1.7 million and $1.5 million, respectively, due to lower average balances and lower rates earned. Interest on long-term securities purchased under resell agreements decreased $8.6 million in 2014 compared to the prior year due to a $189.4 million decrease in the average balances of these instruments, coupled with a decrease in the average rate earned from 1.80% in the previous year to 1.27% in 2014. During 2014, interest expense on deposits declined $3.2 million from 2013. This was largely due to lower overall rates paid on total deposits, which declined 3 basis points in 2014 to .19% The average rate paid on total certificates of deposit declined 7 basis points. Total average certificates of deposit declined $107.1 million, or 4.4%, but included an increase in long-term jumbo certificate of deposit balances of $159.4 million, which carry higher rates. Average rates paid on money market accounts also declined, partly offset by the impact of higher average balances, which increased $371.9 million, or 4.3% over 2013. Interest expense on borrowings increased $330 thousand, as the average rate paid grew by 3 basis points. The average rate paid on total interest bearing liabilities fell to .20% in 2014, compared to .23% in 2013. During 2013, tax equivalent loan interest income declined $6.4 million from 2012 due to a 50 basis point decrease in average rates earned, offset by a $932.3 million, or 9.9%, increase in average loan balances. The average tax equivalent rate earned on the loan portfolio was 4.32% in 2013 compared to 4.82% in 2012. The lower rates depressed interest income by $49.1 million; however, the higher average balances contributed interest income of $42.8 million, which together resulted in a $6.4 million net decrease in interest income. The largest decline occurred in business real estate loan interest, which decreased $6.1 million as a result of a decline in rates of 39 basis points, partly offset by a $57.8 million, or 2.6% increase in average balances. Interest on revolving home equity loans decreased $1.8 million due to a $21.8 million decline in average balances coupled with a 21 basis point decrease in average rates. Higher levels of interest were earned on business, personal real estate and consumer loans, which increased $834 thousand, $711 thousand, and $897 thousand, respectively. These increases were due to higher average balances, which increased 13.6% in business, 12.7% in personal real estate and 21.7% in consumer loans, partly offset by lower average rates earned. Average consumer loan balances increased $256.7 million, which was mainly the result of increases of $196.2 million in passenger vehicle loans and $88.7 million in fixed rate home equity loans. These increases were partially offset by an $82.9 million decrease in marine and RV loans. Interest earned on consumer credit card loans decreased by $809 thousand due to a 44 basis point decrease in the average rate earned, partly offset by the impact of a $21.8 million increase in average balances. Tax equivalent interest income on investment securities decreased by $21.9 million in 2013 due to a 25 basis point decrease in average rates earned on these investments, while total average balances increased only slightly. The average rate earned on the total investment securities portfolio declined from 2.55% in 2012 to 2.30% in 2013. Interest income on mortgage-backed securities decreased $20.0 million in 2013 mainly due to a $665.0 million, or 17.3%, decline in average balances. Other declines occurred in interest on asset-backed securities (down $4.5 million) and U.S. government and federal agency obligations (down $3.5 million) due to rate declines, partly offset by higher average balances. The decline in interest on U.S. government obligations was largely due to a decrease of $3.2 million in inflation-adjusted interest on TIPS. Interest income on state and municipal obligations and government-sponsored enterprise obligations increased $4.5 million and $3.0 million, respectively, due to higher average invested balances, partly offset by declines in rates earned. State and municipal average balances rose $240.9 million, or 17.5%, offset by a rate decline of 31 basis points. Government-sponsored enterprise obligations rose $193.3 million, or 63.0%, offset by a rate decline of 11 basis points. Interest on long-term securities purchased under agreements to resell increased $1.9 million in 2013 compared to the prior year due to a $282.0 million increase in average balances, partly offset by a decrease in the average rate earned of 35 basis points. 22 During 2013, interest expense on deposits decreased $7.0 million compared to 2012. This was the result of lower overall rates paid on total deposits, which declined 8 basis points in 2013 to .22%. Average rates paid on money market accounts declined 7 basis points, and rates paid on certificates of deposit declined 15 basis points. The resulting declines in interest expense were partly offset by the impact of higher average balances of money market accounts, which increased $579.1 million, or 7.1% over 2012. Interest expense on borrowings declined slightly due to lower average rates paid. The average rate paid on total interest bearing liabilities decreased to .23% compared to .30% in 2012. Provision for Loan Losses The provision for loan losses totaled $29.5 million in 2014, which represented an increase of $9.2 million over the 2013 provision of $20.4 million. Net loan charge-offs for the year totaled $34.5 million compared with $31.4 million in 2013, or an increase of $3.2 million. The increase in net loan charge-offs over the previous year was mainly the result of higher construction, business, and consumer loan losses, which increased $3.2 million, $1.3 million and $1.3 million, respectively. These increases were partly offset by lower losses on revolving home equity, personal real estate, and business real estate loans. The allowance for loan losses totaled $156.5 million at December 31, 2014, a decrease of $5.0 million compared to the prior year, and represented 1.36% of outstanding loans. The provision for loan losses is recorded to bring the allowance for loan losses to a level deemed adequate by management based on the factors mentioned in the following “Allowance for Loan Losses” section of this discussion. Non-Interest Income (Dollars in thousands) Bank card transaction fees Trust fees Deposit account charges and other fees Capital market fees Consumer brokerage services Loan fees and sales Other Total non-interest income Non-interest income as a % of total revenue* Total revenue per full-time equivalent employee $ $ $ 2014 175,806 112,158 78,680 12,667 12,006 5,108 39,553 435,978 41.3% 222.6 $ $ $ 2013 166,627 102,529 79,017 14,133 11,006 5,865 39,209 418,386 40.3% 219.5 $ $ $ 2012 154,197 94,679 79,485 21,066 10,162 6,037 34,004 399,630 38.4% 220.8 * Total revenue is calculated as net interest income plus non-interest income. % Change '14-'13 '13-'12 5.5% 9.4 (.4) (10.4) 9.1 (12.9) .9 4.2% 8.1% 8.3 (.6) (32.9) 8.3 (2.8) 15.3 4.7% Non-interest income totaled $436.0 million, an increase of $17.6 million, or 4.2%, compared to $418.4 million in 2013. Bank card fees increased $9.2 million, or 5.5%, over the prior year, as a result of a $7.2 million, or 8.9%, increase in corporate card fees, which totaled $87.8 million this year. Debit card fees grew $1.7 million, or 4.8%, to $37.2 million, while credit card fees increased 2.3% over last year and totaled $24.0 million. Trust fee income increased $9.6 million, or 9.4%, as a result of continued solid growth in both personal and institutional trust fees. The market value of total customer trust assets (on which fees are charged) totaled $39.0 billion at year end 2014 and grew 10.8% over year end 2013. Deposit account fees declined $337 thousand, or .4%, due to lower overdraft and return item fees of $1.3 million, mostly offset by higher account service charges and corporate cash management fees of $635 thousand and $332 thousand, respectively. Overdraft fees comprised 37.7% of total deposit fees in 2014, down from 39.2% in 2013, while corporate cash management fees comprised 42.6% of total deposit fees in 2014, compared to 42.0% in 2013. Capital market fees decreased $1.5 million, or 10.4%, as a result of continued weak demand, while loan fees and sales declined $757 thousand, or 12.9%, due to lower loan commitment fees. Consumer brokerage services revenue increased $1.0 million, or 9.1%, due to growth in advisory fees. Other income increased $344 thousand and included a gain of $2.1 million on the sale of three retail branches in the third quarter of 2014, coupled with higher operating lease revenue and other fee revenue related to the settlement of certain litigation. These increases were partly offset by lower net gains on bank properties sold or held for sale during the period, in addition to lower tax credit sales revenue. During 2013, non-interest income increased $18.8 million, or 4.7%, over 2012 to $418.4 million. Bank card fees increased $12.4 million, or 8.1%, over 2012, as a result of continued growth in corporate card fees of $9.9 million, or 13.9%. In addition, higher transaction volumes resulted in growth of 3.3% in merchant fees, while credit card fees also increased by 3.8%. Corporate card, merchant card and credit card fees for 2013 totaled $80.6 million, $27.1 million and $23.4 million, respectively. Trust fee income increased $7.9 million, or 8.3%, resulting mainly from growth in personal and institutional trust fees. The market value of total customer trust assets totaled $35.2 billion at year end 2013 and grew 16.4% over year end 2012. Deposit account fees decreased $468 thousand, or .6%, primarily due to a decline in overdraft and return item fees of $3.4 million. This decline was mainly the result of a new posting routine on debit card transactions which took effect in February 2013. Partly offsetting this effect was an increase of $3.0 million in various other deposit fees and cash management fees. Capital market fees decreased $6.9 23 million, or 32.9%, compared to 2012 as customer demand for fixed-income securities was weak in 2013. Consumer brokerage services revenue increased $844 thousand, or 8.3%, due to higher advisory fee income, while loan fees and sales revenue decreased $172 thousand, or 2.8%, due to a decline in loan commitment fees. Other non-interest income increased by $5.2 million, or 15.3%, as a result of a $3.0 million fair value loss recorded in 2012 on an office building which was held for sale, and net gains of $1.4 million were recorded during 2013 on sales of five retail branch facilities no longer in use. In addition, higher swap and foreign exchange fees were recorded in 2013. Investment Securities Gains (Losses), Net (In thousands) Available for sale: Common stock U.S. government bonds Municipal bonds Agency mortgage-backed bonds OTTI losses on non-agency mortgage-backed bonds Non-marketable: Private equity investments 2014 2013 2012 $ 1,570 $ 1,375 $ (5,197) — — (1,365) 19,116 — 126 — — — 16 342 (1,284) (1,490) (4,642) (4,425) $ 5,960 4,828 Total investment securities gains (losses), net $ 14,124 $ Net gains and losses on investment securities during 2014, 2013 and 2012 are shown in the table above. Included in these amounts are gains and losses arising from sales of bonds from the Company’s available for sale portfolio, including credit-related losses on debt securities identified as other-than-temporarily impaired. Also shown are gains and losses relating to non-marketable private equity investments, which are primarily held by the Parent’s majority-owned private equity subsidiaries. These include fair value adjustments, in addition to gains and losses realized upon disposition. The portions of the gains and losses that are attributable to minority interests are reported as non-controlling interest in the consolidated statements of income, and resulted in expense of $180 thousand in 2014, income of $1.1 million in 2013 and expense of $1.3 million 2012. Net securities gains of $14.1 million were recorded in 2014, which included $19.1 million in gains relating to the private equity investment portfolio. These gains included $19.6 million related to the sale of an investment which had been held by the Company for many years, partly offset by fair value losses on other investments in this portfolio. During 2014, the Company also sold $36.2 million of U.S. Treasury inflation-protected bonds, realizing a loss of $5.2 million, and recorded a $1.6 million gain upon the donation of appreciated common stock. Also included in net losses were credit-related impairment losses of $1.4 million on certain non-agency guaranteed mortgage-backed securities which have been identified as other-than-temporarily impaired. These identified securities had a total fair value of $54.6 million at December 31, 2014, compared to $70.4 million at December 31, 2013. Net securities losses of $4.4 million were recorded in 2013, compared to net gains of $4.8 million in 2012. In both years, these gains and losses were comprised mainly of fair value adjustments in the private equity investment portfolio, coupled with losses in the available for sale portfolio relating to other-than-temporary impairment (OTTI). In 2013, a gain of $1.4 million relating to the donation of appreciated common stock was also recorded. 24 Non-Interest Expense (Dollars in thousands) Salaries Employee benefits Net occupancy Equipment Supplies and communication Data processing and software Marketing Deposit insurance Other 2014 2013 2012 '14-'13 '13-'12 $ 322,631 $ 310,179 $ 302,675 4.0% % Change 61,469 45,825 18,375 22,432 78,980 15,676 11,622 80,765 56,688 45,639 18,425 22,511 78,245 14,176 11,167 72,603 58,224 45,534 20,147 22,321 73,798 15,106 10,438 70,226 8.4 .4 (.3) (.4) .9 10.6 4.1 11.2 Total non-interest expense $ 657,775 $ 629,633 $ 618,469 4.5% Efficiency ratio Salaries and benefits as a % of total non-interest expense Number of full-time equivalent employees 62.1% 58.4% 4,744 60.5% 58.3% 4,727 59.3% 58.4% 4,708 2.5% (2.6) .2 (8.5) .9 6.0 (6.2) 7.0 3.4 1.8% Non-interest expense was $657.8 million in 2014, an increase of $28.1 million, or 4.5%, over the previous year. Salaries and benefits expense increased $17.2 million, or 4.7%, mainly due to higher full-time salaries expense and medical plan costs, which the Company self insures. Growth in salaries expense resulted partly from staffing additions in commercial banking, wealth, commercial card and IT departments. Full-time equivalent employees totaled 4,744 at December 31, 2014, an increase of .4% over 2013. Occupancy expense increased $186 thousand, or .4%, while equipment expense and supplies and communication expense both declined slightly. Data processing and software expense increased $735 thousand, or .9%, mainly due to higher software licensing and bank card processing expense. Marketing expense increased $1.5 million, or 10.6%, mainly due to lower advertising activities during 2013, and deposit insurance expense increased $455 thousand, or 4.1% due to higher deposit balances. Other non-interest expense increased $8.2 million, or 11.2% over the prior year. The increase resulted from a $2.1 million increase in bank card rewards costs and higher costs for operating lease depreciation, coupled with a prior year $2.0 million reimbursement from the Company's bank card processor and gains of $3.1 million on sales of foreclosed properties during 2013. These effects were partly offset by the current year recovery of $1.7 million from the settlement of past litigation and letter of credit provisions in the prior year totaling $2.8 million. The Summit acquisition in September 2013 also contributed to the overall increase in total non-interest expense, as costs relating to those operations rose $1.7 million in 2014 (the first full year of such costs) compared to 2013. In 2013, non-interest expense was $629.6 million, an increase of $11.2 million, or 1.8%, over 2012. Salaries and benefits expense increased by $6.0 million, or 1.7%, mainly due to higher full-time salaries expense, partly offset by lower medical and incentives expense. Growth in salaries expense resulted partly from staffing costs associated with the Summit acquisition, coupled with staffing additions in commercial banking, wealth and commercial card. Full-time equivalent employees totaled 4,727 at December 31, 2013, an increase of .4%. Occupancy expense increased $105 thousand, or .2%, while supplies and communication expense increased $190 thousand, or .9%. Equipment expense decreased $1.7 million, or 8.5%, due to lower depreciation expense. Data processing and software expense increased $4.4 million, or 6.0%, mainly due to higher bank card processing expense and data processing termination fees relating to the Summit acquisition. Marketing expense declined $930 thousand, or 6.2%, while deposit insurance increased $729 thousand, or 7.0%. Other non-interest expense increased $2.4 million, or 3.4%, over 2012, resulting mainly from an increase of $4.0 million in legal and professional fees, provisions of $2.8 million on letter of credit exposures, contribution expense of $1.5 million on appreciated stock, and higher travel and entertainment expense. These expense increases were partly offset by gains of $3.1 million on sales of foreclosed property in 2013, in addition to a 2012 charge of $5.2 million related to certain Visa-related interchange litigation that did not reoccur in 2013. Income Taxes Income tax expense was $120.2 million in 2014, compared to $122.2 million in 2013 and $127.2 million in 2012. The effective tax rate, including the effect of non-controlling interest, was 31.5% in 2014 compared to 31.9% in 2013 and 32.1% in 2012. The Company’s effective tax rates in the years noted above were lower than the federal statutory rate of 35% mainly due to tax-exempt interest on state and local municipal obligations. Additional information about income tax expense is provided in Note 9 to the consolidated financial statements. 25 Financial Condition Loan Portfolio Analysis Classifications of consolidated loans by major category at December 31 for each of the past five years are shown in the table below. This portfolio consists of loans which were acquired or originated with the intent of holding to their maturity. Loans held for sale are separately discussed in a following section. A schedule of average balances invested in each loan category below appears on page 52. (In thousands) Commercial: Business Real estate — construction and land Real estate — business Personal banking: Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans 2014 2013 2012 2011 2010 Balance at December 31 $ 3,969,952 $ 3,715,319 $ 3,134,801 $ 2,808,265 $ 2,957,043 403,507 2,288,215 406,197 2,313,550 355,996 2,214,975 386,598 460,853 2,180,100 2,065,837 1,883,092 1,705,134 430,873 782,370 6,095 1,787,626 1,512,716 420,589 796,228 4,611 1,584,859 1,289,650 437,567 804,245 9,291 1,428,777 1,440,386 1,114,889 1,164,327 463,587 788,701 6,561 477,518 831,035 13,983 $ 11,469,238 $ 10,956,836 $ 9,831,384 $ 9,177,478 $ 9,410,982 The contractual maturities of loan categories at December 31, 2014, and a breakdown of those loans between fixed rate and floating rate loans are as follows: (In thousands) Business Real estate — construction and land Real estate — business Real estate — personal Total business and real estate loans Consumer (1) Revolving home equity (2) Consumer credit card (3) Overdrafts Total loans Loans with fixed rates Loans with floating rates Total business and real estate loans Principal Payments Due In One Year or Less After One Year Through Five Years After Five Years Total $ 2,077,663 $ 1,510,400 $ 381,889 $ 3,969,952 237,429 491,885 151,947 130,794 1,457,858 501,513 35,284 338,472 1,229,632 $ 2,958,924 $ 3,600,565 $ 1,985,277 403,507 2,288,215 1,883,092 8,544,766 1,705,134 430,873 782,370 6,095 $ 11,469,238 $ $ 640,670 $ 2,167,369 $ 1,142,800 $ 3,950,839 2,318,254 1,433,196 842,477 4,593,927 2,958,924 $ 3,600,565 $ 1,985,277 $ 8,544,766 (1) Consumer loans with floating rates totaled $216.7 million. (2) Revolving home equity loans with floating rates totaled $430.8 million. (3) Consumer credit card loans with floating rates totaled $668.6 million. Total loans at December 31, 2014 were $11.5 billion, an increase of $512.4 million, or 4.7%, over balances at December 31, 2013. The growth in loans during 2014 occurred in business, personal real estate and consumer loan categories, while declines occurred in business real estate and consumer credit card loan categories. Business loans increased $254.6 million, or 6.9%, reflecting growth in commercial and industrial loans, lease loans, corporate card loans and tax-advantaged lending. Business real estate loans decreased $25.3 million, or 1.1%, due to lower totals of owner-occupied loans during 2014. Construction loans decreased slightly due to a decline in commercial construction loans, mostly offset by increased activity in residential construction. Personal real estate loans increased $95.5 million, or 5.3%, as an improved economy and continued low rates helped spur demand. Consumer loans were higher by $192.4 million, or 12.7%, as demand for automobile and other consumer loans remained solid, 26 while marine and recreational vehicle loan balances continued to run off during the year. Revolving home equity loan balances saw a moderate increase of $10.3 million, or 2.4%. Consumer credit card loans decreased by $13.9 million, or 1.7%, as borrowers remained conservative in their use of these card plans. The Company currently generates approximately 29% of its loan portfolio in the St. Louis market, 28% in the Kansas City market, and 43% in other regional markets. The portfolio is diversified from a business and retail standpoint, with 58% in loans to businesses and 42% in loans to consumers. A balanced approach to loan portfolio management and an historical aversion toward credit concentrations, from an industry, geographic and product perspective, have contributed to low levels of problem loans and loan losses. The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $20 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. At December 31, 2014, the balance of SNC loans totaled approximately $508.0 million, with an additional $1.2 billion in unfunded commitments, compared to $406.3 million in loans and $1.2 billion in commitments at December 31, 2013. Commercial Loans Business Total business loans amounted to $4.0 billion at December 31, 2014 and include loans used mainly to fund customer accounts receivable, inventories, and capital expenditures. The business loan portfolio includes tax-advantaged financings which carry tax free interest rates. These loans totaled $727.5 million at December 31, 2014, which was a 3.2% increase over December 31, 2013 balances, and comprised 6.3% of the Company's total loan portfolio. The business loan portfolio also includes direct financing and sales type leases totaling $413.0 million, which are used by commercial customers to finance capital purchases ranging from computer equipment to office and transportation equipment. These leases increased $44.2 million, or 12.0%, over 2013 and comprised 3.6% of the Company’s total loan portfolio. Also included in this portfolio are corporate card loans, which totaled $212.2 million at December 31, 2014. These loans, which increased by $22.6 million, or 11.9% in 2014, are made in conjunction with the Company’s corporate card business, and assist businesses in shifting from paper checks to a credit card payment system in order to automate payment processes. These loans are generally short-term, with outstanding balances averaging between 7 to 13 days in duration, which helps to limit risk in these loans. Business loans, excluding corporate card loans, are made primarily to customers in the regional trade area of the Company, generally the central Midwest, encompassing the states of Missouri, Kansas, Illinois, and nearby Midwestern markets, including Iowa, Oklahoma, Colorado and Ohio. This portfolio is diversified from an industry standpoint and includes businesses engaged in manufacturing, wholesaling, retailing, agribusiness, insurance, financial services, public utilities, healthcare, and other service businesses. Emphasis is upon middle-market and community businesses with known local management and financial stability. Consistent with management’s strategy and emphasis upon relationship banking, most borrowing customers also maintain deposit accounts and utilize other banking services. Net loan charge-offs in this category totaled $465 thousand in 2014, while net loan recoveries of $867 thousand were recorded in 2013. Non-accrual business loans were $11.6 million (.3% of business loans) at both December 31, 2014 and 2013. Real Estate-Construction and Land The portfolio of loans in this category amounted to $403.5 million at December 31, 2014 and comprised 3.5% of the Company’s total loan portfolio. These loans are predominantly made to businesses in local markets. Commercial construction and land development loans totaled $213.4 million, or 52.9% of total construction loans at December 31, 2014. Commercial construction loans are made during the construction phase for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, apartment complexes, shopping centers, hotels and motels, and other commercial properties. Exposure to larger, speculative commercial properties remains low. Commercial land development loans relate to land owned or developed for use in conjunction with business properties. Residential construction and land development loans at December 31, 2014 totaled $190.1 million, or 47.1% of total construction loans. The largest percentage of residential construction and land development loans is for projects located in the Kansas City and St. Louis metropolitan areas. A stable market has contributed to improved loss trends, with net loan recoveries of $1.5 million and $4.7 million recorded in 2014 and 2013, respectively. Construction and land loans on non-accrual status declined to $5.2 million at year end 2014 compared to $10.2 million at year end 2013. 27 Real Estate-Business Total business real estate loans were $2.3 billion at December 31, 2014 and comprised 20.0% of the Company’s total loan portfolio. This category includes mortgage loans for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, shopping centers, hotels and motels, churches, and other commercial properties. Emphasis is placed on owner-occupied lending (44.4% of this portfolio), which presents lower risk levels. The borrowers and/or the properties are generally located in local and regional markets. Additional information about loans by category is presented on page 33. At December 31, 2014, non-accrual balances amounted to $17.9 million, or .8% of the loans in this category, down from $19.8 million at year end 2013. The Company experienced net charge-offs of $427 thousand in 2014 compared to net charge-offs of $952 thousand in 2013. Personal Banking Loans Real Estate-Personal At December 31, 2014, there were $1.9 billion in outstanding personal real estate loans, which comprised 16.4% of the Company’s total loan portfolio. The mortgage loans in this category are mainly for owner-occupied residential properties. The Company originates both adjustable rate and fixed rate mortgage loans. The Company traditionally retained adjustable rate mortgage loans, and in recent years retained all fixed rate loans as directed by its Asset/Liability Management Committee. The Company originates its loans and does not purchase any from outside parties or brokers. Further, it has never maintained or promoted subprime or reduced-document products. At December 31, 2014, 32% of the portfolio was comprised of adjustable rate loans while 68% was comprised of fixed rate loans. Levels of mortgage loan origination activity decreased in 2014 compared to 2013, with originations of $344 million in 2014 compared with $410 million in 2013, as refinance activity declined. However, the 2014 originations outpaced slowing prepayment speeds, resulting in overall growth of 5.3%. The Company has experienced lower loan losses in this category than many others in the industry and believes this is partly because of its conservative underwriting culture, stable markets, and the fact that it does not offer subprime lending products or purchase loans from brokers. Net loan charge-offs for 2014 amounted to $527 thousand, compared to $1.2 million in the previous year. The non-accrual balances of loans in this category increased to $6.2 million at December 31, 2014, compared to $5.1 million at year end 2013. Consumer Consumer loans consist of auto, marine, tractor/trailer, recreational vehicle (RV), fixed rate home equity, and other consumer installment loans. These loans totaled $1.7 billion at year end 2014. Approximately 60% of consumer loans outstanding were originated indirectly from auto and other dealers, while the remaining 40% were direct loans made to consumers. Approximately 56% of the consumer portfolio consists of loans secured by passenger vehicles, 17% in fixed rate home equity loans, and 11% in marine and RV loans. As mentioned above, total consumer loans increased by $192.4 million in 2014, mainly the result of growth in loans collateralized by passenger vehicles (mainly automobiles) of $208.3 million, or 28%. Growth of $38.0 million in other consumer loans and $7.0 million in fixed rate home equity loans was offset by the run-off of $60.9 million in marine and RV loans. Net charge-offs on consumer loans were $8.8 million in 2014 compared to $7.5 million in 2013. Net charge-offs were .5% of average consumer loans in both 2014 and 2013. Consumer loan net charge-offs included marine and RV loan net charge-offs of $2.4 million, which were 1.1% of average marine and RV loans in 2014, compared to 1.3% in 2013. Revolving Home Equity Revolving home equity loans, of which 99% are adjustable rate loans, totaled $430.9 million at year end 2014. An additional $681.5 million was available in unused lines of credit, which can be drawn at the discretion of the borrower. Home equity loans are secured mainly by second mortgages (and less frequently, first mortgages) on residential property of the borrower. The underwriting terms for the home equity line product permit borrowing availability, in the aggregate, generally up to 80% or 90% of the appraised value of the collateral property at the time of origination. Net charge-offs totaled only $40 thousand in 2014, compared to $986 thousand in 2013. Consumer Credit Card Total consumer credit card loans amounted to $782.4 million at December 31, 2014 and comprised 6.8% of the Company’s total loan portfolio. The credit card portfolio is concentrated within regional markets served by the Company. The Company offers a variety of credit card products, including affinity cards, rewards cards, and standard and premium credit cards, and emphasizes its credit card relationship product, Special Connections. Approximately 58% of the households in Missouri that own a Commerce credit card product also maintain a deposit relationship with the subsidiary bank. At December 31, 2014, approximately 85% of the outstanding credit card loan balances had a floating interest rate, compared to 82% in the prior year. Net charge-offs amounted to $24.7 million in 2014, a decrease of $399 thousand from $25.1 million in 2013. The ratio of credit card loan net charge-offs to total average credit card loans was 3.3% in both 2014 and 2013. These ratios mirror bank industry averages, which are at the lowest levels in 8 years. 28 Allowance for Loan Losses 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 reserves needed for pools of loans. Loans subject to individual evaluation generally consist of business, construction, business real estate and personal real estate loans on non-accrual status, and include troubled debt restructurings that are on non-accrual status. These non-accrual loans are evaluated individually for impairment based on factors such as payment history, borrower financial condition and collateral. For collateral dependent loans, appraisals of collateral (including exit costs) are normally obtained annually but discounted based on date last received and market conditions. From these evaluations of expected cash flows and collateral values, specific allowances are determined. Loans which are not individually evaluated are segregated by loan type and sub-type and are collectively evaluated. These loans include commercial loans (business, construction and business real estate) which have been graded pass, special mention or substandard, and all personal banking loans except personal real estate loans on non-accrual status. Collectively-evaluated loans include certain troubled debt restructurings with similar risk characteristics. Allowances for both personal banking and commercial loans use methods which consider historical and current loss trends, loss emergence periods, delinquencies, industry concentrations and unique risks. Economic conditions throughout the Company's market place, as monitored by Company credit officers, are also considered in the allowance determination process. The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses rest upon various judgments and assumptions made by management. Factors that influence these judgments include past loan loss experience, current loan portfolio composition and characteristics, trends in delinquencies, portfolio risk ratings, levels of non-performing assets, and prevailing regional and national economic conditions. The Company has internal credit administration and loan review staffs that continuously review loan quality and report the results of their reviews and examinations to the Company’s senior management and Board of Directors. Such reviews also assist management in establishing the level of the allowance. In using this process and the information available, management must consider various assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these subjective factors, actual outcomes of inherent losses can differ from original estimates. The Company’s subsidiary bank continues to be subject to examination by several regulatory agencies, and examinations are conducted throughout the year, targeting various segments of the loan portfolio for review. Refer to Note 1 to the consolidated financial statements for additional discussion on the allowance and charge-off policies. At December 31, 2014, the allowance for loan losses was $156.5 million compared to $161.5 million at December 31, 2013. Total loans delinquent 90 days or more and still accruing were $13.7 million at December 31, 2014, a decrease of $308 thousand compared to year end 2013. Non-accrual loans at December 31, 2014 were $40.8 million, a decrease of $8.0 million from the prior year. The 2014 year end balance was comprised of $17.9 million of business real estate loans, $11.6 million of business loans, $6.2 million of personal real estate loans and $5.2 million of construction loans. The percentage of allowance to loans decreased to 1.36% at December 31, 2014 compared to 1.47% at year end 2013 as a result of loan growth and a decline of $5.0 million in the allowance. The percentage of allowance to non-accrual loans was 384% at December 31, 2014, compared to 331% at December 31, 2013. Net loan charge-offs totaled $34.5 million in 2014, representing a $3.2 million increase compared to net charge-offs of $31.4 million in 2013. Net charge-offs on business loans were $465 thousand in 2014, an increase of $1.3 million compared to net recoveries of $867 thousand in 2013. Net charge-offs on consumer loans increased $1.3 million to $8.8 million in 2014, compared to net charge-offs of $7.5 million in 2013. Net recoveries on construction and land loans declined $3.2 million to $1.5 million in 2014, compared to $4.7 million in 2013. These increases in net charge-offs were partly offset by charge-off declines in other loan categories. Net charge-offs on business real estate loans decreased to $427 thousand in 2014, compared to net charge-offs of $952 thousand in 2013. Net charge-offs on consumer credit card loans decreased $399 thousand to $24.7 million in 2014, compared to $25.1 million in 2013, and consumer credit card net charge-offs declined to 3.28% of average consumer credit card loans in 2014 compared to 3.34% in 2013. Consumer credit card loan charge-offs as a percentage of total net charge-offs declined to 71.6% in 2014 compared to 80.1% in 2013, as slightly lower consumer credit card charge-offs offset higher overall net charge-offs in other loan categories. Lower net charge-offs also occurred in revolving home equity and personal real estate loans, which declined $946 thousand and $700 thousand respectively. The ratio of net charge-offs to total average loans outstanding in 2014 was .31% compared to .30% in 2013 and .42% in 2012. The provision for loan losses in 2014 was $29.5 million, compared to provisions of $20.4 million in 2013 and $27.3 million in 2012. 29 The Company considers the allowance for loan losses of $156.5 million adequate to cover losses inherent in the loan portfolio at December 31, 2014. The schedules which follow summarize the relationship between loan balances and activity in the allowance for loan losses: (Dollars in thousands) Loans outstanding at end of year(A) Average loans outstanding(A) Allowance for loan losses: Balance at beginning of year Additions to allowance through charges to expense Loans charged off: Business Real estate — construction and land Real estate — business Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans charged off Recoveries of loans previously charged off: Business Real estate — construction and land Real estate — business Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total recoveries Net loans charged off Balance at end of year $ $ $ 2014 11,469,238 11,260,233 161,532 29,531 $ $ $ 2,646 794 1,108 844 12,214 783 32,424 1,960 52,773 2,181 2,323 681 317 3,409 743 7,702 886 18,242 34,531 Years Ended December 31 2013 2012 2011 10,956,836 10,311,654 $ $ 9,831,384 9,379,316 $ $ 9,177,478 9,222,568 $ $ 2010 9,410,982 9,698,670 172,532 $ 184,532 $ 197,538 $ 20,353 27,287 51,515 1,869 621 2,680 1,570 11,029 1,200 33,206 2,024 54,199 2,736 5,313 1,728 343 3,489 214 8,085 938 22,846 31,353 2,809 1,244 7,041 2,416 12,288 2,044 33,098 2,221 63,161 5,306 1,527 1,933 990 4,161 240 8,623 1,094 23,874 39,287 6,749 7,893 4,176 3,217 16,052 1,802 39,242 2,254 81,385 1,761 943 613 445 3,896 135 7,625 1,446 16,864 64,521 194,480 100,000 8,550 15,199 4,780 2,484 24,587 2,014 54,287 2,672 114,573 3,964 193 722 428 4,108 39 6,556 1,621 17,631 96,942 $ 156,532 $ 161,532 $ 172,532 $ 184,532 $ 197,538 Ratio of allowance to loans at end of year Ratio of provision to average loans outstanding 1.36% .26% 1.47% .20% 1.75% .29% 2.01% .56% 2.10% 1.03% (A) Net of unearned income, before deducting allowance for loan losses, excluding loans held for sale. Years Ended December 31 2014 2013 2012 2011 2010 Ratio of net charge-offs (recoveries) to average loans outstanding, by loan category: Business Real estate — construction and land Real estate — business Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts .01% (.37) (.03)% (1.24) (.08)% (.08) .02 .03 .54 .01 3.28 21.97 .04 .07 .52 .23 3.34 18.04 .23 .09 .69 .40 3.35 18.40 Ratio of total net charge-offs to total average loans outstanding .31% .30 % .42 % 30 .17% .16% 1.66 .17 .19 1.09 .36 4.23 2.69 .20 .14 1.64 .41 6.28 11.62 .70% 14.42 1.00% The following schedule provides a breakdown of the allowance for loan losses by loan category and the percentage of each loan category to total loans outstanding at year end. (Dollars in thousands) 2014 2013 2012 2011 2010 Loan Loss Allowance Allocation % of Loans to Total Loans Loan Loss Allowance Allocation % of Loans to Total Loans Loan Loss Allowance Allocation % of Loans to Total Loans Loan Loss Allowance Allocation % of Loans to Total Loans Loan Loss Allowance Allocation % of Loans to Total Loans Business $ 40,881 34.6% $ 43,146 33.9% $ 47,729 31.9% $ 49,217 30.5% $ 47,534 31.4% RE — construction and land RE — business RE — personal Consumer Revolving home equity Consumer credit card Overdrafts Total 13,584 35,157 7,343 16,822 2,472 39,541 732 $ 156,532 3.5 20.0 16.4 14.9 3.7 6.8 18,617 32,426 4,490 15,440 3,152 43,360 .1 901 100.0% $ 161,532 3.7 21.1 16.3 13.8 3.8 7.3 .1 20,555 37,441 3,937 15,165 4,861 41,926 918 3.6 22.5 16.1 13.1 4.5 8.2 .1 28,280 45,000 3,701 15,369 2,220 39,703 1,042 4.2 23.8 15.6 12.1 5.1 8.6 .1 21,316 51,096 4,016 19,449 2,502 50,532 1,093 4.9 22.0 15.3 12.4 5.1 8.8 .1 100.0% $ 172,532 100.0% $ 184,532 100.0% $ 197,538 100.0% Risk Elements of Loan Portfolio Management reviews the loan portfolio continuously for evidence of problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan loss, and (if appropriate) partial or full loan charge-off. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. Interest is included in income only as received and only after all previous loan charge-offs have been recovered, so long as management is satisfied there is no impairment of collateral values. The loan is returned to accrual status only when the borrower has brought all past due principal and interest payments current, and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. 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 comprised of those personal banking loans that are exempt under regulatory rules from being classified as non-accrual. Consumer installment loans and related accrued interest are normally charged down to the fair value of related collateral (or are charged off in full if no collateral) once the loans are more than 120 days delinquent. Credit card loans and the related accrued interest are charged off when the receivable is more than 180 days past due. The following schedule shows non-performing assets and loans past due 90 days and still accruing interest. (Dollars in thousands) Total non-accrual loans Real estate acquired in foreclosure Total non-performing assets Non-performing assets as a percentage of total loans Non-performing assets as a percentage of total assets Total past due 90 days and still accruing interest 2014 $ 40,775 5,476 $ 46,251 2013 48,814 6,625 55,439 $ $ December 31 2012 51,410 13,453 64,863 $ $ $ $ 2011 75,482 18,321 93,803 2010 85,275 12,045 97,320 $ $ .40% .19% .51% .24% .66% .29% 1.02% .45% 1.03% .53% $ 13,658 $ 13,966 $ 15,347 $ 14,958 $ 20,466 The table below shows the effect on interest income in 2014 of loans on non-accrual status at year end. (In thousands) Gross amount of interest that would have been recorded at original rate Interest that was reflected in income Interest income not recognized $ $ 3,879 272 3,607 Non-accrual loans, which are also classified as impaired, totaled $40.8 million at year end 2014, a decrease of $8.0 million from the balance at year end 2013. At December 31, 2014, non-accrual loans were comprised primarily of business real estate loans (43.8%) and business loans (28.4%). Foreclosed real estate decreased $1.1 million to a total of $5.5 million at year end 2014. Total non-performing assets remain low compared to the overall banking industry in 2014, with the non-performing loans to total loans ratio at .36% at December 31, 2014. Loans past due 90 days and still accruing interest decreased $308 thousand at 31 year end 2014 compared to 2013. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section of Note 3 to the consolidated financial statements. In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company’s internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $81.2 million at December 31, 2014 compared with $98.3 million at December 31, 2013, resulting in a decrease of $17.2 million, or 17.4%. The change in potential problem loans was largely due to decreases of $13.2 million in construction and land real estate loans and $5.2 million in business real estate loans. (In thousands) Potential problem loans: Business Real estate – construction and land Real estate – business Real estate – personal Total potential problem loans December 31 2014 2013 $ $ $ 23,919 8,654 45,140 3,469 81,182 $ 23,691 21,812 50,349 2,486 98,338 At December 31, 2014, there were approximately $64.4 million loans outstanding whose terms had been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 3 to the consolidated financial statements. This balance includes certain commercial loans totaling $21.8 million which are classified as substandard and included in the table above because of this classification. Loans with Special Risk Characteristics Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 3 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Construction and land loans and business real estate loans are subject to higher risk because of the impact that low rates and the economy can have on real estate value, and because of the potential volatility of the real estate industry. Certain personal real estate products (residential first mortgages and home equity loans) have contractual features that could increase credit exposure in a market of declining real estate prices, when interest rates are steadily increasing, or when a geographic area experiences an economic downturn. For these personal real estate loans, higher risks could exist when 1) loan terms require a minimum monthly payment that covers only interest, or 2) loan-to- collateral value (LTV) ratios at origination are above 80%, with no private mortgage insurance. Information presented below for personal real estate and home equity loans is based on LTV ratios which were calculated with valuations at loan origination date. The Company does not attempt to obtain updated appraisals or valuations unless the loans become significantly delinquent or are in the process of being foreclosed upon. For credit monitoring purposes, the Company relies on delinquency monitoring along with obtaining refreshed FICO scores, and in the case of home equity loans, reviewing line utilization and credit bureau information annually. This has remained an effective means of evaluating credit trends and identifying problem loans, partly because the Company offers standard, conservative lending products. Real Estate - Construction and Land Loans The Company’s portfolio of construction loans, as shown in the table below, amounted to 3.5% of total loans outstanding at December 31, 2014. (Dollars in thousands) Residential land and land development Residential construction Commercial land and land development Commercial construction Total real estate – construction and land loans December 31, 2014 % of Total % of Total Loans December 31, 2013 % of Total % of Total Loans $ 82,072 108,058 62,379 150,998 20.3% 26.8 15.5 37.4 .7% $ 1.0 .5 1.3 79,273 86,043 77,444 163,437 19.5% 21.2 19.1 40.2 $ 403,507 100.0% 3.5% $ 406,197 100.0% .7% .8 .7 1.5 3.7% 32 Real Estate – Business Loans Total business real estate loans were $2.3 billion at December 31, 2014 and comprised 20.0% 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. Approximately 44% of these loans were for owner- occupied real estate properties, which present lower risk profiles. (Dollars in thousands) Owner-occupied December 31, 2014 $ 1,017,099 Retail Office Multi-family Hotels Farm Industrial Other Total real estate - business loans Real Estate - Personal Loans % of Total % of Total Loans December 31, 2013 % of Total % of Total Loans 44.4% 13.3 10.1 8.8 6.9 6.6 4.2 5.7 8.9% $ 1,074,074 2.7 2.1 1.7 1.4 1.3 .8 1.1 271,228 265,352 178,524 151,483 138,842 89,045 145,002 46.4% 11.7 11.5 7.7 6.5 6.0 3.9 6.3 9.8% 2.5 2.4 1.6 1.4 1.3 .8 1.3 305,296 230,798 200,295 158,348 151,788 94,266 130,325 $ 2,288,215 100.0% 20.0% $ 2,313,550 100.0% 21.1% The Company’s $1.9 billion personal real estate loan portfolio is composed of first mortgages on residential real estate. The majority of this portfolio is comprised of approximately $1.6 billion of loans made to the retail customer base and includes both adjustable rate and fixed rate mortgage loans. As shown in Note 3 to the consolidated financial statements, 4.5% of the retail- based portfolio has FICO scores of less than 660, and delinquency levels have been low. Loans of approximately $17.2 million in this portfolio were structured with interest only payments. Interest only loans are typically made to high net-worth borrowers and generally have low LTV ratios or have additional collateral pledged to secure the loan, and, therefore, they are not perceived to represent above normal credit risk. Loans originated with interest only payments were not made to "qualify" the borrower for a lower payment amount. A small portion of the total portfolio is composed of personal real estate loans made to commercial customers, which totaled $244.3 million at December 31, 2014. The following table presents information about the retail-based personal real estate loan portfolio for 2014 and 2013. (Dollars in thousands) Loans with interest only payments Loans with no insurance and LTV: Between 80% and 90% Between 90% and 95% Over 95% Over 80% LTV with no insurance Total loan portfolio from which above loans were identified Revolving Home Equity Loans 2014 2013 Principal Outstanding at December 31 $ 17,159 % of Loan Portfolio Principal Outstanding at December 31 % of Loan Portfolio 1.0% $ 15,849 1.0% 80,897 27,707 35,233 143,837 1,643,227 4.9 1.7 2.1 8.7 80,431 27,158 38,518 146,107 1,546,768 5.2 1.8 2.5 9.5 The Company also has revolving home equity loans that are generally collateralized by residential real estate. Most of these loans (94.1%) 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 shown in the following tables, the percentage of loans with LTV ratios greater than 80% has remained a small segment of this portfolio, and delinquencies have been low and stable. The weighted average FICO score for the total current portfolio balance is 769. 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 to convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. Over the next three years, approximately 44% of the Company's current outstanding balances are expected to mature. Of these balances, 84% have a FICO score above 700. 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. 33 (Dollars in thousands) Loans with interest only payments Loans with LTV: Between 80% and 90% Over 90% Over 80% LTV Total loan portfolio from which above loans were identified Principal Outstanding at December 31, 2014 405,298 $ New Lines Originated * During 2014 94.1% $156,286 * 36.3% Unused Portion of Available Lines at December 31, 2014 $664,160 Balances Over 30 Days Past Due $1,798 * 154.1% 40,301 22,799 63,100 9.4 5.2 14.6 18,257 14,353 32,610 4.2 3.4 7.6 38,592 9,246 47,838 9.0 2.1 11.1 238 81 319 430,873 166,397 688,541 * Percentage of total principal outstanding of $430.9 million at December 31, 2014. (Dollars in thousands) Loans with interest only payments Loans with LTV: Between 80% and 90% Over 90% Over 80% LTV Total loan portfolio from which above loans were identified Principal Outstanding at December 31, 2013 394,714 $ New Lines Originated * During 2013 93.8% $147,645 * 35.1% Unused Portion of Available Lines at December 31, 2013 $656,679 Balances Over 30 Days Past Due $4,284 * 156.1% 42,162 12,212 54,374 10.0 2.9 12.9 10,767 1,941 12,708 2.6 .4 3.0 36,274 10,312 46,586 8.6 2.5 11.1 284 163 447 420,589 157,197 686,105 * Percentage of total principal outstanding of $420.6 million at December 31, 2013. Fixed Rate Home Equity Loans * .4% .1 — .1 * 1.0% .1 — .1 In addition to the residential real estate mortgage loans and the revolving floating rate line product discussed above, the Company offers a third choice to those consumers desiring a fixed rate loan and a fixed maturity date. This fixed rate home equity loan, typically for home repair or remodeling, is an alternative for individuals who want to finance a specific project or purchase and decide to lock in a specific monthly payment over a defined period. Outstanding balances for these loans were $291.9 million and $284.9 million at December 31, 2014 and 2013, respectively. At times, these loans are written with interest only monthly payments and a balloon payoff at maturity; however, less than 2% of this portfolio was comprised of interest only loans at both December 31, 2014 and 2013. The delinquency history on this product has been low, as balances over 30 days past due totaled only $1.3 million, or .4% of the portfolio, at year end 2014 and $3.5 million, or 1.2% of the portfolio, at year end 2013. (Dollars in thousands) 2014 2013 Principal Outstanding at December 31 * New Loans Originated * Principal Outstanding at December 31 * New Loans Originated * Loans with interest only payments $ 3,400 1.2% $2,015 .7% $ 5,246 1.8% $6,530 2.3% Loans with LTV: Between 80% and 90% Over 90% Over 80% LTV 60,924 20.9 19,472 6.6 23,397 6,129 8.0 2.1 80,396 27.5 29,526 10.1 Total loan portfolio from which above loans were identified 291,891 18.4 7.2 25.6 30,893 11,652 42,545 10.8 4.1 14.9 52,355 20,589 72,944 284,867 * Percentage of total principal outstanding of $291.9 million and $284.9 million at December 31, 2014 and 2013, respectively. Management does not believe these loans collateralized by real estate (fixed rate home equity, personal real estate, and revolving home equity) represent any unusual concentrations of risk, as evidenced by net charge-offs in 2014 of $909 thousand, $527 thousand and $40 thousand, respectively. The amount of any increased potential loss on high LTV agreements relates mainly to amounts advanced that are in excess of the 80% collateral calculation, not the entire approved line. The Company currently offers no subprime first mortgage or home equity loans, which are characterized as new loans to customers with FICO scores below 660. The Company does not purchase brokered loans. 34 Other Consumer Loans Within the consumer loan portfolio are several direct and indirect product lines comprised mainly of loans secured by passenger vehicles, marine, and RVs. During 2014, $617.0 million of new vehicle loans were originated, compared to $507.7 million during 2013. Marine and RV loan production has been significantly curtailed in recent years with few new originations. The loss ratios experienced for marine and RV loans have been higher than for other consumer loan products, at 1.1% and 1.3% in 2014 and 2013, respectively. Balances over 30 days past due for marine and RV loans decreased $1.5 million at year end 2014 compared to 2013. The table below provides the total outstanding principal and other data for this group of direct and indirect lending products at December 31, 2014 and 2013. (In thousands) Passenger vehicles Marine RV Total Principal Outstanding at December 31 2014 New Loans Originated Balances Over 30 Days Past Due Principal Outstanding at December 31 2013 New Loans Originated Balances Over 30 Days Past Due $ $ 958,270 $ 616,994 $ 8,801 $ 749,970 $ 507,678 $ 49,722 142,492 810 1,445 2,049 3,612 68,162 184,969 2,765 11 7,220 2,860 4,317 1,150,484 $ 619,249 $ 14,462 $ 1,003,101 $ 510,454 $ 14,397 Additionally, the Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at December 31, 2014 of $782.4 million in consumer credit card loans outstanding, approximately $163.7 million, or 20.9%, carried a low promotional rate. Within the next six months, $42.6 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters. Investment Securities Analysis Investment securities are comprised of securities which are classified as available for sale, non-marketable, or trading. During 2014, total investment securities increased $506.7 million, or 5.6%, to $9.5 billion (excluding unrealized gains/losses) compared to $9.0 billion at the previous year end. During 2014, securities of $2.5 billion were purchased in the available for sale and non- marketable portfolios, which included $1.3 billion in asset-backed securities. Total sales, maturities and pay downs in these portfolios were $2.0 billion during 2014. During 2015, maturities and pay downs of approximately $1.8 billion are expected to occur. The average tax equivalent yield earned on total investment securities was 2.30% in both 2014 and 2013. At December 31, 2014, the fair value of available for sale securities was $9.5 billion, including a net unrealized gain in fair value of $137.3 million, compared to a net unrealized gain of $41.1 million at December 31, 2013. The overall unrealized gain in fair value at December 31, 2014 included gains of $70.3 million in agency mortgage-backed securities, $24.0 million in state and municipal obligations, $9.8 million in non-agency mortgage-backed securities, and $34.3 million in equity securities held by the Parent. 35 Available for sale investment securities at year end for the past two years are shown below: (In thousands) Amortized Cost U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Equity securities Total available for sale investment securities Fair Value U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Equity securities December 31 2014 2013 $ 497,336 $ 968,574 1,789,215 2,523,377 372,911 3,090,174 140,784 3,931 498,226 766,802 1,624,195 2,743,803 236,595 2,847,368 147,581 9,970 $ $ 9,386,302 $ 8,874,540 501,407 $ 963,127 1,813,201 2,593,708 382,744 3,091,993 139,161 38,219 505,696 741,766 1,619,171 2,772,338 246,983 2,844,071 141,757 43,898 Total available for sale investment securities $ 9,523,560 $ 8,915,680 The available for sale portfolio includes agency mortgage-backed securities, which are collateralized bonds issued by agencies, including FNMA, GNMA, FHLMC, FHLB, Federal Farm Credit Banks and FDIC. Non-agency mortgage-backed securities totaled $382.7 million, at fair value, at December 31, 2014, and included Alt-A type mortgage-backed securities of $60.9 million and prime/jumbo loan type securities of $67.4 million. Certain of the non-agency mortgage-backed securities are other-than- temporarily impaired, and the processes for determining impairment and the related losses are discussed in Note 4 to the consolidated financial statements. At December 31, 2014, U.S. government obligations included $501.3 million in U.S. Treasury inflation-protected securities, and state and municipal obligations included $95.1 million in auction rate securities, at fair value. Other debt securities include corporate bonds, notes and commercial paper. Available for sale equity securities are mainly comprised of common stock held by the Parent which totaled $37.4 million at December 31, 2014. The types of debt securities held in the available for sale security portfolio at year end 2014 are presented in the table below. Additional detail by maturity category is provided in Note 4 to the consolidated financial statements. Available for sale debt securities: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities *Based on call provisions and estimated prepayment speeds. 36 December 31, 2014 Percent of Total Debt Securities Weighted Average Yield Estimated Average Maturity* 5.3% 1.14% 4.1 years 10.2 19.1 27.3 4.0 32.6 1.5 1.82 2.35 2.69 3.05 .87 2.20 5.4 5.5 3.3 3.8 2.1 5.3 Non-marketable securities, which totaled $106.9 million at December 31, 2014, included $32.4 million in Federal Reserve Bank stock and $14.2 million in Federal Home Loan Bank (Des Moines) stock held by the bank subsidiary in accordance with debt and regulatory requirements. These are restricted securities which, lacking a market, are carried at cost. Other non-marketable securities also include private equity securities which are carried at estimated fair value. The Company engages in private equity activities primarily through several private equity subsidiaries. These subsidiaries hold investments in various business entities, which are carried at fair value and totaled $57.6 million at December 31, 2014. In addition to investments held by its private equity subsidiaries, the Parent directly holds investments in several private equity concerns, which totaled $1.8 million at year end 2014. Most of the private equity investments are not readily marketable. While the nature of these investments carries a higher degree of risk than the normal lending portfolio, this risk is mitigated by the overall size of the investments and oversight provided by management, and management believes the potential for long-term gains in these investments outweighs the potential risks. Most of the private equity investments are held by a subsidiary qualified as a Small Business Investment Company. Non-marketable securities at year end for the past two years are shown below: (In thousands) Debt securities Equity securities Total non-marketable investment securities December 31 2014 2013 $ $ 32,793 $ 74,082 106,875 $ 28,485 78,839 107,324 In addition to its holdings in the investment securities portfolio, the Company invests in long-term securities purchased under agreements to resell, which totaled $1.1 billion at December 31, 2014 and $1.2 billion at December 31, 2013. These investments mature in 2015 through 2017, and most have rates that fluctuate with published indices within a fixed range. The counterparties to these agreements are other financial institutions from whom the Company has accepted collateral of $1.1 billion in marketable investment securities at December 31, 2014. The average rate earned on these agreements during 2014 was 1.03%. The Company also holds offsetting repurchase and resell agreements totaling $450.0 million and $300.0 million at December 31, 2014 and 2013, respectively, which are further discussed in Note 19 to the consolidated financial statements. These agreements involve the exchange of collateral under simultaneous repurchase and resell agreements with the same financial institution counterparty. These repurchase and resell agreements have been offset against each other in the balance sheet, as permitted under current accounting guidance. The agreements mature in 2015 through 2016 and earned an average of 59 basis points during 2014. Deposits and Borrowings Deposits are the primary funding source for the Bank and are acquired from a broad base of local markets, including both individual and corporate customers. Total deposits were $19.5 billion at December 31, 2014, compared to $19.0 billion last year, reflecting an increase of $428.4 million, or 2.2%. Most of this growth occurred in the fourth quarter of 2014. Average deposits grew by $734.5 million, or 4.1%, in 2014 compared to 2013 with most of this growth occurring in business demand deposits, which increased $360.5 million, or 8.1%, and in money market deposits, which grew $371.9 million, or 4.3%. Total certificates of deposit fell on average by $107.1 million, or 4.4%, but included an increase of $159.4 million, or 25.9%, in long-term jumbo certificates of deposit. The following table shows year end deposits by type as a percentage of total deposits. Non-interest bearing Savings, interest checking and money market Time open and C.D.’s of less than $100,000 Time open and C.D.’s of $100,000 and over Total deposits December 31 2014 2013 35.0% 54.1 4.5 6.4 100.0% 35.4% 53.1 5.2 6.3 100.0% Core deposits, which include non-interest bearing, interest checking, savings, and money market deposits, supported 76% of average earning assets in 2014 and 75% in 2013. Average balances by major deposit category for the last six years appear on page 52. A maturity schedule of time deposits outstanding at December 31, 2014 is included in Note 7 on Deposits in the consolidated financial statements. 37 The Company’s primary sources of overnight borrowings are federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). Balances in these accounts can fluctuate significantly on a day-to-day basis and generally have one day maturities. Total balances of federal funds purchased and repurchase agreements outstanding at year end 2014 were $1.9 billion, a $516.0 million increase over the $1.3 billion balance outstanding at year end 2013, primarily driven by higher balances of short-term repurchase agreements with several large customers. On an average basis, these borrowings decreased $37.0 million, or 2.9%, during 2014, with a decrease of $80.3 million in federal funds purchased partly offset with an increase of $43.3 million in repurchase agreements. The average rate paid on total federal funds purchased and repurchase agreements was .08% during 2014 and .06% during 2013. The Company’s long-term debt is currently comprised of fixed rate advances from the FHLB. These borrowings decreased to $104.1 million at December 31, 2014, from $105.3 million outstanding at December 31, 2013. The average rate paid on FHLB advances was 3.51% and 3.56% during 2014 and 2013, respectively. Most of the remaining balance outstanding at December 31, 2014 is due in 2017. Liquidity and Capital Resources Liquidity Management Liquidity is managed within the Company in order to satisfy cash flow requirements of deposit and borrowing customers while at the same time meeting its own cash flow needs. The Company has taken numerous steps to address liquidity risk and has developed a variety of liquidity sources which it believes will provide the necessary funds for future growth. The Company manages its liquidity position through a variety of sources including: • A portfolio of liquid assets including marketable investment securities and overnight investments, • A large customer deposit base and limited exposure to large, volatile certificates of deposit, • Lower long-term borrowings that might place demands on Company cash flow, • Relatively low loan to deposit ratio promoting strong liquidity, • Excellent debt ratings from both Standard & Poor’s and Moody’s national rating services, and • Available borrowing capacity from outside sources. During 2014, the Company continued to see more growth in average loans (up 9.2%) than in deposits (up 4.1%). As a result, the Company’s average loans to deposits ratio, one measure of liquidity, increased to 59.9% in 2014 from 57.1% in 2013. The Company’s most liquid assets include available for sale marketable investment securities, federal funds sold, balances at the Federal Reserve Bank, and securities purchased under agreements to resell (resell agreements). At December 31, 2014 and 2013, such assets were as follows: (In thousands) Available for sale investment securities Federal funds sold Long-term securities purchased under agreements to resell Balances at the Federal Reserve Bank Total 2014 2013 $ 9,523,560 $ 8,915,680 32,485 1,050,000 600,744 11,206,789 $ $ 43,845 1,150,000 707,249 10,816,774 38 Federal funds sold are funds lent to the Company’s correspondent bank customers with overnight maturities, and totaled $32.5 million at December 31, 2014. At December 31, 2014, the Company had lent funds totaling $1.1 billion under long-term resell agreements to other large financial institutions. The agreements mature in years 2015 through 2017. Under these agreements, the Company holds marketable securities, safekept by a third-party custodian, as collateral. This collateral totaled $1.1 billion in fair value at December 31, 2014. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $600.7 million at December 31, 2014. The Company’s available for sale investment portfolio includes scheduled maturities and expected pay downs of approximately $1.8 billion during 2015, and these funds offer substantial resources to meet either 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, repurchase agreements, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. At December 31, 2014 and 2013, total investment securities pledged for these purposes were as follows: (In thousands) 2014 2013 Investment securities pledged for the purpose of securing: Federal Reserve Bank borrowings FHLB borrowings and letters of credit Repurchase agreements Other deposits Total pledged securities Unpledged and available for pledging Ineligible for pledging $ 362,920 $ 40,978 2,389,093 1,861,001 4,653,992 3,107,968 1,761,600 505,690 58,445 1,684,748 1,646,562 3,895,445 3,469,398 1,550,837 Total available for sale securities, at fair value $ 9,523,560 $ 8,915,680 Liquidity is also available from the Company’s large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At December 31, 2014, such deposits totaled $17.4 billion and represented 89.1% of the Company’s total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company promoting long lasting relationships and stable funding sources. Total core deposits increased $494.7 million at year end 2014 over 2013, with growth of $246.0 million in consumer and $201.9 million in private banking, and decline of $57.6 million in corporate core deposits. Much of overall deposit growth tends to occur in the fourth quarter, reflecting seasonal patterns. While the Company considers core consumer and private banking deposits less volatile, corporate deposits could decline further if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances. If these corporate deposits decline, the Company's funding needs can be met by liquidity supplied by the investment security portfolio, totaling $1.8 billion as noted above. In addition, as shown on page 40, the Company has borrowing capacity of $3.3 billion through advances from the FHLB and the Federal Reserve. (In thousands) Core deposit base: Non-interest bearing Interest checking Savings and money market Total 2014 2013 $ 6,811,959 $ 6,750,674 1,352,759 9,188,842 1,113,110 8,995,126 $ 17,353,560 $ 16,858,910 Time open and certificates of deposit of $100,000 or greater totaled $1.2 billion at December 31, 2014. These deposits are normally considered more volatile and higher costing, and comprised 6.4% of total deposits at December 31, 2014. 39 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, repurchase agreements, and advances from the FHLB, as follows: (In thousands) Borrowings: Federal funds purchased Repurchase agreements FHLB advances Total 2014 2013 $ $ 3,840 $ 1,858,678 104,058 24,795 1,321,763 105,310 1,966,576 $ 1,451,868 Federal funds purchased, which totaled $3.8 million at December 31, 2014, are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are secured by a portion of the Company’s investment portfolio, and at December 31, 2014 were comprised of non-insured customer funds totaling $1.9 billion. Customer repurchase agreements are offered to customers wishing to earn interest in highly liquid balances and are used by the Company as a funding source considered to be stable, but short-term in nature. The Company's former longer term structured repurchase agreements, borrowed from an upstream financial institution, were repaid in 2014. The Company also borrows on a secured basis through advances from the FHLB, and those borrowings totaled $104.1 million at December 31, 2014. All of the FHLB advances have fixed interest rates, with the majority maturing in 2017. The overall long-term debt position of the Company is small relative to its overall liability position. 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. Additionally, 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 December 31, 2014. (In thousands) Total collateral value pledged Advances outstanding Letters of credit issued Available for future advances December 31, 2014 FHLB Federal Reserve Total 2,381,248 $ 1,206,421 $ 3,587,669 (104,058) (233,085) — — (104,058) (233,085) 2,044,105 $ 1,206,421 $ 3,250,526 $ $ The Company’s average loans to deposits ratio was 59.9% at December 31, 2014, which is considered in the banking industry to be a measure of strong liquidity. Also, the Company receives outside ratings from both Standard & Poor’s and Moody’s on both the consolidated company and its subsidiary bank, Commerce Bank. These ratings are as follows: Commerce Bancshares, Inc. Issuer rating Commercial paper rating Rating outlook Preferred stock Commerce Bank Issuer rating Bank financial strength rating Rating outlook 40 Standard & Poor’s Moody’s A- Stable BBB- A Stable P-1 Stable Baa1 Aa3 B Stable The Company considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been outstanding during the past ten years. The Company has no subordinated or hybrid debt instruments which would affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that, through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit, privately-placed corporate notes or other forms of debt. The Company issued $150.0 million in liquidation value of preferred stock in June 2014, which funded, in part, a $200.0 million accelerated repurchase of its common stock. This transaction is further discussed in Note 14 to the consolidated financial statements. The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash and cash equivalents of $168.8 million in 2014, as reported in the consolidated statements of cash flows on page 60 of this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $360.8 million and has historically been a stable source of funds. Investing activities used total cash of $1.1 billion in 2014 and consisted mainly of purchases and maturities of available for sale investment securities, changes in long-term securities purchased under agreements to resell, and changes in the level of the Company’s loan portfolio. Growth in the loan portfolio used cash of $560.9 million. Activity in the investment securities portfolio used cash of $519.5 million, net repayments of long-term resell agreements provided cash of $100.0 million, and cash of $43.8 million was paid in the sale of several bank branches. Investing activities are somewhat unique to financial institutions in that, while large sums of cash flow are normally used to fund growth in investment securities, loans, or other bank assets, they are normally dependent on the financing activities described below. Financing activities provided total cash of $533.0 million, primarily resulting from a $224.3 million increase in deposits and a net increase of $516.0 million in borrowings of federal funds purchased and repurchase agreements. These increases to cash were partly offset by cash dividend payments of $84.2 million and $4.1 million for common and preferred stock, respectively. The Company received net proceeds of $144.8 million from the issuance of preferred stock and entered into an accelerated stock repurchase agreement as mentioned above, resulting in a net outflow of $55.2 million. Other treasury stock purchases during 2014 totaled $71.0 million. Future short-term liquidity needs for daily operations are not expected to vary significantly, and the Company maintains adequate liquidity to meet these cash flows. The Company’s sound equity base, along with its low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options. Cash flows resulting from the Company’s transactions in its common and preferred stock were as follows: (In millions) Exercise of stock-based awards Purchases of treasury stock Accelerated stock repurchase forward contract Common cash dividends paid Issuance of preferred stock Preferred cash dividends paid Cash used 2014 2013 2012 $ 8.7 $ 9.4 $ (211.0) (60.0) (84.2) 144.8 (4.1) (69.4) — (82.1) — — 14.8 (104.9) — (211.6) — — $ (205.8) $ (142.1) $ (301.7) The Parent faces unique liquidity constraints due to legal limitations on its ability to borrow funds from its bank subsidiary. The Parent obtains funding to meet its obligations from two main sources: dividends received from bank and non-bank subsidiaries (within regulatory limitations) and management fees charged to subsidiaries as reimbursement for services provided by the Parent, as presented below: (In millions) Dividends received from subsidiaries Management fees Total 2014 2013 2012 $ $ 234.0 $ 25.8 259.8 $ 200.4 $ 20.7 221.1 $ 235.0 23.7 258.7 These sources of funds are used mainly to pay cash dividends on outstanding stock, pay general operating expenses, and purchase treasury stock. At December 31, 2014, the Parent’s available for sale investment securities totaled $52.1 million at fair value, consisting of common stock and non-agency backed collateralized mortgage obligations. To support its various funding commitments, the Parent maintains a $20.0 million line of credit with its subsidiary bank. There were no borrowings outstanding under the line during 2014 or 2013. 41 Company senior management is responsible for measuring and monitoring the liquidity profile of the organization with oversight by the Company’s Asset/Liability Committee. This is done through a series of controls, including a written Contingency Funding Policy and risk monitoring procedures, which include daily, weekly and monthly reporting. In addition, the Company prepares forecasts to project changes in the balance sheet affecting liquidity and to allow the Company to better plan for forecasted changes. Capital Management The Company maintains strong regulatory capital ratios, including those of its banking subsidiary, in excess of the “well- capitalized” guidelines under federal banking regulations. The Company’s capital ratios at the end of the last three years are as follows: Regulatory risk-based capital ratios: Tier I capital Total capital Leverage ratio Tangible common equity to tangible assets Dividend payout ratio 2014 2013 2012 13.74% 14.06% 13.60% 14.86 9.36 8.55 32.69 15.28 9.43 9.00 31.46 14.93 9.14 9.25 78.57 Well-Capitalized Regulatory Guidelines 6.00% 10.00 5.00 The Company’s regulatory risked-based capital amounts and risk-weighted assets at the end of the last three years are as follows: (In thousands) Regulatory risk-based capital: Tier I capital Tier II capital Total capital Total risk-weighted assets 2014 2013 2012 $ 2,131,169 $ 2,061,761 $ 1,906,203 173,037 2,304,206 177,875 2,239,636 185,938 2,092,141 15,509,144 14,660,536 14,015,648 The Company must comply with new capital requirements mandated by U.S. Basel III rules which are effective January 1, 2015. Generally, these new rules change the components of regulatory capital and change the way in which risk ratings are assigned to various categories of bank assets. Also, a new Tier I common risk-based ratio is defined. Based on its preliminary review and evaluation of these new rules, the Company believes that these rules will result in only minor changes to its Tier I and Total risk- based capital, but will increase risk-weighted assets as a result of higher risk weightings for short-term commitments, certain asset- backed securities, and construction loans. The capital requirements under Basel III are further discussed in Note 15 to the consolidated financial statements. The Company's estimated common equity Tier I capital to risk-weighted assets under Basel III at December 31, 2014 is shown below. Under fully phased-in Basel III, the minimum capital requirement for Tier I common equity, including the capital conservation buffer, is 7.0%. Dollars in thousands Tier 1 common equity under existing Basel I Estimated equity adjustments Estimated Tier 1 common equity under fully phased-in Basel III (a) Risk weighted assets Estimated risk weighted asset adjustments Estimated risk weighted assets under fully phased-in Basel III (b) $ $ $ $ 1,986,064 253 1,986,317 15,509,144 1,060,580 16,569,724 Estimated Tier 1 common equity under fully phased-in Basel III (a)/(b) 11.99 % The Company maintains a treasury stock buyback program under authorizations by its Board of Directors and normally purchases stock in the open market. In June 2014, the Company entered into the accelerated share repurchase agreement mentioned above, whose final settlement is expected by June 2015. Pending that settlement, the Company's purchases have been limited to minimal amounts to meet stock-based compensation plan activity. The Company currently estimates that at settlement it will 42 receive shares in the range of 1.5 to 1.6 million. At December 31, 2014, 1,898,007 shares remained available for purchase under the current Board authorization. The Company’s common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital levels and alternative investment options. Per share cash dividends paid by the Company increased 5% in 2014 compared with 2013. The Company also distributed its 21st consecutive annual 5% stock dividend in December 2014. Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements 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 totaling $8.4 billion (including approximately $3.5 billion in unused approved credit card lines) and the contractual amount of standby letters of credit totaling $324.8 million at December 31, 2014. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. Management does not anticipate any material losses arising from commitments or contingent liabilities and believes there are no material commitments to extend credit that represent risks of an unusual nature. A table summarizing contractual cash obligations of the Company at December 31, 2014 and the expected timing of these payments follows: (In thousands) Long-term debt obligations* Operating lease obligations Purchase obligations Time open and C.D.’s * Total * Includes principal payments only. Payments Due by Period In One Year or Less After One Year Through Three Years After Three Years Through Five Years After Five Years Total $ $ 192 $ 5,652 69,624 1,638,332 1,713,800 $ 103,866 $ 9,457 122,229 382,047 617,599 $ — $ 5,709 85,324 99,324 190,357 $ — $ 14,802 24,234 2,515 41,551 $ 104,058 35,620 301,411 2,122,218 2,563,307 As of December 31, 2014, the Company had unrecognized tax benefits of $1.3 million. This liability for unrecognized tax benefits represents an estimate of tax positions that the Company has taken in its tax returns which may not be sustained upon examination by taxing authorities. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimated liability has been excluded from the table above. Further information about these benefits is located in Note 9 to the consolidated financial statements. The Company funds a defined benefit pension plan for a portion of its employees. Under the funding policy for the plan, contributions are made as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. No contributions were made to the plan in 2014, and the Company is not required nor does it expect to make a contribution in 2015. The Company has investments in several low-income housing partnerships within the areas it serves. These partnerships supply funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the population with lower family income. If these developments successfully attract a specified percentage of residents falling in that lower income range, federal (and sometimes state) income tax credits are made available to the partners. The tax credits are normally recognized over ten years, and they play an important part in the anticipated yield from these investments. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained. Under the terms of the partnership agreements, the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements, which ranges from 10 to 15 years. At December 31, 2014, the funded investments totaled $16.7 million and are recorded as other assets in the Company’s consolidated balance sheet. Additional unfunded commitments, which are recorded as liabilities, amounted to $13.6 million at December 31, 2014. The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties or retained for use by the Company. During 2014, purchases and sales of tax credits amounted to $33.5 million and $29.6 million, respectively. At December 31, 2014, the Company had outstanding purchase commitments totaling $61.7 million that it expects to fund in 2015. 43 Interest Rate Sensitivity The Company’s Asset/Liability Management Committee (ALCO) measures and manages the Company’s interest rate risk on a monthly basis to identify trends and establish strategies to maintain stability in net interest income throughout various rate environments. Analytical modeling techniques provide management insight into the Company’s exposure to changing rates. These techniques include net interest income simulations and market value analysis. Management has set guidelines specifying acceptable limits within which net interest income and market value may change under various rate change scenarios. These measurement tools indicate that the Company is currently within acceptable risk guidelines as set by management. The Company’s main interest rate measurement tool, income simulations, projects net interest income under various rate change scenarios in order to quantify the magnitude and timing of potential rate-related changes. Income simulations are able to capture option risks within the balance sheet where expected cash flows may be altered under various rate environments. Modeled rate movements include “shocks, ramps and twists”. Shocks are intended to capture interest rate risk under extreme conditions by immediately shifting rates up and down, while ramps measure the impact of gradual changes and twists measure yield curve risk. The size of the balance sheet is assumed to remain constant so that results are not influenced by growth predictions. The following table shows the expected effect that gradual basis point shifts in the swap curve over a twelve month period would have on the Company’s net interest income. (Dollars in millions) 300 basis points rising 200 basis points rising 100 basis points rising December 31, 2014 September 30, 2014 December 31, 2013 $ Change in Net Interest Income % Change in Net Interest Income $ Change in Net Interest Income % Change in Net Interest Income $ Change in Net Interest Income % Change in Net Interest Income $5.4 8.3 8.9 .87% 1.34 1.43 ($.3) 4.4 7.0 (.04)% .72 1.14 ($5.0) 1.0 3.4 (.81)% .17 .56 The Company also employs a sophisticated simulation technique known as a stochastic income simulation. This technique allows management to see a range of results from hundreds of income simulations. The stochastic simulation creates a vector of potential rate paths around the market’s best guess (forward rates) concerning the future path of interest rates and allows rates to randomly follow paths throughout the vector. This allows for the modeling of non-biased rate forecasts around the market consensus. Results give management insight into a likely range of rate-related risk as well as worst and best-case rate scenarios. The Company also uses market value analyses to help identify longer-term risks that may reside on the balance sheet. This is considered a secondary risk measurement tool by management. The Company measures the market value of equity as the net present value of all asset and liability cash flows discounted along the current swap curve plus appropriate market risk spreads. It is the change in the market value of equity under different rate environments, or effective duration, that gives insight into the magnitude of risk to future earnings due to rate changes. Market value analyses also help management understand the price sensitivity of non-marketable bank products under different rate environments. The table above shows the effects of gradual rising rates over a 12 month period on the Company's net interest income. Three rising rate scenarios were selected as shown in the table and net interest income was calculated and compared to a base scenario in which assets, liabilities and rates remained constant over a 12 month period. For each of the three scenarios, interest rates applicable to each interest earning asset or interest bearing liability were ratably increased during the year (by either 100, 200 or 300 basis points). The balances contained in the balance sheet were assumed not to change over the 12 month period, except that it was assumed certain non-maturity type deposits would decline as a result of higher interest rates and would be replaced with short-term federal funds borrowings. Under the 100, 200 and 300 basis point rising rate scenarios at December 31, 2014, total average deposits were projected to decline by 4.8%, 6.9% and 7.5%, respectively. The Company uses these assumptions on deposit activities, both for monitoring interest rate risk and liquidity planning purposes, to analyze the large deposit inflows since 2009 that could run off under rising rate conditions. Under the above scenarios at December 31, 2014, a gradual increase in interest rates of 100 basis points is expected to increase net interest income from the base calculation by $8.9 million, or 1.43%, and a rise of 200 basis points is expected to increase net interest income by $8.3 million, or 1.34%. Under a 300 basis points rising rate scenario, net interest income would increase by $5.4 million, or .87%. Due to the already low interest rate environment, the Company did not model falling rate scenarios. The change in net interest income from the base calculation at December 31, 2014 for the three scenarios shown was higher than projections made at September 30, 2014, largely due to a change in the mix of both interest earning assets and interest bearing liabilities. The change in the mix of interest earning assets is primarily due to investment securities purchases of variable rate bonds and an increase in bonds and resell agreements maturing in the next 12 months that could be reinvested. There were also increases in demand and money market deposits, which are less rate-sensitive, while balances of short-term certificates of deposit, 44 which are generally more rate-sensitive, declined from the previous quarter. This change resulted in a more asset-sensitive risk pattern and improving income projections. As shown in the above scenarios, as rates rise faster, the effect on projected net interest income generally declines. This occurs because, in the higher rate scenarios, the non-contractual deposits are modeled to become more rate sensitive, resulting in margin compression. Also, these scenarios project deposit run-off which is replaced by higher costing short-term borrowings. Rising rates also tend to slow prepayments of both residential mortgage loans and mortgage- backed securities, which also negatively affects net interest income. For comparative purposes, the Company also ran three rising rate scenarios assuming average deposits would decrease by .8%, 1.5% and 2.1% (for the 100, 200 and 300 basis point rising rate scenarios at December 31, 2014). These increases were at a much slower pace than in the scenarios above. The table below reflects the results of these projections. (Dollars in millions) 300 basis points rising 200 basis points rising 100 basis points rising December 31, 2014 September 30, 2014 $ Change in Net Interest Income % Change in Net Interest Income $ Change in Net Interest Income % Change in Net Interest Income $ 25.4 22.1 14.8 4.11% $ 3.57 2.39 18.5 17.5 12.7 3.04% 2.90 2.08 Under these alternate scenarios, net interest income rises strongly and is higher than previous scenarios due to the fact that average balances of short-term federal funds borrowings (which re-price quickly) are less than in the previously described scenarios, and projected interest expense does not grow as much. 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 their effect on the Company’s performance. Through review and oversight by the ALCO, the Company attempts to engage in strategies that neutralize interest rate risk as much as possible. The Company’s balance sheet remains well-diversified with moderate interest rate risk and is well-positioned for future growth. The use of derivative products is limited and the deposit base is strong and stable. The loan to deposit ratio is still at relatively low levels, which should present the Company with opportunities to fund future loan growth at reasonable costs. 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 impacts of interest rate risk. Derivative Financial Instruments The Company maintains an overall interest rate risk management strategy that permits the use of derivative instruments to modify exposure to interest rate risk. The Company’s interest rate risk management strategy includes the ability to modify the re- pricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Interest rate swaps are used on a limited basis as part of this strategy. The Company also sells swap contracts to customers who wish to modify their interest rate sensitivity. The Company offsets the interest rate risk of these swaps by purchasing matching contracts with offsetting pay/receive rates from other financial institutions. The notional amount of these types of swaps at December 31, 2014 was $641.7 million. Credit risk participation agreements arise when the Company contracts, as a guarantor or beneficiary, with other financial institutions to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. The Company enters into foreign exchange derivative instruments as an accommodation to customers and offsets the related foreign exchange risk by entering into offsetting third-party forward contracts with approved, reputable counterparties. In addition, the Company takes proprietary positions in such contracts based on market expectations. This trading activity is managed within a policy of specific controls and limits. Most of the foreign exchange contracts outstanding at December 31, 2014 mature within six months. In all of these contracts, the Company is exposed to credit risk in the event of nonperformance by counterparties, who may be bank customers or other financial institutions. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures. Because the Company generally enters into transactions only with high quality counterparties, there have been no losses associated with counterparty nonperformance on derivative financial instruments. 45 The following table summarizes the notional amounts and estimated fair values of the Company’s derivative instruments at December 31, 2014 and 2013. Notional amount, along with the other terms of the derivative, is used to determine the amounts to be exchanged between the counterparties. Because the notional amount does not represent amounts exchanged by the parties, it is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk. 2014 2013 (In thousands) Notional Amount Positive Fair Value Negative Fair Value Notional Amount Positive Fair Value Negative Fair Value Interest rate swaps $ 647,709 $ 10,144 $ (10,166) $ 596,933 $ 11,428 $ (11,729) Interest rate caps Credit risk participation agreements Foreign exchange contracts Total at December 31 $ 53,587 75,943 19,791 797,030 62 3 248 10,457 $ $ (62) (226) (494) (10,948) 9,736 52,456 81,207 740,332 $ 1 4 (1) (69) 1,547 12,980 $ (1,530) (13,329) $ Operating Segments The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The results are determined based on the Company’s management accounting process, which assigns balance sheet and income statement items to each responsible segment. These segments are defined by customer base and product type. The management process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Each segment is managed by executives who, in conjunction with the Chief Executive Officer, make strategic business decisions regarding that segment. The three reportable operating segments are Consumer, Commercial and Wealth. Additional information is presented in Note 13 on Segments in the consolidated financial statements. The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, cash, etc.) and funds provided (deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to each new source or use of funds with a maturity, based on current swap rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are valued using weighted average pools. The funds transfer pricing process attempts to remove interest rate risk from valuation, allowing management to compare profitability under various rate environments. The Company also assigns loan charge-offs and recoveries (labeled in the table below as “provision for loan losses”) directly to each operating segment instead of allocating an estimated loan loss provision. The operating segments also include a number of allocations of income and expense from various support and overhead centers within the Company. 46 The table below is a summary of segment pre-tax income results for the past three years. (Dollars in thousands) Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals Year ended December 31, 2014: Net interest income Provision for loan losses Non-interest income Investment securities gains, net Non-interest expense Income before income taxes Year ended December 31, 2013: Net interest income Provision for loan losses Non-interest income Investment securities losses, net $ 270,081 $ 287,244 $ 40,128 $ 597,453 $ 22,751 $ 620,204 (35,209) 113,245 — 559 190,594 — (267,931) (250,964) $ $ 80,186 268,221 (34,277) 112,819 — 227,433 280,128 3,772 186,446 — $ $ $ $ 372 128,203 — (98,589) 70,114 40,185 (688) 117,323 — $ $ (34,278) 432,042 — (617,484) 377,733 588,534 (31,193) 416,588 — $ $ 4,747 3,936 14,124 (40,291) 5,267 30,838 10,840 1,798 (4,425) (27,498) $ $ (29,531) 435,978 14,124 (657,775) 383,000 619,372 (20,353) 418,386 (4,425) (629,633) Non-interest expense (270,209) (235,396) (96,530) (602,135) Income before income taxes $ 76,554 $ 234,950 $ 60,290 $ 371,794 $ 11,553 $ 383,347 2014 vs 2013 Increase (decrease) in income before income taxes: Amount $ 3,632 $ (7,517) $ 9,824 $ 5,939 $ (6,286) $ (347) Percent 4.7 % (3.2)% 16.3% 1.6 % (54.4)% (.1)% Year ended December 31, 2012: Net interest income Provision for loan losses Non-interest income Investment securities gains, net $ 274,844 $ 290,968 $ 39,498 $ 605,310 $ (35,496) 114,003 — (2,824) 179,824 — (695) 108,776 — (39,015) 402,603 — 34,596 11,728 (2,973) 4,828 $ 639,906 (27,287) 399,630 4,828 Non-interest expense (266,740) (226,935) (90,659) (584,334) (34,135) (618,469) Income before income taxes $ 86,611 $ 241,033 $ 56,920 $ 384,564 $ 14,044 $ 398,608 2013 vs 2012 Increase (decrease) in income before income taxes: Amount Percent Consumer $ (10,057) $ (6,083) $ 3,370 $ (12,770) $ (2,491) $ (15,261) (11.6)% (2.5 )% 5.9 % (3.3)% (17.7 )% (3.8 )% The Consumer segment includes consumer deposits, consumer finance, and consumer debit and credit cards. For 2014, income before income taxes for the Consumer segment increased $3.6 million, or 4.7%, compared to 2013. This increase was mainly due to growth of $1.9 million in net interest income and a decline in non-interest expense of $2.3 million, or .8%. These increases to income were partly offset by an increase of $932 thousand in the provision for loan losses. Net interest income increased due to a $2.9 million decrease in deposit interest expense, party offset by a $1.6 million decline in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios. Non-interest income increased $426 thousand due to growth in bank card fees (mainly debit and credit card), partly offset by a decline in mortgage banking revenue. Non-interest expense decreased from the prior year due to lower salaries and benefits expense (mainly full-time salaries and incentives) and allocated servicing costs. These decreases were partly offset by higher bank card rewards expense. The provision for loan losses totaled $35.2 million, a $932 thousand increase over the prior year, which was mainly due to higher losses on fixed rate home equity and other consumer loans, partly offset by lower marine and RV loan net charge-offs. Total average loans in this segment increased $129.5 million, or 5.0%, in 2014 compared to the prior year due to growth in auto lending, partly offset by declines in marine and RV and other consumer loans. Average deposits increased $220.2 million, or 2.4%, over the prior year, resulting from continuing growth in interest checking and money market deposit accounts, partly offset by a decline in certificates of deposit less than $100,000. Pre-tax profitability for 2013 was $76.6 million, a decrease of $10.1 million, or 11.6%, from 2012. This decrease was mainly due to a decline of $6.6 million, or 2.4%, in net interest income, coupled with an increase of $3.5 million, or 1.3%, in non-interest 47 expense. In addition, non-interest income decreased $1.2 million, while the provision for loan losses decreased $1.2 million, or 3.4%. Net interest income declined due to a $4.7 million decrease in loan interest income and a $7.3 million decrease in net allocated funding credits, partly offset by a decline of $5.3 million in deposit interest expense. Non-interest income decreased mainly due to a declines overdraft charges, mortgage banking revenue and ATM fees, but the declines were partly offset by growth in bank card fees. Non-interest expense increased over the prior year due to higher corporate management fees, bank card related expense, building rent expense and credit card fraud losses, partly offset by lower incentive compensation expense and allocated building security expense. The provision for loan losses totaled $34.3 million, a $1.2 million decrease from 2012, which was mainly due to lower losses on marine and RV loans. Total average loans in this segment increased $170.8 million, or 7.1%, in 2013 compared to the prior year due to growth in auto loan originations, partly offset by repayments of marine and RV loans. Average deposits rose 5.7% over 2012, due to higher interest checking and money market deposit accounts, partly offset by lower certificates of deposit under $100,000. Commercial The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as merchant and commercial bank card products. The segment includes the Capital Markets Group, which sells fixed- income securities to individuals, corporations, correspondent banks, public institutions, and municipalities, and also provides investment safekeeping and bond accounting services. Pre-tax income for 2014 decreased $7.5 million, or 3.2%, compared to the prior year, mainly due to increases in non-interest expense and the provision for loan losses, partly offset by higher net interest income and non-interest income. Net interest income increased $7.1 million, or 2.5%, due to growth of $5.3 million in loan interest income. The provision for loan losses increased $3.2 million over last year, as construction and business loan net recoveries were lower by $3.2 million and $1.0 million, respectively. Non-interest income increased $4.1 million, or 2.2%, over the previous year due to growth in bank card fees (mainly corporate card) and operating lease income, partly offset by lower capital market fees and tax credit sales income. Non-interest expense increased $15.6 million, or 6.6%, during 2014, mainly due to higher full-time salary costs, foreclosed property expense and lease depreciation expense, in addition to bank card processor reimbursements received in the previous year. Allocated costs for information technology, credit administration and commercial banking support also rose. These increases were partly offset by the non-recurrence of a letter of credit provision recorded in 2013. Average segment loans increased $658.6 million, or 10.8%, compared to 2013, with most of the growth in commercial and industrial loans, lease loans, and tax-advantaged loans. Average deposits increased $479.6 million, or 7.0.%, due to growth in business demand, interest checking and money market deposit accounts. In 2013, pre-tax profitability for the Commercial segment decreased $6.1 million, or 2.5%, compared to 2012, mainly due to higher non-interest expense and a decline in net interest income, partly offset by higher non-interest income and a decline in the provision for loan losses. Net interest income decreased $10.8 million, due to a $5.7 million decline in loan interest income and lower net allocated funding credits of $5.6 million. Non-interest income increased by $6.6 million, or 3.7%, over 2012 due to growth in corporate card fees, partly offset by lower capital market fees. Growth was also seen in corporate cash management fees and tax credit sales fees. Non-interest expense increased $8.5 million, or 3.7%, over 2012, mainly due to higher full-time salaries expense, a provision recorded on a letter of credit exposure, and higher bank card related expense. These expense increases were partly offset by higher gains on sales of foreclosed property, lower incentive compensation, and lower processing costs. The provision for loan losses declined $6.6 million from 2012, as business real estate loan net charge-offs declined $4.2 million and construction and land loan net recoveries increased $4.4 million, while business loan recoveries decreased by $1.6 million. Average segment loans increased $476.0 million, or 8.4%, compared to 2012 as a result of growth in all commercial loan categories. Average deposits increased $542.7 million, or 8.7%, due to growth in non-interest bearing accounts and certificates of deposit over $100,000. Wealth The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management services, brokerage services, and includes Private Banking accounts. At December 31, 2014, the Trust group managed investments with a market value of $22.5 billion and administered an additional $16.6 billion in non-managed assets. It also provides investment management services to The Commerce Funds, a series of mutual funds with $2.0 billion in total assets at December 31, 2014. Wealth segment pre-tax profitability for 2014 was $70.1 million, compared to $60.3 million in 2013, an increase of $9.8 million, or 16.3%. Net interest income decreased slightly, due to a $1.6 million decline in net allocated funding credits, partly offset by an $885 thousand increase in loan interest income and a decline of $622 thousand in deposit interest expense. Non-interest income increased $10.9 million, or 9.3%, over the prior year due to growth in personal and institutional trust fees and brokerage advisory fees. Non-interest expense increased $2.1 million, or 2.1%, resulting from higher full-time salary costs and incentive compensation, partly offset by recoveries of past litigation. The provision for loan losses decreased $1.1 million, mainly due to lower losses on revolving home equity loans. Average assets increased $75.7 million, or 8.8%, during 2014 mainly due to higher loan balances (mainly Private Banking consumer and personal real estate loans) originated in this segment. Average deposits also increased 48 $25.6 million, or 1.4%, due to growth in interest checking and business demand deposit accounts, partly offset by a decline in money market deposit accounts. In 2013, pre-tax income for the wealth segment was $60.3 million, compared to $56.9 million in 2012, an increase of $3.4 million, or 5.9%. Net interest income increased $687 thousand, or 1.7%, mainly due to a $1.2 million decline in deposit interest expense and an increase of $529 thousand in loan interest income, which were partly offset by a $1.1 million decrease in net allocated funding credits. Non-interest income increased $8.5 million, or 7.9%, over 2012 due to higher trust and brokerage fees. Non-interest expense increased $5.9 million, or 6.5%, mainly due to higher full-time salary costs, incentive compensation and processing costs. Average assets increased $112.4 million, or 15.1%, during 2013 mainly due to growth in consumer and personal real estate loans. Average deposits also increased $195.9 million, or 11.6%, due to growth in money market and interest checking deposit accounts. 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 certain administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. Also included in this category is the difference between the Company’s provision for loan losses and net loan charge-offs, which are generally assigned directly to the segments. In 2014, the pre-tax income in this category was $5.3 million, compared to $11.6 million in 2013. This decrease was due to higher unallocated non- interest expense of $12.8 million, in addition to lower unallocated net interest income of $8.1 million. Also, the unallocated loan loss provision increased $6.1 million, due to a decline in the excess of total net charge-offs over total provision in 2014. Partly offsetting these effects were higher unallocated securities gains of $18.5 million. Impact of Recently Issued Accounting Standards Investment Companies In June 2013, the FASB issued ASU 2013-08, "Amendments to the Scope, Measurement, and Disclosure Requirements" for investment companies. The amendments changed the assessment of whether an entity is an investment company by requiring an entity to possess certain fundamental characteristics, while allowing judgment in assessing other typical characteristics. The ASU was effective January 1, 2014, and the Company did not change the status of any subsidiary or the accounting applied to a subsidiary under the new guidelines. Investments - Equity Method and Joint Ventures The FASB issued ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects", in January 2014. These amendments allow investors in low income housing tax credit entities to account for the investments using a proportional amortization method, provided that certain conditions are met, and recognize amortization of the investment as a component of income tax expense. In addition, disclosures are required that will enable users to understand the nature of the investments, and the effect of the measurement of the investments and the related tax credits on the investor's financial statements. This ASU is effective for interim and annual periods beginning January 1, 2015 and should be applied retrospectively to all periods presented. The Company adopted the practical expedient to the proportional amortization method on January 1, 2015. The effect of the adoption, including the retrospective application to prior periods, was not significant to the consolidated financial statements. Troubled Debt Restructurings by Creditors The FASB issued ASU 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure", in January 2014. These amendments require companies to disclose the amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction. The ASU also defines when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan and thus when a loan is transferred to foreclosed property. The amendments are effective for interim and annual periods beginning January 1, 2015. The adoption did not have a significant effect on the Company's consolidated financial statements. The FASB issued ASU 2014-14, "Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure", in August 2014. The amendments provide guidance on how to classify and measure foreclosed loans that are government-guaranteed. The objective of the update is to reduce diversity in practice by addressing the classification of foreclosed mortgage loans that are fully or partially guaranteed under government programs. These disclosures are required in interim and annual periods beginning January 1, 2015. The adoption did not have a significant effect on the Company's consolidated financial statements. Discontinued Operations and Disposals The FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", in April 2014. The ASU changes the criteria for reporting discontinued operations, limiting this reporting to disposals of components of an entity that represent strategic shifts with major effects on financial results. The ASU requires new disclosures for disposals reported as discontinued operations, and for disposals of significant components 49 that do not qualify for discontinued operations reporting. The amendments are effective for interim and annual periods beginning January 1, 2015 and must be applied prospectively. The adoption did not have a significant effect on the Company's consolidated financial statements. Revenue from Contracts with Customers The FASB issued ASU 2014-09, "Revenue from Contracts with Customers", in May 2014. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict 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. The guidance identifies specific steps that entities should apply in order to achieve this principle. The amendments are effective for interim and annual periods beginning January 1, 2017 and must be applied retrospectively. The Company is in the process of evaluating the impact of the ASU's adoption on the Company's consolidated financial statements. Transfers and Servicing The FASB issued ASU 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures", in June 2014. The amendments require that repurchase-to-maturity transactions and repurchase agreements that are part of financing arrangements be accounted for as secured borrowings. The amendments also require additional disclosures for certain transfers accounted for as sales. The accounting changes and the disclosures on sales are required to be presented in interim and annual periods beginning January 1, 2015. The ASU also requires disclosures about types of collateral, contractual tenor and potential risks for transactions accounted for as secured borrowings. These disclosures are required in interim and annual periods beginning April 1, 2015. The adoption is not expected to have a significant effect on the Company's consolidated financial statements. Derivatives The FASB issued ASU 2014-16, "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity", in November 2014. The ASU provides guidance relating to certain hybrid financial instruments when determining whether the characteristics of the embedded derivative feature are clearly and closely related to the host contract. In making that evaluation, the characteristics of the entire hybrid instrument should be considered, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The amendments are effective January 1, 2016; however, early adoption is permitted. Adoption is not expected to have a significant effect on the Company's consolidated financial statements. Corporate Governance The Company has adopted a number of corporate governance measures. These include corporate governance guidelines, a code of ethics that applies to its senior financial officers and the charters for its audit committee, its committee on compensation and human resources, and its committee on governance/directors. This information is available on the Company’s Web site www.commercebank.com under Investor Relations. 50 SUMMARY OF QUARTERLY STATEMENTS OF INCOME Year ended December 31, 2014 (In thousands, except per share data) Interest income Interest expense Net interest income Non-interest income Investment securities gains (losses), net Salaries and employee benefits Other expense Provision for loan losses Income before income taxes Income taxes Non-controlling interest 12/31/2014 9/30/2014 6/30/2014 3/31/2014 For the Quarter Ended $ 158,916 $ 161,811 $ 167,567 $ (6,987) 151,929 112,302 3,650 (99,526) (70,792) (4,664) 92,899 (29,157) (1,017) (7,095) 154,716 112,286 2,995 (95,462) (66,724) (7,652) 100,159 (31,138) (836) (7,074) 160,493 108,763 (2,558) (94,849) (68,082) (7,555) 96,212 (30,312) 631 159,998 (6,932) 153,066 102,627 10,037 (94,263) (68,077) (9,660) 93,730 (29,609) 192 64,313 .64 .64 99,511 99,953 Net income attributable to Commerce Bancshares, Inc. Net income per common share — basic* Net income per common share — diluted* Weighted average shares — basic* Weighted average shares — diluted* $ $ $ 62,725 $ 68,185 $ 66,531 $ .62 $ .62 $ 95,181 95,525 .69 $ .69 $ 95,104 95,516 .67 $ .66 $ 98,206 98,609 Year ended December 31, 2013 (In thousands, except per share data) 12/31/2013 9/30/2013 6/30/2013 3/31/2013 For the Quarter Ended Interest income Interest expense Net interest income Non-interest income Investment securities gains (losses), net Salaries and employee benefits Other expense Provision for loan losses Income before income taxes Income taxes Non-controlling interest $ 162,141 $ 162,144 $ 167,255 $ (7,276) 154,865 109,522 (1,342) (95,012) (66,306) (5,543) 96,184 (30,359) 90 (7,438) 154,706 106,311 650 (91,405) (64,907) (4,146) 101,209 (32,764) (221) (7,797) 159,458 102,676 (1,568) (89,569) (67,397) (7,379) 96,221 (30,182) (234) Net income attributable to Commerce Bancshares, Inc. Net income per common share — basic* Net income per common share — diluted* Weighted average shares — basic* Weighted average shares — diluted* $ $ $ 65,915 $ 68,224 $ 65,805 $ .66 $ .65 $ 99,585 100,087 .68 $ .68 $ 99,229 99,724 .65 $ .65 $ 98,987 99,400 158,745 (8,402) 150,343 99,877 (2,165) (90,881) (64,156) (3,285) 89,733 (28,925) 209 61,017 .61 .61 99,458 99,715 Year ended December 31, 2012 (In thousands, except per share data) 12/31/2012 9/30/2012 6/30/2012 3/31/2012 For the Quarter Ended Interest income Interest expense Net interest income Non-interest income Investment securities gains (losses), net Salaries and employee benefits Other expense Provision for loan losses Income before income taxes Income taxes Non-controlling interest Net income attributable to Commerce Bancshares, Inc. Net income per common share — basic* Net income per common share — diluted* Weighted average shares — basic* Weighted average shares — diluted* * Restated for the 5% stock dividend distributed in 2014. $ 170,185 $ 163,194 $ 174,624 $ (8,932) 161,253 103,309 (3,728) (94,553) (63,724) (8,326) 94,231 (27,628) 188 (9,383) 153,811 100,922 3,180 (89,292) (64,099) (5,581) 98,941 (32,155) (780) (9,519) 165,105 100,816 1,336 (87,511) (68,829) (5,215) 105,702 (34,466) (503) 66,791 $ 66,006 $ 70,733 $ .66 $ .66 $ 100,134 100,326 .65 $ .64 $ 100,591 100,936 .69 $ .69 $ 101,181 101,491 $ $ $ 51 169,966 (10,229) 159,737 94,583 4,040 (89,543) (60,918) (8,165) 99,734 (32,920) (1,015) 65,799 .64 .64 102,127 102,514 AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS (Dollars in thousands) ASSETS Loans:(A) Business(B) Real estate – construction and land Real estate – business Real estate – personal Consumer Revolving home equity Student(C) Consumer credit card Overdrafts Total loans Loans held for sale Investment securities: U.S. government & federal agency obligations Government-sponsored enterprise obligations State & municipal obligations(B) Mortgage-backed securities Asset-backed securities Other marketable securities(B) Trading securities(B) Non-marketable securities(B) Total investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Total interest earning assets Allowance for loan losses Unrealized gain on investment securities Cash and due from banks Land, buildings and equipment - net Other assets Total assets LIABILITIES AND EQUITY Interest bearing deposits: Savings Interest checking and money market Time open & C.D.’s of less than $100,000 Time open & C.D.’s of $100,000 and over Total interest bearing deposits Borrowings: Federal funds purchased and securities sold under agreements to repurchase Other borrowings Total borrowings Total interest bearing liabilities Non-interest bearing deposits Other liabilities Equity Total liabilities and equity Net interest margin (T/E) Net yield on interest earning assets Percentage increase (decrease) in net interest margin (T/E) compared to the prior year Average Balance 2014 Interest Income/ Expense Average Rates Earned/Paid Average Balance 2013 Interest Income/ Expense Average Rates Earned/Paid Average Balance 2012 Interest Income/ Expense Average Rates Earned/Paid Years Ended December 31 $ 3,919,421 $ 418,702 2,300,855 1,818,125 1,617,039 426,720 — 754,482 4,889 11,260,233 — 110,791 15,826 88,206 69,054 68,434 16,188 — 86,298 — 454,797 — 497,271 13,750 13,211 61,593 80,229 24,976 3,928 411 10,692 208,790 101 12,473 555 676,716 855 12,667 4,137 5,926 23,585 1,019 3,484 4,503 28,088 794,752 1,715,493 2,981,225 2,834,013 150,379 18,423 104,211 9,095,767 31,817 985,205 220,876 21,593,898 (160,828) 126,314 382,207 354,899 376,433 $ 22,672,923 $ 670,650 9,477,947 935,387 1,372,509 12,456,493 1,257,660 104,896 1,362,556 13,819,049 6,339,183 225,554 2,289,137 $ 22,672,923 24,669 106 102,847 15,036 92,555 66,353 67,299 16,822 — 84,843 — 445,755 176 8,775 8,658 58,522 87,523 27,475 5,625 472 12,226 209,276 21,119 387 676,819 766 13,589 6,002 6,383 26,740 809 3,364 4,173 30,913 2.83% $ 3.78 3.83 3.80 4.23 3.79 — 11.44 — 4.04 — 3,366,564 $ 378,896 2,251,113 1,694,955 1,437,270 424,358 — 752,478 6,020 10,311,654 4,488 2.77 1.66 3.59 2.69 .88 2.61 2.23 10.26 2.30 .32 1.27 .25 3.13 401,162 499,947 1,617,814 3,187,648 3,061,415 182,323 20,986 116,557 9,087,852 1,174,589 155,885 20,759,137 (166,846) 157,910 382,500 357,544 383,739 $ 21,873,984 .13 .13 .44 .43 .19 $ 625,517 9,059,524 1,034,991 1,380,003 12,100,035 .08 3.32 .33 .20% 1,294,691 103,901 1,398,592 13,498,627 5,961,116 237,130 2,177,111 $ 21,873,984 3.05 % $ 3.97 4.11 3.91 4.68 3.96 — 11.28 — 4.32 3.92 2,962,699 $ 356,425 2,193,271 1,503,357 1,180,538 446,204 — 730,697 6,125 9,379,316 9,688 102,013 15,146 98,693 65,642 66,402 18,586 — 85,652 — 452,134 361 332,382 12,260 2.19 1.73 3.62 2.75 .90 3.09 2.25 10.49 2.30 .43 1.80 .25 3.26 306,676 1,376,872 3,852,616 2,925,249 139,499 25,107 118,879 9,077,280 16,393 892,624 135,319 19,510,620 (178,934) 257,511 369,020 357,336 385,125 $ 20,700,678 .12 .15 .58 .46 .22 $ 574,336 8,430,559 1,117,236 1,181,426 11,303,557 .06 3.24 .30 .23 % 1,185,978 108,916 1,294,894 12,598,451 5,522,991 334,684 2,244,552 $ 20,700,678 5,653 54,056 107,527 31,940 6,556 637 12,558 231,187 82 19,174 339 703,277 802 17,880 7,918 7,174 33,774 808 3,481 4,289 38,063 $ 648,628 $ 645,906 $ 665,214 3.00% .42% 3.11 % (2.90)% 3.44 % 4.25 4.50 4.37 5.62 4.17 — 11.72 — 4.82 3.73 3.69 1.84 3.93 2.79 1.09 4.70 2.54 10.56 2.55 .50 2.15 .25 3.60 .14 .21 .71 .61 .30 .07 3.20 .33 .30 % 3.41 % (.64) % (A) Loans on non-accrual status are included in the computation of average balances. Included in interest income above are loan fees and late charges, net of amortization of deferred loan (B) origination fees and costs, which are immaterial. Credit card income from merchant discounts and net interchange fees are not included in loan income. Interest income and yields are presented on a fully-taxable equivalent basis using the Federal statutory income tax rate. Loan interest income includes tax free loan income (categorized as business loan income) which includes tax equivalent adjustments of $7,640,000 in 2014, $6,673,000 in 2013, $5,803,000 in 2012, $5,538,000 in 2011, $4,620,000 in 2010, and 52 AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Average Balance 2011 Interest Income/ Expense Average Rates Earned/Paid Average Balance 2010 Interest Income/ Expense Average Rates Earned/Paid Average Balance 2009 Interest Income/ Expense Average Rates Earned/Paid Average Balance Five Year Compound Growth Rate Years Ended December 31 $ 2,910,668 $ 419,905 2,117,031 1,433,869 1,118,700 468,718 — 746,724 6,953 9,222,568 47,227 104,624 18,831 101,988 69,048 70,127 19,952 — 84,479 — 469,049 1,115 357,861 17,268 5,781 51,988 114,405 30,523 8,455 552 8,283 237,255 55 13,455 487 721,416 852 25,004 11,352 9,272 46,480 1,741 3,680 5,421 51,901 253,020 1,174,751 3,556,106 2,443,901 171,409 20,011 107,501 8,084,560 10,690 768,904 194,176 18,328,125 (191,311) 162,984 348,875 377,200 378,642 $ 19,404,515 $ 525,371 7,702,901 1,291,165 1,409,740 10,929,177 1,035,007 112,107 1,147,114 12,076,291 4,742,033 476,249 2,109,942 $ 19,404,515 3.59% 4.48 4.82 4.82 6.27 4.26 — 11.31 — 5.09 2.36 $ 2,887,427 $ 557,282 2,029,214 1,476,031 1,250,076 484,878 246,395 760,079 7,288 9,698,670 358,492 439,073 203,593 966,694 2,821,485 1,973,734 183,328 21,899 113,326 6,723,132 110,792 22,384 102,451 76,531 84,204 20,916 5,783 89,225 — 512,286 6,091 9,673 4,591 45,469 113,222 38,559 8,889 671 7,216 228,290 6,542 48 2,549 427 749,691 622 28,676 22,871 13,847 66,016 2,584 14,948 17,532 83,548 150,235 171,883 17,108,954 (195,870) 149,106 368,340 395,108 410,361 $ 18,235,999 $ 478,592 6,785,299 1,660,462 1,323,952 10,248,305 1,085,121 452,810 1,537,931 11,786,236 4,114,664 346,312 1,988,787 $ 18,235,999 4.83 2.28 4.43 3.22 1.25 4.93 2.76 7.71 2.93 .51 1.75 .25 3.94 .16 .32 .88 .66 .43 .17 3.28 .47 .43% 116,686 26,746 108,107 87,085 101,761 21,456 9,440 89,045 — 560,326 8,219 6,754 4,219 43,882 136,921 30,166 9,793 506 6,398 238,639 222 — 807 808,213 642 30,789 51,982 35,371 118,784 3,699 31,527 35,226 154,010 3.84% 4.02 5.05 5.18 6.74 4.31 2.35 11.74 — 5.28 1.70 $ 3,119,778 $ 739,896 2,143,675 1,585,273 1,464,170 495,629 344,243 727,422 9,781 10,629,867 397,583 2.20 2.25 4.70 4.01 1.95 4.85 3.06 6.37 3.40 .73 1.70 .25 4.38 .13 .42 1.38 1.05 .64 .24 3.30 1.14 .71% 169,214 137,928 873,607 2,802,532 937,435 179,847 16,927 136,911 5,254,401 43,811 — 325,744 16,651,406 (181,417) 24,105 364,579 411,366 349,164 $ 17,619,203 $ 438,748 5,807,753 2,055,952 1,858,543 10,160,996 968,643 920,467 1,889,110 12,050,106 3,660,166 176,676 1,732,255 $ 17,619,203 4.67% (10.76) 1.43 2.78 2.01 (2.95) NM .73 (12.95) 1.16 NM 24.06 41.94 14.45 1.24 24.76 (3.52) 1.71 (5.31) 11.60 (6.20) NM (7.48) 5.34 (2.38) 39.27 .95 (2.91) 1.52 5.17 8.86 10.29 (14.57) (5.88) 4.16 5.36 (35.23) (6.33) 2.78 11.61 5.01 5.73 5.17% 3.74% 3.61 5.04 5.49 6.95 4.33 2.74 12.24 — 5.27 2.07 3.99 3.06 5.02 4.89 3.22 5.45 2.99 4.67 4.54 .51 — .25 4.85 .15 .53 2.53 1.90 1.17 .38 3.43 1.86 1.28% 3.93% 7.48% $ 669,515 $ 666,143 $ 654,203 3.65% .51% 3.89% 1.83% $3,922,000 in 2009. Investment securities interest income includes tax equivalent adjustments of $20,784,000 in 2014, $19,861,000 in 2013, $19,505,000 in 2012, $17,907,000 in 2011, $15,593,000 in 2010 and $14,779,000 in 2009 . These adjustments relate to state and municipal obligations, other marketable securities, trading securities, and non-marketable securities. In December 2008, the Company purchased $358,451,000 of student loans with the intent to hold to maturity. In October 2010, the seller elected to repurchase the loans under (C) the terms of the original agreement. 53 QUARTERLY AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS (Dollars in millions) ASSETS Loans: Business(A) Real estate – construction and land $ Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans Investment securities: U.S. government & federal agency obligations Government-sponsored enterprise obligations State & municipal obligations(A) Mortgage-backed securities Asset-backed securities Other marketable securities(A) Trading securities(A) Non-marketable securities(A) Total investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Total interest earning assets Allowance for loan losses Unrealized gain on investment securities Cash and due from banks Land, buildings and equipment – net Other assets Total assets LIABILITIES AND EQUITY Interest bearing deposits: Savings Interest checking and money market Time open & C.D.’s under $100,000 Time open & C.D.’s $100,000 & over Total interest bearing deposits Borrowings: Federal funds purchased and securities sold under agreements to repurchase Other borrowings Total borrowings Total interest bearing liabilities Non-interest bearing deposits Other liabilities Equity Total liabilities and equity Net interest margin (T/E) Fourth Quarter Third Quarter Second Quarter First Quarter Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Year ended December 31, 2014 3,927 401 2,302 1,868 1,685 435 759 5 11,382 2.75% $ 3.80 3.77 3.76 4.14 3.65 11.43 — 3.98 499 (.25) 851 1,800 2,873 2,818 151 16 102 9,110 42 949 465 21,948 (161) 149 394 363 370 23,063 672 9,594 890 1,273 12,429 1,321 104 1,425 13,854 6,592 288 2,329 23,063 159 $ $ $ $ 1.70 3.83 2.60 .86 3.09 2.12 8.24 2.13 .20 1.13 .25 3.00 .13 .13 .42 .45 .19 .08 3.34 .32 .20% $ $ $ $ 3,964 422 2,286 1,835 1,645 429 755 4 11,340 499 764 1,787 2,954 2,804 148 20 95 9,071 37 924 114 21,486 (161) 150 381 353 373 22,582 675 9,356 923 1,428 12,382 1,329 105 1,434 13,816 6,294 185 2,287 22,582 162 2.81% $ 3.78 3.80 3.77 4.16 3.77 11.47 — 4.01 3.10 1.63 3.42 2.68 .89 2.43 2.35 7.74 2.25 .32 1.15 .25 3.12 .14 .13 .43 .42 .19 .09 3.32 .32 .20% $ $ $ $ 3,941 432 2,293 1,791 1,602 420 746 5 11,230 494 790 1,665 3,080 2,860 150 19 110 9,168 24 969 141 21,532 (161) 122 369 352 382 22,596 685 9,488 954 1,450 12,577 1,170 105 1,275 13,852 6,231 230 2,283 22,596 168 2.85% $ 3.76 3.86 3.80 4.24 3.93 11.42 — 4.05 6.55 1.66 3.41 2.69 .89 2.42 2.14 18.12 2.56 .40 1.22 .25 3.26 .12 .13 .45 .42 .19 .09 3.34 .36 .20% $ $ $ $ 3,844 420 2,323 1,779 1,533 424 757 5 11,085 497 775 1,606 3,019 2,854 153 19 110 9,033 25 1,102 161 21,406 (161) 83 385 352 381 22,446 649 9,474 976 1,340 12,439 1,209 105 1,314 13,753 6,238 198 2,257 22,446 160 2.90% 3.77 3.90 3.86 4.41 3.82 11.43 — 4.12 1.71 1.66 3.69 2.80 .89 2.50 2.28 6.42 2.24 .43 1.53 .25 3.16 .12 .13 .47 .44 .19 .07 3.28 .33 .20% Net yield on interest earning assets 2.88% 2.99% 3.13% 3.03% (A) Includes tax equivalent calculations. 54 QUARTERLY AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS (Dollars in millions) ASSETS Loans: Business(A) Real estate – construction and land $ Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans Loans held for sale Investment securities: U.S. government & federal agency obligations Government-sponsored enterprise obligations State & municipal obligations(A) Mortgage-backed securities Asset-backed securities Other marketable securities(A) Trading securities(A) Non-marketable securities(A) Total investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Total interest earning assets Allowance for loan losses Unrealized gain on investment securities Cash and due from banks Land, buildings and equipment – net Other assets Total assets LIABILITIES AND EQUITY Interest bearing deposits: Savings Interest checking and money market Time open & C.D.’s under $100,000 Time open & C.D.’s $100,000 & over Total interest bearing deposits Borrowings: Federal funds purchased and securities sold under agreements to repurchase Other borrowings Total borrowings Total interest bearing liabilities Non-interest bearing deposits Other liabilities Equity Total liabilities and equity Net interest margin (T/E) $ $ $ $ Fourth Quarter Third Quarter Second Quarter First Quarter Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Year ended December 31, 2013 3,635 391 2,300 1,783 1,500 421 760 7 10,797 — 405 663 1,629 2,944 2,844 168 18 114 8,785 35 1,150 260 21,027 (163) 89 404 353 389 22,099 628 9,199 998 1,287 12,112 1,186 106 1,292 13,404 6,271 210 2,214 22,099 162 3.04% $ 3.98 4.02 3.80 4.52 3.88 11.20 — 4.22 — 1.12 1.63 3.53 2.78 .87 3.25 2.44 11.65 2.26 .39 1.51 .25 3.20 .12 .14 .48 .46 .20 .05 3.27 .31 .22% $ $ $ $ 3,415 399 2,257 1,729 1,472 422 753 6 10,453 — 402 427 1,605 3,028 3,000 180 16 114 8,772 32 1,170 115 20,542 (165) 60 384 357 374 21,552 631 8,964 1,021 1,432 12,048 1,248 104 1,352 13,400 5,873 145 2,134 21,552 161 2.96% $ 4.07 4.12 3.83 4.53 3.94 11.33 — 4.26 — 3.04 1.74 3.54 2.86 .87 2.92 2.41 7.10 2.31 .44 1.73 .24 3.25 .14 .15 .54 .43 .21 .05 3.27 .30 .22% $ $ $ $ 3,253 373 2,217 1,665 1,431 426 742 6 10,113 9 400 439 1,634 3,273 3,200 188 22 119 9,275 23 1,200 117 20,737 (167) 229 366 359 397 21,921 640 8,933 1,053 1,464 12,090 1,544 103 1,647 13,737 5,768 229 2,187 21,921 166 3.07% $ 3.94 4.14 3.97 4.69 3.96 11.20 — 4.34 4.05 5.15 1.74 3.61 2.77 .91 2.97 2.40 16.92 2.52 .48 1.94 .26 3.36 .11 .14 .63 .46 .22 .07 3.23 .27 .23% $ $ $ $ 3,157 352 2,230 1,600 1,343 429 755 5 9,871 9 3.17% 3.87 4.17 4.08 5.03 4.08 11.38 — 4.49 3.79 398 (.59) 1.86 3.79 2.59 .93 3.21 1.90 6.20 2.12 .42 2.01 .24 3.23 .12 .17 .66 .52 .25 .07 3.19 .32 .25% 469 1,603 3,514 3,207 194 28 119 9,532 9 1,178 130 20,729 (172) 256 376 361 375 21,925 604 9,142 1,069 1,337 12,152 1,201 103 1,304 13,456 5,929 366 2,174 21,925 157 Net yield on interest earning assets 3.06% 3.11% 3.21% 3.07% (A) Includes tax equivalent calculations. 55 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is set forth on pages 44 through 46 of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Commerce Bancshares, Inc.: We have audited the accompanying consolidated balance sheets of Commerce Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commerce Bancshares, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Kansas City, Missouri February 24, 2015 56 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS ASSETS Loans Allowance for loan losses Net loans Investment securities: Available for sale ($467,143,000 and $687,680,000 pledged at December 31, 2014 and 2013, respectively, to secure swap and repurchase agreements) Trading Non-marketable Total investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Cash and due from banks Land, buildings and equipment – net Goodwill Other intangible assets – net Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Non-interest bearing Savings, interest checking and money market Time open and C.D.’s of less than $100,000 Time open and C.D.’s of $100,000 and over Total deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings Other liabilities Total liabilities Commerce Bancshares, Inc. stockholders’ equity: December 31 2014 2013 (In thousands) $ 11,469,238 $ 10,956,836 (156,532) (161,532) 11,312,706 10,795,304 9,523,560 8,915,680 15,357 106,875 19,993 107,324 9,645,792 9,042,997 32,485 43,845 1,050,000 1,150,000 600,744 467,488 357,871 138,921 7,450 380,823 707,249 518,420 349,654 138,921 9,268 316,378 $ 23,994,280 $ 23,072,036 $ 6,811,959 $ 6,750,674 10,541,601 10,108,236 878,433 1,243,785 983,689 1,204,749 19,475,778 19,047,348 1,862,518 1,346,558 104,058 217,680 107,310 356,423 21,660,034 20,857,639 Preferred stock, $1 par value Authorized 2,000,000 shares; issued 6,000 shares at December 31, 2014 and none at December 31, 2013 144,784 — Common stock, $5 par value Authorized 120,000,000 shares at December 31, 2014 and 100,000,000 shares at December 31, 2013; issued 96,830,977 shares at December 31, 2014 and 96,244,762 shares at December 31, 2013 Capital surplus Retained earnings Treasury stock of 367,487 shares at December 31, 2014 and 235,986 shares at December 31, 2013, at cost Accumulated other comprehensive income Total Commerce Bancshares, Inc. stockholders’ equity Non-controlling interest Total equity Total liabilities and equity See accompanying notes to consolidated financial statements. 57 484,155 1,229,075 426,648 481,224 1,279,948 449,836 (16,562) 62,093 (10,097) 9,731 2,330,193 2,210,642 4,053 3,755 2,334,246 2,214,397 $ 23,994,280 $ 23,072,036 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) INTEREST INCOME Interest and fees on loans Interest on loans held for sale Interest on investment securities Interest on federal funds sold and short-term securities purchased under agreements to resell Interest on long-term securities purchased under agreements to resell Interest on deposits with banks Total interest income INTEREST EXPENSE Interest on deposits: Savings, interest checking and money market Time open and C.D.’s of less than $100,000 Time open and C.D.’s of $100,000 and over Interest on federal funds purchased and securities sold under agreements to repurchase Interest on other borrowings Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses NON-INTEREST INCOME Bank card transaction fees Trust fees Deposit account charges and other fees Capital market fees Consumer brokerage services Loan fees and sales Other Total non-interest income INVESTMENT SECURITIES GAINS (LOSSES), NET Change in fair value of other-than-temporarily impaired securities Portion recognized in other comprehensive income Net impairment losses recognized in earnings Realized gains (losses) on sales and fair value adjustments Investment securities gains (losses), net NON-INTEREST EXPENSE Salaries and employee benefits Net occupancy Equipment Supplies and communication Data processing and software Marketing Deposit insurance Other Total non-interest expense Income before income taxes Less income taxes Net income Less non-controlling interest expense Net income attributable to Commerce Bancshares, Inc. Less preferred stock dividends Net income available to common shareholders Net income per common share - basic Net income per common share - diluted See accompanying notes to consolidated financial statements. $ $ $ 58 For the Years Ended December 31 2013 2012 2014 $ 447,157 $ — 188,006 101 12,473 555 648,292 13,522 4,137 5,926 1,019 3,484 28,088 620,204 29,531 590,673 175,806 112,158 78,680 12,667 12,006 5,108 39,553 435,978 (2,091) 726 (1,365) 15,489 14,124 384,100 45,825 18,375 22,432 78,980 15,676 11,622 80,765 657,775 383,000 120,216 262,784 1,030 261,754 4,050 257,704 $ 2.62 $ 2.61 $ 439,082 $ 176 189,415 106 21,119 387 650,285 14,355 6,002 6,383 809 3,364 30,913 619,372 20,353 599,019 166,627 102,529 79,017 14,133 11,006 5,865 39,209 418,386 278 (1,562) (1,284) (3,141) (4,425) 366,867 45,639 18,425 22,511 78,245 14,176 11,167 72,603 629,633 383,347 122,230 261,117 156 260,961 — 260,961 $ 2.60 $ 2.59 $ 446,331 361 211,682 82 19,174 339 677,969 18,682 7,918 7,174 808 3,481 38,063 639,906 27,287 612,619 154,197 94,679 79,485 21,066 10,162 6,037 34,004 399,630 11,223 (12,713) (1,490) 6,318 4,828 360,899 45,534 20,147 22,321 73,798 15,106 10,438 70,226 618,469 398,608 127,169 271,439 2,110 269,329 — 269,329 2.64 2.63 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income Other comprehensive income (loss): Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings Net unrealized gains (losses) on other securities Change in pension loss Other comprehensive income (loss) Comprehensive income Less non-controlling interest expense For the Years Ended December 31 2014 2013 2012 $ 262,784 $ 261,117 $ 271,439 (412) 60,007 (7,233) 52,362 315,146 1,030 958 (138,960) 11,389 (126,613) 134,504 156 7,566 24,126 (5,886) 25,806 297,245 2,110 295,135 Comprehensive income attributable to Commerce Bancshares, Inc. $ 314,116 $ 134,348 $ See accompanying notes to consolidated financial statements. 59 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Provision for depreciation and amortization Amortization of investment security premiums, net Deferred income tax (benefit) expense Investment securities (gains) losses, net Net gains on sales of loans held for sale Proceeds from sales of loans held for sale Net (increase) decrease in trading securities Stock-based compensation (Increase) decrease in interest receivable Decrease in interest payable Increase (decrease) in income taxes payable Net tax benefit related to equity compensation plans Other changes, net Net cash provided by operating activities INVESTING ACTIVITIES Cash and cash equivalents received in acquisition Cash paid in sales of branches Proceeds from sales of investment securities Proceeds from maturities/pay downs of investment securities Purchases of investment securities Net increase in loans Long-term securities purchased under agreements to resell Repayments of long-term securities purchased under agreements to resell Purchases of land, buildings and equipment Sales of land, buildings and equipment Net cash used in investing activities FINANCING ACTIVITIES Net increase in non-interest bearing, savings, interest checking and money market deposits Net decrease in time open and C.D.’s Repayment of long-term securities sold under agreements to repurchase Net increase (decrease) in federal funds purchased and short-term securities sold under agreements to repurchase Repayment of other long-term borrowings Net increase (decrease) in other short-term borrowings Proceeds from issuance of preferred stock Purchases of treasury stock Accelerated stock repurchase agreement Issuance of stock under equity compensation plans Net tax benefit related to equity compensation plans Cash dividends paid on common stock Cash dividends paid on preferred stock Net cash provided by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Income tax payments, net Interest paid on deposits and borrowings Loans transferred to foreclosed real estate Loans transferred from held for sale to held for investment category See accompanying notes to consolidated financial statements. 60 For the Years Ended December 31 2014 2013 2012 $ 262,784 $ 261,117 $ 271,439 29,531 42,303 23,211 (540) (14,124) — — 16,005 8,829 (2,185) (230) 344 (1,850) (3,242) 360,836 — (43,827) 64,442 1,914,105 (2,498,090) (560,890) (450,000) 550,000 (43,658) 5,236 20,353 41,944 30,419 9,201 4,425 — — 1,358 6,427 3,234 (1,569) (1,663) (1,003) (12,494) 361,749 27,287 43,448 36,238 16,234 (4,828) (376) 22,720 (9,645) 5,001 3,149 (1,272) (13,395) (2,094) (10,026) 383,880 47,643 — 16,299 2,542,123 — — 16,875 3,080,664 (2,411,153) (3,182,857) (938,223) (125,000) 175,000 (23,841) 3,492 (693,193) (575,000) 225,000 (34,969) 2,643 (1,062,682) (713,660) (1,160,837) 282,276 (57,956) (350,000) 865,960 (1,252) (2,000) 144,784 (210,974) (60,000) 8,652 1,850 (84,241) (4,050) 533,049 (168,797) 1,269,514 1,100,717 $ 120,172 $ 28,218 $ 5,074 $ — $ $ $ $ $ $ 801,211 (82,013) (50,000) 313,008 (1,578) 2,000 — 1,777,058 (257,586) — (172,531) (8,107) — — (69,353) (104,909) — 9,426 1,003 — 14,820 2,094 (82,104) (211,608) — 841,600 489,689 779,825 1,269,514 $ 114,336 $ 32,432 $ 8,747 $ 8,941 $ — 1,039,231 262,274 517,551 779,825 119,166 39,335 8,167 — Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands, except per share data) Balance, December 31, 2011 Net income Other comprehensive income Distributions to non-controlling interest Purchases of treasury stock Cash dividends paid on common stock ($2.090 per share) Net tax benefit related to equity compensation plans Stock-based compensation Issuance under stock purchase and equity compensation plans, net 5% stock dividend, net Balance, December 31, 2012 Net income Other comprehensive loss Acquisition of Summit Bancshares Inc. Distributions to non-controlling interest Purchases of treasury stock Cash dividends paid on common stock ($.816 per share) Net tax benefit related to equity compensation plans Stock-based compensation Issuance under stock purchase and equity compensation plans, net 5% stock dividend, net Balance, December 31, 2013 Net income Other comprehensive income Distributions to non-controlling interest Issuance of preferred stock Purchases of treasury stock Cash dividends paid on common stock ($.857 per share) Cash dividends paid on preferred stock ($.675 per share) Net tax benefit related to equity compensation plans Stock-based compensation Issuance under stock purchase and equity compensation plans, net 5% stock dividend, net Balance, December 31, 2014 Commerce Bancshares, Inc. Shareholders Preferred Stock Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Non- Controlling Interest Total $ — $ 446,387 $ 1,042,065 $ 575,419 $ (8,362) $ 110,538 $ 4,314 $ 2,170,361 269,329 2,110 271,439 25,806 (1,977) (104,909) (211,608) 2,094 5,001 (16,905) 12,259 70,252 (155,930) — 458,646 1,102,507 477,210 260,961 1,001 11,125 (82,104) 1,003 6,427 (14,824) 21,577 173,710 (206,231) — 481,224 1,279,948 449,836 261,754 144,784 (84,241) (4,050) 1,850 8,829 (14,703) 32,493 73,198 (7,580) 31,071 (69,353) 25,066 10,699 (10,097) (210,974) 24,209 25,806 (1,977) (104,909) (211,608) 2,094 5,001 15,588 (221) 2,171,574 261,117 (126,613) 43,197 (848) (69,353) (82,104) 1,003 6,427 10,242 (245) 136,344 (126,613) 4,447 156 (848) 9,731 52,362 3,755 1,030 2,214,397 262,784 (732) 52,362 (732) 144,784 (210,974) (60,000) (84,241) (4,050) 1,850 8,829 9,506 (269) 2,931 13,151 (196,651) 180,300 $ 144,784 $ 484,155 $ 1,229,075 $ 426,648 $ (16,562) $ 62,093 $ 4,053 $ 2,334,246 Accelerated share repurchase forward contract (60,000) See accompanying notes to consolidated financial statements. 61 Commerce Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Nature of Operations Commerce Bancshares, Inc. and its subsidiaries (the Company) conducts its principal activities from approximately 350 locations throughout Missouri, Illinois, Kansas, Oklahoma and Colorado. Principal activities include retail and commercial banking, investment management, securities brokerage, mortgage banking, credit related insurance and private equity investment activities. Basis of Presentation The Company follows accounting principles generally accepted in the United States of America (GAAP) and reporting practices applicable to the banking industry. The preparation of financial statements under GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. These estimates are based on information available to management at the time the estimates are made. While the consolidated financial statements reflect management’s best estimates and judgments, actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries (after elimination of all material intercompany balances and transactions). Certain amounts for prior years have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income or total assets. Cash and Cash Equivalents In the accompanying consolidated statements of cash flows, cash and cash equivalents include “Cash and due from banks”, “Federal funds sold and short-term securities purchased under agreements to resell”, and “Interest earning deposits with banks” as segregated in the accompanying consolidated balance sheets. Loans and Related Earnings Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances, net of undisbursed loan proceeds, the allowance for loan losses, and any deferred fees and costs on originated loans. Origination fee income received on loans and amounts representing the estimated direct costs of origination are deferred and amortized to interest income over the life of the loan using the interest method. Interest on loans is accrued based upon the principal amount outstanding. Interest income is recognized primarily on the level yield method. Loan and commitment fees, net of costs, are deferred and recognized in income over the term of the loan or commitment as an adjustment of yield. Annual fees charged on credit card loans are capitalized to principal and amortized over 12 months to loan fees and sales. Other credit card fees, such as cash advance fees and late payment fees, are recognized in income as an adjustment of yield when charged to the cardholder’s account. Non-Accrual Loans Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Business, construction real estate, business real estate, and personal real estate loans that are contractually 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. Consumer, revolving home equity and credit card loans are exempt under regulatory rules from being classified as non-accrual. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed against current income, and the loan is charged off to the extent uncollectible. Principal and interest payments received on non-accrual loans are generally applied to principal. Interest is included in income only after all previous loan charge- offs have been recovered and is recorded only as received. The loan is returned to accrual status only when the borrower has brought all past due principal and interest payments current, and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. A six month history of sustained payment performance is generally required before reinstatement of accrual status. 62 Restructured Loans A loan is accounted for as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrowers’ financial difficulties, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, or accrued interest, (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Business, business real estate, construction real estate and personal real estate troubled debt restructurings with impairment charges are placed on non-accrual status. The Company measures the impairment loss of a troubled debt restructuring in the same manner as described below. Troubled debt restructurings which are performing under their contractual terms continue to accrue interest which is recognized in current earnings. Impaired Loans Loans are evaluated regularly by management for impairment. Included in impaired loans are all non-accrual loans, as well as loans that have been classified as troubled debt restructurings. Once a loan has been identified as impaired, impairment is measured based on either the present value of the expected future cash flows at the loan’s initial effective interest rate or the fair value of the collateral if collateral dependent. Factors considered in determining impairment include delinquency status, cash flow analysis, credit analysis, and collateral value and availability. Allowance/Provision for Loan Losses The allowance for loan losses is maintained at a level believed to be appropriate by management to provide for probable loan losses inherent in the portfolio as of the balance sheet date, including losses on known or anticipated problem loans as well as for loans which are not currently known to require specific allowances. Management has established a process to determine the amount of the allowance for loan losses which assesses the risks and losses inherent in its portfolio. Business, construction real estate and business real estate loans are normally larger and more complex, and their collection rates are harder to predict. These loans are more likely to be collateral dependent and are allocated a larger reserve, due to their potential volatility. Personal real estate, credit card, consumer and revolving home equity loans are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Management’s process provides an allowance consisting of a specific allowance component based on certain individually evaluated loans and a general component based on estimates of reserves needed for pools of loans. Loans subject to individual evaluation generally consist of business, construction real estate, business real estate and personal real estate loans on non-accrual status. These impaired loans are evaluated individually for the impairment of repayment potential and collateral adequacy. Other impaired loans identified as performing troubled debt restructurings are collectively evaluated because they have similar risk characteristics. Loans which have not been identified as impaired are segregated by loan type and sub-type and are collectively evaluated. Reserves calculated for these loan pools are estimated using a consistent methodology that considers historical loan loss experience by loan type, loss emergence periods, delinquencies, current economic factors, loan risk ratings and industry concentrations. The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses is based on various judgments and assumptions made by management. The amount of the allowance for loan losses is highly dependent on management’s estimates affecting valuation, appraisal of collateral, evaluation of performance and status, and the amount and timing of future cash flows expected to be received on impaired loans. Factors that influence these judgments include past loan loss experience, current loan portfolio composition and characteristics, trends in portfolio risk ratings, levels of non-performing assets, prevailing regional and national economic conditions, and the Company’s ongoing loan review process. The estimates, appraisals, evaluations, and cash flows utilized by management may be subject to frequent adjustments due to changing economic prospects of borrowers or properties. These estimates are reviewed periodically and adjustments, if necessary, are recorded in the provision for loan losses in the periods in which they become known. Loans, or portions of loans, are charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. Business, business real estate, construction real estate and personal real estate loans are generally charged down to estimated collectible balances when they are placed on non-accrual status. Consumer loans and related accrued interest are normally charged down to the fair value of related collateral (or are charged off in full if no collateral) once the loans are more than 120 days delinquent. Credit card loans are charged off against the allowance for loan losses when the receivable is more than 180 days past due. The interest and fee income previously capitalized but not collected on credit card charge-offs is reversed against interest income. 63 Operating, Direct Financing and Sales Type Leases The net investment in direct financing and sales type leases is included in loans on the Company’s consolidated balance sheets and consists of the present values of the sum of the future minimum lease payments and estimated residual value of the leased asset. Revenue consists of interest earned on the net investment and is recognized over the lease term as a constant percentage return thereon. The net investment in operating leases is included in other assets on the Company’s consolidated balance sheets. It is carried at cost, less the amount depreciated to date. Depreciation is recognized, on the straight-line basis, over the lease term to the estimated residual value. Operating lease revenue consists of the contractual lease payments and is recognized over the lease term in other non-interest income. Estimated residual values are established at lease inception utilizing contract terms, past customer experience, and general market data and are reviewed and adjusted, if necessary, on an annual basis. Investments in Debt and Equity Securities The Company has classified the majority of its investment portfolio as available for sale. From time to time, the Company sells securities and utilizes the proceeds to reduce borrowings, fund loan growth, or modify its interest rate profile. Securities classified as available for sale are carried at fair value. Changes in fair value, excluding certain losses associated with other-than- temporary impairment (OTTI), are reported in other comprehensive income (loss), a component of stockholders’ equity. Securities are periodically evaluated for OTTI in accordance with guidance provided in ASC 320-10-35. For securities with OTTI, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it likely that it will be required to sell the security before the anticipated recovery. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred, and the loss is then recognized in current earnings. The noncredit-related portion of the overall loss is reported in other comprehensive income (loss). Mortgage and asset-backed securities whose credit ratings are below AA at their purchase date are evaluated for OTTI under ASC 325-40-35, which requires evaluations for OTTI at purchase date and in subsequent periods. Gains and losses realized upon sales of securities are calculated using the specific identification method and are included in investment securities gains (losses), net, in the consolidated statements of income. Premiums and discounts are amortized to interest income over the estimated lives of the securities. Prepayment experience is continually evaluated to determine the appropriate estimate of the future rate of prepayment. When a change in a bond's estimated remaining life is necessary, a corresponding adjustment is made in the related amortization of premium or discount accretion. Non-marketable securities include certain private equity investments, consisting of both debt and equity instruments. These securities are carried at fair value in accordance with ASC 946-10-15, with changes in fair value reported in current earnings. In the absence of readily ascertainable market values, fair value is estimated using internally developed models. Changes in fair value and gains and losses from sales are included in Investment securities gains (losses), net in the consolidated statements of income. Other non-marketable securities acquired for debt and regulatory purposes are accounted for at cost. Trading account securities, which are bought and held principally for the purpose of resale in the near term, are carried at fair value. Gains and losses, both realized and unrealized, are recorded in non-interest income. Purchases and sales of securities are recognized on a trade date basis. A receivable or payable is recognized for pending transaction settlements. Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase The Company periodically enters into investments of securities under agreements to resell with large financial institutions. These agreements are accounted for as collateralized financing transactions. Securities pledged by the counterparties to secure these agreements are delivered to a third party custodian. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral, or the Company may return collateral pledged when appropriate to maintain full collateralization for these transactions. At December 31, 2014, the Company had entered into $1.1 billion of long-term agreements to resell and had accepted securities valued at $1.1 billion as collateral. Securities sold under agreements to repurchase are offered to cash management customers as an automated, collateralized investment account and totaled $1.9 billion at December 31, 2014. From time to time, securities sold may also be used by the Bank to obtain additional borrowed funds at favorable rates. As of December 31, 2014, the Company had pledged $1.9 billion of available for sale securities as collateral for these repurchase agreements. As permitted by current accounting guidance, the Company offsets certain securities purchased under agreements to resell against securities sold under agreements to repurchase in its balance sheet presentation. These agreements, which are not included in the balance sheet amounts above, are further discussed in Note 19, Balance Sheet Offsetting. 64 Land, Buildings and Equipment Land is stated at cost, and buildings and equipment are stated at cost, including capitalized interest when appropriate, less accumulated depreciation. Depreciation is computed using straight-line and accelerated methods. The Company generally assigns depreciable lives of 30 years for buildings, 10 years for building improvements, and 3 to 8 years for equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or remaining lease terms. Maintenance and repairs are charged to non-interest expense as incurred. Foreclosed Assets Foreclosed assets consist of property that has been repossessed and is comprised of commercial and residential real estate and other non-real estate property, including auto and recreational and marine vehicles. The assets are initially recorded at the lower of the loan balance or fair value less estimated selling costs. Initial valuation adjustments are charged to the allowance for loan losses. Fair values are estimated primarily based on appraisals, third-party price opinions, or internally developed pricing models. After initial recognition, fair value estimates are updated periodically, and the assets may be marked down further, reflecting a new cost basis. These valuation adjustments, in addition to gains and losses realized on sales and net operating expenses, are recorded in other non-interest expense. Intangible Assets Goodwill and intangible assets that have indefinite useful lives are not amortized but are tested annually for impairment. Intangible assets that have finite useful lives, such as core deposit intangibles and mortgage servicing rights, are amortized over their estimated useful lives. Core deposit intangibles are amortized over periods of 8 to 14 years, representing their estimated lives, using accelerated methods. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. Goodwill is assessed for impairment on an annual basis or more frequently in certain circumstances. When testing for goodwill impairment, the Company may initially perform a qualitative assessment. Based on the results of this qualitative assessment, if the Company concludes it is more likely than not that a reporting unit's fair value is less than its carrying amount, a quantitative analysis is performed. Quantitative valuation methodologies include a combination of formulas using current market multiples, based on recent sales of financial institutions within the Company's geographic marketplace. If the fair value of a reporting unit is less than the carrying amount, additional analysis is required to measure the amount of impairment. The Company has not recorded impairment resulting from goodwill impairment tests. However, adverse changes in the economic environment, operations of the reporting unit, or other factors could result in a decline in fair value. Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate their carrying amount may not be recoverable. Impairment is indicated if the sum of the undiscounted estimated future net cash flows is less than the carrying value of the intangible asset. The Company has not recorded other-than-temporary impairment losses on these intangible assets. Income Taxes Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income taxes are provided for temporary differences between the financial reporting bases and income tax bases of the Company’s assets and liabilities, net operating losses, and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income when such assets and liabilities are anticipated to be settled or realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as tax expense or benefit in the period that includes the enactment date of the change. In determining the amount of deferred tax assets to recognize in the financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. A valuation allowance is established if it is more likely than not that all or some portion of the deferred tax asset will not be realized. The Company recognizes interest and penalties related to income taxes within income tax expense in the consolidated statements of income. The Company and its eligible subsidiaries file a consolidated federal income tax return. State and local income tax returns are filed on a combined, consolidated or separate return basis based upon each jurisdiction’s laws and regulations. 65 Derivatives As required by current accounting guidance, all derivatives are carried at fair value on the balance sheet. Accounting for changes in the fair value of derivatives (gains and losses) differs depending on whether a qualifying hedge relationship has been designated and on the type of hedge relationship. Derivatives used to hedge the exposure to change in the fair value of an asset, liability, or firm commitment attributable to a particular risk are considered fair value hedges. Under the fair value hedging model, gains or losses attributable to the change in fair value of the derivative, as well as gains and losses attributable to the change in fair value of the hedged item, are recognized in current earnings. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Under the cash flow hedging model, the effective portion of the gain or loss related to the derivative is recognized as a component of other comprehensive income and reclassified to earnings in the same period in which the hedged transaction affects earnings. The ineffective portion is recognized in current earnings. At the present time, the Company's application of hedge accounting is not significant. Most of the derivatives held by the Company do not qualify for hedge accounting, and gains and losses on these derivatives are recognized in current earnings. These include interest rate swaps and caps, which are offered to customers to assist in managing their risks of adverse changes in interest rates. Each contract between the Company and a customer is offset by a contract between the Company and an institutional counterparty, thus minimizing the Company's exposure to rate changes. The Company also enters into certain contracts, known as credit risk participation agreements, to buy or sell credit protection on specific interest rate swaps. It also purchases and sells forward foreign exchange contracts, either in connection with customer transactions, or for its own trading purposes. The Company has master netting arrangements with various counterparties but does not offset derivative assets and liabilities under these arrangements in its consolidated balance sheets. Additional information about derivatives held by the Company and valuation methods employed is provided in Note 16, Fair Value Measurements and Note 18, Derivative Instruments. Pension Plan The Company’s pension plan is described in Note 10, Employee Benefit Plans. The funded status of the plan is recognized as an asset or liability in the consolidated balance sheet, and changes in that funded status are recognized in the year in which the changes occur through other comprehensive income. Plan assets and benefit obligations are measured as of fiscal year end. The measurement of the projected benefit obligation and pension expense involve actuarial valuation methods and the use of various actuarial and economic assumptions. The Company monitors the assumptions and updates them periodically. Due to the long- term nature of the pension plan obligation, actual results may differ significantly from estimations. Such differences are adjusted over time as the assumptions are replaced by facts and values are recalculated. Stock-Based Compensation The Company’s stock-based employee compensation plan is described in Note 11, Stock-Based Compensation and Directors Stock Purchase Plan. In accordance with the requirements of ASC 718-10-30-3 and 35-2, the Company measures the cost of stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The expense recognized is based on an estimation of the number of awards for which the requisite service is expected to be rendered and is included in salaries and employee benefits in the accompanying consolidated statements of income. Treasury Stock Purchases of the Company’s common stock are recorded at cost. Upon re-issuance for acquisitions, exercises of stock-based awards or other corporate purposes, treasury stock is reduced based upon the average cost basis of shares held. Income per Share Basic income per share is computed using the weighted average number of common shares outstanding during each year. Diluted income per share includes the effect of all dilutive potential common shares (primarily stock options and stock appreciation rights) outstanding during each year. The Company applies the two-class method of computing income per share. The two-class method is an earnings allocation formula that determines income per share for common stock and for participating securities, according to dividends declared and participation rights in undistributed earnings. The Company’s restricted share awards are considered to be a class of participating security. All per share data has been restated to reflect the 5% stock dividend distributed in December 2014. 66 2. Acquisition and Disposition On September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The transaction was accounted for using the acquisition method of accounting, and as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. In this transaction, the Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $13.3 million in goodwill and $5.6 million in core deposit premium. Most of the goodwill was assigned to the Company's Commercial segment. None of the goodwill recognized is deductible for income tax purposes. On July 25, 2014, the Company sold banking branches in Farmington, Desloge and Bonne Terre, Missouri. The sale included approximately $13.3 million in loans, $60.3 million in deposits, and various bank premises. The Company recognized a $2.1 million gain on the sale. 3. Loans and Allowance for Loan Losses Major classifications within the Company’s held to maturity loan portfolio at December 31, 2014 and 2013 are as follows: (In thousands) Commercial: Business Real estate — construction and land Real estate — business Personal Banking: Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans 2014 2013 $ 3,969,952 $ 3,715,319 403,507 406,197 2,288,215 2,313,550 1,883,092 1,705,134 430,873 782,370 6,095 1,787,626 1,512,716 420,589 796,228 4,611 $ 11,469,238 $ 10,956,836 Loans to directors and executive officers of the Parent and the Bank, and to their associates, are summarized as follows: (In thousands) Balance at January 1, 2014 Additions Amounts collected Amounts written off Balance, December 31, 2014 $ $ 44,728 402,428 (381,737) — 65,419 Management believes all loans to directors and executive officers have been made in the ordinary course of business with normal credit terms, including interest rate and collateral considerations, and do not represent more than a normal risk of collection. The activity in the table above includes draws and repayments on several lines of credit with business entities. There were no outstanding loans at December 31, 2014 to principal holders (over 10% ownership) of the Company’s common stock. The Company’s lending activity is generally centered in Missouri, Illinois, Kansas and other nearby states including Oklahoma, Colorado, Iowa, Ohio, and others. The Company maintains a diversified portfolio with limited industry concentrations of credit risk. Loans and loan commitments are extended under the Company’s normal credit standards, controls, and monitoring features. Most loan commitments are short or intermediate term in nature. Commercial loan maturities generally range from three to seven years. Collateral is commonly required and would include such assets as marketable securities and cash equivalent assets, accounts receivable and inventory, equipment, other forms of personal property, and real estate. At December 31, 2014, unfunded loan 67 commitments totaled $8.4 billion (which included $3.5 billion in unused approved lines of credit related to credit card loan agreements) which could be drawn by customers subject to certain review and terms of agreement. At December 31, 2014, loans totaling $3.6 billion were pledged at the FHLB as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.3 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings. The Company has a net investment in direct financing and sales type leases of $413.0 million and $368.8 million at December 31, 2014 and 2013, respectively, which is included in business loans on the Company’s consolidated balance sheets. This investment includes deferred income of $26.4 million and $25.1 million at December 31, 2014 and 2013, respectively. The net investment in operating leases amounted to $22.8 million and $24.4 million at December 31, 2014 and 2013, respectively, and is included in other assets on the Company’s consolidated balance sheets. Allowance for loan losses A summary of the activity in the allowance for losses during the previous three years follows: (In thousands) Balance at December 31, 2011 Provision for loan losses Deductions: Loans charged off Less recoveries Net loans charged off Balance at December 31, 2012 Provision for loan losses Deductions: Loans charged off Less recoveries Net loans charged off (recoveries) Balance at December 31, 2013 Provision for loan losses Deductions: Loans charged off Less recoveries Net loans charged off (recoveries) Balance at December 31, 2014 Commercial Personal Banking Total $ 122,497 $ 62,035 $ 184,532 (14,444) 41,731 27,287 11,094 8,766 2,328 105,725 (16,143) 5,170 9,777 (4,607) 94,189 (5,204) 4,548 5,185 (637) 52,067 15,108 36,959 66,807 36,496 49,029 13,069 35,960 67,343 34,735 48,225 13,057 35,168 63,161 23,874 39,287 172,532 20,353 54,199 22,846 31,353 161,532 29,531 52,773 18,242 34,531 $ 89,622 $ 66,910 $ 156,532 68 The following table shows the balance in the allowance for loan losses and the related loan balance at December 31, 2014 and 2013, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status which are individually evaluated for impairment and other impaired loans deemed to have similar risk characteristics, which are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20. (In thousands) December 31, 2014 Commercial Personal Banking Total December 31, 2013 Commercial Personal Banking Total Impaired loans Impaired Loans All Other Loans Allowance for Loan Losses Loans Outstanding Allowance for Loan Losses Loans Outstanding $ $ $ $ 4,527 $ 2,314 6,841 $ 8,476 $ 2,424 55,551 25,537 81,088 78,516 29,120 10,900 $ 107,636 $ $ $ $ 85,095 $ 6,606,123 64,596 4,782,027 149,691 $ 11,388,150 85,713 $ 6,356,550 64,919 4,492,650 150,632 $ 10,849,200 The table below shows the Company’s investment in impaired loans at December 31, 2014 and 2013. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 73. (In thousands) Non-accrual loans Restructured loans (accruing) Total impaired loans 2014 2013 40,775 $ 40,313 48,814 58,822 81,088 $ 107,636 $ $ 69 The following table provides additional information about impaired loans held by the Company at December 31, 2014 and 2013, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided. (In thousands) December 31, 2014 With no related allowance recorded: Business Real estate – construction and land Real estate – business Real estate – personal With an allowance recorded: Business Real estate – construction and land Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Total December 31, 2013 With no related allowance recorded: Business Real estate – construction and land Real estate – business Revolving home equity With an allowance recorded: Business Real estate – construction and land Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Total Recorded Investment Unpaid Principal Balance Related Allowance $ $ $ $ $ $ $ $ $ $ 9,237 $ 11,532 $ 4,552 13,453 1,227 8,493 17,258 1,384 28,469 $ 38,667 $ 12,326 $ 13,846 $ 8,148 7,835 9,096 4,244 529 10,441 52,619 $ 81,088 $ 9,610 15,025 12,465 4,244 529 10,441 66,160 $ 104,827 $ 7,969 $ 9,000 $ 8,766 4,089 2,191 16,067 6,417 2,741 23,015 $ 34,225 $ 19,266 $ 22,597 $ 17,632 20,794 10,425 4,025 666 11,813 19,708 29,287 13,576 4,025 666 11,813 84,621 $ 101,672 $ 107,636 $ 135,897 $ — — — — — 1,844 1,081 1,602 1,441 50 9 814 6,841 6,841 — — — — — 3,037 2,174 3,265 1,361 85 2 976 10,900 10,900 Total average impaired loans during 2014 and 2013 are shown in the table below. (In thousands) Commercial 2014 Personal Banking Total Commercial 2013 Personal Banking Total Average impaired loans: Non-accrual loans Restructured loans (accruing) Total $ $ 38,114 $ 7,132 $ 33,156 20,040 71,270 $ 27,172 $ 45,246 53,196 98,442 $ $ 35,900 $ 5,329 $ 40,251 24,134 41,229 64,385 76,151 $ 29,463 $ 105,614 70 The table below shows interest income recognized during the years ended December 31, 2014, 2013 and 2012 for impaired loans held at the end of each respective period. This interest relates to accruing restructured loans, as discussed previously. (In thousands) Interest income recognized on impaired loans: Business Real estate – construction and land Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Total For the Year Ended December 31 2014 2013 2012 $ 344 $ 509 $ 1,184 361 153 208 286 27 993 758 215 263 346 36 1,116 $ 2,372 $ 3,243 $ 655 246 376 415 37 1,341 4,254 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 December 31, 2014 and 2013. (In thousands) December 31, 2014 Commercial: Business Real estate – construction and land Real estate – business Personal Banking: Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total December 31, 2013 Commercial: Business Real estate – construction and land Real estate – business Personal Banking: Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total Current or Less Than 30 Days Past Due 30 – 89 Days Past Due 90 Days Past Due and Still Accruing Non-accrual Total $ 3,946,144 $ 11,152 $ 1,096 $ 11,560 $ 3,969,952 397,488 2,266,688 1,868,606 1,687,285 428,478 764,599 5,721 827 3,661 6,618 16,053 1,552 9,559 374 35 — 1,676 1,796 843 8,212 — 5,157 17,866 6,192 — — — — 403,507 2,288,215 1,883,092 1,705,134 430,873 782,370 6,095 $ 11,365,009 $ 49,796 $ 13,658 $ 40,775 $ 11,469,238 $ 3,697,589 $ 5,467 $ 671 $ 11,592 $ 3,715,319 386,423 2,292,385 1,771,231 1,492,960 416,614 777,564 4,315 9,601 1,340 9,755 17,482 1,082 9,952 296 — 47 1,560 2,274 702 8,712 — 10,173 19,778 5,080 — 2,191 — — 406,197 2,313,550 1,787,626 1,512,716 420,589 796,228 4,611 $ 10,839,081 $ 54,975 $ 13,966 $ 48,814 $ 10,956,836 71 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 attached to loans where the borrower exhibits material negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment, as discussed in Note 1. (In thousands) December 31, 2014 Pass Special mention Substandard Non-accrual Total December 31, 2013 Pass Special mention Substandard Non-accrual Total Commercial Loans Business Real Estate - Construction Real Estate - Business Total $ $ $ 3,871,569 $ 385,831 $ 2,184,541 $ 62,904 23,919 11,560 3,865 8,654 5,157 3,969,952 $ 403,507 $ 40,668 45,140 17,866 2,288,215 $ 6,441,941 107,437 77,713 34,583 6,661,674 3,618,120 $ 372,515 $ 2,190,344 $ 6,180,979 61,916 23,691 11,592 1,697 21,812 10,173 53,079 50,349 19,778 116,692 95,852 41,543 $ 3,715,319 $ 406,197 $ 2,313,550 $ 6,435,066 72 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 person'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 are related to commercial activity. These totaled $244.3 million, or less than 6.0% of the Personal Banking portfolio, at both December 31, 2014 and December 31, 2013. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at December 31, 2014 and 2013 by FICO score. December 31, 2014 FICO score: Under 600 600 – 659 660 – 719 720 – 779 780 and over Total December 31, 2013 FICO score: Under 600 600 – 659 660 – 719 720 – 779 780 and over Total Personal Banking Loans % of Loan Category Real Estate - Personal Consumer Revolving Home Equity Consumer Credit Card 1.4% 5.2% 1.8% 4.1% 3.1 9.9 26.7 58.9 10.2 22.9 28.0 33.7 4.4 13.7 32.8 47.3 11.8 32.4 27.8 23.9 100.0% 100.0% 100.0% 100.0% 1.7 % 5.4 % 2.1 % 4.1 % 3.3 10.3 25.8 58.9 10.1 23.4 28.3 32.8 7.3 15.0 28.5 47.1 11.7 32.9 27.9 23.4 100.0 % 100.0 % 100.0 % 100.0 % Troubled debt restructurings As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $64.4 million at December 31, 2014. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non- accrual loans totaled $24.1 million at December 31, 2014. Other performing restructured loans totaled $40.3 million at December 31, 2014. These are partly comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as troubled debt restructurings. These commercial loans totaled $21.8 million and $38.2 million at December 31, 2014 and 2013, respectively. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $10.4 million at December 31, 2014 and $11.8 million at December 31, 2013. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company also classifies certain loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. These loans, which are comprised of personal real estate, revolving home equity and consumer loans, totaled $8.1 million and $8.8 million at December 31, 2014 and 2013, respectively. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. 73 The table below shows the outstanding balance of loans classified as troubled debt restructurings at December 31, 2014, in addition to the period end balances of 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) Commercial: Business Real estate – construction and land Real estate – business Personal Banking: Real estate – personal Consumer Revolving home equity Consumer credit card Total restructured loans Balance 90 days past due at any time during previous 12 months December 31, 2014 $ 18,321 $ 12,249 12,634 6,000 4,271 529 10,441 $ 64,445 $ 7,464 3,285 22 84 47 40 890 11,832 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 consumer credit card loans were estimated to decrease interest income by approximately $1.1 million on an annual, pre-tax basis, compared to amounts contractually owed. The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors. If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing, troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin. The Company had commitments of $6.9 million at December 31, 2014 to lend additional funds to borrowers with restructured loans. The Company’s holdings of foreclosed real estate totaled $5.5 million and $6.6 million at December 31, 2014 and 2013, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.4 million and $2.8 million at December 31, 2014 and 2013, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated selling costs. 74 4. Investment Securities Investment securities, at fair value, consisted of the following at December 31, 2014 and 2013. (In thousands) Available for sale: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Equity securities Total available for sale Trading Non-marketable Total investment securities 2014 2013 $ 501,407 $ 963,127 1,813,201 2,593,708 382,744 3,091,993 139,161 38,219 9,523,560 15,357 106,875 505,696 741,766 1,619,171 2,772,338 246,983 2,844,071 141,757 43,898 8,915,680 19,993 107,324 $ 9,645,792 $ 9,042,997 Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for borrowing and regulatory purposes, which totaled $46.6 million and $46.5 million at December 31, 2014 and December 31, 2013, respectively. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost. Non- marketable securities also include private equity investments, which amounted to $60.2 million and $60.7 million at December 31, 2014 and December 31, 2013, respectively. In the absence of readily ascertainable market values, these securities are carried at estimated fair value. A summary of the available for sale investment securities by maturity groupings as of December 31, 2014 is shown in the following table. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security at December 31, 2014. Yields on tax exempt securities have not been adjusted for tax exempt status. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities which have no guarantee, but are collateralized by residential mortgages. Also included are certain other asset-backed securities, primarily collateralized by credit cards, automobiles and commercial loans. The Company does not have exposure to subprime-originated mortgage-backed or collateralized debt obligation instruments, and does not hold any trust preferred securities. 75 (Dollars in thousands) U.S. government and federal agency obligations: Within 1 year After 1 but within 5 years After 5 but within 10 years After 10 years Total U.S. government and federal agency obligations Government-sponsored enterprise obligations: Within 1 year After 1 but within 5 years After 5 but within 10 years After 10 years Total government-sponsored enterprise obligations State and municipal obligations: Within 1 year After 1 but within 5 years After 5 but within 10 years After 10 years Total state and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities: Within 1 year After 1 but within 5 years After 5 but within 10 years Total other debt securities Equity securities Amortized Cost Fair Value Weighted Average Yield 1.56*% 1.57* .64* .01* 1.14* 1.82 1.54 2.03 2.22 1.82 2.87 2.47 2.23 1.61 2.35 2.69 3.05 .87 1.77 $ 104,791 $ 198,166 141,179 53,200 497,336 53,022 425,884 423,873 65,795 968,574 178,463 688,284 808,478 113,990 104,782 204,838 142,575 49,212 501,407 53,567 426,591 417,331 65,638 963,127 180,247 708,764 813,479 110,711 1,789,215 1,813,201 2,523,377 2,593,708 372,911 3,090,174 5,986,462 382,744 3,091,993 6,068,445 11,248 50,091 79,445 140,784 3,931 11,249 50,344 77,568 139,161 38,219 Total available for sale investment securities $ 9,386,302 $ 9,523,560 * Rate does not reflect inflation adjustment on inflation-protected securities Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $501.3 million, at fair value, at December 31, 2014. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal. Included in state and municipal obligations are $95.1 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. Equity securities are primarily comprised of investments in common stock held by the Parent, which totaled $37.4 million, at fair value, at December 31, 2014. 76 For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type. (In thousands) December 31, 2014 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government and federal agency obligations $ 497,336 $ 9,095 $ (5,024) $ Government-sponsored enterprise obligations State and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities Equity securities Total December 31, 2013 U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities Equity securities Total 968,574 1,789,215 2,523,377 372,911 3,090,174 5,986,462 140,784 3,931 2,593 32,340 75,923 11,061 6,922 93,906 420 34,288 (8,040) (8,354) (5,592) (1,228) (5,103) (11,923) (2,043) — 501,407 963,127 1,813,201 2,593,708 382,744 3,091,993 6,068,445 139,161 38,219 $ $ 9,386,302 $ 172,642 $ (35,384) $ 9,523,560 498,226 $ 20,614 $ (13,144) $ 766,802 1,624,195 2,743,803 236,595 2,847,368 5,827,766 147,581 9,970 2,245 28,321 54,659 12,008 6,872 73,539 671 33,928 (27,281) (33,345) (26,124) (1,620) (10,169) (37,913) (6,495) — 505,696 741,766 1,619,171 2,772,338 246,983 2,844,071 5,863,392 141,757 43,898 $ 8,874,540 $ 159,318 $ (118,178) $ 8,915,680 The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At December 31, 2014, the fair value of securities on this watch list was $123.9 million compared to $188.8 million at December 31, 2013. As of December 31, 2014, the Company had recorded OTTI on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $54.6 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $13.7 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 included the following: Significant Inputs Prepayment CPR Projected cumulative default Credit support Loss severity 77 Range 2% - 25% 20% - 58% 0% - 18% 23% - 77% The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities. (In thousands) Cumulative OTTI credit losses at January 1 Credit losses on debt securities for which impairment was previously recognized Increase in expected cash flows that are recognized over remaining life of security Cumulative OTTI credit losses at December 31 2014 2013 2012 $ $ 12,499 $ 11,306 $ 1,365 (130) 1,284 (91) 9,931 1,490 (115) 13,734 $ 12,499 $ 11,306 Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period. (In thousands) December 31, 2014 Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. government and federal agency obligations $ 90,261 $ Government-sponsored enterprise obligations State and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities Total December 31, 2013 224,808 172,980 55,128 141,655 1,424,457 1,621,240 16,434 $ 2,125,723 U.S. government and federal agency obligations $ 96,172 818 922 646 429 609 2,009 3,047 55 $ 32,077 $ 4,206 $ 122,338 $ 224,779 215,702 381,617 43,659 159,098 584,374 80,203 7,118 7,708 5,163 619 3,094 8,876 1,988 449,587 388,682 436,745 185,314 1,583,555 2,205,614 96,637 $ $ 5,488 $ 1,137,135 $ 29,896 $ 3,262,858 243 $ 59,677 $ 12,901 $ 155,849 $ $ Government-sponsored enterprise obligations State and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities Total 487,317 478,818 717,778 53,454 1,088,556 1,859,788 90,028 18,155 15,520 26,124 918 9,072 36,114 5,604 93,654 178,150 9,126 17,825 580,971 656,968 — 22,289 58,398 80,687 9,034 — 702 1,097 1,799 891 717,778 75,743 1,146,954 1,940,475 99,062 $ 3,012,123 $ 75,636 $ 421,202 $ 42,542 $ 3,433,325 $ 118,178 5,024 8,040 8,354 5,592 1,228 5,103 11,923 2,043 35,384 13,144 27,281 33,345 26,124 1,620 10,169 37,913 6,495 The total available for sale portfolio consisted of approximately 1,900 individual securities at December 31, 2014. The portfolio included 363 securities, having an aggregate fair value of $3.3 billion, that were in a loss position at December 31, 2014, compared to 507 securities, with a fair value of $3.4 billion, at December 31, 2013. The total amount of unrealized loss on these securities decreased $82.8 million to $35.4 million. At December 31, 2014, the fair value of securities in an unrealized loss position for 12 months or longer totaled $1.1 billion, or 11.9% of the total portfolio value, and did not include any securities identified as other- than-temporarily impaired. The Company’s holdings of state and municipal obligations included gross unrealized losses of $8.4 million at December 31, 2014. Of these losses, $5.6 million related to auction rate securities and $2.7 million related to other state and municipal obligations. This portfolio, excluding auction rate securities, totaled $1.7 billion at fair value, or 18.0% of total available for sale securities. The Company has processes and procedures in place to monitor its state and municipal holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the following table. 78 At December 31, 2014 Texas Florida New York Ohio Washington General obligation Lease Housing Transportation Limited tax % of Portfolio Average Life (in years) Average Rating (Moody’s) 11.0% 9.3 7.3 6.0 5.7 35.2% 15.6 12.9 12.5 9.1 4.7 4.1 6.5 5.1 5.3 4.9 4.8 3.9 4.7 6.1 Aa2 Aa3 Aa2 Aa2 Aa2 Aa2 Aa2 Aa1 A1 Aa2 The credit ratings (Moody’s rating or equivalent) at December 31, 2014 in the state and municipal bond portfolio (excluding auction rate securities) are shown in the following table. The average credit quality of the portfolio is Aa2 as rated by Moody’s. Aaa Aa A Not rated % of Portfolio 9.3% 74.6 15.4 .7 100.0% The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings. (In thousands) Proceeds from sales of available for sale securities Proceeds from sales of non-marketable securities Total proceeds Available for sale: Gains realized on sales Losses realized on sales Gain realized on donation Other-than-temporary impairment recognized on debt securities Non-marketable: Gains realized on sales Losses realized on sales Fair value adjustments, net 2014 2013 2012 $ $ $ 30,998 $ 33,444 64,442 $ — $ (5,197) 1,570 (1,365) 1,629 (134) 17,621 7,076 $ 9,223 16,299 $ 126 $ — 1,375 (1,284) 1,808 (2,979) (3,471) 5,231 11,644 16,875 358 — — (1,490) 1,655 (200) 4,505 4,828 Investment securities gains (losses), net $ 14,124 $ (4,425) $ Investment securities with a fair value of $4.7 billion and $3.9 billion were pledged at December 31, 2014 and 2013, respectively, to secure public deposits, securities sold under repurchase agreements, trust funds, and borrowings at the Federal Reserve Bank. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $467.1 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeds 10% of stockholders’ equity. 79 5. Land, Buildings and Equipment Land, buildings and equipment consist of the following at December 31, 2014 and 2013: (In thousands) Land Buildings and improvements Equipment Total Less accumulated depreciation and amortization Net land, buildings and equipment 2014 2013 $ 106,599 $ 535,039 244,239 885,877 528,006 $ 357,871 $ 106,005 529,842 227,467 863,314 513,660 349,654 Depreciation expense of $29.8 million, $30.7 million and $32.2 million for 2014, 2013 and 2012, respectively, was included in occupancy expense and equipment expense in the consolidated income statements. Repairs and maintenance expense of $16.5 million, $16.8 million and $17.3 million for 2014, 2013 and 2012, respectively, was included in occupancy expense and equipment expense. There has been no interest expense capitalized on construction projects in the past three years. 6. Goodwill and Other Intangible Assets The following table presents information about the Company's intangible assets which have estimable useful lives. (In thousands) Amortizable intangible assets: Core deposit premium Mortgage servicing rights Total December 31, 2014 December 31, 2013 Gross Carrying Amount Accumulated Amortization Valuation Allowance Net Amount Gross Carrying Amount Accumulated Amortization Valuation Allowance Net Amount $ 31,270 3,693 $ 34,963 $ $ (24,698) (2,718) (27,416) $ $ — $ 6,572 878 (97) $ 7,450 (97) $ 31,270 3,430 $ 34,700 $ $ (22,781) (2,567) (25,348) $ $ — $ 8,489 779 (84) $ 9,268 (84) The carrying amount of goodwill and its allocation among segments at December 31, 2014 and 2013 is shown in the table below. As a result of ongoing assessments, no impairment of goodwill was recorded in 2014, 2013 or 2012. Further, the annual assessment of qualitative factors on January 1, 2015 revealed no likelihood of impairment as of that date. (In thousands) Consumer segment Commercial segment Wealth segment Total goodwill December 31, 2014 December 31, 2013 $ $ 70,721 $ 67,454 746 138,921 $ 70,721 67,454 746 138,921 Changes in the net carrying amount of goodwill and other net intangible assets for the years ended December 31, 2014 and 2013 are shown in the following table. (In thousands) Balance at December 31, 2012 Summit acquisition Originations Amortization Impairment reversal Balance at December 31, 2013 Originations Amortization Impairment Goodwill Core Deposit Premium Mortgage Servicing Rights $ 125,585 $ 4,828 $ 13,336 — — — 138,921 — — — 5,550 — (1,889) — 8,489 — (1,917) — 472 — 298 (300) 309 779 263 (151) (13) 878 Balance at December 31, 2014 $ 138,921 $ 6,572 $ 80 Mortgage servicing rights (MSRs) are initially recorded at fair value and subsequently amortized over the period of estimated servicing income. They are periodically reviewed for impairment and if impairment is indicated, recorded at fair value. At December 31, 2014, temporary impairment of $97 thousand had been recognized. Temporary impairment, including impairment recovery, is effected through a change in a valuation allowance. The fair value of the MSRs is based on the present value of expected future cash flows, as further discussed in Note 16 on Fair Value Measurements. Aggregate amortization expense on intangible assets for the years ended December 31, 2014, 2013 and 2012 was $2.1 million, $2.2 million and $2.5 million, respectively. The following table shows the estimated future amortization expense based on existing asset balances and the interest rate environment as of December 31, 2014. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions. (In thousands) 2015 2016 2017 2018 2019 $ 1,986 1,597 1,235 912 680 7. Deposits At December 31, 2014, the scheduled maturities of total time open and certificates of deposit were as follows: (In thousands) Due in 2015 Due in 2016 Due in 2017 Due in 2018 Due in 2019 Thereafter Total $ 1,638,332 301,354 80,693 56,728 42,596 2,515 $ 2,122,218 The following table shows a detailed breakdown of the maturities of time open and certificates of deposit, by size category, at December 31, 2014. (In thousands) Due in 3 months or less Due in over 3 through 6 months Due in over 6 through 12 months Due in over 12 months Total Certificates of Deposit under $100,000 Other Time Deposits under $100,000 Certificates of Deposit over $100,000 Other Time Deposits over $100,000 145,232 $ 30,779 $ 363,581 $ 12,646 $ 155,693 260,582 135,960 35,553 49,132 65,502 272,824 238,723 268,887 28,172 45,415 13,537 Total 552,238 492,242 593,852 483,886 697,467 $ 180,966 $ 1,144,015 $ 99,770 $ 2,122,218 $ $ Regulations of the Federal Reserve System require cash balances to be maintained at the Federal Reserve Bank, based on certain deposit levels. The minimum reserve requirement for the Bank at December 31, 2014 totaled $59.8 million. 81 8. Borrowings The following table sets forth selected information for short-term borrowings (borrowings with an original maturity of less than one year). (Dollars in thousands) Federal funds purchased and repurchase agreements: 2014 2013 2012 Year End Weighted Rate Average Weighted Rate Average Balance Outstanding Maximum Outstanding at any Month End Balance at December 31 .1% .1 .1 .1% $ 1,119,578 $ 1,862,518 $ 1,862,518 .1 .1 914,554 785,978 1,479,849 1,149,156 996,558 683,550 Short-term borrowings consist primarily of federal funds purchased and securities sold under agreements to repurchase (repurchase agreements), which generally have one day maturities. At December 31, 2014, nearly all of these borrowings were short-term repurchase agreements comprised of non-insured customer funds, which were secured by a portion of the Company’s investment portfolio. The Bank is a member of the Des Moines FHLB and has access to term financing from the FHLB. These borrowings are secured under a blanket collateral agreement including primarily residential mortgages as well as all unencumbered assets and stock of the borrowing bank. At December 31, 2014, total outstanding advances were $104.1 million with a weighted interest rate of 3.5% and a remaining maturity of three years. All of the outstanding advances have fixed interest rates and contain prepayment penalties. The FHLB has also issued letters of credit, totaling $233.1 million at December 31, 2014, to secure the Company’s obligations to certain depositors of public funds. The Company's borrowings of long-term structured repurchase agreements matured in total during 2014, averaging $138.1 million during the year. 9. Income Taxes The components of income tax expense from operations for the years ended December 31, 2014, 2013 and 2012 were as follows: (In thousands) Year ended December 31, 2014: U.S. federal State and local Total Year ended December 31, 2013: U.S. federal State and local Total Year ended December 31, 2012: U.S. federal State and local Total Current Deferred Total $ $ $ $ $ $ 109,183 $ 11,573 120,756 $ 102,191 $ 10,838 113,029 $ 100,210 $ 10,725 110,935 $ (679) $ 139 (540) $ 7,984 $ 1,217 9,201 $ 15,125 $ 1,109 16,234 $ 108,504 11,712 120,216 110,175 12,055 122,230 115,335 11,834 127,169 The components of income tax (benefit) expense recorded directly to stockholders’ equity for the years ended December 31, 2014, 2013 and 2012 were as follows: (In thousands) Unrealized gain (loss) on securities available for sale Accumulated pension (benefit) loss Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes Income tax (benefit) expense allocated to stockholders’ equity 2014 2013 2012 $ $ 36,525 $ (4,433) (1,850) 30,242 $ (84,582) $ 6,981 (1,003) (78,604) $ 19,425 (3,608) (2,094) 13,723 82 Significant components of the Company’s deferred tax assets and liabilities at December 31, 2014 and 2013 were as follows: (In thousands) Deferred tax assets: Loans, principally due to allowance for loan losses Accrued expenses Equity-based compensation Deferred compensation Pension Other Total deferred tax assets Deferred tax liabilities: Equipment lease financing Unrealized gain on securities available for sale Land, buildings and equipment Intangibles Accretion on investment securities Other Total deferred tax liabilities Net deferred tax assets (liabilities) 2014 2013 $ $ 68,014 $ 14,590 12,689 7,397 5,885 16,173 124,748 67,531 52,158 14,520 7,532 5,919 3,181 150,841 (26,093) $ 70,154 15,740 12,407 6,980 728 14,740 120,749 64,320 15,633 14,757 7,282 5,972 7,325 115,289 5,460 Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the total deferred tax assets. A reconciliation between the expected federal income tax expense using the federal statutory tax rate of 35% and the Company’s actual income tax expense for 2014, 2013 and 2012 is provided in the table below. The effective tax rate is calculated by dividing income taxes by income before income taxes less the non-controlling interest expense. (In thousands) Computed “expected” tax expense Increase (decrease) in income taxes resulting from: 2014 2013 2012 $ 133,690 $ 134,117 $ 138,774 Tax-exempt interest, net of cost to carry State and local income taxes, net of federal tax benefit Tax deductible dividends on allocated shares held by the Company’s ESOP Other Total income tax expense (17,806) 7,613 (1,116) (2,165) 120,216 $ (16,612) 7,836 (1,116) (1,995) 122,230 $ (15,516) 7,692 (2,991) (790) 127,169 $ It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. The Company recorded tax benefits related to interest and penalties of $6 thousand, $5 thousand and $81 thousand in 2014, 2013 and 2012, respectively. At December 31, 2014 and 2013, liabilities for interest and penalties were $178 thousand and $172 thousand, respectively. As of December 31, 2014 and 2013, the gross amount of unrecognized tax benefits was $1.3 million and $1.4 million, respectively, and the total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $852 thousand and $1.0 million, respectively. The Company and its subsidiaries are subject to income tax by federal, state and local government taxing authorities. Tax years 2011 through 2014 remain open to examination for U.S. federal income tax as well as income tax in major state taxing jurisdictions. 83 The activity in the accrued liability for unrecognized tax benefits for the years ended December 31, 2014 and 2013 was as follows: (In thousands) Unrecognized tax benefits at beginning of year Gross increases – tax positions in prior period Gross decreases – tax positions in prior period Gross increases – current-period tax positions Lapse of statute of limitations Unrecognized tax benefits at end of year 10. Employee Benefit Plans 2014 2013 $ $ 1,428 $ 20 (5) 299 (430) 1,312 $ 1,581 70 (2) 282 (503) 1,428 Employee benefits charged to operating expenses are summarized in the table below. Substantially all of the Company’s employees are covered by a defined contribution (401(k)) plan, under which the Company makes matching contributions. (In thousands) Payroll taxes Medical plans 401(k) plan Pension plans Other Total employee benefits 2014 2013 2012 21,417 $ 22,855 12,057 2,555 2,585 61,469 $ 21,118 $ 18,490 12,465 1,627 2,988 56,688 $ 20,621 19,861 12,613 2,441 2,688 58,224 $ $ A portion of the Company’s employees are covered by a noncontributory defined benefit pension plan, however, participation in the pension plan is not available to employees hired after June 30, 2003. All participants are fully vested in their benefit payable upon normal retirement date, which is based on years of participation and compensation. Certain key executives also participate in a supplemental executive retirement plan (the CERP) that the Company funds only as retirement benefits are disbursed. The CERP carries no segregated assets. Since January 2011, all benefits accrued under the pension plan have been frozen. However, the accounts continue to accrue interest at a stated annual rate. The CERP continues to provide credits based on hypothetical contributions in excess of those permitted under the 401(k) plan. In the tables presented below, the pension plan and the CERP are presented on a combined basis. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to satisfy the statutory minimum required contribution as defined by the Pension Protection Act, which is intended to provide for current service accruals and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. No contributions to the defined benefit plan were made in 2014 or 2013, and the minimum required contribution for 2015 is expected to be zero. The Company does not expect to make any further contributions in 2015 other than the necessary funding contributions to the CERP. Contributions to the CERP were $69 thousand, $69 thousand and $65 thousand during 2014, 2013 and 2012, respectively. As noted in the table below, pension cost in 2014 included a settlement loss of $1.7 million, resulting from a cash-out opportunity offered during the year to certain vested inactive participants with deferred benefits. The following items are components of the net pension cost for the years ended December 31, 2014, 2013 and 2012. (In thousands) Service cost-benefits earned during the year Interest cost on projected benefit obligation Expected return on plan assets Amortization of unrecognized net loss Settlement loss recognized Net periodic pension cost 2014 2013 2012 $ $ 430 $ 509 $ 5,069 (6,285) 1,654 1,687 4,509 (6,476) 3,085 — 2,555 $ 1,627 $ 504 5,162 (6,178) 2,953 — 2,441 84 The following table sets forth the pension plans’ funded status, using valuation dates of December 31, 2014 and 2013. (In thousands) Change in projected benefit obligation Projected benefit obligation at prior valuation date Service cost Interest cost Plan settlements Benefits paid Actuarial (gain) loss Projected benefit obligation at valuation date Change in plan assets Fair value of plan assets at prior valuation date Actual return on plan assets Employer contributions Plan settlements Benefits paid Fair value of plan assets at valuation date 2014 2013 $ 113,673 $ 125,147 430 5,069 (7,163) (5,193) 18,631 125,447 107,172 9,909 69 (7,163) (5,193) 104,794 509 4,509 — (5,904) (10,588) 113,673 101,834 11,173 69 — (5,904) 107,172 (6,501) Funded status and net amount recognized at valuation date $ (20,653) $ The accumulated benefit obligation, which represents the liability of a plan using only benefits as of the measurement date, was $125.4 million and $113.7 million for the combined plans on December 31, 2014 and 2013, respectively. Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at December 31, 2014 and 2013 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis. (In thousands) Prior service credit (cost) Accumulated loss Accumulated other comprehensive loss Cumulative employer contributions in excess of net periodic benefit cost Net amount recognized as an accrued benefit liability on the December 31 balance sheet Net gain (loss) arising during period Amortization or settlement recognition of net loss Total recognized in other comprehensive income Total income (expense) recognized in net periodic pension cost and other comprehensive income 2014 2013 $ $ $ $ $ — $ (37,145) (37,145) 16,492 (20,653) $ (15,007) $ 3,341 (11,666) $ (14,221) $ — (25,479) (25,479) 18,978 (6,501) 15,285 3,085 18,370 16,743 The estimated net loss to be amortized from accumulated other comprehensive income into net periodic pension cost in 2015 is $2.6 million. The following assumptions, on a weighted average basis, were used in accounting for the plans. Determination of benefit obligation at year end: Discount rate Assumed credit on cash balance accounts Determination of net periodic benefit cost for year ended: Discount rate Long-term rate of return on assets Assumed credit on cash balance accounts 2014 2013 2012 3.95% 5.00% 4.55% 6.00% 5.00% 4.55% 5.00% 3.65% 6.50% 5.00% 3.65% 5.00% 4.80% 6.50% 5.00% 85 The following table shows the fair values of the Company’s pension plan assets by asset category at December 31, 2014 and 2013. Information about the valuation techniques and inputs used to measure fair value are provided in Note 16 on Fair Value Measurements. (In thousands) December 31, 2014 Assets: U.S. government obligations Government-sponsored enterprise obligations (a) State and municipal obligations Agency mortgage-backed securities (b) Non-agency mortgage-backed securities Asset-backed securities Corporate bonds (c) Equity securities and mutual funds: (d) U.S. large-cap U.S. mid-cap U.S. small-cap International developed markets Emerging markets Money market funds Total December 31, 2013 Assets: U.S. government obligations Government-sponsored enterprise obligations (a) State and municipal obligations Agency mortgage-backed securities (b) Non-agency mortgage-backed securities Asset-backed securities Corporate bonds (c) Equity securities and mutual funds: (d) U.S. large-cap U.S. mid-cap U.S. small-cap International developed markets Emerging markets Money market funds Total Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value $ 1,290 $ 1,290 $ — $ 1,259 10,638 1,762 5,635 5,776 34,264 20,296 13,362 3,590 3,377 473 — — — — — — 20,296 13,362 3,590 3,377 473 1,259 10,638 1,762 5,635 5,776 34,264 — — — — — 3,072 104,794 $ 3,072 45,460 $ — 59,334 $ 901 $ 901 $ — $ $ $ 2,512 7,270 1,744 6,156 5,985 36,345 23,677 13,864 4,331 857 659 — — — — — — 23,677 13,864 4,331 857 659 2,512 7,270 1,744 6,156 5,985 36,345 — — — — — 2,871 107,172 $ $ 2,871 47,160 $ — 60,012 $ — — — — — — — — — — — — — — — — — — — — — — — — — — — — (a) This category represents bonds (excluding mortgage-backed securities) issued by agencies such as the Federal Home Loan Bank, the Federal Home Loan Mortgage Corp and the Federal National Mortgage Association. (b) This category represents mortgage-backed securities issued by the agencies mentioned in (a). (c) This category represents investment grade bonds issued in the U.S., primarily by domestic issuers, representing diverse industries. (d) This category represents investments in individual common stocks and equity funds. These holdings are diversified, largely across the financial services, consumer goods, healthcare, technology, and energy sectors. 86 The investment policy of the pension plan is designed for growth in value, within limits designed to safeguard against significant losses within the portfolio. The policy sets guidelines, which may change from time to time, regarding the types and percentages of investments held. Currently, the policy includes guidelines such as holding bonds rated investment grade or better and prohibiting investment in Company stock. The plan does not utilize derivatives. Management believes there are no significant concentrations of risk within the plan asset portfolio at December 31, 2014. Under the current policy, the long-term investment target mix for the plan is 35% equity securities and 65% fixed income securities. The Company regularly reviews its policies on investment mix and may make changes depending on economic conditions and perceived investment risk. The discount rate is based on matching the Company's estimated plan cash flows to a yield curve derived from a portfolio of corporate bonds rated AA by either Moody's or Standard and Poor's. The assumed overall expected long-term rate of return on pension plan assets used in calculating 2014 pension plan expense was 6.0%. Determination of the plan’s expected rate of return is based upon historical and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. The 10-year annualized return for the Company’s pension plan was 7.2%. During 2014, the plan’s rate of return was 9.1%, compared to 11.1% in 2013. Returns for any plan year may be affected by changes in the stock market and interest rates. The Company expects to incur pension expense of $1.9 million in 2015, compared to $2.6 million in 2014. The decline in expense expected in 2015 as compared to 2014 is due to the $1.7 million settlement expense in 2014, which is not expected to reoccur in 2015, partially offset by increases in expense due to a decrease in the discount rate and the effect of the new mortality assumptions mentioned below. The Company utilizes published mortality tables to incorporate mortality assumptions into the measurement of the pension benefit obligation. During 2014, the Society of Actuaries published new mortality tables, which incorporate a greater longevity for people living in the United States. The Company utilized the updated mortality tables in measuring the pension benefit obligation as of December 31, 2014, which increased the benefit obligation by $11.4 million. The following future benefit payments are expected to be paid: (In thousands) 2015 2016 2017 2018 2019 2020 - 2024 $ 6,263 6,614 6,877 7,115 7,263 38,265 11. Stock-Based Compensation and Directors Stock Purchase Plan* The Company’s stock-based compensation is provided under a stockholder-approved plan which allows for issuance of various types of awards, including stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards and stock-based awards. At December 31, 2014, 3,578,149 shares remained available for issuance under the plan. The stock- based compensation expense that was charged against income was $8.8 million, $6.4 million and $5.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. The total income tax benefit recognized in the income statement for share- based compensation arrangements was $3.3 million, $2.4 million and $1.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. 87 During 2014 and 2013, stock-based compensation was issued in the form of nonvested stock awards and stock appreciation rights. Nonvested stock is awarded to key employees, by action of the Company's Compensation and Human Resources Committee and Board of Directors. These awards generally vest after 4 to 7 years of continued employment, but vesting terms may vary according to the specifics of the individual grant agreement. There are 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 December 31, 2014 and changes during the year then ended is presented below. Nonvested at January 1, 2014 Granted Vested Forfeited Nonvested at December 31, 2014 Shares 1,200,750 195,177 (107,299) (28,689) 1,259,939 Weighted Average Grant Date Fair Value 32.64 42.48 28.51 36.85 34.41 The total fair value (at vest date) of shares vested during 2014, 2013 and 2012 was $4.5 million, $2.1 million and $2.1 million, respectively. Stock appreciation rights (SARs) and stock options are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs, which the Company granted in 2006 through 2009, and again in 2013 and 2014, vest ratably over four years of continuous service and have 10-year contractual terms. All SARs must be settled in stock under provisions of the plan. Non-qualified stock options, which were granted in 2005 and previous years, vested ratably over three years of continuous service, and also have 10-year contractual terms. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of options and SARs on date of grant. The Black-Scholes model is a closed-end model that uses various assumptions as shown in the following table. Expected volatility is based on historical volatility of the Company’s stock. The Company uses historical exercise behavior and other factors to estimate the expected term of the options and SARs, which represents the period of time that the options and SARs granted are expected to be outstanding. The risk-free rate for the expected term is based on the U.S. Treasury zero coupon spot rates in effect at the time of grant. The per share average fair value and the model assumptions for SARs granted in 2014 are 2013 shown in the table below. Weighted per share average fair value at grant date Assumptions: Dividend yield Volatility Risk-free interest rate Expected term 2014 $8.82 2013 $6.49 2.0% 22.1% 2.3% 2.3% 23.2% 1.2% 7.1 years 7.3 years A summary of stock option activity during 2014 is presented below. (Dollars in thousands, except per share data) Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2014 474,894 29.10 Granted Forfeited Expired Exercised — — (1,462) (404,757) Outstanding, exercisable and vested at December 31, 2014 68,675 $ — — 29.22 29.07 29.27 0.2 years $ 977 88 A summary of SAR activity during 2014 is presented below. (Dollars in thousands, except per share data) Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2014 Granted Forfeited Expired Exercised Outstanding at December 31, 2014 Exercisable at December 31, 2014 Vested and expected to vest at December 31, 2014 1,845,863 $ 181,556 (2,478) (7,084) (237,279) 1,780,578 $ 1,425,874 $ 1,763,892 $ 33.03 42.40 39.37 32.44 33.12 33.96 32.72 33.92 3.7 years $ 16,966 2.5 years $ 15,356 3.7 years $ 16,885 Additional information about stock options and SARs exercised is presented below. (In thousands) Intrinsic value of options and SARs exercised Cash received from options and SARs exercised Tax benefit realized from options and SARs exercised 2014 2013 2012 $ $ $ 8,068 $ 8,652 $ 1,153 $ 6,580 9,426 335 $ $ $ 7,769 14,820 1,269 As of December 31, 2014, there was $20.1 million of unrecognized compensation cost (net of estimated forfeitures) related to unvested SARs and stock awards. That cost is expected to be recognized over a weighted average period of 2.9 years. The Company has a directors stock purchase plan whereby outside directors of the Company and its subsidiaries may elect to use their directors’ fees to purchase Company stock at market value each month end. Remaining shares available for issuance under this plan were 124,086 at December 31, 2014. In 2014, 20,117 shares were purchased at an average price of $42.34 and in 2013, 21,233 shares were purchased at an average price of $38.46. * All share and per share amounts in this note have been restated for the 5% stock dividend distributed in 2014. 89 12. Accumulated Other Comprehensive Income The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale securities. Unrealized gains and losses on debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately below. The other component is amortization from other comprehensive income of losses associated with pension benefits, which occurs as the amortization is included in current net periodic benefit cost. Unrealized Gains (Losses) on Securities (1) OTTI Other Pension Loss (2) Total Accumulated Other Comprehensive Income $ 4,203 $ 21,303 $ (15,775) $ (In thousands) Balance January 1, 2014 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Current period other comprehensive income (loss), before tax Income tax (expense) benefit Current period other comprehensive income (loss), net of tax (2,030) 1,365 (665) 253 (412) 93,158 3,627 96,785 (36,778) 60,007 (15,007) 3,341 (11,666) 4,433 (7,233) Balance December 31, 2014 Balance January 1, 2013 $ $ 3,791 $ 81,310 $ (23,008) $ 3,245 $ 160,263 $ (27,164) $ Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Current period other comprehensive income (loss), before tax Income tax (expense) benefit Current period other comprehensive income (loss), net of tax 261 1,284 1,545 (587) 958 (222,628) (1,501) (224,129) 85,169 (138,960) 15,285 3,085 18,370 (6,981) 11,389 Balance December 31, 2013 $ 4,203 $ 21,303 $ (15,775) $ 9,731 76,121 8,333 84,454 (32,092) 52,362 62,093 136,344 (207,082) 2,868 (204,214) 77,601 (126,613) 9,731 (1) The pre-tax amounts reclassified from accumulated other comprehensive income are included in "investment securities gains (losses), net" in the consolidated statements of income. (2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost as "amortization of unrecognized net loss" and "settlement loss recognized" (see Note 10), for inclusion in the consolidated statements of income. 13. Segments The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment includes the consumer portion of the retail branch network (loans, deposits and other personal banking services), indirect and other consumer financing, and consumer debit and credit bank cards. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as merchant and commercial bank card products. The Commercial segment also includes the Capital Markets Group, which sells fixed income securities and provides investment safekeeping and bond accounting services. The Wealth segment provides traditional trust and estate tax planning, advisory and discretionary investment management, and brokerage services, and includes the Private Banking product portfolio. The Company’s business line reporting system derives segment information from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies, which have been developed to reflect the underlying economics of the businesses. The policies address the methodologies applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided) by assets and liabilities based on their maturity, prepayment and/or repricing characteristics. Income and expense that directly relate to segment operations are recorded in the segment when incurred. Expenses that indirectly support the segments are allocated based on the most appropriate method available. The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, and cash) and funds provided (e.g., deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to each new source or use of funds with a maturity, based on current swap rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are valued using weighted average pools. The funds transfer pricing process attempts to remove interest rate risk from valuation, allowing management to compare profitability under various rate environments. 90 The following tables present selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between 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. Segment Income Statement Data (In thousands) Year ended December 31, 2014: Net interest income Provision for loan losses Non-interest income Investment securities gains, net Non-interest expense Income before income taxes Year ended December 31, 2013: Net interest income Provision for loan losses Non-interest income Investment securities losses, net Non-interest expense Income before income taxes Year ended December 31, 2012: Net interest income Provision for loan losses Non-interest income Investment securities gains, net Non-interest expense Income before income taxes Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals $ $ $ $ $ 270,081 $ (35,209) 113,245 — (267,931) 80,186 $ 268,221 $ (34,277) 112,819 — (270,209) 76,554 $ 274,844 $ (35,496) 114,003 — (266,740) $ 86,611 $ 287,244 $ 559 190,594 — (250,964) 227,433 $ 280,128 $ 3,772 186,446 — (235,396) 234,950 $ 290,968 $ (2,824) 179,824 — (226,935) 241,033 $ 40,128 $ 372 128,203 — (98,589) 70,114 $ 40,185 $ (688) 117,323 — (96,530) 60,290 $ 39,498 $ (695) 108,776 — (90,659) 56,920 $ 597,453 $ (34,278) 432,042 — (617,484) 377,733 $ 588,534 $ (31,193) 416,588 — (602,135) 371,794 $ 605,310 $ (39,015) 402,603 — (584,334) 384,564 $ 22,751 $ 4,747 3,936 14,124 (40,291) 5,267 $ 30,838 $ 10,840 1,798 (4,425) (27,498) 11,553 $ 34,596 $ 11,728 (2,973) 4,828 (34,135) 14,044 $ 620,204 (29,531) 435,978 14,124 (657,775) 383,000 619,372 (20,353) 418,386 (4,425) (629,633) 383,347 639,906 (27,287) 399,630 4,828 (618,469) 398,608 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. Segment Balance Sheet Data (In thousands) Average balances for 2014: Assets Loans, including held for sale Goodwill and other intangible assets Deposits Average balances for 2013: Assets Loans, including held for sale Goodwill and other intangible assets Deposits $ $ Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals 2,806,028 $ 2,718,634 76,786 9,537,686 6,966,520 $ 6,783,471 69,733 7,288,884 931,397 $ 922,120 746 1,911,391 10,703,945 $ 10,424,225 147,265 18,737,961 11,968,978 $ 836,008 — 57,715 22,672,923 11,260,233 147,265 18,795,676 2,674,136 $ 2,589,179 73,340 9,317,525 6,321,153 $ 6,124,902 61,925 6,809,265 855,721 $ 845,918 746 1,885,807 9,851,010 $ 9,559,999 136,011 18,012,597 12,022,974 $ 756,143 — 48,554 21,873,984 10,316,142 136,011 18,061,151 The above segment balances include only those items directly associated with the segment. The “Other/Elimination” column includes unallocated bank balances not associated with a segment (such as investment securities and federal funds sold), balances relating to certain other administrative and corporate functions, and eliminations between segment and non-segment balances. This column also includes the resulting effect of allocating such items as float, deposit reserve and capital for the purpose of computing the cost or credit for funds used/provided. 91 The Company’s reportable segments are strategic lines of business that offer different products and services. They are managed separately because each line services a specific customer need, requiring different performance measurement analyses and marketing strategies. The performance measurement of the 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. 14. Common and Preferred Stock On December 15, 2014, the Company distributed a 5% stock dividend on its $5 par common stock for the 21st consecutive year. All per common share data in this report has been restated to reflect the stock dividend. The Company applies the two-class method of computing income per share, as nonvested share-based awards that pay nonforfeitable common stock 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 following table. Nonvested share-based awards are further discussed in Note 11 on Stock-Based Compensation. Basic income per share is based on the weighted average number of common shares outstanding during the year. Diluted income per share gives effect to all dilutive potential common shares that were outstanding during the year. Presented below is a summary of the components used to calculate basic and diluted income per common share, which have been restated for all stock dividends. (In thousands, except per share data) Basic income per common share: Net income attributable to Commerce Bancshares, Inc. Less preferred stock dividends Net income available to common shareholders Less income allocated to nonvested restricted stock Net income allocated to common stock Weighted average common shares outstanding Basic income per common share Diluted income per common share: Net income available to common shareholders Less income allocated to nonvested restricted stock Net income allocated to common stock Weighted average common shares outstanding 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 Weighted average diluted common shares outstanding Diluted income per common share 2014 2013 2012 $ $ $ $ $ $ 261,754 $ 4,050 257,704 3,332 254,372 $ 96,984 2.62 $ 257,704 $ 3,323 254,381 $ 96,984 260,961 $ — 260,961 2,939 258,022 $ 99,315 2.60 $ 260,961 $ 2,931 258,030 $ 99,315 400 97,384 417 99,732 2.61 $ 2.59 $ 269,329 — 269,329 2,563 266,766 101,005 2.64 269,329 2,562 266,767 101,005 308 101,313 2.63 Nearly all unexercised stock options and stock appreciation rights were included in the computations of diluted income per share for the years ended December 31, 2014, 2013 and 2012. At the Annual Meeting of the Shareholders, held on April 16, 2014, a proposal to increase the shares of Company common stock authorized for issuance under its articles of incorporation was approved. This approval increased the authorized shares from 100,000,000 to 120,000,000. On June 19, 2014, the Company issued and sold 6,000,000 depositary shares, representing 6,000 shares of 6.00% Series B Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share, having an aggregate liquidation preference of $150.0 million (“Series B Preferred Stock”). Each depositary share has a liquidation preference of $25 per share. Dividends on the Series B Preferred Stock, if declared, accrue and are payable quarterly, in arrears, at a rate of 6.00%. The Series B Preferred Stock qualifies as Tier 1 capital for the purposes of the regulatory capital calculations. The net proceeds from the issuance and sale of the Series B Preferred Stock, after deducting underwriting discount and commissions, and the payment of expenses were approximately $144.8 million. The net proceeds from the offering were used to fund, in part, the accelerated share repurchase program discussed below. 92 In the event that the Company does not declare and pay dividends on the Series B Preferred Stock for the most recent dividend period, the ability of the Company to declare or pay dividends on, purchase, redeem or otherwise acquire shares of its common stock or any securities of the Company that rank junior to the Series B Preferred Stock is subject to certain restrictions under the terms of the Series B Preferred Stock. The Company paid dividends on the Preferred Stock totaling $4.1 million during 2014. Concurrent with the issuance and sale of the Series B Preferred Stock, on June 19, 2014, the Company entered into an accelerated share repurchase agreement (the “ASR agreement”) with Morgan Stanley & Co. LLC (“Morgan Stanley”). Under the ASR agreement, the Company paid $200.0 million to Morgan Stanley and received from Morgan Stanley 3,055,434 shares of the Company’s common stock, representing approximately 70% of the estimated total number of shares to be delivered by Morgan Stanley at the conclusion of the accelerated stock repurchase program. Upon final settlement, which is expected to occur on or before June 2015, the Company expects to receive the balance of the shares repurchased under the ASR agreement. The specific number of shares that the Company ultimately will repurchase will be based on the volume-weighted-average price per share of the Company’s common stock during the repurchase period. During the term of the ASR agreement, the Company may only make repurchases of Company common stock with the consent of Morgan Stanley. The ASR agreement is part of a stock repurchase program that was authorized by the Company’s board of directors in June 2014 to buy up to 5,000,000 shares of the Company's common stock. The Company accounted for the repurchase under the ASR agreement as two separate transactions: (i) as shares of common stock acquired in a treasury stock transaction recorded on the acquisition date; and (ii) as a forward contract indexed to the Company’s common stock that is classified as equity and reported as a component of surplus. At December 31, 2014, 1,898,007 shares of common stock remained available for purchase under the current board authorization. The table below shows activity in the outstanding shares of the Company’s common stock during the past three years. Shares in the table below are presented on an historical basis and have not been restated for the annual 5% stock dividends. (In thousands) Shares outstanding at January 1 Issuance of stock: Awards and sales under employee and director plans 5% stock dividend Summit acquisition Purchases of treasury stock under accelerated stock buyback program Other purchases of treasury stock Other Shares outstanding at December 31 15. Regulatory Capital Requirements Years Ended December 31 2014 2013 2012 95,881 91,414 88,952 549 4,586 — (3,055) (1,626) (8) 96,327 653 4,565 1,000 — (1,742) (9) 95,881 837 4,352 — — (2,716) (11) 91,414 The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that could have a direct material effect on the Company’s financial statements. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier I capital to total average assets (leverage ratio), and minimum ratios of Tier I and Total capital to risk-weighted assets (as defined). To meet minimum, adequately capitalized regulatory requirements, an institution must maintain a Tier I capital ratio of 4.00%, a Total capital ratio of 8.00% and a leverage ratio of 4.00%. The minimum required ratios for well- capitalized banks (under prompt corrective action provisions) are 6.00% for Tier I capital, 10.00% for Total capital and 5.00% for the leverage ratio. 93 The following tables show the capital amounts and ratios for the Company (on a consolidated basis) and the Bank, together with the minimum and well-capitalized capital requirements, at the last two year ends. (Dollars in thousands) December 31, 2014 Total Capital (to risk-weighted assets): Actual Minimum Capital Requirement Well-Capitalized Capital Requirement Amount Ratio Amount Ratio Amount Ratio Commerce Bancshares, Inc. (consolidated) $ 2,304,206 14.86% $ 1,240,732 8.00% N.A. N.A. Commerce Bank 2,026,666 13.16 1,232,378 8.00 $ 1,540,472 10.00% Tier I Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 2,131,169 13.74% $ 620,366 4.00% N.A. Commerce Bank 1,869,053 12.13 616,189 4.00 $ 924,283 Tier I Capital (to adjusted quarterly average assets): (Leverage Ratio) Commerce Bancshares, Inc. (consolidated) $ 2,131,169 9.36% $ 910,977 4.00% N.A. Commerce Bank December 31, 2013 Total Capital (to risk-weighted assets): 1,869,053 8.24 907,807 4.00 $ 1,134,759 N.A. 6.00% N.A. 5.00% Commerce Bancshares, Inc. (consolidated) $ 2,239,636 15.28% $ 1,172,843 8.00% N.A. N.A. Commerce Bank 1,971,850 13.55 1,164,469 8.00 $ 1,455,586 10.00% Tier I Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 2,061,761 14.06% $ 586,421 4.00% N.A. Commerce Bank 1,809,231 12.43 582,234 4.00 $ 873,351 Tier I Capital (to adjusted quarterly average assets): (Leverage Ratio) Commerce Bancshares, Inc. (consolidated) $ 2,061,761 9.43% $ 874,673 4.00% N.A. Commerce Bank 1,809,231 8.31 871,050 4.00 $ 1,088,812 N.A. 6.00% N.A. 5.00% At December 31, 2014, the Company met all capital requirements to which it is subject, and the Bank’s capital position exceeded the regulatory definition of well-capitalized. In 2013 and 2014, the U.S. bank regulators approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. Under the final rules, known as Basel III, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier I capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier I capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at .625% of risk-weighted assets and increases each subsequent year by an additional .625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The phase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule and should be fully phased-in by January 1, 2019. Management believes that the Company's capital levels will remain characterized as "well-capitalized" under the new rules. 16. Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale and trading securities, certain non-marketable securities relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as loans held for sale, mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting, or write-downs of individual assets. 94 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: • Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. • Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds). • Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider. When determining the fair value measurements for assets and liabilities required or permitted to be recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets, and the Company must use alternative valuation techniques to derive an estimated fair value measurement. 95 Instruments Measured at Fair Value on a Recurring Basis The table below presents the carrying values of assets and liabilities measured at fair value on a recurring basis at December 31, 2014 and 2013. There were no transfers among levels during these years. (In thousands) December 31, 2014 Assets: Available for sale securities: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Equity securities Trading securities Private equity investments Derivatives * Assets held in trust Total assets Liabilities: Derivatives * Total liabilities December 31, 2013 Assets: Available for sale securities: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Equity securities Trading securities Private equity investments Derivatives * Assets held in trust Total assets Liabilities: Derivatives * Total liabilities * The fair value of each class of derivative is shown in Note 18. Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value $ $ $ 501,407 $ 963,127 1,813,201 2,593,708 382,744 3,091,993 139,161 38,219 15,357 57,581 10,457 8,848 9,615,803 501,407 $ — $ — — — — — — 17,975 — — — 8,848 528,230 963,127 1,718,058 2,593,708 382,744 3,091,993 139,161 20,244 15,357 — 10,454 — 8,934,846 10,948 10,948 $ — — $ 10,722 10,722 $ 505,696 $ 741,766 1,619,171 2,772,338 246,983 2,844,071 141,757 43,898 19,993 56,612 12,980 7,511 9,012,776 505,696 $ — $ — — — — — — 24,646 — — — 7,511 537,853 741,766 1,491,447 2,772,338 246,983 2,844,071 141,757 19,252 19,993 — 12,976 — 8,290,583 13,329 13,329 $ $ — — $ 13,260 13,260 $ — — 95,143 — — — — — — 57,581 3 — 152,727 226 226 — — 127,724 — — — — — — 56,612 4 — 184,340 69 69 96 Valuation methods for instruments measured at fair value on a recurring basis Following is a description of the Company’s valuation methodologies used for instruments measured at fair value on a recurring basis: Available for sale investment securities For available for sale securities, changes in fair value, including that portion of other-than-temporary impairment unrelated to credit loss, are recorded in other comprehensive income. As mentioned in Note 4 on Investment Securities, the Company records the credit-related portion of other-than-temporary impairment in current earnings. This portfolio comprises the majority of the assets which the Company records at fair value. Most of the portfolio, which includes government-sponsored enterprise, mortgage- backed and asset-backed securities, are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2 in the fair value hierarchy. Where quoted prices are available in an active market, the measurements are classified as Level 1. Most of the Level 1 measurements apply to equity securities and U.S. Treasury obligations. The fair values of Level 1 and 2 securities (excluding equity securities) in the available for sale portfolio are prices provided by a third-party pricing service. The prices provided by the third-party pricing service are based on observable market inputs, as described in the sections below. On a quarterly basis, the Company compares a sample of these prices to other independent sources for the same and similar securities. Variances are analyzed, and, if appropriate, additional research is conducted with the third- party pricing service. Based on this research, the pricing service may affirm or revise its quoted price. No significant adjustments have been made to the prices provided by the pricing service. The pricing service also provides documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate. Valuation methods and inputs, by class of security: • U.S. government and federal agency obligations U.S. treasury bills, bonds and notes, including inflation-protected securities, are valued using live data from active market makers and inter-dealer brokers. Valuations for stripped coupon and principal issues are derived from yield curves generated from various dealer contacts and live data sources. • Government-sponsored enterprise obligations Government-sponsored enterprise obligations are evaluated using cash flow valuation models. Inputs used are live market data, cash settlements, Treasury market yields, and floating rate indices such as LIBOR, CMT, and Prime. • State and municipal obligations, excluding auction rate securities A yield curve is generated and applied to bond sectors, and individual bond valuations are extrapolated. Inputs used to generate the yield curve are bellwether issue levels, established trading spreads between similar issuers or credits, historical trading spreads over widely accepted market benchmarks, new issue scales, and verified bid information. Bid information is verified by corroborating the data against external sources such as broker-dealers, trustees/paying agents, issuers, or non-affiliated bondholders. • Mortgage and asset-backed securities Collateralized mortgage obligations and other asset-backed securities are valued at the tranche level. For each tranche valuation, the process generates predicted cash flows for the tranche, applies a market based (or benchmark) yield/spread for each tranche, and incorporates deal collateral performance and tranche level attributes to determine tranche-specific spreads to adjust the benchmark yield. Tranche cash flows are generated from new deal files and prepayment/default assumptions. Tranche spreads are based on tranche characteristics such as average life, type, volatility, ratings, underlying collateral and performance, and prevailing market conditions. The appropriate tranche spread is applied to the corresponding benchmark, and the resulting value is used to discount the cash flows to generate an evaluated price. Valuation of agency pass-through securities, typically issued under GNMA, FNMA, FHLMC, and SBA programs, are primarily derived from information from the To Be Announced (TBA) market. This market consists of generic mortgage pools which have not been received for settlement. Snapshots of the TBA market, using live data feeds distributed by multiple electronic platforms, are used in conjunction with other indices to compute a price based on discounted cash flow models. 97 • Other debt securities Other debt securities are valued using active markets and inter-dealer brokers as well as bullet spread scales and option adjusted spreads. The spreads and models use yield curves, terms and conditions of the bonds, and any special features (e.g., call or put options and redemption features). • Equity securities Equity securities are priced using the market prices for each security from the major stock exchanges or other electronic quotation systems. These are generally classified as Level 1 measurements. Stocks which trade infrequently are classified as Level 2. The available for sale portfolio includes certain auction rate securities. The auction process by which the auction rate securities are normally priced has not functioned in recent years, and due to the illiquidity in the market, the fair value of these securities cannot be based on observable market prices. The fair values of these securities are estimated using a discounted cash flows analysis which is discussed more fully in the Level 3 Inputs section of this note. Because many of the inputs significant to the measurement are not observable, these measurements are classified as Level 3 measurements. Trading securities The securities in the Company’s trading portfolio are priced by averaging several broker quotes for similar instruments and are classified as Level 2 measurements. Private equity investments These securities are held by the Company’s private equity subsidiaries and are included in non-marketable investment securities in the consolidated balance sheets. Due to the absence of quoted market prices, valuation of these nonpublic investments requires significant management judgment. These fair value measurements, which are discussed in the Level 3 Inputs section of this note, are classified as Level 3. Derivatives The Company’s derivative instruments include interest rate swaps, foreign exchange forward contracts, and certain credit risk guarantee agreements. When appropriate, the impact of credit standing as well as any potential credit enhancements, such as collateral, has been considered in the fair value measurement. • Valuations for interest rate swaps are derived from a proprietary model whose significant inputs are readily observable market parameters, primarily yield curves used to calculate current exposure. Counterparty credit risk is incorporated into the model and calculated by applying a net credit spread over LIBOR to the swap's total expected exposure over time. The net credit spread is comprised of spreads for both the Company and its counterparty, derived from probability of default and other loss estimate information obtained from a third party credit data provider or from the Company's Credit Department when not otherwise available. The credit risk component is not significant compared to the overall fair value of the swaps. The results of the model are constantly validated through comparison to active trading in the marketplace. These fair value measurements are classified as Level 2. • Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations from global market makers and are classified as Level 2. • The Company’s contracts related to credit risk guarantees are valued under a proprietary model which uses unobservable inputs and assumptions about the creditworthiness of the counterparty (generally a Bank customer). Customer credit spreads, which are based on probability of default and other loss estimates, are calculated internally by the Company's Credit Department, as mentioned above, and are based on the Company's internal risk rating for each customer. Because these inputs are significant to the measurements, they are classified as Level 3. Assets held in trust Assets held in an outside trust for the Company’s deferred compensation plan consist of investments in mutual funds. The fair value measurements are based on quoted prices in active markets and classified as Level 1. The Company has recorded an asset representing the total investment amount. The Company has also recorded a corresponding nonfinancial liability, representing the Company’s liability to the plan participants. 98 The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows: (In thousands) Year ended December 31, 2014: Balance at January 1, 2014 Total gains or losses (realized/unrealized): Included in earnings Included in other comprehensive income Investment securities called Discount accretion Purchases of private equity securities Sale / paydown of private equity securities Capitalized interest/dividends Purchase of risk participation agreement Sale of risk participation agreement Balance at December 31, 2014 Total gains or losses for the annual period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2014 Year ended December 31, 2013: Balance at January 1, 2013 Total gains or losses (realized/unrealized): Included in earnings Included in other comprehensive income Investment securities called Discount accretion Purchases of private equity securities Sale / paydown of private equity securities Capitalized interest/dividends Sale of risk participation agreement Balance at December 31, 2013 Total gains or losses for the annual period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2013 $ $ $ $ $ Fair Value Measurements Using Significant Unobservable Inputs (Level 3) State and Municipal Obligations Private Equity Investments Derivatives Total $ 127,724 $ 56,612 $ (65) $ 184,271 19,137 122 — 3,638 (38,225) 2,006 — — — — — — — — 14,152 (32,464) 144 — — 95,143 $ 57,581 $ — — — — — — 41 (321) (223) $ 19,259 3,638 (38,225) 2,006 14,152 (32,464) 144 41 (321) 152,501 — $ 718 $ 118 $ 836 126,414 $ 68,167 $ (187) $ 194,394 — 3,253 (2,150) 207 — — — — 127,724 $ (2,971) — — — 3,950 (12,865) 331 — 56,612 $ 234 — — — — — — (112) (65) $ (2,737) 3,253 (2,150) 207 3,950 (12,865) 331 (112) 184,271 — $ (5,297) $ 234 $ (5,063) Gains and losses on the Level 3 assets and liabilities in the table above are reported in the following income categories: (In thousands) Year ended December 31, 2014: Other Non- Interest Income Investment Securities Gains (Losses), Net Total Total gains or losses included in earnings Change in unrealized gains or losses relating to assets still held at December 31, 2014 Year ended December 31, 2013: Total gains or losses included in earnings Change in unrealized gains or losses relating to assets still held at December 31, 2013 $ $ $ $ 122 $ 19,137 $ 19,259 118 $ 718 $ 836 234 $ (2,971) $ (2,737) 234 $ (5,297) $ (5,063) 99 Level 3 Inputs As shown above, the Company's significant Level 3 measurements which employ unobservable inputs that are readily quantifiable pertain to auction rate securities (ARS) held by the Bank and investments in portfolio concerns held by the Company's private equity subsidiaries. ARS are included in state and municipal securities and totaled $95.1 million at December 31, 2014, while private equity investments, included in non-marketable securities, totaled $57.6 million. Information about these inputs is presented in the table and discussions below. Quantitative Information about Level 3 Fair Value Measurements Auction rate securities Valuation Technique Discounted cash flow Private equity investments Market comparable companies Unobservable Input Estimated market recovery period Estimated market rate EBITDA multiple Range 3 - 5 years 5.3% 5.5 2.1% - - 4.0 The fair values of ARS are estimated using a discounted cash flows analysis in which estimated cash flows are based on mandatory interest rates paid under failing auctions and projected over an estimated market recovery period. Under normal conditions, ARS traded in weekly auctions and were considered liquid investments. The Company's estimate of when these auctions might resume is highly judgmental and subject to variation depending on current and projected market conditions. Few auctions of these securities have been successful in recent years, and most secondary transactions have been privately arranged. Estimated cash flows during the period over which the Company expects to hold the securities are discounted at an estimated market rate. These securities are comprised of bonds issued by various states and municipalities for healthcare and student lending purposes, and market rates are derived for each type. Market rates are calculated at each valuation date using a LIBOR or Treasury based rate plus spreads representing adjustments for liquidity premium and nonperformance risk. The spreads are developed internally by employees in the Company's bond department. An increase in the holding period alone would result in a higher fair value measurement, while an increase in the estimated market rate (the discount rate) alone would result in a lower fair value measurement. The valuation of the ARS portfolio is reviewed on a quarterly basis by the Company's chief investment officers. The fair values of the Company's private equity investments are based on a determination of fair value of the investee company less preference payments assuming the sale of the investee company. Investee companies are normally non-public entities. The fair value of the investee company is determined by reference to the investee's total earnings before interest, depreciation/ amortization, and income taxes (EBITDA) multiplied by an EBITDA factor. EBITDA is normally determined based on a trailing prior period adjusted for specific factors including current economic outlook, investee management, and specific unique circumstances such as sales order information, major customer status, regulatory changes, etc. The EBITDA multiple is based on management's review of published trading multiples for recent private equity transactions and other judgments and is derived for each individual investee. The fair value of the Company's investment (which is usually a partial interest in the investee company) is then calculated based on its ownership percentage in the investee company. On a quarterly basis, these fair value analyses are reviewed by a valuation committee consisting of investment managers and senior Company management. 100 Instruments Measured at Fair Value on a Nonrecurring Basis For assets measured at fair value on a nonrecurring basis during 2014 and 2013, and still held as of December 31, 2014 and 2013, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation assumptions used to determine each adjustment, and the carrying value of the related individual assets or portfolios at December 31, 2014 and 2013. (In thousands) Balance at December 31, 2014 Fair Value Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Collateral dependent impaired loans $ 11,742 $ — $ — $ 11,742 $ Private equity investments Mortgage servicing rights Foreclosed assets Long-lived assets Balance at December 31, 2013 984 878 2,540 9,895 — — — — — — — — 984 878 2,540 9,895 (1,184) (1,516) (13) (706) (2,327) Collateral dependent impaired loans $ 23,654 $ — $ — $ 23,654 $ (8,406) Private equity investments Mortgage servicing rights Foreclosed assets 500 779 1,287 — — — — — — 500 779 1,287 (500) 309 (430) Valuation methods for instruments measured at fair value on a nonrecurring basis Following is a description of the Company’s valuation methodologies used for other financial and nonfinancial instruments measured at fair value on a nonrecurring basis. Collateral dependent impaired loans While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains a staff of qualified appraisers who also review third party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by credit administration. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. These measurements are classified as Level 3. Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company at December 31, 2014 and 2013 are shown in the table above. Private equity investments and restricted stock These assets are included in non-marketable investment securities in the consolidated balance sheets. They include certain investments in private equity concerns held by the Parent company which are carried at cost, reduced by other-than-temporary impairment. These investments are periodically evaluated for impairment based on their estimated fair value as determined by review of available information, most of which is provided as monthly or quarterly internal financial statements, annual audited financial statements, investee tax returns, and in certain situations, through research into and analysis of the assets and investments held by those private equity concerns. Restricted stock consists of stock issued by the Federal Reserve Bank and FHLB which is held by the bank subsidiary as required for regulatory purposes. Generally, there are restrictions on the sale and/or liquidation of these investments, and they are carried at cost, reduced by other-than-temporary impairment. Fair value measurements for these securities are classified as Level 3. 101 Mortgage servicing rights The Company initially measures its mortgage servicing rights at fair value and amortizes them over the period of estimated net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The fair value measurements are classified as Level 3. Foreclosed assets Foreclosed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, marine and recreational vehicles. Foreclosed assets are initially recorded as held for sale at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods. These measurements are classified as Level 3. Long-lived assets In accordance with ASC 360-10-35, investments in branch facilities and various office buildings are written down to estimated fair value, or estimated fair value less cost to sell if the property is held for sale. Fair value is estimated in a process which considers current local commercial real estate market conditions and the judgment of the sales agent and often involves obtaining third party appraisals from certified real estate appraisers. The carrying amounts of these real estate holdings are regularly monitored by real estate professionals employed by the Company. These fair value measurements are classified as Level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. The measurements in 2014 pertained mainly to a downtown Kansas City office building and several properties previously designated for future branch sites, which are held for sale. 17. Fair Value of Financial Instruments The carrying amounts and estimated fair values of financial instruments held by the Company, in addition to a discussion of the methods used and assumptions made in computing those estimates, are set forth below. Loans The fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820 “Fair Value Measurements and Disclosures”. Expected future cash flows for each individual loan are based on contractual features, and for loans with optionality, such as variable rates and prepayment features, are based on a multi-rate path process. Each loan's expected future cash flows are discounted using the LIBOR/swap curve plus an appropriate spread. For business, construction and business real estate loans, internally-developed pricing spreads based on loan type, term and credit score are utilized. The spread for personal real estate loans is generally based on newly originated loans with similar characteristics. For consumer loans, the spread is calculated at loan origination as part of the Bank's funds transfer pricing process, which is indicative of individual borrower creditworthiness. All consumer credit card loans are discounted at the same spread, depending on whether the rate is variable or fixed. Investment Securities and Derivative Instruments Detailed descriptions of the fair value measurements of these instruments are provided in Note 16 on Fair Value Measurements. Federal Funds Purchased and Sold, Interest Earning Deposits With Banks and Cash and Due From Banks The carrying amounts of federal funds purchased and sold, interest earning deposits with banks, and cash and due from banks approximates fair value, as these instruments are payable on demand or mature overnight. Securities Purchased/Sold under Agreements to Resell/Repurchase The fair values of these investments and borrowings are estimated by discounting contractual maturities using an estimate of the current market rate for similar instruments. 102 Deposits The fair value of deposits with no stated maturity is equal to the amount payable on demand. Such deposits include savings and interest and non-interest bearing demand deposits. These fair value estimates do not recognize any benefit the Company receives as a result of being able to administer, or control, the pricing of these accounts. Because they are payable on demand, they are classified as Level 1 in the fair value hierarchy. The fair value of time open and certificates of deposit is based on the discounted value of cash flows, taking early withdrawal optionality into account. Discount rates are based on the Company’s approximate cost of obtaining similar maturity funding in the market. Their fair value measurement is classified as Level 3. Other Borrowings The fair value of other borrowings, which consists mainly of long-term debt, is estimated by discounting contractual maturities using an estimate of the current market rate for similar instruments. The estimated fair values of the Company’s financial instruments are as follows: (In thousands) Financial Assets Loans: Business Real estate - construction and land Real estate - business Real estate - personal Consumer Revolving home equity Consumer credit card Overdrafts Investment securities: Available for sale Available for sale Available for sale Trading Non-marketable Federal funds sold Securities purchased under agreements to resell Interest earning deposits with banks Cash and due from banks Derivative instruments Derivative instruments Financial Liabilities Fair Value Hierarchy Level 2014 2013 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Level 3 $ 3,969,952 $ 3,982,531 $ 3,715,319 $ 3,723,263 Level 3 Level 3 Level 3 Level 3 Level 3 Level 3 Level 3 Level 1 Level 2 Level 3 Level 2 Level 3 Level 1 Level 3 Level 1 Level 1 Level 2 Level 3 403,507 407,905 406,197 410,022 2,288,215 2,315,378 2,313,550 2,345,124 1,883,092 1,933,456 1,787,626 1,802,364 1,705,134 1,701,037 1,512,716 1,519,830 430,873 782,370 6,095 433,508 794,929 6,095 420,589 796,228 4,611 424,811 811,550 4,611 519,382 519,382 530,342 530,342 8,909,035 8,909,035 8,257,614 8,257,614 95,143 15,357 106,875 32,485 95,143 15,357 106,875 32,485 127,724 19,993 107,324 43,845 127,724 19,993 107,324 43,845 1,050,000 1,048,866 1,150,000 1,149,625 600,744 467,488 10,454 3 600,744 467,488 10,454 3 707,249 518,420 12,976 4 707,249 518,420 12,976 4 Non-interest bearing deposits Level 1 $ 6,811,959 $ 6,811,959 $ 6,750,674 $ 6,750,674 Savings, interest checking and money market deposits Time open and certificates of deposit Federal funds purchased Securities sold under agreements to repurchase Other borrowings Derivative instruments Derivative instruments Level 1 Level 3 Level 1 Level 3 Level 3 Level 2 Level 3 10,541,601 10,541,601 10,108,236 10,108,236 2,122,218 2,121,114 2,188,438 2,190,610 3,840 3,840 24,795 24,795 1,858,678 1,858,731 1,321,763 1,321,633 104,058 10,722 226 111,102 10,722 226 107,310 13,260 69 116,843 13,260 69 103 Off-Balance Sheet Financial Instruments The fair value of letters of credit and commitments to extend credit is based on the fees currently charged to enter into similar agreements. The aggregate of these fees is not material. These instruments are also referenced in Note 20 on Commitments, Contingencies and Guarantees. Limitations 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. 18. Derivative Instruments The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. The largest group of notional amounts relate to interest rate swaps, which are discussed in more detail below. (In thousands) Interest rate swaps Interest rate caps Credit risk participation agreements Foreign exchange contracts Total notional amount December 31 2014 2013 647,709 53,587 75,943 19,791 797,030 $ $ 596,933 9,736 52,456 81,207 740,332 $ $ The Company’s foreign exchange activity involves the purchase and sale of forward foreign exchange contracts, which are commitments to purchase or deliver a specified amount of foreign currency at a specific future date. This activity enables customers involved in international business to hedge their exposure to foreign currency exchange rate fluctuations. The Company minimizes its related exposure arising from these customer transactions with offsetting contracts for the same currency and time frame. In addition, the Company uses foreign exchange contracts, to a limited extent, for trading purposes, including taking proprietary positions. Risk arises from changes in the currency exchange rate and from the potential for counterparty nonperformance. These risks are controlled by adherence to a foreign exchange trading policy which contains control limits on currency amounts, open positions, maturities and losses, and procedures for approvals, record-keeping, monitoring and reporting. Hedge accounting has not been applied to these foreign exchange activities. Credit risk participation agreements arise when the Company contracts, as a guarantor or beneficiary, with other financial institutions to share credit risk associated with certain interest rate swaps. The Company’s risks and responsibilities as guarantor are further discussed in Note 20 on Commitments, Contingencies and Guarantees. The Company’s interest rate risk management strategy includes the ability to modify the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Interest rate swaps are used on a limited basis as part of this strategy. The Company’s other derivative instruments are accounted for as free- standing derivatives, and changes in their fair value are recorded in current earnings. These instruments include interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by matching contracts purchased by the Company from other financial dealer institutions. Contracts with dealers that require central clearing are novated to a clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings. The notional amount of these free-standing swaps at December 31, 2014 was $641.7 million. Many of the Company’s interest rate swap arrangements with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions, or can require instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements. 104 The banking customer counterparties are engaged in a variety of businesses, including real estate, building materials, communications, consumer products, education, and manufacturing. At December 31, 2014, the largest loss exposures were in the groups related to real estate and building materials, retirement communities, and manufacturing. If the counterparties in these groups failed to perform, and if the underlying collateral proved to be of no value, the Company would incur losses of $3.7 million (real estate and building materials), $1.2 million (retirement communities), and $1.2 million (manufacturing), based on estimated amounts at December 31, 2014. The fair values of the Company’s derivative instruments are shown in the table below. Information about the valuation methods used to measure fair value is provided in Note 16 on Fair Value Measurements. Derivatives instruments with a positive fair value (asset derivatives) are reported in other assets in the consolidated balance sheets while derivative instruments with a negative fair value (liability derivatives) are reported in other liabilities in the consolidated balance sheets. Asset Derivatives December 31 Liability Derivatives December 31 2014 2013 2014 2013 Fair Value Fair Value — $ — $ — $ — $ (22) (22) $ $ $ (300) (300) (11,429) (1) (69) (1,530) (10,144) (62) (226) (494) (10,926) (10,948) $ $ (13,029) (13,329) 10,144 62 3 248 10,457 10,457 $ $ $ 11,428 1 4 1,547 12,980 12,980 $ $ $ (In thousands) Derivatives designated as hedging instruments: Interest rate swaps Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments: Interest rate swaps Interest rate caps Credit risk participation agreements Foreign exchange contracts Total derivatives not designated as hedging instruments Total derivatives $ $ $ $ $ The effects of derivative instruments on the consolidated statements of income are shown in the table below. Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on Derivative For the Years Ended December 31 2014 2013 2012 (In thousands) Derivatives and hedged instruments in fair value hedging relationships: Interest rate swaps and hedged loans Interest and fees on loans Total Derivatives not designated as hedging instruments: $ $ (1) (1) $ $ 14 14 $ $ $ 7 7 743 — 25 (161) (20) 11 598 Other non-interest income $ 1,674 $ 1,140 Other non-interest income Other non-interest income Other non-interest income Loan fees and sales Loan fees and sales 33 122 (263) — — — 234 81 — — $ 1,566 $ 1,455 $ 105 Interest rate swaps Interest rate caps Credit risk participation agreements Foreign exchange contracts Mortgage loan commitments Mortgage loan forward sale contracts Total 19. Balance Sheet Offsetting The following tables show the extent to which assets and liabilities relating to derivative instruments, securities purchased under agreements to resell (resell agreements), and securities sold under agreements to repurchase (repurchase agreements) have been offset in the consolidated balance sheets. They also provide information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which are generally marketable securities. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability (after netting is applied); thus amounts of excess collateral are not shown. Most of the assets and liabilities in the following tables were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default. The Company is party to master netting arrangements with most of its swap derivative counterparties; however, the Company does not offset derivative assets and liabilities under these arrangements on its consolidated balance sheet. Collateral, usually in the form of marketable securities, is exchanged between the Company and dealer bank counterparties, and is generally subject to thresholds and transfer minimums. By contract, it may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash and securities to its clearing agency. At December 31, 2014, the Company had a net liability position with dealer bank and clearing agency counterparties totaling $9.7 million, and had posted securities with a fair value of $4.7 million and cash totaling $7.5 million. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below. Resell and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral accepted or pledged in resell and repurchase agreements with other financial institutions also may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with customers. The Company is party to several agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resell agreements with the same financial institution counterparty. These repurchase and resell agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the balance sheet, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $450.0 million at both December 31, 2014 and $300.0 million at December 31, 2013. At December 31, 2014, the Company had posted collateral of $462.4 million in marketable securities, consisting mainly of agency mortgage-backed securities, and accepted $493.7 million in investment grade asset-backed, commercial mortgage-backed, and corporate bonds. 106 (In thousands) December 31, 2014 Assets: Derivatives subject to master netting agreements Derivatives not subject to master netting agreements Total derivatives Total resell agreements, subject to master netting arrangements Liabilities: Derivatives subject to master netting agreements Derivatives not subject to master netting agreements Total derivatives Total repurchase agreements, subject to master netting arrangements December 31, 2013 Assets: Derivatives subject to master netting agreements Derivatives not subject to master netting agreements Total derivatives Total resell agreements, subject to master netting arrangements Liabilities: Derivatives subject to master netting agreements Derivatives not subject to master netting agreements Total derivatives Total repurchase agreements, subject to master netting arrangements Gross Amount Recognized Gross Amounts Offset in the Balance Sheet Net Amounts Presented in the Balance Sheet Gross Amounts Not Offset in the Balance Sheet Financial Instruments Available for Offset Securities Collateral Received/ Pledged Net Amount $ 10,209 $ — $ 10,209 $ (251) $ — $ 9,958 248 10,457 — — 248 10,457 1,500,000 (450,000) 1,050,000 — (1,049,370) 630 10,454 494 10,948 — — — 10,454 494 10,948 (251) (8,738) 1,465 2,308,678 (450,000) 1,858,678 — (1,858,678) — $ 11,579 $ — $ 11,579 $ (1,299) $ (338) $ 9,942 1,401 12,980 — — 1,401 12,980 1,450,000 (300,000) 1,150,000 — (1,150,000) — 12,962 367 13,329 — — — 12,962 (1,299) (9,063) 2,600 367 13,329 1,621,763 (300,000) 1,321,763 — (1,321,763) — 20. Commitments, Contingencies and Guarantees The Company leases certain premises and equipment, all of which were classified as operating leases. The rent expense under such arrangements amounted to $6.7 million, $6.5 million and $6.9 million in 2014, 2013 and 2012, respectively. A summary of minimum lease commitments follows: (In thousands) Year Ended December 31 2015 2016 2017 2018 2019 After Total minimum lease payments Type of Property Real Property Equipment Total $ 5,616 $ 36 $ 4,971 4,447 3,462 2,247 14,802 33 6 — — — $ 5,652 5,004 4,453 3,462 2,247 14,802 35,620 107 All leases expire prior to 2051. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, the future minimum lease commitments are not expected to be less than the amounts shown for 2015. The Company engages in various transactions and commitments with off-balance sheet risk in the normal course of business to meet customer financing needs. The Company uses the same credit policies in making the commitments and conditional obligations described below as it does for on-balance sheet instruments. The following table summarizes these commitments at December 31: (In thousands) Commitments to extend credit: Credit card Other Standby letters of credit, net of participations Commercial letters of credit 2014 2013 $ 3,517,639 $ 3,835,323 4,922,748 4,591,468 324,817 7,519 325,623 11,771 Commitments to extend credit are legally binding agreements to lend to a borrower providing there are no violations of any conditions established in the contract. As many of the commitments are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash requirements. Refer to Note 3 on Loans and Allowance for Loan Losses for further discussion. Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods to a buyer. The majority of commercial letters of credit issued are used to settle payments in international trade. Typically, letters of credit require presentation of documents which describe the commercial transaction, evidence shipment, and transfer title. 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 the customer, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. At December 31, 2014, the Company had recorded a liability in the amount of $3.2 million, representing the carrying value of the guarantee obligations associated with the standby letters of credit. This amount will be accreted into income over the remaining life of the respective commitments. Commitments outstanding under these letters of credit, which represent the maximum potential future payments guaranteed by the Company, were $324.8 million at December 31, 2014. The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties or retained for use by the Company. During 2014, purchases and sales of tax credits amounted to $33.5 million and $29.6 million, respectively. At December 31, 2014, the Company had outstanding purchase commitments totaling $61.7 million that it expects to fund in 2015. The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at December 31, 2014, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term, with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 3 to 11 years. At December 31, 2014, the fair value of the Company's guarantee liability RPAs was $226 thousand, and the notional amount of the underlying swaps was $70.0 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated and is dependent upon the fair value of the interest rate swaps at the time of default. 108 In December 2013, the settlement of a multi-district interchange suit against Visa, MasterCard and credit-card issuing major banks was approved in federal court. The settlement included a provision to reduce credit card interchange income by 10 basis points over an eight month period. The Company's payments to Visa related to the reduction began in September 2013 and totaled $4.5 million during the payment period, which ended in April 2014. The Company has no further liability related to this matter. On January 4, 2013, the Company was named in a petition by Patrick J. Malloy III, Bankruptcy Trustee for the Bankruptcy Estate of George David Gordon Jr. (“Gordon”). The petition alleged that Gordon was involved in securities fraud and that Bank South, an Oklahoma bank that was subsequently acquired by the Company, together with a lending officer employed by Bank South, were jointly and severally liable, as aiders and abettors of the fraudulent scheme, for losses suffered by defrauded investors. The Company disbursed $2.5 million upon settlement of the suit in May 2014, and later recovered insurance proceeds of $750 thousand. On August 15, 2014, a customer filed a purported class action complaint against the Bank in the Circuit Court, Jackson County, Missouri. The case is Cassandra Warren, et al v. Commerce Bank (Case No. 1416-CV19197). In the case, the customer alleges violation of the Missouri usury statute in connection with the Bank charging overdraft fees in connection with point-of-sale/debit and automated-teller machine cards. The case seeks class-action status for Missouri customers of the Bank who may have been similarly affected. The Company believes the complaint lacks merit and will defend itself vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. The Company has various other lawsuits pending at December 31, 2014, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss amount can be determined to be probable and estimable. 21. Related Parties The Company’s Chief Executive Officer, its Vice Chairman, and its President are directors of Tower Properties Company (Tower) and, together with members of their immediate families, beneficially own approximately 64% of the outstanding stock of Tower. At December 31, 2014, Tower owned 233,796 shares of Company stock. Tower is primarily engaged in the business of owning, developing, leasing and managing real property. Payments from the Company and its affiliates to Tower are summarized below. During 2012, the Company leased several surface parking lots in downtown Kansas City, owned by Tower, for employee use. In the fourth quarter of 2012, the Company purchased these lots from Tower for $7.1 million. Other payments, with the exception of dividend payments, relate to property management services, including construction oversight, on four Company-owned office buildings and related parking garages in downtown Kansas City. (In thousands) Rent on leased parking lots Leasing agent fees Operation of parking garages Building management fees Property construction management fees Dividends paid on Company stock held by Tower Total 2014 2013 2012 $ — $ 502 86 1,824 335 200 — $ 50 84 1,799 114 191 $ 2,947 $ 2,238 $ 294 63 75 1,774 231 489 2,926 Tower has a $13.5 million line of credit with the Bank which is subject to normal credit terms and has a variable interest rate. The maximum borrowings outstanding under this line during 2014 were $3.0 million, and there was a balance of $1.3 million outstanding at December 31, 2014. The maximum borrowings outstanding during 2013 and 2012 were $2.0 million and $5.0 million, respectively, and there was no balance outstanding at December 31, 2013 or 2012. Interest of $15 thousand, $12 thousand, and $51 thousand was paid during 2014, 2013 and 2012, respectively. Letters of credit may be collateralized under this line of credit; however, there were no letters of credit outstanding during 2014, 2013 or 2012, and thus, no fees were received during these periods. From time to time, the Bank extends additional credit to Tower for construction and development projects. No construction loans were outstanding during 2014, 2013 and 2012. 109 Tower leases office space in the Kansas City bank headquarters building owned by the Company. Rent paid to the Company totaled $69 thousand in 2014, $67 thousand in 2013 and $66 thousand in 2012, at $15.17, $14.92 and $15.08 per square foot, respectively. Directors of the Company and their beneficial interests have deposit accounts with the Bank and may be provided with cash management and other banking services, including loans, in the ordinary course of business. Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unrelated persons and did not involve more than the normal risk of collectability. As discussed in Note 20 on Commitments, Contingencies, and Guarantees, the Company regularly purchases various state tax credits arising from third-party property redevelopment and resells the credits to third parties. During 2014, the Company sold state tax credits to its Chief Executive Officer, its Vice Chairman, and its President, in the amount of $396 thousand, $155 thousand, and $60 thousand, respectively, for personal tax planning. During 2013, the Company sold state tax credits to its Chief Executive Officer, his father (a former Chief Executive Officer), its Vice Chairman, and a member of its Board of Directors, in the amount of $846 thousand, $282 thousand, $456 thousand, and $200 thousand, respectively. During 2012, the Company's Chief Executive Officer purchased state tax credits of $465 thousand. The terms of the sales and the amounts paid were the same as the terms and amounts paid for similar tax credits by persons not related to the Company. 110 22. Parent Company Condensed Financial Statements Following are the condensed financial statements of Commerce Bancshares, Inc. (Parent only) for the periods indicated: Condensed Balance Sheets (In thousands) Assets Investment in consolidated subsidiaries: Banks Non-banks Cash Securities purchased under agreements to resell Investment securities: Available for sale Non-marketable Advances to subsidiaries, net of borrowings Income tax benefits Other assets Total assets Liabilities and stockholders’ equity Pension obligation Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Condensed Statements of Income (In thousands) Income Dividends received from consolidated subsidiaries: Banks Non-banks Earnings of consolidated subsidiaries, net of dividends Interest and dividends on investment securities Management fees charged subsidiaries Investment securities gains Other Total income Expense Salaries and employee benefits Professional fees Data processing fees paid to affiliates Other Total expense Income tax benefit Net income December 31 2014 2013 $ 2,069,369 $ 1,952,179 45,600 56 161,650 52,118 1,787 19,731 3,848 16,551 63,134 53 142,650 57,754 3,326 1,772 470 15,201 2,370,710 $ 2,236,539 $ $ 20,653 $ 19,864 40,517 2,330,193 $ 2,370,710 $ 6,501 19,396 25,897 2,210,642 2,236,539 For the Years Ended December 31 2014 2013 2012 $ 200,001 $ 200,001 $ 235,000 34,000 32,493 2,501 25,806 204 2,176 390 62,815 4,029 20,701 1,294 2,958 — 34,467 5,074 23,658 346 2,067 297,181 292,188 300,612 26,030 2,363 3,030 10,578 42,001 (6,574) 20,433 3,538 2,775 10,236 36,982 (5,755) 24,188 1,950 2,664 7,582 36,384 (5,101) $ 261,754 $ 260,961 $ 269,329 111 Condensed Statements of Cash Flows (In thousands) Operating Activities Net income For the Years Ended December 31 2014 2013 2012 $ 261,754 $ 260,961 $ 269,329 Adjustments to reconcile net income to net cash provided by operating activities: Earnings of consolidated subsidiaries, net of dividends Other adjustments, net Net cash provided by operating activities Investing Activities (32,493) 5,412 234,673 (62,815) (139) 198,007 (Increase) decrease in securities purchased under agreements to resell (19,000) (74,975) Decrease in investment in subsidiaries, net Proceeds from sales of investment securities Proceeds from maturities/pay downs of investment securities Purchases of investment securities (Increase) decrease in advances to subsidiaries, net Net purchases of building improvements and equipment Net cash provided by (used in) investing activities Financing Activities Proceeds from issuance of preferred stock Purchases of treasury stock Accelerated stock repurchase agreement Issuance of stock under equity compensation plans Net tax benefit related to equity compensation plans Cash dividends paid on common stock Cash dividends paid on preferred stock Net cash used in financing activities Increase (decrease) in cash Cash at beginning of year Cash at end of year Income tax payments (receipts), net (34,467) (6,310) 228,552 50,400 1,195 346 17,063 (2,000) 4,136 (92) 71,048 357 157 5,852 — (17,959) (98) 151 866 13,644 — 3,732 (402) (30,691) (56,984) 144,784 (210,974) (60,000) 8,652 1,850 (84,241) (4,050) — — (69,353) (104,909) — 9,426 1,003 — 14,820 2,094 (82,104) (211,608) — — (203,979) (141,028) (299,603) 3 53 56 $ (5) 58 53 $ (8,209) $ (6,933) $ $ $ (3) 61 58 523 Dividends paid by the Parent to its shareholders were substantially provided from Bank dividends. The Bank may distribute dividends without prior regulatory approval, provided that the dividends do not exceed the sum of net income for the current year and retained net income for the preceding two years, subject to maintenance of minimum capital requirements. The Parent charges fees to its subsidiaries for management services provided, which are allocated to the subsidiaries based primarily on total average assets. The Parent makes cash advances to its private equity subsidiaries for general short-term cash flow purposes. Advances may be made to the Parent by its subsidiary bank holding company for temporary investment of idle funds. Interest on such advances is based on market rates. For the past several years, the Parent has maintained a $20.0 million line of credit for general corporate purposes with the Bank. The line of credit is secured by investment securities. The Parent has not borrowed under this line during the past three years. At December 31, 2014, the fair value of available for sale investment securities held by the Parent consisted of investments of $37.4 million in common stock and $14.7 million in non-agency mortgage-backed securities. The Parent’s unrealized net gain in fair value on its investments was $35.3 million at December 31, 2014. The corresponding net of tax unrealized gain included in stockholders’ equity was $21.9 million. Also included in stockholders’ equity was an unrealized net of tax gain in fair value of investment securities held by subsidiaries, which amounted to $63.2 million at December 31, 2014. 112 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure. Item 9a. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework (1992), our management concluded that our internal control over financial reporting was effective as of December 31, 2014. We intend to implement the new Internal Control — Integrated Framework issued in May 2013 by the Committee of Sponsoring Organizations of the Treadway Commission during our fiscal year 2015. The Company’s internal control over financial reporting as of December 31, 2014 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which follows. Changes in Internal Control Over Financial Reporting No change in the Company’s internal control over financial reporting occurred that has materially affected, or is reasonably likely to materially affect, such controls during the last quarter of the period covered by this report. 113 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Commerce Bancshares, Inc.: We have audited Commerce Bancshares, Inc.'s (the Company) internal control over financial reporting as of December 31, Integrated Framework (1992) issued by the Committee of Sponsoring 2014, based on criteria established in Internal Control Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Commerce Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2014, and our report dated February 24, 2015 expressed an unqualified opinion on those consolidated financial statements. Kansas City, Missouri February 24, 2015 114 Item 9b. OTHER INFORMATION None PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Items 401, 405 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K regarding executive officers is included at the end of Part I of this Form 10-K under the caption “Executive Officers of the Registrant” and under the captions “Proposal One - Election of the 2018 Class of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Audit Committee Report”, “Committees of the Board - Audit Committee and Committee on Governance/Directors” in the definitive proxy statement, which is incorporated herein by reference. The Company’s financial officer code of ethics for the chief executive officer and senior financial officers of the Company, including the chief financial officer, principal accounting officer or controller, or persons performing similar functions, is available at www.commercebank.com. Amendments to, and waivers of, the code of ethics are posted on this Web site. Item 11. EXECUTIVE COMPENSATION The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K regarding executive compensation is included under the captions “Compensation Discussion and Analysis”, “Executive Compensation”, “Director Compensation”, “Compensation and Human Resources Committee Report”, and “Compensation and Human Resources Committee Interlocks and Insider Participation” in the definitive proxy statement, which is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Items 201(d) and 403 of Regulation S-K is included under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the definitive proxy statement, which is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Items 404 and 407(a) of Regulation S-K is covered under the captions “Proposal One - Election of the 2018 Class of Directors” and “Corporate Governance” in the definitive proxy statement, which is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 9(e) of Schedule 14A is included under the captions “Pre-approval of Services by the External Auditor” and “Fees Paid to KPMG LLP” in the definitive proxy statement, which is incorporated herein by reference. 115 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (a) The following documents are filed as a part of this report: (1) (2) Financial Statements: Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Quarterly Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statement Schedules: All schedules are omitted as such information is inapplicable or is included in the financial statements. Page 57 58 59 60 61 62 51 (b) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits (pages E-1 through E-2). 116 Pursuant to the requirements of Section 13 or 15(d) 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 this 24th day of February 2015. SIGNATURES COMMERCE BANCSHARES, INC. By: /s/ THOMAS J. NOACK Thomas J. Noack Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 24th day of February 2015. By: By: /s/ CHARLES G. KIM Charles G. Kim Chief Financial Officer /s/ JEFFERY D. ABERDEEN Jeffery D. Aberdeen Controller (Chief Accounting Officer) A majority of the Board of Directors* David W. Kemper (Chief Executive Officer) Terry D. Bassham John R. Capps Earl H. Devanny, III W. Thomas Grant, II James B. Hebenstreit Jonathan M. Kemper Terry O. Meek Benjamin F. Rassieur, III Todd R. Schnuck Andrew C. Taylor Kimberly G. Walker ____________ * David W. Kemper, Director and Chief Executive Officer, and the other Directors of Registrant listed, executed a power of attorney authorizing Thomas J. Noack, their attorney-in-fact, to sign this report on their behalf. /s/ THOMAS J. NOACK Thomas J. Noack Attorney-in-Fact By: 117 INDEX TO EXHIBITS 3 —Articles of Incorporation and By-Laws: (a) Restated Articles of Incorporation, as amended, were filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 7, 2014, and the same are hereby incorporated by reference. (b) Restated By-Laws, as amended, were filed in current report on Form 8-K (Commission file number 0-2989) dated February 14, 2013, and the same are hereby incorporated by reference. 4 — Instruments defining the rights of security holders, including indentures: (a) Pursuant to paragraph (b)(4)(iii) of Item 601 Regulation S-K, Registrant will furnish to the Commission upon request copies of long-term debt instruments. 10 — Material Contracts (Each of the following is a management contract or compensatory plan arrangement): (a) Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of January 1, 2009 was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated August 7, 2009, and the same is hereby incorporated by reference. (b)(1) Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan amended and restated as of July 24, 2009 was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated August 7, 2009, and the same is hereby incorporated by reference. (b)(2) An amendment to the Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan was filed in current report on Form 8-K (Commission file number 0-2989) dated February 16, 2012, and the same is hereby incorporated by reference. (c) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors amended and restated as of April 17, 2013 was filed in current report on Form 8-K (Commission file number 0-2989) dated April 23, 2013, and the same is hereby incorporated by reference. (d)(1) Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan amended and restated as of April 2001 was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 8, 2001, and the same is hereby incorporated by reference. (d)(2) An amendment to the Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan was filed in current report on Form 8-K (Commission file number 0-2989) dated February 16, 2012, and the same is hereby incorporated by reference. (e) Commerce Executive Retirement Plan amended and restated as of January 28, 2011 was filed in annual report on Form 10-K (Commission file number 0-2989) dated February 25, 2011, and the same is hereby incorporated by reference. (f) Commerce Bancshares, Inc. Restricted Stock Plan amended and restated as of July 24, 2009 was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated August 7, 2009, and the same is hereby incorporated by reference. (g)(1) 2009 Form of Severance Agreement between Commerce Bancshares, Inc. and the persons listed at the end of such agreement. (g)(2) 2015 Form of Severance Agreement between Commerce Bancshares, Inc. and the persons listed at the end of such agreement. (h) Trust Agreement for the Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of January 1, 2001 was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 8, 2001, and the same is hereby incorporated by reference. (i) Commerce Bancshares, Inc. 2015 Compensatory Arrangements with CEO and Named Executive Officers were filed in current report on Form 8-K (Commission file number 0-2989) dated February 2, 2015, and the same is hereby incorporated by reference. (j) Commerce Bancshares, Inc. 2005 Equity Incentive Plan amended and restated as of April 17, 2013 was filed in current report on Form 8-K (Commission file number 0-2989) dated April 23, 2013, and the same is hereby incorporated by reference. (k) Commerce Bancshares, Inc. Notice of Grant of Stock Options and Option Agreement was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated August 5, 2005, and the same is hereby incorporated by reference. E-1 (l) Commerce Bancshares, Inc. Restricted Stock Award Agreement, pursuant to the Restricted Stock Plan, was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated August 5, 2005, and the same is hereby incorporated by reference. (m) Commerce Bancshares, Inc. Stock Appreciation Rights Agreement and Commerce Bancshares, Inc. Restricted Stock Award Agreement, pursuant to the 2005 Equity Incentive Plan, were filed in current report on Form 8-K (Commission file number 0-2989) dated February 23, 2006, and the same are hereby incorporated by reference. (n) Commerce Bancshares, Inc. Stock Appreciation Rights Agreement and Commerce Bancshares, Inc. Restricted Stock Award Agreements, pursuant to the 2005 Equity Incentive Plan, were filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 6, 2013, and the same are hereby incorporated by reference. (o) Form of Notice of Grant of Award and Award Agreement for Restricted Stock for Executive Officers, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 7, 2014, and the same is hereby incorporated by reference. (p) Form of Notice of Grant of Award and Award Agreement for Restricted Stock for Employees other than Executive Officers, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 7, 2014, and the same is hereby incorporated by reference. (q) Form of Notice of Grant of Award and Award Agreement for Stock Appreciation Rights, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 7, 2014, and the same is hereby incorporated by reference. 21 — Subsidiaries of the Registrant 23 — Consent of Independent Registered Public Accounting Firm 24 — Power of Attorney 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 Exhibits 10(g)(1) and 10(g)(2) were filed as part of the Form 10-K with the Securities and Exchange commission but are not included herein. Copies may be obtained upon a written request to: Mr. Jeffery D. Aberdeen, Controller Commerce Bancshares, Inc. 1000 Walnut, Suite 700 Kansas City, MO 64106 E-2 The consolidated subsidiaries of the Registrant at February 1, 2015 were as follows: Exhibit 21 Name CBI-Kansas, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Kansas Location State or Other Jurisdiction of Incorporation Clayton Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Clayton Realty Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Commerce Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Commerce Brokerage Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Missouri Clayton Holdings, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Missouri Missouri Delaware Illinois Financial, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peoria, IL Delaware Illinois Realty, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peoria, IL Commerce Insurance Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fenton, MO Missouri Commerce Investment Advisors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Commerce Mortgage Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri CBI Equipment Finance, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Mid-Am Acquisition, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Missouri Tower Redevelopment Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri CBI Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Arizona CFB Partners, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Delaware CFB Venture Fund I, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Delaware Capital for Business, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri CFB Venture Fund, L.P.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit 23 The Board of Directors Commerce Bancshares, Inc.: We consent to the incorporation by reference in the Registration Statements No. 33-28294, No. 33-82692, No. 33-8075, No. 33-78344, No. 33-61499, No. 33-61501, No. 333-14651, No. 333-186867, and No. 333-188374, each on Form S-8, No. 333-140221 and No. 333-196689 on Form S-3ASR, and No. 333-140475 and No. 333-189535 on Form S-4 of Commerce Bancshares, Inc. of our reports dated February 24, 2015, with respect to the consolidated balance sheets of Commerce Bancshares, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2014, and the effectiveness of internal control over financial reporting as of December 31, 2014, which reports appear in the December 31, 2014 annual report on Form 10-K of Commerce Bancshares, Inc. KPMG LLP Kansas City, Missouri February 24, 2015 POWER OF ATTORNEY Exhibit 24 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby appoint Thomas J. Noack and Jeffery D. Aberdeen, or either of them, attorney for the undersigned to sign the Annual Report on Form 10-K of Commerce Bancshares, Inc., for the fiscal year ended December 31, 2014, together with any and all amendments which might be required from time to time with respect thereto, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, with respect to Commerce Bancshares, Inc., with full power and authority in either of said attorneys to do and perform in the name of and on behalf of the undersigned every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person. IN WITNESS WHEREOF, the undersigned have executed these presents as of this 30th day of January, 2015. /s/ TERRY D. BASSHAM /s/ JOHN R. CAPPS /s/ EARL H. DEVANNY, III /s/ W. THOMAS GRANT, II /s/ JAMES B. HEBENSTREIT /s/ DAVID W. KEMPER /s/ JONATHAN M. KEMPER /s/ TERRY O. MEEK /s/ BENJAMIN F. RASSIEUR, III /s/ TODD R. SCHNUCK /s/ ANDREW C. TAYLOR /s/ KIMBERLY G. WALKER CERTIFICATION Exhibit 31.1 I, David W. Kemper, certify that: 1. I have reviewed this annual report on Form 10-K of Commerce Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 24, 2015 /s/ DAVID W. KEMPER David W. Kemper Chairman and Chief Executive Officer Exhibit 31.2 I, Charles G. Kim, certify that: 1. I have reviewed this annual report on Form 10-K of Commerce Bancshares, Inc.; CERTIFICATION 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 24, 2015 /s/ CHARLES G. KIM Charles G. Kim Executive Vice President and Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32 In connection with the Annual Report of Commerce Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David W. Kemper and Charles G. Kim, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ DAVID W. KEMPER David W. Kemper Chief Executive Officer /s/ CHARLES G. KIM Charles G. Kim Chief Financial Officer February 24, 2015 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. C O M P A N Y P R O F I L E Commerce Bancshares, Inc. operates as a super-community bank offering an array of sophisticated financial products delivered with high-quality, personal customer service. The Company’s customer promise we ask, listen and solve is not just its brand, but also its corporate focus. With this platform, Commerce is continually building its long-term franchise while paying strict attention to asset quality and expense management. Commerce provides a full range of financial products to consumer and commercial customers including: lending, payment processing, trust, brokerage and capital markets services. Commerce uses a variety of delivery platforms including an expansive ATM network, full-featured online banking, a central contact center, and has a nation- wide presence in the commercial payments industry. • $24.0 billion in assets • 37th largest U.S. bank based on asset size1 • 195 branches • 392 ATMs • 357,000 online banking customers2 • 45.7 million online banking sessions3 • 88,000 mobile customers • 4,744 full-time equivalent (FTE) employees Data as of December 2014 unless otherwise noted 1Source: SNL Financial as of 9/30/2014 2Includes active Retail and Small Business customers 3Retail sessions in 2014 C O M M E R C E B A N C S H A R E S A T A G L A N C E E I G H T K E Y M A R K E T S C O M M E R C I A L O F F I C E S C O M M E R C E U S P R E S E N C E 1. Cincinnati 2. Nashville 3. Dallas Branch Footprint Extended Commercial Market Area Commercial Payments Services 1. St. Louis 2. Kansas City 3. Springfield 4. Central Missouri 5. Central Illinois 6. Wichita 7. Tulsa/Oklahoma City 8. Denver 8 6 2 4 1 3 5 1 2 7 3 C O N T I N U O U S I M P R O V E M E N T A B O U T T H E C O V E R Commerce is dedicated to continuous improvement and innovation. That requires listening to customer needs and investing in products that provide superior solutions. We continuously look for new ways to deepen our customer relationships and improve our business processes for greater cost-efficiency. pro v e m e nt s Im u o u n i t n o C In n o v t n e m t s e v n a tion & I Mercy, one of the nation’s largest health care systems, serves millions of patients each year from its 32 hospitals. Commerce Bank is making it easier for those patients to pay their medical bills with new zero-percent interest rate loans. The Health Services Financing program is one of many solutions Commerce has developed over the years to support Mercy’s mission. From left, Tammy Krebel, Commerce senior vice president, commercial banking; Mark Huebner, director of health services financing; Bruce Fernandez, Mercy’s director of treasury services; and Steve Walden, Mercy’s manager of treasury operations. CO R P O R AT E H E A D Q UA RT E R S 1000 Walnut P.O. Box 419248 Kansas City, MO 64141-6248 (816) 234-2000 www.commercebank.com I N D E P E N D E N T A CCO U N TA N TS KPMG LLP Kansas City, Missouri T R A N S F E R A G E N T, R EG I ST R A R A N D D I V I D E N D D I S B U R S I N G A G E N T Computershare Trust Company, N.A. P.O. Box 30170 College Station, TX 77842-3170 (800) 317-4445 (800) 952-9245 Hearing Impaired/TDD www.computershare.com/investor STO C K E XC H A N G E L I ST I N G NASDAQ Symbol: CBSH Preferred Stock: CBSHP CO M M O N STO C K I N F O R M AT I O N The table below sets forth the high and the low prices of actual transactions for the Company’s common stock, which is publicly traded on the NASDAQ Stock Market, adjusted for the December 2014 5% stock dividend. F I S C A L 2 0 14 First Quarter Second Quarter Third Quarter Fourth Quarter H I G H L O W $45.06 45.19 45.38 44.30 $39.68 40.09 42.23 38.10 A N N UA L M E E T I N G The annual meeting of shareholders will be held Wednesday, April 15, 2015 at 9:30 a.m., in the Kemper Auditorium on the 15th floor of the Commerce Trust Company Building at 922 Walnut Street, Kansas City, MO 64106. I N V ESTO R I N Q U I R I ES Shareholders, analysts and investors seeking information about the Company should direct their inquiries to: Jeffery D. Aberdeen, Controller 1000 Walnut P.O. Box 419248 Kansas City, MO 64141-6248 (800) 892-7100 mymoney@commercebank.com S H A R E H O L D E R S M AY R ECE I V E F U T U R E A N N UA L R E P O RTS A N D P R O X Y M AT E R I A L S OV E R T H E I N T E R N E T To take advantage of the opportunity to receive materials electronically, rather than by mail, individuals who hold stock in their name may enroll for electronic delivery at Computershare’s investor website https://www-us.computershare.com/investor/contact. • If you have already created a login ID and password at the above site, just log in and follow the prompts to “Enroll in Electronic Delivery.” • If you have not created a login ID and password on the above site, choose “Create Login.” You will need the Social Security number or tax ID number associated with your Commerce stock account to create the login. After you have created your login, follow the prompts to “Enroll in Electronic Delivery.” Please note: • Your consent is entirely revocable. • You can always vote your proxy on the Internet whether or not you elect to receive your materials electronically. Shareholders who hold their Commerce stock through a bank, broker or other holder of record should refer to the information provided by that entity for instructions on how to elect to view future annual reports and proxy statements over the Internet. Employee PIP (401(k)) shareholders who have a Company email address and online access will automatically be enrolled to receive the Annual Report, Proxy Statement and proxy card over the Internet unless they choose to opt out by emailing the Corporate Secretary at thomas.noack@ commercebank.com. Financial Highlights 1 | Message to Our Shareholders 2 | Strength • Community • Innovation 10 Success Stories 11 | Community Advisors 20 | Officers and Directors 24 T A B L E O F C O N T E N T S i r u o s s i M , s i u o L . t S , n o s i r r a H k l a F y b d e n g i s e D i r u o s s i M , s i u o L . t S , n o s i r r a H k l a F y b d e n g i s e D S T R E N G T H | C O M M U N I T Y | I N N O V A T I O N 2 0 1 4 A N N U A L R E P O R T A N D F O R M 1 0 - K C O M M E R C E B A N C S H A R E S , I N C . 2 0 1 4 A N N U A L R E P O R T A N D F O R M 1 0 - K COMMER CE BA NCSH ARES, IN C. 1000 WALNUT P.O. BOX 419248 KANSAS CITY, MO 64141-6248 Phone: (816) 234-2000 (800) 892-7100 Email: mymoney@commercebank.com Website: www.commercebank.com An Equal Opportunity Employer

Continue reading text version or see original annual report in PDF format above