CBSH 3.31.2012 10Q
Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
_________________________________________________________

For the quarterly period ended March 31, 2012

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

For the transition period from           to          
Commission File No. 0-2989
 
COMMERCE BANCSHARES, INC.
 
(Exact name of registrant as specified in its charter)
Missouri
 
43-0889454
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 
 
1000 Walnut,
Kansas City, MO
 
64106
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(816) 234-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
As of April 24, 2012, the registrant had outstanding 88,452,726 shares of its $5 par value common stock, registrant’s only class of common stock.
 


Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q
 

 
 
 
Page
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2012
 
December 31, 2011
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
    
 
    
Loans
$
9,247,971

 
$
9,177,478

  Allowance for loan losses
(181,532
)
 
(184,532
)
Net loans
9,066,439

 
8,992,946

Loans held for sale
9,673

 
31,076

Investment securities:
 
 
 

 Available for sale ($420,085,000 and $418,046,000 pledged in 2012 and 2011,
 
 
 
  respectively, to secure structured repurchase agreements)
9,120,399

 
9,224,702

 Trading
34,178

 
17,853

 Non-marketable
120,734

 
115,832

Total investment securities
9,275,311

 
9,358,387

Short-term federal funds sold and securities purchased under agreements to resell
40,925

 
11,870

Long-term securities purchased under agreements to resell
850,000

 
850,000

Interest earning deposits with banks
12,038

 
39,853

Cash and due from banks
381,462

 
465,828

Land, buildings and equipment, net
353,866

 
360,146

Goodwill
125,585

 
125,585

Other intangible assets, net
7,070

 
7,714

Other assets
404,548

 
405,962

Total assets
$
20,526,917

 
$
20,649,367

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
5,209,381

 
$
5,377,549

   Savings, interest checking and money market
9,038,283

 
8,933,941

   Time open and C.D.'s of less than $100,000
1,143,687

 
1,166,104

   Time open and C.D.'s of $100,000 and over
1,380,409

 
1,322,289

Total deposits
16,771,760

 
16,799,883

Federal funds purchased and securities sold under agreements to repurchase
1,122,988

 
1,256,081

Other borrowings
111,520

 
111,817

Other liabilities
321,443

 
311,225

Total liabilities
18,327,711

 
18,479,006

Commerce Bancshares, Inc. stockholders’ equity:
 
 
 

   Preferred stock, $1 par value
 
 
 
      Authorized and unissued 2,000,000 shares
—

 
—

   Common stock, $5 par value
 
 
 

 Authorized 100,000,000 shares; issued 89,277,398 shares in 2012 and 2011
446,387

 
446,387

   Capital surplus
1,032,985

 
1,042,065

   Retained earnings
620,780

 
575,419

   Treasury stock of 587,906 shares in 2012 and 217,755 shares in 2011, at cost
(22,872
)
 
(8,362
)
   Accumulated other comprehensive income
118,056

 
110,538

Total Commerce Bancshares, Inc. stockholders' equity
2,195,336

 
2,166,047

Non-controlling interest
3,870

 
4,314

Total equity
2,199,206

 
2,170,361

Total liabilities and equity
$
20,526,917

 
$
20,649,367

See accompanying notes to consolidated financial statements.

3
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
 
For the Three Months Ended March 31
(In thousands, except per share data)
2012
2011
 
(Unaudited)
INTEREST INCOME
    
 
Interest and fees on loans
$
111,756

$
118,377

Interest and fees on loans held for sale
105

298

Interest on investment securities
53,758

54,889

Interest on short-term federal funds sold and securities purchased under
 
 
   agreements to resell
17

10

Interest on long-term securities purchased under agreements to resell
4,275

2,162

Interest on deposits with banks
55

90

Total interest income
169,966

175,826

INTEREST EXPENSE
 
 
Interest on deposits:
 
 
   Savings, interest checking and money market
5,081

6,900

   Time open and C.D.'s of less than $100,000
2,106

3,743

   Time open and C.D.'s of $100,000 and over
1,911

2,673

Interest on federal funds purchased and securities sold under
 
 
   agreements to repurchase
225

622

Interest on other borrowings
906

915

Total interest expense
10,229

14,853

Net interest income
159,737

160,973

Provision for loan losses
8,165

15,789

Net interest income after provision for loan losses
151,572

145,184

NON-INTEREST INCOME
 
 
Bank card transaction fees
34,733

37,462

Trust fees
22,814

21,572

Deposit account charges and other fees
19,336

19,300

Capital market fees
6,871

4,720

Consumer brokerage services
2,526

2,663

Loan fees and sales
1,561

1,824

Other
6,742

8,365

Total non-interest income
94,583

95,906

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
Impairment reversals on debt securities
5,587

6,305

Noncredit-related reversals on securities not expected to be sold
(5,907
)
(6,579
)
Net impairment losses
(320
)
(274
)
Realized gains on sales and fair value adjustments
4,360

1,601

Investment securities gains, net
4,040

1,327

NON-INTEREST EXPENSE
 
 
Salaries and employee benefits
89,543

87,392

Net occupancy
11,260

12,037

Equipment
5,189

5,577

Supplies and communication
5,613

5,532

Data processing and software
17,469

16,467

Marketing
3,822

4,258

Deposit insurance
2,520

4,891

Indemnification obligation
—

(1,359
)
Other
15,045

19,165

Total non-interest expense
150,461

153,960

Income before income taxes
99,734

88,457

Less income taxes
32,920

27,507

Net income
66,814

60,950

Less non-controlling interest expense
1,015

497

Net income attributable to Commerce Bancshares, Inc.
$
65,799

$
60,453

Net income per common share — basic
$
.74

$
.66

Net income per common share — diluted
$
.74

$
.66

See accompanying notes to consolidated financial statements.

4
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
For the Three Months Ended March 31
(In thousands)
 
2012
2011
 
 
(Unaudited)
Net income
 
$
66,814

$
60,950

Other comprehensive income (loss):
 
 
 
Available for sale debt securities for which a portion of an other-than-temporary impairment (OTTI) has been recorded in earnings:
 
 
 
Unrealized holding gains subsequent to initial OTTI recognition
 
5,420

6,475

Income tax expense
 
(2,060
)
(2,461
)
  Net unrealized gains on OTTI securities
 
3,360

4,014

Other available for sale investment securities:
 
 
 
Unrealized holding gains (losses)
 
6,319

(10,405
)
Reclassification adjustment for gains included in net income
 
(342
)
(176
)
Net unrealized gains (losses) on securities
 
5,977

(10,581
)
Income tax (expense) benefit
 
(2,271
)
4,021

  Net unrealized gains (losses) on other securities
 
3,706

(6,560
)
Prepaid pension cost:
 
 
 
Amortization of accumulated pension loss
 
730

540

Income tax expense
 
(278
)
(205
)
  Pension loss amortization
 
452

335

Other comprehensive income (loss)
 
7,518

(2,211
)
Comprehensive income
 
74,332

58,739

Non-controlling interest expense
 
(1,015
)
(497
)
Comprehensive income attributable to Commerce Bancshares, Inc
$
73,317

$
58,242

See accompanying notes to consolidated financial statements.

























5
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

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

(In thousands, except per share data)
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
 
(Unaudited)
Balance January 1, 2012
$
446,387

$
1,042,065

$
575,419

$
(8,362
)
$
110,538

$
4,314

$
2,170,361

Net income




65,799





1,015

66,814

Other comprehensive income








7,518



7,518

Distributions to non-controlling interest










(1,459
)
(1,459
)
Purchase of treasury stock






(31,600
)




(31,600
)
Issuance of stock under purchase and equity compensation plans


(3,065
)


9,019





5,954

Net tax benefit related to equity compensation plans


649









649

Stock-based compensation


1,407









1,407

Issuance of nonvested stock awards


(8,071
)


8,071





—

Cash dividends ($.230 per share)




(20,438
)






(20,438
)
Balance March 31, 2012
$
446,387

$
1,032,985

$
620,780

$
(22,872
)
$
118,056

$
3,870

$
2,199,206

Balance January 1, 2011
$
433,942

$
971,293

$
555,778

$
(2,371
)
$
63,345

$
1,477

$
2,023,464

Net income




60,453





497

60,950

Other comprehensive loss








(2,211
)


(2,211
)
Distributions to non-controlling interest










(206
)
(206
)
Purchase of treasury stock






(4,311
)




(4,311
)
Issuance of stock under purchase and equity compensation plans
1,136

3,687



6,062





10,885

Net tax benefit related to equity compensation plans


717









717

Stock-based compensation


1,256









1,256

Issuance of nonvested stock awards
965

(852
)


(113
)




—

Cash dividends ($.219 per share)




(20,054
)






(20,054
)
Balance March 31, 2011
$
436,043

$
976,101

$
596,177

$
(733
)
$
61,134

$
1,768

$
2,070,490

See accompanying notes to consolidated financial statements.



6
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended March 31
(In thousands)
2012
 
2011
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
66,814

 
$
60,950

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
8,165

 
15,789

  Provision for depreciation and amortization
11,021

 
11,868

  Amortization of investment security premiums, net
11,987

 
2,713

  Investment securities gains, net(A)
(4,040
)
 
(1,327
)
  Net gains on sales of loans held for sale
(358
)
 
(571
)
  Originations of loans held for sale
—

 
(15,789
)
  Proceeds from sales of loans held for sale
21,699

 
26,751

  Net (increase) decrease in trading securities
(11,300
)
 
2,009

  Stock-based compensation
1,407

 
1,256

  (Increase) decrease in interest receivable
3,825

 
(1,245
)
  Increase in interest payable
114

 
69

  Increase in income taxes payable
23,496

 
27,052

  Net tax benefit related to equity compensation plans
(649
)
 
(717
)
  Other changes, net
(12,036
)
 
(26,838
)
Net cash provided by operating activities
120,145

 
101,970

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities(A)
6,986

 
11,202

Proceeds from maturities/pay downs of investment securities(A)
643,378

 
610,003

Purchases of investment securities(A)
(558,651
)
 
(801,432
)
Net (increase) decrease in loans
(81,658
)
 
17,270

Long-term securities purchased under agreements to resell
—

 
(350,000
)
Repayments of long-term securities purchased under agreements to resell
—

 
100,000

Purchases of land, buildings and equipment
(5,393
)
 
(5,819
)
Sales of land, buildings and equipment
701

 
1,686

Net cash provided by (used in) investing activities
5,363

 
(417,090
)
FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
(84,876
)
 
334,382

Net increase in time open and C.D.'s
35,703

 
162,628

Net decrease in short-term federal funds purchased and securities sold under
 
 
 
  agreements to repurchase
(133,093
)
 
(59,813
)
Repayment of long-term borrowings
(297
)
 
(301
)
Purchases of treasury stock
(31,600
)
 
(4,311
)
Issuance of stock under stock purchase and equity compensation plans
5,954

 
10,885

Net tax benefit related to equity compensation plans
649

 
717

Cash dividends paid on common stock
(1,074
)
 
(20,054
)
Net cash provided by (used in) financing activities
(208,634
)
 
424,133

Increase (decrease) in cash and cash equivalents
(83,126
)
 
109,013

Cash and cash equivalents at beginning of year
517,551

 
460,675

Cash and cash equivalents at March 31
$
434,425

 
$
569,688

(A) Available for sale and non-marketable securities
 
 
 
Income tax payments, net
$
9,271

 
$
455

Interest paid on deposits and borrowings
$
10,115

 
$
14,784

Loans transferred to foreclosed real estate
$
1,311

 
$
16,246

Cash dividends payable on common stock at end of period
$
19,364

 
$
—

See accompanying notes to consolidated financial statements.

7
Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012 (Unaudited)
 
1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2011 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2012 are not necessarily indicative of results to be attained for the full year or any other interim periods.

The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2011 Annual Report on Form 10-K.

2. Loans and Allowance for Loan Losses

Major classifications within the Company’s held to maturity loan portfolio at March 31, 2012 and December 31, 2011 are as follows:

(In thousands)
 
Mar. 31, 2012
 
Dec. 31, 2011
Commercial:
 
 
 
 
Business
 
$
2,920,237

 
$
2,808,265

Real estate – construction and land
 
376,642

 
386,598

Real estate – business
 
2,203,686

 
2,180,100

Personal Banking:
 
 
 
 
Real estate – personal
 
1,458,467

 
1,428,777

Consumer
 
1,113,481

 
1,114,889

Revolving home equity
 
448,169

 
463,587

Consumer credit card
 
723,759

 
788,701

Overdrafts
 
3,530

 
6,561

Total loans
 
$
9,247,971

 
$
9,177,478


At March 31, 2012, loans of $3.1 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.2 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Allowance for loan losses    

A summary of the activity in the allowance for loan losses during the three months ended March 31, 2012 and 2011 follows:
 
 
For the Three Months Ended March 31, 2012
 
For the Three Months Ended March 31, 2011

(In thousands)
 
Commercial
Personal Banking

Total
 
Commercial
Personal Banking

Total
Balance at January 1
$
122,497

$
62,035

$
184,532

 
$
119,946

$
77,592

$
197,538

Provision
(3,198
)
11,363

8,165

 
13,465

2,324

15,789

Deductions:
 
 
 
 
 
 
 
   Loans charged off
2,528

13,389

15,917

 
6,364

17,025

23,389

   Less recoveries on loans
703

4,049

4,752

 
1,304

3,296

4,600

Net loans charged off
1,825

9,340

11,165

 
5,060

13,729

18,789

Balance at March 31
$
117,474

$
64,058

$
181,532

 
$
128,351

$
66,187

$
194,538



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Table of Contents


The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2012 and December 31, 2011, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below and deemed to have similar risk characteristics, which are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.

(In thousands)
 

Commercial
 
   Personal
   Banking
 

Total
March 31, 2012
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
Impaired loans
 
$
5,221

 
$
4,751

 
$
9,972

All other loans
 
112,253

 
59,307

 
171,560

Loans outstanding:
 
 
 
 
 
 
Impaired loans
 
102,005

 
30,686

 
132,691

All other loans
 
5,398,560

 
3,716,720

 
9,115,280

December 31, 2011
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
Impaired loans
 
$
6,668

 
$
4,090

 
$
10,758

All other loans
 
115,829

 
57,945

 
173,774

Loans outstanding:
 
 
 
 
 
 
Impaired loans
 
108,167

 
31,088

 
139,255

All other loans
 
5,266,796

 
3,771,427

 
9,038,223


Impaired loans

The table below shows the Company’s investment in impaired loans at March 31, 2012 and December 31, 2011. These loans consist of loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. The restructured loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession. They are largely 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 loans totaled $41.3 million at both March 31, 2012 and December 31, 2011. 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 $22.5 million at March 31, 2012 and $22.4 million at December 31, 2011.


(In thousands)
 
Mar. 31, 2012
 
Dec. 31, 2011
Non-accrual loans
 
$
68,875

 
$
75,482

Restructured loans (accruing)
 
63,816

 
63,773

Total impaired loans
 
$
132,691

 
$
139,255

















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Table of Contents


The following table provides additional information about impaired loans held by the Company at March 31, 2012 and December 31, 2011, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.



(In thousands)
Recorded Investment
Unpaid Principal
Balance
 Related
Allowance
March 31, 2012
 
 
 
With no related allowance recorded:
 
 
 
Business
$
16,179

$
20,555

$
—

Real estate – construction and land
18,303

40,607

—

Real estate – business
11,705

14,747

—

Real estate – personal
770

782

—

 
$
46,957

$
76,691

$
—

With an allowance recorded:
 
 
 
Business
$
16,833

$
20,030

$
1,566

Real estate – construction and land
25,948

27,629

2,540

Real estate – business
13,037

18,147

1,115

Real estate – personal
7,448

10,194

617

Consumer credit card
22,468

22,468

4,134

 
$
85,734

$
98,468

$
9,972

Total
$
132,691

$
175,159

$
9,972

December 31, 2011
 
 
 
With no related allowance recorded:
 
 
 
Business
$
19,759

$
22,497

$
—

Real estate – construction and land
8,391

22,746

—

Real estate – business
6,853

9,312

—

Real estate – personal
793

793

—

 
$
35,796

$
55,348

$
—

With an allowance recorded:
 
 
 
Business
$
15,604

$
19,286

$
1,500

Real estate – construction and land
37,387

47,516

2,580

Real estate – business
20,173

24,799

2,588

Real estate – personal
7,867

10,671

795

Consumer credit card
22,428

22,428

3,295

 
$
103,459

$
124,700

$
10,758

Total
$
139,255

$
180,048

$
10,758


Total average impaired loans for the three month periods ending March 31, 2012 and 2011 are shown in the table below.


(In thousands)
Commercial
Personal Banking
Total
Average impaired loans:
 
 
 
For the Three Months Ended March 31, 2012
 
 
 
Non-accrual loans
$
67,564

$
7,409

$
74,973

 Restructured loans (accruing)
40,226

23,554

63,780

Total
$
107,790

$
30,963

$
138,753

For the Three Months Ended March 31, 2011
 
 
 
Non-accrual loans
$
75,302

$
7,027

$
82,329

Restructured loans (accruing)
42,936

20,528

63,464

Total
$
118,238

$
27,555

$
145,793





10
Table of Contents

The table below shows interest income recognized during the three month periods ending March 31, 2012 and 2011 for impaired loans held at the end of each respective period. This interest relates to accruing restructured loans, as discussed above.
 
For the Three Months Ended March 31
(In thousands)
2012
2011
Interest income recognized on impaired loans:
 
 
Business
$
105

$
101

Real estate - construction and land
250

260

Real estate - business
54

96

Real estate - personal
14

18

Consumer credit card
326

395

Total
$
749

$
870


Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at March 31, 2012 and December 31, 2011.



(In thousands)
Current or Less Than 30 Days Past Due

30 – 89
Days Past Due
90 Days Past Due and Still Accruing
Non-accrual



Total
March 31, 2012
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
2,893,883

$
5,430

$
782

$
20,142

$
2,920,237

Real estate – construction and land
341,369

14,068

150

21,055

376,642

Real estate – business
2,168,501

12,892

1,638

20,655

2,203,686

Personal Banking:
 
 
 
 
 
Real estate – personal
1,437,273

11,020

3,151

7,023

1,458,467

Consumer
1,101,279

10,511

1,691

—

1,113,481

Revolving home equity
445,990

911

1,268

—

448,169

Consumer credit card
707,328

8,683

7,748

—

723,759

Overdrafts
3,223

307

—

—

3,530

Total
$
9,098,846

$
63,822

$
16,428

$
68,875

$
9,247,971

December 31, 2011
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
2,777,578

$
4,368

$
595

$
25,724

$
2,808,265

Real estate – construction and land
362,592

1,113

121

22,772

386,598

Real estate – business
2,151,822

8,875

29

19,374

2,180,100

Personal Banking:
 
 
 
 
 
Real estate – personal
1,406,449

11,671

3,045

7,612

1,428,777

Consumer
1,096,742

15,917

2,230

—

1,114,889

Revolving home equity
461,941

1,003

643

—

463,587

Consumer credit card
769,922

10,484

8,295

—

788,701

Overdrafts
6,173

388

—

—

6,561

Total
$
9,033,219

$
53,819

$
14,958

$
75,482

$
9,177,478














11
Table of Contents

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 negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.
Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
March 31, 2012
 
 
 
 
Pass
$
2,781,156

$
300,425

$
2,033,726

$
5,115,307

Special mention
65,202

6,525

56,097

127,824

Substandard
53,737

48,637

93,208

195,582

Non-accrual
20,142

21,055

20,655

61,852

Total
$
2,920,237

$
376,642

$
2,203,686

$
5,500,565

December 31, 2011
 
 
 
 
Pass
$
2,669,868

$
304,408

$
1,994,391

$
4,968,667

Special mention
37,460

4,722

52,683

94,865

Substandard
75,213

54,696

113,652

243,561

Non-accrual
25,724

22,772

19,374

67,870

Total
$
2,808,265

$
386,598

$
2,180,100

$
5,374,963


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 Delinquency section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a 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 approximately $221.0 million in personal real estate loans and $140.2 million in consumer loans, or 9.6% of the Personal Banking portfolio, for which FICO scores are not obtained because they are related to commercial activity. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2012 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
March 31, 2012
 
 
 
 
FICO score:
 
 
 
 
Under 600
3.3
%
8.5
%
2.5
%
5.2
%
600 - 659
4.7

11.6

5.2

12.2

660 - 719
11.7

23.8

17.8

33.0

720 - 780
31.1

25.6

29.3

28.1

Over 780
49.2

30.5

45.2

21.5

Total
100.0
%
100.0
%
100.0
%
100.0
%








12
Table of Contents

Troubled debt restructurings

As mentioned above, the Company's impaired loans include loans which have been classified as troubled debt restructurings. The majority of troubled debt restructurings are classified as such upon renewal when the contractual interest rate of the new loan, which may be greater or less than the rate on the previous loan, was not judged to be a market rate for debt with similar risk. As a result, the financial effects of the modifications cannot readily be quantified. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the modified terms will be collected. Other restructured loans consist mainly of performing commercial loans and consumer credit loans under debt management programs, as mentioned above. The table below shows the outstanding balances at March 31, 2012 of loans classified as troubled debt restructurings, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the previous twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
(In thousands)
March 31, 2012
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
22,586

$
—

Real estate - construction and land
38,439

9,506

Real estate - business
8,216

1,595

Personal Banking:
 
 
Real estate - personal
3,164

—

Consumer credit card
22,468

6,698

Total restructured loans
$
94,873

$
17,799


The determination of the allowance for loan losses related to troubled debt restructurings depends on the collectability of principal and interest, according to the repayment terms. As mentioned above, the majority of troubled debt restructurings were classified as such when the loans were renewed at an interest rate not judged to be market, and as such, the modified terms did not change estimated collectability under the terms of the contract. The allowance for loan losses for troubled debt restructurings on non-accrual status is determined by individual evaluation using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those restructured loans which management expects to collect under contractual terms, and which are maintained on accruing status, are generally risk-rated as substandard. The allowance for loan losses related to accruing restructured loans is determined by collective evaluation because the loans have similar risk characteristics. Collective evaluation, which is the same process used for other substandard loans, considers historical loss experience and current economic factors.

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

The Company had commitments of $5.8 million at March 31, 2012 to lend additional funds to borrowers with restructured loans.

Loans held for sale

In addition to the portfolio of loans which are intended to be held to maturity, the Company has, in previous periods, originated loans intended to be sold in secondary markets. These historically consisted of student loans and certain fixed rate residential mortgage loans. Under statutory requirements effective mid-2010, the Company was prohibited from originating new federally guaranteed student loans, and the balance below represents the remaining unsold portion of these loans. Also, the Company recently chose to retain fixed rate mortgages, and currently does not hold these types of loans for sale.








13
Table of Contents

The following table presents information about loans held for sale, including an impairment valuation allowance resulting from declines in fair value below cost, which is further discussed in Note 12 on Fair Value Measurements.

(In thousands)
Mar. 31, 2012
Dec. 31, 2011
Balance outstanding:
 
 
Student loans, at cost
$
9,844

$
28,706

Residential mortgage loans, at cost
—

2,545

Valuation allowance on student loans
(171
)
(175
)
Total loans held for sale, at lower of cost or fair value
$
9,673

$
31,076

 
 
 
 
For the Three Months Ended March 31
(In thousands)
2012
2011
Net gains on sales:
 
 
Student loans
$
309

$
68

Residential mortgage loans
49

503

Total gains on sales of loans held for sale, net
$
358

$
571


The Company’s holdings of foreclosed real estate totaled $18.6 million and $18.3 million at March 31, 2012 and December 31, 2011, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $3.5 million and $4.2 million at March 31, 2012 and December 31, 2011, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.

3. Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2012 and December 31, 2011.

 
(In thousands)
Mar. 31, 2012
Dec. 31, 2011
Available for sale:
 
 
U.S. government and federal agency obligations
$
368,662

$
364,665

Government-sponsored enterprise obligations
277,924

315,698

State and municipal obligations
1,326,867

1,245,284

Agency mortgage-backed securities
3,866,456

4,106,059

Non-agency mortgage-backed securities
294,221

316,902

Asset-backed securities
2,817,492

2,693,143

 Other debt securities
123,355

141,260

 Equity securities
45,422

41,691

 Total available for sale
9,120,399

9,224,702

Trading
34,178

17,853

Non-marketable
120,734

115,832

Total investment securities
$
9,275,311

$
9,358,387


Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $45.3 million at both March 31, 2012 and December 31, 2011. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $75.4 million and $70.5 million at March 31, 2012 and December 31, 2011, respectively.






14
Table of Contents

A summary of the available for sale investment securities by maturity groupings as of March 31, 2012 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.

(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
    
    
Within 1 year
$
7,856

$
8,011

After 1 but within 5 years
186,985

208,287

After 5 but within 10 years
133,940

152,364

Total U.S. government and federal agency obligations
328,781

368,662

Government-sponsored enterprise obligations:
 
 
Within 1 year
31,111

31,230

After 1 but within 5 years
108,983

112,296

After 5 but within 10 years
12,114

12,219

After 10 years
122,904

122,179

Total government-sponsored enterprise obligations
275,112

277,924

State and municipal obligations:
 
 
Within 1 year
82,630

83,542

After 1 but within 5 years
542,924

561,698

After 5 but within 10 years
471,973

484,430

After 10 years
210,317

197,197

Total state and municipal obligations
1,307,844

1,326,867

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
3,742,525

3,866,456

  Non-agency mortgage-backed securities
287,375

294,221

  Asset-backed securities
2,815,676

2,817,492

Total mortgage and asset-backed securities
6,845,576

6,978,169

Other debt securities:
 
 
Within 1 year
47,999

49,544

After 1 but within 5 years
63,858

67,837

After 5 but within 10 years
5,974

5,974

Total other debt securities
117,831

123,355

Equity securities
21,252

45,422

Total available for sale investment securities
$
8,896,396

$
9,120,399


Included in U.S. government securities are $360.5 million, at fair value, of U.S. Treasury inflation-protected securities (TIPS). Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $129.9 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $27.5 million at March 31, 2012.









15
Table of Contents

For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.
 
 
(In thousands)
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
March 31, 2012
    
    
    
    
U.S. government and federal agency obligations
$
328,781

$
39,881

$
—

$
368,662

Government-sponsored enterprise obligations
275,112

3,580

(768
)
277,924

State and municipal obligations
1,307,844

36,873

(17,850
)
1,326,867

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,742,525

124,282

(351
)
3,866,456

  Non-agency mortgage-backed securities
287,375

10,288

(3,442
)
294,221

  Asset-backed securities
2,815,676

8,409

(6,593
)
2,817,492

Total mortgage and asset-backed securities
6,845,576

142,979

(10,386
)
6,978,169

Other debt securities
117,831

5,524

—

123,355

Equity securities
21,252

24,170

—

45,422

Total
$
8,896,396

$
253,007

$
(29,004
)
$
9,120,399

December 31, 2011
 
 
 
 
U.S. government and federal agency obligations
$
328,530

$
36,135

$
—

$
364,665

Government-sponsored enterprise obligations
311,529

4,169

—

315,698

State and municipal obligations
1,220,840

35,663

(11,219
)
1,245,284

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,989,464

117,088

(493
)
4,106,059

  Non-agency mortgage-backed securities
315,752

8,962

(7,812
)
316,902

  Asset-backed securities
2,692,436

7,083

(6,376
)
2,693,143

Total mortgage and asset-backed securities
6,997,652

133,133

(14,681
)
7,116,104

Other debt securities
135,190

6,070

—

141,260

Equity securities
18,354

23,337

—

41,691

Total
$
9,012,095

$
238,507

$
(25,900
)
$
9,224,702


The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3/A-, whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2012, the fair value of securities on this watch list was $211.5 million.

As of March 31, 2012, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $118.3 million. The credit-related portion of the impairment totaled $10.4 million and was recorded in earnings. The noncredit-related portion of the impairment totaled $1.5 million on a pre-tax basis, and has been recognized in accumulated other comprehensive income. The Company does not intend to sell these securities and believes it is not more likely than not that it will be required to sell the securities before the recovery of their amortized cost bases.

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

Significant Inputs
Range
Prepayment CPR
0% - 31%
Projected cumulative default
13% - 57%
Credit support
0% - 17%
Loss severity
33% - 57%

16
Table of Contents

The following table shows changes in the credit losses recorded in the three months ended March 31, 2012 and 2011, for which a portion of an OTTI was recognized in other comprehensive income.
 
For the Three Months Ended March 31
(In thousands)
2012
2011
Balance at January 1
$
9,931

$
7,542

Credit losses on debt securities for which impairment was previously recognized
320

274

Increase in expected cash flows that are recognized over remaining life of security
(38
)
—

Balance at March 31
$
10,213

$
7,816


Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.
 
Less than 12 months
 
12 months or longer
 
Total
 
(In thousands)
   Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
March 31, 2012
 
 
 
 
 
 
 
 
Government-sponsored enterprise obligations
$
82,149

$
768

 
$
—

$
—

 
$
82,149

$
768

State and municipal obligations
148,038

1,582

 
87,350

16,268

 
235,388

17,850

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
60,464

351

 
—

—

 
60,464

351

   Non-agency mortgage-backed securities
4,602

115

 
72,198

3,327

 
76,800

3,442

   Asset-backed securities
708,365

4,897

 
96,157

1,696

 
804,522

6,593

Total mortgage and asset-backed securities
773,431

5,363

 
168,355

5,023

 
941,786

10,386

Total
$
1,003,618

$
7,713

 
$
255,705

$
21,291

 
$
1,259,323

$
29,004

December 31, 2011
 
 
 
 
 
 
 
 
State and municipal obligations
$
65,962

$
712

 
$
110,807

$
10,507

 
$
176,769

$
11,219

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
72,019

493

 
—

—

 
72,019

493

   Non-agency mortgage-backed securities
23,672

784

 
118,972

7,028

 
142,644

7,812

   Asset-backed securities
1,236,526

4,982

 
87,224

1,394

 
1,323,750

6,376

Total mortgage and asset-backed securities
1,332,217

6,259

 
206,196

8,422

 
1,538,413

14,681

Total
$
1,398,179

$
6,971

 
$
317,003

$
18,929

 
$
1,715,182

$
25,900


The total available for sale portfolio consisted of approximately 1,550 individual securities at March 31, 2012. The portfolio included 181 securities, having an aggregate fair value of $1.3 billion, that were in a loss position at March 31, 2012. Securities identified as other-than-temporarily impaired which have been in a loss position for 12 months or longer totaled $60.7 million at fair value, or .7% of the total available for sale portfolio value. Securities with temporary impairment which have been in a loss position for 12 months or longer totaled $195.0 million, or 2.1% of the total portfolio value.


















17
Table of Contents

The Company’s holdings of state and municipal obligations included gross unrealized losses of $17.9 million at March 31, 2012. Of these losses, $16.5 million related to auction rate securities (ARS) and $1.3 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.2 billion at fair value, or 13.1% of total available for sale securities. The average credit quality of the portfolio, excluding ARS, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the largest holdings, by state and economic sector, is shown in the table below.
 

% of
Portfolio
Average
Life
(in years)
Average
Rating
(Moody’s)
At March 31, 2012
 
 
 
Texas
10.1%
5.3
      Aa1
Florida
9.1
4.7
      Aa3
Washington
6.2
4.0
      Aa2
Illinois
4.9
6.0
      Aa3
Ohio
4.9
5.1
      Aa2
General obligation
27.5%
4.5
      Aa2
Housing
20.0
4.6
      Aa1
Transportation
14.5
4.0
      Aa3
Lease
13.9
3.7
      Aa3
Limited Tax
6.4
5.1
      Aa2

The remaining unrealized losses on the Company’s investments, as shown in the preceding tables, are largely contained in the categories of non-agency mortgage-backed and other asset-backed securities. These securities are not guaranteed by an outside agency and are dependent on payments received from the underlying collateral. While virtually all of these securities, at purchase date, were comprised of senior tranches and were highly rated by various rating agencies, changes in interest rates, the adverse housing market, liquidity pressures, and overall economic climate has resulted in low fair values for certain of these securities. As mentioned above, the Company maintains a watch list comprised mostly of these securities, and has recorded OTTI losses on certain of these securities.

The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
 
For the Three Months Ended March 31
(In thousands)
2012
2011
Proceeds from sales of available for sale securities
$
4,951

$
11,202

Proceeds from sales of non-marketable securities
2,035

—

Total proceeds
$
6,986

$
11,202

Available for sale:
 
 
Gains realized on sales
$
342

$
176

Other-than-temporary impairment recognized on debt securities
(320
)
(274
)
 Non-marketable:
 

         

 Gains realized on sales
93

—

 Losses realized on sales
(200
)
—

Fair value adjustments, net
4,125

1,425

Investment securities gains, net
$
4,040

$
1,327


At March 31, 2012, securities carried at $4.2 billion were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve Bank and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $420.1 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.


18
Table of Contents

4. Goodwill and Other Intangible Assets

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

 
March 31, 2012
 
December 31, 2011
 
 
(In thousands)
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
 
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
Amortizable intangible assets:
    
    
    
 
 
    
    
    
 
Core deposit premium
$
25,720

$
(19,336
)
$
—

$
6,384

 
$
25,720

$
(18,750
)
$
—

$
6,970

Mortgage servicing rights
3,097

(2,024
)
(387
)
686

 
3,097

(1,926
)
(427
)
744

Total
$
28,817

$
(21,360
)
$
(387
)
$
7,070

 
$
28,817

$
(20,676
)
$
(427
)
$
7,714


Aggregate amortization expense on intangible assets was $684 thousand and $813 thousand, respectively, for the three months ended March 31, 2012 and 2011. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2012. 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)
 
2012
$
2,300

2013
1,758

2014
1,281

2015
937

2016
625



Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2012 is as follows.

(In thousands)
Goodwill
Core Deposit Premium
Mortgage Servicing Rights
Balance January 1, 2012
$
125,585

$
6,970

$
744

Amortization
—

(586
)
(98
)
Impairment reversal
—

—

40

Balance March 31, 2012
$
125,585

$
6,384

$
686



Goodwill allocated to the Company’s operating segments at March 31, 2012 and December 31, 2011 is shown below.

(In thousands)
 
Consumer segment
$
67,765

Commercial segment
57,074

Wealth segment
746

Total goodwill
$
125,585



5. Guarantees

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

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Table of Contents

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2012 that net liability was $5.2 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $366.3 million at March 31, 2012.

The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at March 31, 2012, 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 5 to 10 years. At March 31, 2012, the liability recorded for guarantor RPAs was $115 thousand, and the notional amount of the underlying swaps was $37.3 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default. The Company's loss exposure at March 31, 2012, before considering collateral coverage, was approximately $3.5 million.

6. Pension

The amount of net pension cost for the three months ended March 31, 2012 and 2011 is shown in the table below:
 
For the Three Months Ended March 31
(In thousands)
2012
2011
Service cost - benefits earned during the period
$
103

$
88

Interest cost on projected benefit obligation
1,287

1,362

Expected return on plan assets
(1,645
)
(1,675
)
Amortization of unrecognized net loss
730

540

Net periodic pension cost
$
475

$
315


Substantially all benefits accrued under the Company’s defined benefit pension plan were frozen effective January 1, 2005, and the remaining benefits were frozen effective January 1, 2011. During the first three months of 2012, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2012.


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Table of Contents

7. Common Stock

Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 11.
 
For the Three Months Ended March 31
(In thousands, except per share data)
2012
2011
Basic income per common share:
 
 
Net income attributable to Commerce Bancshares, Inc.
$
65,799

$
60,453

Less income allocated to nonvested restricted stockholders
562

404

  Net income available to common stockholders
$
65,237

$
60,049

  Distributed income
$
20,247

$
19,907

  Undistributed income
$
44,990

$
40,142

Weighted average common shares outstanding
88,221

90,791

Distributed income per share
$
.23

$
.22

Undistributed income per share
.51

.44

   Basic income per common share
$
.74

$
.66

Diluted income per common share:
 
 
Net income attributable to Commerce Bancshares, Inc.
$
65,799

$
60,453

Less income allocated to nonvested restricted stockholders
561

403

  Net income available to common stockholders
$
65,238

$
60,050

  Distributed income
$
20,247

$
19,907

  Undistributed income
$
44,991

$
40,143

Weighted average common shares outstanding
88,221

90,791

  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
335

387

  Weighted average diluted common shares outstanding
88,556

91,178

Distributed income per share
$
.23

$