e10vk
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, 2009 Commission File
No. 0-2989
COMMERCE
BANCSHARES, INC.
(Exact name of registrant as
specified in its charter)
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Missouri
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43-0889454
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(State of Incorporation)
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(IRS Employer Identification No.)
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1000 Walnut,
Kansas City, MO
(Address
of principal executive offices)
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64106
(Zip
Code)
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(816) 234-2000
(Registrants
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of class
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Name of exchange on which
registered
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$5 Par Value Common Stock
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NASDAQ Global Select Market
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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 þ No o
Indicate by check mark if the
Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes o No þ
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 o No o
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 Registrants
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. 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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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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 June 30, 2009, the aggregate market value of the
voting stock held by non-affiliates of the Registrant was
approximately $2,065,000,000. As of February 10, 2010,
there were 83,195,752 shares of Registrants
$5 Par Value Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for
its 2010 annual meeting of shareholders, which will be filed
within 120 days of December 31, 2009, are incorporated
by reference into Part III of this Report.
Commerce
Bancshares, Inc.
Form 10-K
2
PART I
General
Commerce Bancshares, Inc. (the Company), 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. The Company owns all of the outstanding
capital stock of one national banking association, Commerce
Bank, N.A. (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. The Company 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.
The Company owns a second tier holding company that is the
direct owner of the Bank. A list of the Companys
subsidiaries is included as Exhibit 21.
The Company is one of the nations top 50 bank holding
companies, based on asset size. At December 31, 2009, the
Company had consolidated assets of $18.1 billion, loans of
$10.5 billion, deposits of $14.2 billion, and equity
of $1.9 billion. All of the Companys operations
conducted by subsidiaries are consolidated for purposes of
preparing the Companys consolidated financial statements.
The Company does not utilize unconsolidated subsidiaries or
special purpose entities to provide off-balance sheet borrowings
or securitizations.
The Companys 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, high ethical
standards and safe, sound assets. The Company operates under a
super-community banking format with a local orientation,
augmented by experienced, centralized support in select critical
areas. The Companys local market orientation is reflected
in its financial centers and regional advisory boards, which are
comprised of local business persons, professionals and other
community representatives, that 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 Banks facilities are located throughout Missouri,
Kansas, and central Illinois, and in Tulsa, 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. In addition, several of the Illinois markets
are located in areas with some of the most productive farmland
in the world. The real estate lending operations of the Bank are
centered in its lower Midwestern markets. Historically, these
markets have generally tended to be less volatile than in other
parts of the country. While the decline in the national real
estate market resulted in significantly higher real estate loan
losses during 2008 and 2009 for the banking industry, management
believes the diversity and nature of the Banks markets has
resulted in lower real estate loan losses in these markets and
is a key factor in the Banks relatively lower loan loss
levels.
The Company regularly evaluates the potential acquisition of,
and holds discussions with, various financial institutions
eligible for bank holding company ownership or control. In
addition, the Company regularly considers the potential
disposition of certain of its assets and branches. The Company
seeks merger or acquisition partners that are culturally similar
and have experienced management and possess either significant
market presence or have potential for improved profitability
through financial management, economies of scale and expanded
services. The Companys most recent acquisitions were in
2007, when it
3
acquired the outstanding stock of South Tulsa Financial
Corporation, located in Tulsa, Oklahoma, and Commerce Bank,
located in Denver, Colorado. For additional information on
acquisition and branch disposition activity, refer to
page 74.
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, and student lending. It provides services
through a network of 214 full-service branches, a widespread ATM
network of 412 machines, and the use of alternative delivery
channels such as extensive online banking and telephone banking
services. In 2009, this retail segment contributed 41% 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. In
2009, it contributed 42% 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. This segment
also manages the Companys family of proprietary mutual
funds, which are available for sale to both trust and general
retail customers. Fixed income investments are sold to
individuals and institutional investors through the Capital
Markets Group, which is also included in this segment. At
December 31, 2009, the Wealth segment managed investments
with a market value of $12.8 billion and administered an
additional $9.3 billion in non-managed assets. Additional
information relating to operating segments can be found on pages
52 and 96.
Supervision
and Regulation
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 Boards 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. The BHC Act also prohibits, with certain
exceptions, 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
Banks record in meeting the credit needs of the
communities it serves in accordance with the Community
Reinvestment Act of 1977, as amended (CRA). The Bank has a
current CRA rating of outstanding.
The Company is required to file with the Federal Reserve Board
various reports and such additional information as the Federal
Reserve Board may require. The Federal Reserve Board also makes
regular examinations of the Company and its subsidiaries. The
Companys banking subsidiary is organized as a national
banking association and is subject to regulation, supervision
and examination by the Office of the Comptroller of the Currency
(OCC). 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 primarily for the protection of depositors
and the preservation of the federal deposit insurance funds, and
not for the protection
4
of security holders. Statutory and regulatory controls increase
a bank holding companys 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, 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 instruments 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.
Subsidiary
Bank
Under Federal Reserve policy, the Company 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, any capital 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 companys 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.
Substantially all of the deposits of the Bank are insured up to
the applicable limits by the Bank Insurance Fund of the FDIC.
The Emergency Economic Stabilization Act of 2008 (discussed
further under Legislation) temporarily increased the
general depositor limit from $100,000 to $250,000, through
December 31, 2013. During 2009, the Bank also participated
in the FDICs Transaction Account Guarantee Program. Under
that program, all non-interest bearing transaction accounts were
fully guaranteed by the FDIC for the entire amount of the
account. Coverage under this program was in addition to and
separate from the coverage available under the FDICs
general deposit insurance rules. Effective January 1, 2010,
the Bank no longer participates in the program, and depositor
accounts are insured up to $250,000 under the FDICs
general deposit insurance rules. 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
has established a risk-based assessment system under which
institutions are classified and pay premiums according to their
perceived risk to the federal deposit insurance funds. The
Banks premiums had been relatively low prior to the 2008
economic crisis. These rose significantly in 2009 due to higher
fees charged by the FDIC in order to replenish its insurance
fund, which has been depleted by the recent high levels of bank
failures across the country. The Banks FDIC expense,
including its portion of an industry-wide special assessment,
totaled $27.4 million in 2009, compared to
$2.1 million in 2008. In late 2009, the FDIC Board ruled
that insured institutions must prepay their quarterly risk-based
assessments for the fourth quarter of 2009 and subsequent years
2010 through 2012, in order to cover the costs of future
expected bank failures. The Banks pre-payment on
December 30, 2009 totaled $68.7 million.
Payment
of Dividends
The principal source of the Companys cash revenues is
dividends paid by the Bank. The Federal Reserve Board may
prohibit the payment of dividends by bank holding companies if
their actions constitute unsafe or unsound practices. The OCC
limits the payment of dividends by the Bank in any calendar year
to the net profit of the current year combined with the retained
net profits of the preceding two years. Permission must be
obtained from the OCC 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.
5
Capital
Adequacy
The Company is required to comply with the capital adequacy
standards established by the Federal Reserve. These capital
adequacy guidelines generally require bank holding companies to
maintain minimum total capital equal to 8% of total
risk-adjusted assets and off-balance sheet items (the
Total Risk-Based Capital Ratio), with at least
one-half of that amount consisting of Tier I, or core
capital, and the remaining amount consisting of Tier II, or
supplementary capital. 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 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 organizations
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, 2009, the Bank was
well-capitalized under regulatory capital adequacy
standards, as further discussed on page 100.
Legislation
These laws and regulations are under constant review by various
agencies and legislatures, and are subject to sweeping change.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB
Act) contained major changes in laws that previously kept the
banking industry largely separate from the securities and
insurance industries. The GLB Act authorized the creation of a
new kind of financial institution, known as a financial
holding company, and a new kind of bank subsidiary, called
a financial subsidiary, which may engage in a
broader range of investment banking, insurance agency,
brokerage, and underwriting activities. The GLB Act also
included privacy provisions that limit banks abilities to
disclose non-public information about customers to
non-affiliated entities. Banking organizations are not required
to become financial holding companies, but instead may continue
to operate as bank holding companies, providing the same
services they were authorized to provide prior to the enactment
of the GLB Act. The Company currently operates as a bank holding
company.
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 OCC. 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.
In 2001, the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (USA PATRIOT Act) was signed into law. The USA
PATRIOT Act 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
U.S. Treasury Department issued a number of regulations
implementing the USA PATRIOT Act that apply certain of its
requirements to financial institutions such as the
Companys broker-dealer subsidiary. The regulations impose
obligations on financial institutions to maintain appropriate
policies, procedures and controls to detect, prevent and report
money laundering and terrorist financing.
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In October 2008, the Emergency Economic Stabilization Act of
2008 was enacted in response to a global financial crisis
spurred by frozen credit markets, institution failures and loss
of investor confidence. Under the Act, the Troubled Asset Relief
Program (TARP) was created, which authorized the
U.S. Treasury department to spend up to $700 billion
to purchase distressed assets and make capital injections into
banks. The stated goal of TARP was to improve the liquidity of
targeted illiquid,
difficult-to-value
assets by purchasing them from banks and other financial
institutions, thus encouraging banks to resume lending again at
levels seen before the crisis, loosening credit and improving
the market order and investor confidence. The Company did not
apply for TARP funds.
The FDICs Debt Guarantee Program allowed eligible
financial institutions to issue senior unsecured debt whose
principal and interest payments would be guaranteed by the FDIC.
The Company did not issue debt under this program, which
guaranteed debt issued on or before October 31, 2009 and
maturing on or before December 31, 2012. The program has
been extended through April 30, 2010 on a limited,
emergency basis, which the Company does not expect to utilize.
The Credit Card Accountability, Responsibility, and Disclosure
Act of 2009 (the Credit CARD Act) was signed into law in May
2009. It is comprehensive credit card legislation that aims to
establish fair and transparent practices relating to open end
consumer credit plans. The first phase of the legislation began
in August 2009, under which the payment period (with no late
fees) was extended from 14 days to 21 days, the
advance warning period for significant changes to credit card
accounts was extended from 15 days to 45 days, and
opt-out provisions were made available to customers. A second
phase began in February 2010, which includes provisions
governing when rate increases can be applied on late accounts,
requirements for clearer disclosures of terms before opening an
account, prohibitions on charging over-limit fees and
double-cycle billing, and various other restrictions. Additional
rules will become effective in July 2010, which deal with
interest rate reinstatements on former overdue accounts, and
gift card expiration dates and inactivity fees.
In November 2009, the Federal Reserve announced that starting
July 1, 2010, banks may not charge fees for paying
overdrafts on ATM and debit card transactions unless the
customer gives consent. Additional federal legislation has been
introduced which would limit the number and amount of overdraft
fees which banks can charge, prohibit ordering the posting of
transactions to cause consumers to incur higher fees, prohibit
non-sufficient funds fees on ATM or debit card transactions, and
require banks to provide a consumer notice and opportunity to
cancel transactions that would trigger an overdraft. The new
regulations, including the Credit CARD Act, could result in
lower fees earned on overdraft and credit card transactions.
In 2009 legislation was proposed by the President which could
affect the way student loans are originated in the U.S. The
proposed legislation would expand Pell Grants and Perkins Loan
programs and require all colleges and universities to convert to
direct lending programs with the U.S. government as of
July 1, 2010. Currently, colleges and universities have the
choice of participating in either direct lending with the
U.S. government or a program whereby loans are originated
by banks, but guaranteed by the U.S. government. Should
this legislation ultimately be passed, the Company may not be
able to continue its guaranteed student loan origination
business.
Congress is considering sweeping legislation that would overhaul
regulation of the financial services industry. The proposals
include the creation of an independent Consumer Financial
Protection Agency. The new agency would take consumer regulatory
responsibility of financial products from other agencies and
centralize it in one office. It would have the authority and
accountability to supervise, examine, and enforce consumer
financial protection laws, and any institution that provides
consumer financial products would fall under its jurisdiction.
The establishment of the proposed agency effectively separates
two types of regulation: consumer protection and safety and
soundness that are presently mutually reinforced within the
existing agencies. This possible separation is of special
concern to the financial industry, as it could result in
weakening both of these aims. Other proposed legislation
includes the creation of an agency to protect against systemic
risk, the creation of a single Federal bank regulator, further
regulation of the
over-the-counter
derivatives market, stricter capital and liquidity standards for
large institutions, provisions for non-binding
say-on-pay
shareholder voting on executive compensation, and creation of a
Securities and Exchange Commission (SEC) office with regulatory
authority over credit rating agencies. Recent proposals from the
administration include assessing fees totaling $170 billion
against larger banks (those with assets in
7
excess of $50 billion) to recoup TARP losses, in addition
to prohibitions on proprietary trading activities and ownership
of hedge and private equity funds.
Competition
The Companys locations in regional markets throughout
Missouri, Kansas, central Illinois, Tulsa, Oklahoma, and Denver,
Colorado, face intense competition from hundreds of financial
service providers. The Company 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. The
passage of the GLB Act, which removed barriers between banking
and the securities and insurance industries, has resulted in
greater competition among these industries. The Company
generally competes on the basis of customer services and
responsiveness to customer needs, interest rates on loans and
deposits, lending limits and customer convenience, such as
location of offices.
Employees
The Company and its subsidiaries employed 4,565 persons on
a full-time basis and 674 persons on a part-time basis at
December 31, 2009. The Company provides a variety of
benefit programs including a 401K plan as well as group life,
health, accident, and other insurance. The Company also
maintains training and educational programs designed to prepare
employees for positions of increasing responsibility.
Available
Information
The Companys 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.
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Page
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I.
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Distribution of Assets, Liabilities and Stockholders
Equity; Interest Rates and Interest Differential
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23, 60-63
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II.
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Investment Portfolio
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41-43, 77-82
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III.
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Loan Portfolio
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Types of Loans
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28
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Maturities and Sensitivities of Loans to Changes in Interest
Rates
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29
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Risk Elements
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35-41
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IV.
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Summary of Loan Loss Experience
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33-35
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V.
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Deposits
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43-44, 84
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VI.
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Return on Equity and Assets
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18
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VII.
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Short-Term Borrowings
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85-86
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8
Making or continuing an investment in securities issued by
Commerce Bancshares, Inc., including its common stock, involves
certain risks that you should carefully consider. The risks and
uncertainties described below are not the only risks that may
have a material adverse effect on the Company. Additional risks
and uncertainties also could adversely affect its business and
financial results. 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 Companys 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 have adversely affected the Companys
industry and may continue to do so.
Given the concentration of the Companys banking business
in the United States, it is particularly exposed to downturns in
the U.S. economy. The economic trends which began in 2008,
such as declines in the housing market, falling home prices,
increasing foreclosures, unemployment and under-employment, have
negatively impacted the credit performance of mortgage loans and
resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities as well as
major commercial and investment banks. These write-downs,
initially of mortgage-backed securities and other complex
financial instruments, but spreading to various classes of real
estate, commercial and consumer loans in turn, have caused many
financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and
institutional investors have reduced or ceased providing funding
to borrowers, including to other financial institutions. This
market turmoil and tightening of credit have led to an increased
level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction
of business activity generally. The resulting economic pressure
on consumers and lack of confidence in the financial markets has
adversely affected the Companys business, financial
condition and results of operations through higher levels of
loan losses and lower loan demand. While there have been some
recent indications of stabilization, management does not expect
significant economic improvement in the near future. In
particular, the Company may face the following risks in
connection with these market conditions:
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The Company may face increased regulation of the industry.
Compliance with such regulation may divert resources from other
areas of the business and limit the ability to pursue other
opportunities. Recently adopted regulation over credit card and
overdraft account practices could result in lower revenues from
these products.
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Market developments may affect consumer confidence levels and
may cause declines in consumer credit usage and adverse changes
in payment patterns, causing increases in delinquencies and
default rates. These could impact the Companys loan losses
and provision for loan losses, as a significant part of the
Companys business includes consumer and credit card
lending.
|
|
|
|
Reduced levels of economic activity may cause declines in
financial service transactions and the fees earned by the
Company on such transactions.
|
|
|
|
The Companys ability to assess the creditworthiness of its
customers may be impaired if the models and approaches it uses
to select, manage, and underwrite its customers become less
predictive of future behaviors.
|
|
|
|
The process used to estimate losses inherent in the
Companys credit exposure 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, which may no
longer be capable of accurate estimation which may, in turn,
impact the reliability of the process.
|
9
|
|
|
|
|
Competition in the industry could intensify as a result of the
increasing consolidation of financial services companies in
connection with current market conditions.
|
|
|
|
With higher bank failures occurring in 2009 and more expected in
the future, the Company may be required to pay significantly
higher FDIC premiums for extended periods of time because of the
low funding levels within the FDIC insurance fund.
|
Significant
changes in banking laws and regulations could materially affect
the Companys business.
Increased regulation of the banking industry is being demanded
by the current political administration. Certain regulation has
already been imposed during the past year, and much additional
regulation has been proposed. Such regulation, along with
possible changes in tax laws and accounting rules, may have a
significant impact on the ways that financial institutions
conduct business, implement strategic initiatives, engage in tax
planning and make financial disclosures. Compliance with such
regulation may increase costs and limit the ability to pursue
business opportunities.
The
performance of the Company is dependent on the economic
conditions of the markets in which the Company
operates.
The Companys 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 has recently begun to expand
into Oklahoma, Colorado and other surrounding states. Since the
Company does not have a significant presence in other parts of
the country, a prolonged economic downtown in these markets
could have a material adverse effect on the Companys
financial condition and results of operations.
Significant
changes in federal monetary policy could materially affect the
Companys 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 investing by influencing the
interest rate 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 Companys control and difficult to predict.
The
soundness of other financial institutions could adversely affect
the Company.
The Companys 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 even rumors or
questions about, one or more financial services institutions, or
the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or
defaults by the Company or 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 Companys credit risk
may be exacerbated when the collateral held cannot be realized
upon or is liquidated at prices not sufficient to recover the
full amount of the financial instrument exposure due to the
Company. There is no assurance that any such losses would not
materially and adversely affect results of operations.
10
The
Companys 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
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 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
Companys 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 that were 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 our
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
Companys investment portfolio values may be adversely
impacted by changing interest rates and deterioration in the
credit quality of underlying collateral within mortgage and
other asset-backed investment securities.
The Company generally invests in securities issued by
government-backed agencies or privately issued securities that
are highly rated by credit rating agencies at the time of
purchase, but are subject to changes in market value due to
changing interest rates and implied credit spreads. Certain
mortgage and asset-backed securities represent beneficial
interests which are collateralized by residential mortgages,
credit cards, automobiles, mobile homes or other assets. While
these investment securities are highly rated at the time of
initial investment, the value of these securities may decline
significantly due to actual or expected deterioration in the
underlying collateral, especially residential mortgage
collateral. Market conditions have resulted in a deterioration
in fair values for non-guaranteed mortgage-backed and other
asset-backed securities. Under accounting rules, when the
impairment is due to declining expected cash flows, some portion
of the impairment, depending on the Companys 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.
The
Company is subject to interest rate risk.
The Companys net interest income is the largest source of
overall revenue to the Company, representing 62% of total
revenue. Interest rates are beyond the Companys control,
and they fluctuate in response to general economic conditions
and the policies of various governmental and regulatory
agencies, in particular, the Federal Reserve Board. Changes in
monetary policy, including changes in interest rates, will
influence the origination of loans, the purchase of investments,
the generation of deposits, and the rates received on loans and
investment securities and paid on deposits. Management believes
it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in
interest rates on the Companys results of operations.
However, any substantial, prolonged change in market interest
rates could have a material adverse effect on the Companys
financial condition and results of operations.
11
Future
loan losses could increase.
The Company maintains an allowance for loan losses that
represents managements 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
managements 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. The Company has seen significant
increases in losses in its loan portfolio, particularly in
residential construction, consumer, and credit card loans, due
to the deterioration in the housing industry and general
economic conditions. Until the housing sector and overall
economy begin to recover, it is likely that these losses will
continue. While the Companys credit loss ratios remain
below industry averages, continued economic deterioration and
further loan losses may negatively affect its results of
operations and could further increase levels of its allowance.
In addition, the Companys allowance level is subject to
review by regulatory agencies, that could require adjustments to
the allowance. See the section captioned Allowance for
Loan Losses in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations,
of this report for further discussion related to the
Companys process for determining the appropriate level of
the allowance for possible loan loss.
The
Company operates in a highly competitive industry and market
area.
The Company operates in the financial services industry, a
rapidly changing environment having numerous competitors
including other banks and insurance companies, securities
dealers, brokers, trust and investment companies and mortgage
bankers. The pace of consolidation among financial service
providers is accelerating and there are many new changes in
technology, product offerings and regulation. New entrants
offering competitive products continually penetrate our markets.
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
Companys 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. While the Company has
policies and procedures 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. Should any of
these systems become compromised, the reputation of the Company
could be damaged, relationships with existing customers impaired
and result in lost business and incur significant expenses
trying to remedy the compromise.
The
Company may not attract and retain skilled employees.
The Companys success depends, in large part, on its
ability to attract and retain key people. Competition for the
best people in most activities engaged in by the Company 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 Companys key personnel could have a
material adverse impact on the Companys business because
of their skills, knowledge of the Companys market, years
of industry experience, and the difficulty of promptly finding
qualified replacement personnel.
|
|
Item 1b.
|
UNRESOLVED
STAFF COMMENTS
|
None
12
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rentable
|
|
|
% occupied
|
|
|
% occupied
|
|
Building
|
|
square footage
|
|
|
in total
|
|
|
by bank
|
|
|
|
|
922 Walnut
|
|
|
256,000
|
|
|
|
95
|
%
|
|
|
93
|
%
|
Kansas City, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
1000 Walnut
|
|
|
403,000
|
|
|
|
84
|
|
|
|
36
|
|
Kansas City, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
811 Main
|
|
|
237,000
|
|
|
|
100
|
|
|
|
100
|
|
Kansas City, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
8000 Forsyth
|
|
|
178,000
|
|
|
|
95
|
|
|
|
92
|
|
Clayton, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
1551 N. Waterfront
|
|
|
120,000
|
|
|
|
100
|
|
|
|
32
|
|
Pkwy, Wichita, KS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank leases offices in Omaha, Nebraska which house its
credit card operations. Additionally, certain other installment
loan, trust and safe deposit functions operate out of leased
offices in downtown Kansas City. The Company has an additional
208 branch locations in Missouri, Illinois, Kansas, Oklahoma and
Colorado which are owned or leased, and 160 off-site ATM
locations.
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
The information required by this item is set forth in
Item 8 under Note 19, Commitments, Contingencies and
Guarantees on page 112.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted during the fourth quarter of 2009 to a
vote of security holders through the solicitation of proxies or
otherwise.
Executive
Officers of the Registrant
The following are the executive officers of the Company, each of
whom is designated annually, and 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
|
|
Positions with Registrant
|
|
|
Jeffery D. Aberdeen, 56
|
|
Controller of the Company since December 1995. Prior thereto he
was Assistant Controller of the Company. He is Controller of the
Companys subsidiary bank, Commerce Bank, N.A.
|
|
|
|
Kevin G. Barth, 49
|
|
Executive Vice President of the Company since April 2005 and
Executive Vice President of Commerce Bank, N.A. since October
1998. Senior Vice President of the Company and Officer of
Commerce Bank, N.A. prior thereto.
|
|
|
|
Sara E. Foster, 49
|
|
Senior Vice President of the Company since February 1998 and
Vice President of the Company prior thereto.
|
13
|
|
|
|
Name and Age
|
|
Positions with Registrant
|
|
|
|
|
|
David W. Kemper, 59
|
|
Chairman of the Board of Directors of the Company since November
1991, Chief Executive Officer of the Company since June 1986,
and President of the Company since April 1982. He is Chairman of
the Board, President and Chief Executive Officer of Commerce
Bank, N.A. He is the son of James M. Kemper, Jr. (a former
Director and former Chairman of the Board of the Company) and
the brother of Jonathan M. Kemper, Vice Chairman of the Company.
|
|
|
|
Jonathan M. Kemper, 56
|
|
Vice Chairman of the Company since November 1991 and Vice
Chairman of Commerce Bank, N.A. since December 1997. Prior
thereto, he was Chairman of the Board, Chief Executive Officer,
and President of Commerce Bank, N.A. He is the son of James M.
Kemper, Jr. (a former Director and former Chairman of the Board
of the Company) and the brother of David W. Kemper, Chairman,
President, and Chief Executive Officer of the Company.
|
|
|
|
Charles G. Kim, 49
|
|
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, N.A. since January
2004. Prior thereto, he was Senior Vice President of Commerce
Bank, N.A. (Clayton, MO), a former subsidiary of the Company.
|
|
|
|
Seth M. Leadbeater, 59
|
|
Vice Chairman of the Company since January 2004. Prior thereto
he was Executive Vice President of the Company. He has been Vice
Chairman of Commerce Bank, N.A. since September 2004. Prior
thereto he was Executive Vice President of Commerce Bank, N.A.
and President of Commerce Bank, N.A. (Clayton, MO).
|
|
|
|
Robert C. Matthews, Jr., 62
|
|
Executive Vice President and Chief Credit Officer of the Company
since December 1989. Executive Vice President of Commerce Bank,
N.A. since December 1997.
|
|
|
|
Michael J. Petrie, 53
|
|
Senior Vice President of the Company since April 1995. Prior
thereto, he was Vice President of the Company.
|
|
|
|
Robert J. Rauscher, 52
|
|
Senior Vice President of the Company since October 1997. Senior
Vice President of Commerce Bank, N.A. prior thereto.
|
|
|
|
V. Raymond Stranghoener, 58
|
|
Executive Vice President of the Company since July 2005 and
Senior Vice President of the Company prior thereto. Prior to his
employment with the Company in October 1999, he was employed at
BankAmerica Corp. as National Executive of the Bank of America
Private Bank Wealth Strategies Group.
|
14
PART II
|
|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Commerce
Bancshares, Inc.
Common
Stock Data
The following table sets forth the high and low prices of actual
transactions for the Companys common stock and cash
dividends paid for the periods indicated (restated for the 5%
stock dividend distributed in December 2009).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
|
|
2009
|
|
First
|
|
$
|
42.30
|
|
|
$
|
26.48
|
|
|
$
|
.229
|
|
|
|
Second
|
|
|
37.38
|
|
|
|
28.31
|
|
|
|
.229
|
|
|
|
Third
|
|
|
38.08
|
|
|
|
29.47
|
|
|
|
.229
|
|
|
|
Fourth
|
|
|
40.38
|
|
|
|
34.19
|
|
|
|
.229
|
|
|
|
2008
|
|
First
|
|
$
|
41.36
|
|
|
$
|
34.47
|
|
|
$
|
.227
|
|
|
|
Second
|
|
|
41.41
|
|
|
|
35.76
|
|
|
|
.227
|
|
|
|
Third
|
|
|
48.06
|
|
|
|
33.11
|
|
|
|
.227
|
|
|
|
Fourth
|
|
|
50.34
|
|
|
|
33.75
|
|
|
|
.227
|
|
|
|
2007
|
|
First
|
|
$
|
43.86
|
|
|
$
|
40.25
|
|
|
$
|
.216
|
|
|
|
Second
|
|
|
42.26
|
|
|
|
38.58
|
|
|
|
.216
|
|
|
|
Third
|
|
|
41.81
|
|
|
|
37.39
|
|
|
|
.216
|
|
|
|
Fourth
|
|
|
42.01
|
|
|
|
38.06
|
|
|
|
.216
|
|
|
|
Commerce Bancshares, Inc. common shares are listed on the Nasdaq
Global Select Market (NASDAQ) under the symbol CBSH. The Company
had 4,444 shareholders of record as of December 31,
2009.
15
Performance
Graph
The following graph presents a comparison of Company (CBSH)
performance to the indices named below. It assumes $100 invested
on December 31, 2004 with dividends invested on a Total
Return basis.
The following table sets forth information about the
Companys purchases of its $5 par value common stock,
its only class of stock registered pursuant to Section 12
of the Exchange Act, during the fourth quarter of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Shares Purchased
|
|
|
Maximum Number that
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
as Part of Publicly
|
|
|
May Yet Be Purchased
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Announced Program
|
|
|
Under the Program
|
|
|
|
|
October 1 31, 2009
|
|
|
1,459
|
|
|
$
|
39.72
|
|
|
|
1,459
|
|
|
|
2,861,999
|
|
November 1 30, 2009
|
|
|
216
|
|
|
$
|
38.64
|
|
|
|
216
|
|
|
|
2,861,783
|
|
December 1 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,861,783
|
|
|
|
Total
|
|
|
1,675
|
|
|
$
|
39.58
|
|
|
|
1,675
|
|
|
|
2,861,783
|
|
|
|
The Companys stock purchases shown above were made under a
3,000,000 share authorization by the Board of Directors on
February 1, 2008. Under this authorization,
2,861,783 shares remained available for purchase at
December 31, 2009.
16
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The required information is set forth below in Item 7.
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Commerce Bancshares, Inc. (the Company) operates as a
super-community bank offering an array of sophisticated
financial products delivered with high-quality, personal
customer 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
approximately 370 locations in Missouri, Kansas, Illinois,
Oklahoma and Colorado using delivery platforms which include an
extensive network of branches and ATM machines, full-featured
online banking, and a central contact center.
The core of the Companys competitive advantage is its
focus on the local markets it services and its concentration on
relationship banking, with high service levels and competitive
products. In order to enhance shareholder value, the Company
grows its core revenue by expanding new and existing customer
relationships, utilizing improved technology, and enhancing
customer satisfaction.
Various indicators are used by management in evaluating the
Companys financial condition and operating performance.
Among these indicators are the following:
|
|
|
|
|
Net income and growth in earnings per share Net
income was $169.1 million, a decline of 10.4% compared to
the previous year. The return on average assets was .96%.
Diluted earnings per share declined 12.3% in 2009 compared to
2008.
|
|
|
|
Growth in total revenue Total revenue is comprised
of net interest income and non-interest income. Total revenue in
2009 grew 6.6% over 2008, which resulted from growth of
$42.8 million, or 7.2%, in net interest income coupled with
growth of $20.9 million, or 5.6%, in non-interest income.
Total revenue has risen 4.9%, compounded annually, over the last
five years.
|
|
|
|
Expense control Non-interest expense grew by 1.1%
this year. Salaries and employee benefits, the largest expense
component, grew by 3.6%, due to merit increases and higher
pension and medical costs.
|
|
|
|
Asset quality Net loan charge-offs in 2009 increased
$69.0 million over those recorded in 2008, and averaged
1.31% of loans compared to .64% in the previous year. Total
non-performing assets amounted to $116.7 million, an
increase of $37.6 million over balances at the previous
year end, and represented 1.15% of loans outstanding.
|
|
|
|
Shareholder return Total shareholder return,
including the change in stock price and dividend reinvestment,
was 1.9% over the past 5 years and 8.5% over the past
10 years.
|
17
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)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Return on total assets
|
|
|
.96
|
%
|
|
|
1.15
|
%
|
|
|
1.33
|
%
|
|
|
1.54
|
%
|
|
|
1.60
|
%
|
Return on total equity
|
|
|
9.76
|
|
|
|
11.81
|
|
|
|
13.97
|
|
|
|
15.92
|
|
|
|
16.16
|
|
Equity to total assets
|
|
|
9.83
|
|
|
|
9.71
|
|
|
|
9.55
|
|
|
|
9.70
|
|
|
|
9.89
|
|
Loans to
deposits(1)
|
|
|
79.79
|
|
|
|
92.11
|
|
|
|
88.49
|
|
|
|
84.73
|
|
|
|
81.34
|
|
Non-interest bearing deposits to total deposits
|
|
|
6.66
|
|
|
|
5.47
|
|
|
|
5.45
|
|
|
|
5.78
|
|
|
|
6.23
|
|
Net yield on interest earning assets (tax equivalent basis)
|
|
|
3.93
|
|
|
|
3.96
|
|
|
|
3.85
|
|
|
|
3.95
|
|
|
|
3.89
|
|
(Based on end of period data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income to
revenue(2)
|
|
|
38.43
|
|
|
|
38.80
|
|
|
|
40.85
|
|
|
|
40.72
|
|
|
|
40.03
|
|
Efficiency
ratio(3)
|
|
|
59.89
|
|
|
|
63.08
|
|
|
|
62.65
|
|
|
|
60.20
|
|
|
|
59.20
|
|
Tier I risk-based capital ratio
|
|
|
13.04
|
|
|
|
10.92
|
|
|
|
10.31
|
|
|
|
11.25
|
|
|
|
12.21
|
|
Total risk-based capital ratio
|
|
|
14.39
|
|
|
|
12.31
|
|
|
|
11.49
|
|
|
|
12.56
|
|
|
|
13.63
|
|
Tier I leverage ratio
|
|
|
9.58
|
|
|
|
9.06
|
|
|
|
8.76
|
|
|
|
9.05
|
|
|
|
9.43
|
|
Tangible equity to assets
ratio(4)
|
|
|
9.71
|
|
|
|
8.25
|
|
|
|
8.61
|
|
|
|
8.77
|
|
|
|
9.32
|
|
Cash dividend payout ratio
|
|
|
44.15
|
|
|
|
38.54
|
|
|
|
33.76
|
|
|
|
30.19
|
|
|
|
28.92
|
|
|
|
|
|
|
(1) |
|
Includes loans held for
sale. |
|
(2) |
|
Revenue includes net interest
income and non-interest income. |
|
(3) |
|
The efficiency ratio is
calculated as non-interest expense (excluding intangibles
amortization) as a percent of revenue. |
|
(4) |
|
The tangible equity ratio is
calculated as stockholders equity reduced by goodwill and
other intangible assets (excluding mortgage servicing rights)
divided by total assets reduced by goodwill and other intangible
assets (excluding mortgage servicing rights). |
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net interest income
|
|
$
|
635,502
|
|
|
$
|
592,739
|
|
|
$
|
538,072
|
|
|
$
|
513,199
|
|
|
$
|
501,702
|
|
Provision for loan losses
|
|
|
160,697
|
|
|
|
108,900
|
|
|
|
42,732
|
|
|
|
25,649
|
|
|
|
28,785
|
|
Non-interest income
|
|
|
396,585
|
|
|
|
375,712
|
|
|
|
371,581
|
|
|
|
352,586
|
|
|
|
334,837
|
|
Investment securities gains (losses), net
|
|
|
(7,195
|
)
|
|
|
30,294
|
|
|
|
8,234
|
|
|
|
9,035
|
|
|
|
6,362
|
|
Non-interest expense
|
|
|
622,063
|
|
|
|
615,380
|
|
|
|
574,159
|
|
|
|
522,391
|
|
|
|
495,649
|
|
Net income
|
|
|
169,075
|
|
|
|
188,655
|
|
|
|
206,660
|
|
|
|
219,842
|
|
|
|
223,247
|
|
Net income per common share-basic*
|
|
|
2.07
|
|
|
|
2.37
|
|
|
|
2.58
|
|
|
|
2.70
|
|
|
|
2.64
|
|
Net income per common share-diluted*
|
|
|
2.07
|
|
|
|
2.36
|
|
|
|
2.56
|
|
|
|
2.67
|
|
|
|
2.60
|
|
Cash dividends
|
|
|
74,720
|
|
|
|
72,055
|
|
|
|
68,915
|
|
|
|
65,758
|
|
|
|
63,421
|
|
Cash dividends per share*
|
|
|
.914
|
|
|
|
.907
|
|
|
|
.864
|
|
|
|
.806
|
|
|
|
.752
|
|
Market price per share*
|
|
|
38.72
|
|
|
|
41.86
|
|
|
|
40.69
|
|
|
|
41.82
|
|
|
|
42.88
|
|
Book value per share*
|
|
|
22.72
|
|
|
|
19.85
|
|
|
|
19.33
|
|
|
|
17.86
|
|
|
|
16.31
|
|
Common shares outstanding*
|
|
|
83,008
|
|
|
|
79,580
|
|
|
|
79,155
|
|
|
|
80,979
|
|
|
|
82,179
|
|
Total assets
|
|
|
18,120,189
|
|
|
|
17,532,447
|
|
|
|
16,204,831
|
|
|
|
15,230,349
|
|
|
|
13,885,545
|
|
Loans, including held for sale
|
|
|
10,490,327
|
|
|
|
11,644,544
|
|
|
|
10,841,264
|
|
|
|
9,960,118
|
|
|
|
8,899,183
|
|
Investment securities
|
|
|
6,473,388
|
|
|
|
3,780,116
|
|
|
|
3,297,015
|
|
|
|
3,496,323
|
|
|
|
3,770,181
|
|
Deposits
|
|
|
14,210,451
|
|
|
|
12,894,733
|
|
|
|
12,551,552
|
|
|
|
11,744,854
|
|
|
|
10,851,813
|
|
Long-term debt
|
|
|
1,236,062
|
|
|
|
1,447,781
|
|
|
|
1,083,636
|
|
|
|
553,934
|
|
|
|
269,390
|
|
Equity
|
|
|
1,885,905
|
|
|
|
1,579,467
|
|
|
|
1,530,156
|
|
|
|
1,446,536
|
|
|
|
1,340,475
|
|
Non-performing assets
|
|
|
116,670
|
|
|
|
79,077
|
|
|
|
33,417
|
|
|
|
18,223
|
|
|
|
11,713
|
|
|
|
|
|
|
* |
|
Restated for the 5% stock
dividend distributed in December 2009. |
18
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change
|
|
|
% Change
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
09-08
|
|
|
08-07
|
|
|
09-08
|
|
|
08-07
|
|
|
|
|
Net interest income
|
|
$
|
635,502
|
|
|
$
|
592,739
|
|
|
$
|
538,072
|
|
|
$
|
42,763
|
|
|
$
|
54,667
|
|
|
|
7.2
|
%
|
|
|
10.2
|
%
|
Provision for loan losses
|
|
|
(160,697
|
)
|
|
|
(108,900
|
)
|
|
|
(42,732
|
)
|
|
|
51,797
|
|
|
|
66,168
|
|
|
|
47.6
|
|
|
|
154.8
|
|
Non-interest income
|
|
|
396,585
|
|
|
|
375,712
|
|
|
|
371,581
|
|
|
|
20,873
|
|
|
|
4,131
|
|
|
|
5.6
|
|
|
|
1.1
|
|
Investment securities gains (losses), net
|
|
|
(7,195
|
)
|
|
|
30,294
|
|
|
|
8,234
|
|
|
|
(37,489
|
)
|
|
|
22,060
|
|
|
|
(123.8
|
)
|
|
|
267.9
|
|
Non-interest expense
|
|
|
(622,063
|
)
|
|
|
(615,380
|
)
|
|
|
(574,159
|
)
|
|
|
6,683
|
|
|
|
41,221
|
|
|
|
1.1
|
|
|
|
7.2
|
|
Income taxes
|
|
|
(73,757
|
)
|
|
|
(85,077
|
)
|
|
|
(93,737
|
)
|
|
|
(11,320
|
)
|
|
|
(8,660
|
)
|
|
|
(13.3
|
)
|
|
|
(9.2
|
)
|
Non-controlling interest (expense) income
|
|
|
700
|
|
|
|
(733
|
)
|
|
|
(599
|
)
|
|
|
1,433
|
|
|
|
(134
|
)
|
|
|
195.5
|
|
|
|
(22.4
|
)
|
|
|
Net income
|
|
$
|
169,075
|
|
|
$
|
188,655
|
|
|
$
|
206,660
|
|
|
$
|
(19,580
|
)
|
|
$
|
(18,005
|
)
|
|
|
(10.4
|
)%
|
|
|
(8.7
|
)%
|
|
|
Net income for 2009 was $169.1 million, a decline of
$19.6 million, or 10.4%, compared to $188.7 million in
2008. The decline in net income resulted from a
$51.8 million increase in the provision for loan losses and
a $37.5 million decrease in investment securities gains,
but was partly offset by increases of $42.8 million in net
interest income and $20.9 million in non-interest income.
Diluted income per share was $2.07 in 2009 compared to $2.36 in
2008. Several significant items of non-interest income and
non-interest expense affected results for 2009 and 2008. During
2009, FDIC insurance expense rose to $27.4 million compared
to $2.1 million in 2008. Results for 2008 included a
$22.2 million gain on the redemption of Visa, Inc. (Visa)
stock, a loss of $33.3 million relating to purchases of
auction rate securities, and a $6.9 million gain on a bank
branch sale. Reductions in a Visa indemnification obligation,
discussed further in the Non-Interest Expense section of this
discussion, were recorded in both years. Excluding these items,
diluted income per share would have been $2.27 in 2009 and $2.33
in 2008, or a decline of $.06. The return on average assets was
.96% in 2009 compared to 1.15% in 2008, and the return on
average equity was 9.76% compared to 11.81%. At
December 31, 2009, the ratio of tangible equity to assets
improved to 9.71% compared to 8.25% at year end 2008.
During 2009, net interest income increased $42.8 million,
or 7.2%, compared to 2008. This growth was mainly the result of
lower rates paid on deposits and borrowings coupled with a
higher average balance in investment securities, but partly
offset by lower yields on loans and investment securities and
declining loan balances. The provision for loan losses totaled
$160.7 million in 2009, an increase of $51.8 million
over the prior year and indicative of the general decline in the
U.S. economy. The Company incurred higher net loan
charge-offs in all loan categories, with the largest increases
in construction, consumer, consumer credit card, and business
loans.
Non-interest income in 2009 increased $20.9 million, or
5.6%, over amounts reported in the previous year, mainly due to
growth in bank card and student lending fees, which rose
$8.3 million and $20.8 million, respectively. Student
lending (included in loan fees and sales) included higher gains
on loan sales and the reversal of certain impairment charges
which had been recorded in 2008. Non-interest expense increased
$6.7 million, or 1.1%, over 2008. This growth in 2009
included increases of $25.3 million in FDIC insurance
expense and $12.2 million in salaries and employee benefits
expense, in addition to a $7.1 million decline in
reductions to the Visa indemnification obligation. These
increases in expense were largely offset by the 2008 loss of
$33.3 million on the purchase of auction rate securities
(ARS), discussed further in the Non-Interest Expense section.
Income tax expense declined 13.3% in 2009 and resulted in an
effective tax rate of 30.4%, which was slightly lower than the
effective tax rate of 31.1% in the previous year. The decrease
in income tax expense in 2009 compared to 2008 was mainly due to
changes in the mix of taxable and non-taxable income on lower
pre-tax income.
During 2008, net income was $188.7 million, a decrease of
$18.0 million, or 8.7%, compared to $206.7 million in
2007. The decline in net income was mainly the result of an
increase in the provision for loan losses of $66.2 million
coupled with a 7.2% increase in non-interest expense, but partly
offset by increases in net interest income, investment
securities gains and non-interest income. Net interest income
increased $54.7 million, or 10.2%, in 2008 compared to
2007, mainly as a result of growth in loans and
19
investment securities, coupled with a large reduction in rates
paid on interest bearing liabilities. These effects were partly
offset by lower loan yields and higher borrowings. In 2008, net
investment securities gains totaled $30.3 million compared
to $8.2 million in 2007. Gains in 2008 included a
$22.2 million gain on the redemption of Visa stock and a
gain of $7.9 million on the sale of certain ARS, further
described in the Investment Securities Gains (Losses) section of
this discussion.
Non-interest income in 2008 rose $4.1 million, or 1.1%,
over amounts reported in the previous year and included a
$9.4 million impairment charge on certain loans held for
sale. Non-interest expense increased $41.2 million, or
7.2%, over 2007, mainly due to the $33.3 million ARS loss
mentioned previously and a $9.6 million reduction in the
Visa indemnification obligation. The provision for loan losses
totaled $108.9 million in 2008, an increase of
$66.2 million over 2007, and reflected higher net loan
charge-offs, mainly in consumer and consumer credit card loans.
Income tax expense declined 9.2% in 2008 and resulted in an
effective tax rate of 31.1%, which was slightly lower than the
effective tax rate of 31.2% in the previous year. The decrease
in income tax expense in 2008 compared to 2007 was mainly due to
lower pre-tax earnings.
The Company continually evaluates the profitability of its
network of bank branches throughout its markets. As a result of
this evaluation process, the Company may periodically sell the
assets and liabilities of certain branches, or may sell the
premises of specific banking facilities. In February 2009, the
Company sold its branch in Lakin, Kansas. In this transaction,
the Company sold the bank facility and certain deposits totaling
approximately $4.7 million and recorded a gain of $644
thousand. During the second quarter of 2008, the Company sold
its banking branch, including the facility, in Independence,
Kansas. In this transaction, approximately $23.3 million in
loans, $85.0 million in deposits, and various other assets
and liabilities were sold. A gain of $6.9 million was
recorded.
The Company distributed a 5% stock dividend for the sixteenth
consecutive year on December 15, 2009. All per share and
average share data in this report has been restated to reflect
the 2009 stock dividend.
Critical
Accounting Policies
The Companys 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 Companys
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 Companys
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, lease, construction and
business real estate loans. These loans are normally larger and
more complex, and their collection rates are harder to predict.
Personal loans, including personal mortgage, credit card and
consumer loans, are individually smaller and perform in a more
homogenous manner, making loss estimates more predictable.
Further discussion of the methodologies used in establishing the
allowance is provided in the Allowance for Loan Losses section
of this discussion.
20
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, 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
Companys 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 Companys
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 which
are observable in the marketplace, or can be derived from
observable data. Such securities totaled approximately
$5.7 billion, or 89.9% of the available for sale portfolio
at December 31, 2009, and were classified as Level 2
measurements. The Company also holds $167.8 million in
auction rate securities. These were classified as Level 3
measurements, as no market currently exists for these
securities, and fair values were derived from internally
generated cash flow valuation models which used unobservable
inputs which were 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 Companys 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, 2009, non-agency guaranteed mortgage-backed
securities with a par value of $171.6 million were
identified as other-than-temporarily impaired. The
credit-related impairment loss on these securities amounted to
$2.5 million, which was recorded in the consolidated income
statement in investment securities gains (losses), net. The
noncredit-related loss on these securities, which was recorded
in other comprehensive income, was $30.3 million on a
pre-tax basis.
The Company, through its direct holdings and its Small Business
Investment 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 $49.5 million at
December 31, 2009. Changes in fair value are reflected in
current earnings, and reported in investment securities gains
(losses), net in the consolidated income statements. Because
there is no observable market data for these securities, their
fair values are internally developed using available information
and managements judgment, and 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
21
these companies, the evaluation of the investee companys
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, and 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
Companys financial position and results of operations.
22
Net
Interest Income
Net interest income, the largest source of revenue, results from
the Companys 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Change due to
|
|
|
|
|
|
Change due to
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
(In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
Interest income, fully taxable equivalent basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(31,745
|
)
|
|
$
|
(66,327
|
)
|
|
$
|
(98,072
|
)
|
|
$
|
57,851
|
|
|
$
|
(137,334
|
)
|
|
$
|
(79,483
|
)
|
Loans held for sale
|
|
|
2,161
|
|
|
|
(8,910
|
)
|
|
|
(6,749
|
)
|
|
|
1,741
|
|
|
|
(8,713
|
)
|
|
|
(6,972
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
|
5,037
|
|
|
|
(1,503
|
)
|
|
|
3,534
|
|
|
|
(9,129
|
)
|
|
|
63
|
|
|
|
(9,066
|
)
|
State and municipal obligations
|
|
|
9,669
|
|
|
|
(3,557
|
)
|
|
|
6,112
|
|
|
|
5,698
|
|
|
|
(1,344
|
)
|
|
|
4,354
|
|
Mortgage and asset-backed securities
|
|
|
63,862
|
|
|
|
(22,144
|
)
|
|
|
41,718
|
|
|
|
17,036
|
|
|
|
6,090
|
|
|
|
23,126
|
|
Other securities
|
|
|
4,524
|
|
|
|
(1,155
|
)
|
|
|
3,369
|
|
|
|
1,129
|
|
|
|
(2,010
|
)
|
|
|
(881
|
)
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
(7,361
|
)
|
|
|
(704
|
)
|
|
|
(8,065
|
)
|
|
|
(4,848
|
)
|
|
|
(12,746
|
)
|
|
|
(17,594
|
)
|
Interest earning deposits with banks
|
|
|
1,183
|
|
|
|
(574
|
)
|
|
|
609
|
|
|
|
198
|
|
|
|
|
|
|
|
198
|
|
|
|
Total interest income
|
|
|
47,330
|
|
|
|
(104,874
|
)
|
|
|
(57,544
|
)
|
|
|
69,676
|
|
|
|
(155,994
|
)
|
|
|
(86,318
|
)
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
113
|
|
|
|
(657
|
)
|
|
|
(544
|
)
|
|
|
42
|
|
|
|
(923
|
)
|
|
|
(881
|
)
|
Interest checking and money market
|
|
|
6,211
|
|
|
|
(35,369
|
)
|
|
|
(29,158
|
)
|
|
|
7,117
|
|
|
|
(61,197
|
)
|
|
|
(54,080
|
)
|
Time open and C.D.s of less than $100,000
|
|
|
(3,466
|
)
|
|
|
(21,874
|
)
|
|
|
(25,340
|
)
|
|
|
(9,775
|
)
|
|
|
(23,860
|
)
|
|
|
(33,635
|
)
|
Time open and C.D.s of $100,000 and over
|
|
|
8,424
|
|
|
|
(28,718
|
)
|
|
|
(20,294
|
)
|
|
|
7,566
|
|
|
|
(25,640
|
)
|
|
|
(18,074
|
)
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
(8,439
|
)
|
|
|
(12,947
|
)
|
|
|
(21,386
|
)
|
|
|
(16,534
|
)
|
|
|
(41,845
|
)
|
|
|
(58,379
|
)
|
Other borrowings
|
|
|
(4,611
|
)
|
|
|
(1,767
|
)
|
|
|
(6,378
|
)
|
|
|
38,018
|
|
|
|
(13,888
|
)
|
|
|
24,130
|
|
|
|
Total interest expense
|
|
|
(1,768
|
)
|
|
|
(101,332
|
)
|
|
|
(103,100
|
)
|
|
|
26,434
|
|
|
|
(167,353
|
)
|
|
|
(140,919
|
)
|
|
|
Net interest income, fully taxable equivalent basis
|
|
$
|
49,098
|
|
|
$
|
(3,542
|
)
|
|
$
|
45,556
|
|
|
$
|
43,242
|
|
|
$
|
11,359
|
|
|
$
|
54,601
|
|
|
|
Net interest income totaled $635.5 million in 2009,
representing an increase of $42.8 million, or 7.2%,
compared to $592.7 million in 2008. On a tax equivalent
basis, net interest income totaled $654.2 million and
increased $45.6 million, or 7.5%, over the previous year.
This increase was mainly the result of lower rates paid on
deposits and borrowings coupled with higher average investment
securities balances during the year, but partly offset by lower
average loan balances and yields. The net yield on earning
assets (tax equivalent) was 3.93% in 2009 compared with 3.96% in
the previous year.
During 2009, interest income on loans (tax equivalent) declined
$98.1 million from 2008 due to lower rates earned on most
lending products coupled with lower loan balances, especially in
business, business real estate and consumer loans. The average
rate earned on the loan portfolio decreased 75 basis points
to 5.27%
23
compared to 6.02% in the previous year. Average loan balances
decreased $306.0 million, or 2.8%, reflecting lower line of
credit usage, lower demand and pay-downs. Additionally, the
Company has ceased most marine and recreational vehicle lending
in the consumer loan portfolio. The student loan portfolio,
which was acquired late in the fourth quarter of 2008,
contributed $9.2 million to interest income with average
loan balances of $344.2 million during 2009. Tax equivalent
interest earned on investment securities increased by
$54.7 million, or 29.8%, due to higher average balances of
securities, partially offset by a decrease in rates earned on
these investments. Average balances of mortgage and asset-backed
securities increased 51.4% to $3.7 billion, and state and
municipal obligations increased 25.6%. Additionally, average
balances of U.S. government and federal agency securities
increased 67.8% during the year to $307.1 million,
primarily a result of purchases of U.S. Treasury
inflation-protected securities during the last six months of
2009. Interest earned on federal funds sold and resale agreement
assets declined $8.1 million, mainly due to a
$381.5 million decrease in average balances coupled with
much lower overnight rates. Average rates (tax equivalent)
earned on interest earning assets in 2009 decreased to 4.85%
compared to 5.63% in the previous year, or a decline of
78 basis points.
Interest expense on deposits decreased $75.3 million in
2009 compared to 2008. The decline resulted from much lower
rates paid on all deposit products, but was partly offset by the
effects of higher average balances of money market accounts and
certificates of deposit of $100,000 and over. Average rates paid
on deposit balances declined 76 basis points from 1.68% in
2008 to .92% in 2009. Interest expense on borrowings declined
$27.8 million, or 44.1%, as a result of lower rates paid
and lower average balances of federal funds purchased and
repurchase agreement borrowings. The average rate paid on
interest bearing liabilities decreased to 1.04% compared to
1.83% in 2008.
During 2008, interest income on loans (tax equivalent) declined
$79.5 million from 2007 due to lower rates earned on
virtually all lending products but offset by higher loan
balances, especially in business, consumer and consumer credit
card loans. The lower rates earned on the loan portfolio were
related to the actions taken by the Federal Reserve Bank during
2008 to reduce interest rate levels, which caused the
Companys portfolio to re-price quickly. Tax equivalent
interest earned on investment securities increased by
$17.5 million, or 10.5%, due to higher average balances of
mortgage-backed and municipal securities, coupled with higher
rates earned on these investments. Interest earned on federal
funds sold and resale agreement assets declined
$17.6 million, mainly due to lower average balances coupled
with lower overnight rates. Average rates (tax equivalent)
earned on interest earning assets in 2008 decreased to 5.63%
compared to 6.61% in the previous year, or a decline of
98 basis points.
Interest expense on deposits in 2008 decreased
$106.7 million compared to 2007, mainly the result of much
lower rates paid on all deposit products but partly offset by
the effects of higher average balances of money market accounts
and certificates of deposit of $100,000 and over. Average rates
paid on deposit balances declined 100 basis points from
2.68% in 2007 to 1.68% in 2008. Interest expense on borrowings
declined $34.2 million, or 35.2%, mainly as a result of
lower rates paid and lower average balances of federal funds
purchased and repurchase agreement borrowings. Also, while
advances from the Federal Home Loan Bank (FHLB) and the Federal
Reserves Term Auction Facility increased on average by
$788.3 million, rates on these borrowings dropped
significantly in 2008. The average rate paid on interest bearing
liabilities decreased to 1.83% compared to 3.01% in 2007.
Provision
for Loan Losses
The provision for loan losses totaled $160.7 million in
2009, up from $108.9 million in the previous year, or an
increase of $51.8 million. In 2007 the provision totaled
$42.7 million. The growth in the provision in 2009 was the
result of deteriorating economic conditions affecting the
Companys loan portfolio, higher watch list loan totals,
and increasing loan loss experience. As a result, the Company
increased its allowance for loan losses by $21.9 million in
2009. 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.
24
Non-Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
09-08
|
|
|
08-07
|
|
|
|
|
Deposit account charges and other fees
|
|
$
|
106,362
|
|
|
$
|
110,361
|
|
|
$
|
117,350
|
|
|
|
(3.6
|
)%
|
|
|
(6.0
|
)%
|
Bank card transaction fees
|
|
|
122,124
|
|
|
|
113,862
|
|
|
|
103,613
|
|
|
|
7.3
|
|
|
|
9.9
|
|
Trust fees
|
|
|
76,831
|
|
|
|
80,294
|
|
|
|
78,840
|
|
|
|
(4.3
|
)
|
|
|
1.8
|
|
Bond trading income
|
|
|
22,432
|
|
|
|
15,665
|
|
|
|
9,338
|
|
|
|
43.2
|
|
|
|
67.8
|
|
Consumer brokerage services
|
|
|
10,831
|
|
|
|
12,156
|
|
|
|
11,754
|
|
|
|
(10.9
|
)
|
|
|
3.4
|
|
Loan fees and sales
|
|
|
21,273
|
|
|
|
(2,413
|
)
|
|
|
8,835
|
|
|
|
N.M.
|
|
|
|
N.M.
|
|
Other
|
|
|
36,732
|
|
|
|
45,787
|
|
|
|
41,851
|
|
|
|
(19.8
|
)
|
|
|
9.4
|
|
|
|
Total non-interest income
|
|
$
|
396,585
|
|
|
$
|
375,712
|
|
|
$
|
371,581
|
|
|
|
5.6
|
%
|
|
|
1.1
|
%
|
|
|
Non-interest income as a % of total revenue*
|
|
|
38.4
|
%
|
|
|
38.8
|
%
|
|
|
40.8
|
%
|
|
|
|
|
|
|
|
|
Total revenue per full-time equivalent employee
|
|
$
|
201.4
|
|
|
$
|
185.6
|
|
|
$
|
179.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Total revenue is calculated as
net interest income plus non-interest income. |
Non-interest income totaled $396.6 million, an increase of
$20.9 million, or 5.6%, compared to $375.7 million in
2008. Deposit account fees declined $4.0 million, or 3.6%,
as a result of lower overdraft fee revenue, which fell
$6.8 million, or 9.5%. Overdraft fees comprised 60.9% of
total deposit account fee income in 2009. Partly offsetting this
decline was an increase in cash management fees, which grew
$3.2 million, or 10.6%, over the prior year. Bank card fee
income rose $8.3 million, or 7.3% overall, due to continued
growth in transaction fees earned on corporate card, debit card
and merchant transactions, which increased 24.1%, 4.6% and 3.4%,
respectively, but was negatively impacted by lower retail sales
affecting credit card fees. Trust fees decreased
$3.5 million, or 4.3%, mainly in institutional and
corporate fees and reflected the impact that lower markets have
had on trust asset values during 2009 and the effects of low
interest rates on money market assets held in trust accounts.
The market value of total customer trust assets (on which fees
are charged) totaled $22.1 billion at year end 2009, and
grew 14.0% over year end 2008. Bond trading income rose
$6.8 million due to higher sales of fixed income securities
to correspondent banks and corporate customers, while consumer
brokerage services revenue declined $1.3 million due to
lower fees earned on sales of annuity and mutual fund products.
Loan fees and sales increased by $23.7 million, as gains on
student loan sales increased $20.8 million. The 2009 gains
included the reversal of impairment reserves of
$8.6 million on certain held for sale student loans,
through sales of the related loans and recoveries in the fair
value of most of the remaining outstanding loans. The impairment
had originally been established in 2008 due to liquidity
concerns, which at year end 2009 were largely alleviated. In
addition, mortgage banking revenue and loan commitment fees both
increased over 2008. The decrease in other non-interest income
of $9.1 million from 2008 was mainly due to a gain of
$6.9 million recorded in the second quarter of 2008 on the
sale of a banking branch in Independence, Kansas, mentioned
previously. Other declines were reported in cash sweep
commissions, equipment rental income and fees on interest rate
swap sales. Partly offsetting these declines was an impairment
charge of $1.1 million recorded in 2008 on an office
building held for sale, which formerly housed the Companys
check processing operations.
During 2008, non-interest income increased $4.1 million, or
1.1%, over 2007 to $375.7 million. Results for 2008
included an impairment charge of $9.4 million, recorded in
loan fees and sales, on certain student loans held for sale. The
Company has agreements to sell its portfolio of originated
student loans to various student loan servicing agencies. Due to
uncertainties surrounding some of these agencies abilities
to fulfill these contracts in the future, the Company recorded
the impairment in order to adjust a portion of the portfolio,
totaling $206.1 million, to fair value. Most of the charge
was reversed in 2009, as mentioned above. During 2008, bank card
fee income grew by $10.2 million, or 9.9%, over 2007 due to
solid growth in debit card and corporate credit card fee income,
which grew by 9.4% and 28.6%, respectively. However, deposit
account fees declined by $7.0 million, or 6.0%, mainly due
to a decrease of $10.4 million in deposit account overdraft
fees. This decline was partly offset by growth in corporate cash
management fee income, which increased $4.5 million, or
17.2%. Trust fee income grew by $1.5 million, or 1.8%, and
was especially affected in the fourth quarter by lower market
values of the trust assets on which fees are based. Market
values of total trust
25
assets at year end 2008 were 14.6% lower than at year end 2007.
Consumer brokerage services revenue grew by $402 thousand, or
3.4%, on higher annuity commissions. Bond trading income
increased $6.3 million, or 67.8%, due to increased sales
volumes from its correspondent bank and commercial customers.
Other non-interest income rose $3.9 million over the prior
year, largely due to the $6.9 million gain on the
Independence branch sale. Additional increases occurred in cash
sweep commission income and fees on interest rate swap sales.
These increases were partly offset by the impairment charge on
the office building mentioned above, in addition to declines in
official check sales and equipment rental income.
Investment
Securities Gains (Losses), Net
Net gains and losses on investment securities during 2009, 2008
and 2007 are shown in the table below. Included in these amounts
are gains and losses arising from sales of bonds from the
Companys available for sale portfolio, including
credit-related losses on debt securities identified as
other-than-temporarily impaired. Also included are gains and
losses on sales of publicly traded common stock held by the
holding company, Commerce Bancshares, Inc. (the Parent). Gains
and losses relating to non-marketable private equity
investments, which are primarily held by the Parents
majority-owned venture capital subsidiaries, are also shown
below. These include fair value adjustments, in addition to
gains and losses realized upon disposition. The portion of the
activity attributable to minority interests is reported as
non-controlling interest in the consolidated income statement
and resulted in income of $1.1 million in 2009 and expense
of $299 thousand and $389 thousand in 2008 and 2007,
respectively.
Net securities losses of $7.2 million were recorded in
2009. Most of the loss resulted from a $5.0 million net
decline in fair value of various private equity securities. In
addition, credit-related
other-than-temporary
impairment (OTTI) losses of $2.5 million were recorded on
certain non-agency mortgage-backed securities with a par value
of $171.6 million. The non credit-related loss on these
securities, which was recorded in other comprehensive income,
was $30.3 million.
Net securities gains of $30.3 million were recorded in
2008, compared to net gains of $8.2 million in 2007. Most
of the net gain in 2008 occurred because of Visas
redemption of certain Class B stock held by its former
member banks. The redemption occurred in conjunction with an
initial public offering by Visa in which 500 thousand shares of
Class B stock held by the Company were redeemed, resulting
in a $22.2 million gain. Also, in December 2008,
$341.4 million in auction rate securities were sold in
exchange for federally guaranteed student loans, resulting in a
gain of $7.9 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred equity securities
|
|
$
|
|
|
|
$
|
(3,504
|
)
|
|
$
|
(663
|
)
|
Common stock
|
|
|
|
|
|
|
(294
|
)
|
|
|
2,521
|
|
Auction rate securities
|
|
|
|
|
|
|
7,861
|
|
|
|
|
|
Other bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains
|
|
|
322
|
|
|
|
1,140
|
|
|
|
1,069
|
|
OTTI losses
|
|
|
(2,473
|
)
|
|
|
|
|
|
|
|
|
Non-marketable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity investments
|
|
|
(5,044
|
)
|
|
|
2,895
|
|
|
|
5,307
|
|
Visa Class B stock
|
|
|
|
|
|
|
22,196
|
|
|
|
|
|
|
|
Total investment securities gains (losses), net
|
|
$
|
(7,195
|
)
|
|
$
|
30,294
|
|
|
$
|
8,234
|
|
|
|
26
Non-Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
09-08
|
|
|
08-07
|
|
|
|
|
Salaries
|
|
$
|
290,289
|
|
|
$
|
286,161
|
|
|
$
|
265,378
|
|
|
|
1.4
|
%
|
|
|
7.8
|
%
|
Employee benefits
|
|
|
55,490
|
|
|
|
47,451
|
|
|
|
43,390
|
|
|
|
16.9
|
|
|
|
9.4
|
|
Net occupancy
|
|
|
45,925
|
|
|
|
46,317
|
|
|
|
45,789
|
|
|
|
(.8
|
)
|
|
|
1.2
|
|
Equipment
|
|
|
25,472
|
|
|
|
24,569
|
|
|
|
24,121
|
|
|
|
3.7
|
|
|
|
1.9
|
|
Supplies and communication
|
|
|
32,156
|
|
|
|
35,335
|
|
|
|
34,162
|
|
|
|
(9.0
|
)
|
|
|
3.4
|
|
Data processing and software
|
|
|
61,789
|
|
|
|
56,387
|
|
|
|
50,342
|
|
|
|
9.6
|
|
|
|
12.0
|
|
Marketing
|
|
|
18,231
|
|
|
|
19,994
|
|
|
|
18,199
|
|
|
|
(8.8
|
)
|
|
|
9.9
|
|
Deposit insurance
|
|
|
27,373
|
|
|
|
2,051
|
|
|
|
1,412
|
|
|
|
N.M.
|
|
|
|
45.3
|
|
Loss on purchase of auction rate securities
|
|
|
|
|
|
|
33,266
|
|
|
|
|
|
|
|
N.M.
|
|
|
|
N.M.
|
|
Indemnification obligation
|
|
|
(2,496
|
)
|
|
|
(9,619
|
)
|
|
|
20,951
|
|
|
|
N.M.
|
|
|
|
N.M.
|
|
Other
|
|
|
67,834
|
|
|
|
73,468
|
|
|
|
70,415
|
|
|
|
(7.7
|
)
|
|
|
4.3
|
|
|
|
Total non-interest expense
|
|
$
|
622,063
|
|
|
$
|
615,380
|
|
|
$
|
574,159
|
|
|
|
1.1
|
%
|
|
|
7.2
|
%
|
|
|
Efficiency ratio
|
|
|
59.9
|
%
|
|
|
63.1
|
%
|
|
|
62.7
|
%
|
|
|
|
|
|
|
|
|
Salaries and benefits as a % of total non-interest expense
|
|
|
55.6
|
%
|
|
|
54.2
|
%
|
|
|
53.8
|
%
|
|
|
|
|
|
|
|
|
Number of full-time equivalent employees
|
|
|
5,125
|
|
|
|
5,217
|
|
|
|
5,083
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense was $622.1 million in 2009, an
increase of $6.7 million, or 1.1%, over the previous year.
A major expense to the Company in 2009 was FDIC deposit
insurance, which rose dramatically over amounts recorded in
previous years. The Company expects these costs to remain high
as the banking industry replenishes the FDIC insurance fund,
which has been depleted by the recent high levels of bank
failures across the country. The Company incurred total annual
expense of $27.4 million during 2009 as a result of normal
deposit premiums and special assessments, compared to
$2.1 million in 2008. Also, the FDIC required insured
institutions to prepay their quarterly risk-based assessments
for the fourth quarter of 2009 and subsequent years 2010 through
2012. Accordingly, a cash payment of $68.7 million was paid
by the Company on December 30, 2009. The payment has been
recorded as an asset and will be reduced each quarter as the
Companys regular quarterly assessments come due and are
expensed.
During 2009, salaries and benefits expense increased by
$12.2 million, or 3.6%, over 2008 due to merit increases
and higher pension and medical costs. Occupancy expense
decreased slightly, while equipment expense increased $903
thousand, or 3.7%, mainly due to higher data processing
equipment depreciation expense. Supplies and communication
expense decreased $3.2 million, or 9.0%, as a result of
lower supplies and courier expense. Data processing and software
costs grew by $5.4 million, or 9.6%. Core data processing
expense increased $3.5 million due to several new software
and servicing systems, in addition to higher bank card
processing costs, which increased in relation to higher bank
card revenues. Marketing expense decreased $1.8 million, or
8.8%. Other expense decreased $5.6 million, or 7.7%, partly
due to declines in travel and entertainment expense and
impairment charges on foreclosed property. Other decreases
occurred in leased asset depreciation, professional fees and
recruiting expense, which were partly offset by a decline in
loan origination cost deferrals.
In 2008, non-interest expense was $615.4 million, an
increase of 7.2% over the previous year. Salaries and benefits
expense grew by $24.8 million, or 8.0%, due to merit
increases, higher incentive payments, and increased medical
insurance costs. In addition, increased salary costs resulted
from higher staffing in areas such as commercial bank card,
private banking, and commercial banking, which were part of
certain growth initiatives established by the Company in 2007.
Occupancy, supplies and communication, and equipment costs grew
by 1.2%, 3.4%, and 1.9%, respectively, and were well controlled.
Occupancy costs increased mainly as a result of higher building
services and repairs expense. Equipment expense grew mainly due
to higher repairs and maintenance expense, partly offset by a
decline in equipment depreciation expense. Supplies and
27
communication costs were higher due to increased costs for
supplies and courier expense. Data processing and software
expense increased $6.0 million, or 12.0%, mainly due to
higher bank card processing costs. Exclusive of bank card costs,
core data processing expense increased $2.1 million, or
6.7%, over the prior year due to investments in new software and
servicing systems. Marketing expense also rose by
$1.8 million, or 9.9%, over the prior year mainly related
to deposit account product marketing and other campaigns
supporting Company initiatives. Other non-interest expense
increased $3.1 million, or 4.3%, in 2008 partly due to a
$2.5 million impairment charge on foreclosed land which was
sold later that year. Other increases occurred in travel and
entertainment, FHLB letter of credit fees, and credit card
rewards expense. Partly offsetting these increases were declines
in professional fees and leased asset depreciation.
Non-interest expense in 2008 also included a $33.3 million
non-cash loss related to the purchase of auction rate securities
from customers. The securities were purchased at par value from
the customers, and this loss represents the amount by which par
value exceeded estimated fair value on the purchase date. Most
of these securities were subsequently sold in the fourth quarter
of 2008, and the gain relating to that transaction was recorded
in investments securities gains (losses), as noted above.
Also included in non-interest expense were adjustments to the
Companys estimate of its share of certain litigation costs
arising from its member bank relationship with Visa. An
obligation was initially recorded in 2007 which represented the
Companys portion of litigation costs relating to various
suits against Visa. The obligation has been periodically
adjusted to reflect escrow funding by Visa, suit settlements,
and changes in estimates of remaining litigation costs. As a
result of these adjustments, reductions to the obligation were
recorded in 2009 and 2008 of $2.5 million and
$9.6 million, respectively.
Income
Taxes
Income tax expense was $73.8 million in 2009, compared to
$85.1 million in 2008 and $93.7 million in 2007.
Income tax expense in 2009 decreased 13.3% from 2008, compared
to an 11.8% decrease in pre-tax income. The effective tax rate
was 30.4%, 31.1% and 31.2% in 2009, 2008 and 2007, respectively.
The Companys effective tax rates in those years were lower
than the federal statutory rate of 35% mainly due to tax-exempt
interest on state and local municipal obligations.
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 the Company
intends to hold to their maturity, and includes a portfolio of
student loans which was acquired in 2008. The Companys
portfolio of originated student loans was classified as held for
sale in 2006, and is included in the table below only for 2005.
Loans held for sale are discussed in the following section. A
schedule of average balances invested in each loan category
below appears on page 60.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Business
|
|
$
|
2,877,936
|
|
|
$
|
3,404,371
|
|
|
$
|
3,257,047
|
|
|
$
|
2,860,692
|
|
|
$
|
2,527,654
|
|
Real estate construction and land
|
|
|
665,110
|
|
|
|
837,369
|
|
|
|
668,701
|
|
|
|
658,148
|
|
|
|
424,561
|
|
Real estate business
|
|
|
2,104,030
|
|
|
|
2,137,822
|
|
|
|
2,239,846
|
|
|
|
2,148,195
|
|
|
|
1,919,045
|
|
Real estate personal
|
|
|
1,537,687
|
|
|
|
1,638,553
|
|
|
|
1,540,289
|
|
|
|
1,478,669
|
|
|
|
1,352,339
|
|
Consumer
|
|
|
1,333,763
|
|
|
|
1,615,455
|
|
|
|
1,648,072
|
|
|
|
1,435,038
|
|
|
|
1,287,348
|
|
Home equity
|
|
|
489,517
|
|
|
|
504,069
|
|
|
|
460,200
|
|
|
|
441,851
|
|
|
|
448,507
|
|
Student
|
|
|
331,698
|
|
|
|
358,049
|
|
|
|
|
|
|
|
|
|
|
|
330,238
|
|
Consumer credit card
|
|
|
799,503
|
|
|
|
779,709
|
|
|
|
780,227
|
|
|
|
648,326
|
|
|
|
592,465
|
|
Overdrafts
|
|
|
6,080
|
|
|
|
7,849
|
|
|
|
10,986
|
|
|
|
10,601
|
|
|
|
10,854
|
|
|
|
Total loans
|
|
$
|
10,145,324
|
|
|
$
|
11,283,246
|
|
|
$
|
10,605,368
|
|
|
$
|
9,681,520
|
|
|
$
|
8,893,011
|
|
|
|
28
In December 2008, the Company elected to reclassify certain
segments of its real estate, business, and consumer portfolios.
The reclassifications were made to better align the loan
reporting with its related collateral and purpose. Amounts
reclassified to real estate construction and land pertained
mainly to commercial or residential land and lots which were
held by borrowers for future development. Amounts reclassified
to personal real estate related mainly to one to four family
rental property secured by residential mortgages. The table
below shows the effect of the reclassifications on the various
lending categories as of the transfer date. Because the
information was not readily available and it was impracticable
to do so, periods prior to 2008 were not restated.
|
|
|
|
|
|
|
|
|
Effect of
|
|
(In thousands)
|
|
reclassification
|
|
|
|
|
Business
|
|
$
|
(55,991
|
)
|
Real estate construction and land
|
|
|
158,268
|
|
Real estate business
|
|
|
(214,071
|
)
|
Real estate personal
|
|
|
142,093
|
|
Consumer
|
|
|
(30,299
|
)
|
|
|
Net reclassification
|
|
$
|
|
|
|
|
The contractual maturities of loan categories at
December 31, 2009, and a breakdown of those loans between
fixed rate and floating rate loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Payments Due
|
|
|
|
|
|
|
|
|
|
In
|
|
|
After One
|
|
|
After
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Year Through
|
|
|
Five
|
|
|
|
|
|
|
|
(In thousands)
|
|
or Less
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
|
|
|
|
|
Business
|
|
$
|
1,566,491
|
|
|
$
|
1,141,653
|
|
|
$
|
169,792
|
|
|
$
|
2,877,936
|
|
|
|
|
|
Real estate construction and land
|
|
|
477,162
|
|
|
|
185,124
|
|
|
|
2,824
|
|
|
|
665,110
|
|
|
|
|
|
Real estate business
|
|
|
653,649
|
|
|
|
1,232,146
|
|
|
|
218,235
|
|
|
|
2,104,030
|
|
|
|
|
|
Real estate personal
|
|
|
188,587
|
|
|
|
384,937
|
|
|
|
964,163
|
|
|
|
1,537,687
|
|
|
|
|
|
|
|
Total business and real estate loans
|
|
$
|
2,885,889
|
|
|
$
|
2,943,860
|
|
|
$
|
1,355,014
|
|
|
|
7,184,763
|
|
|
|
|
|
|
|
Consumer(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,333,763
|
|
|
|
|
|
Home
equity(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
489,517
|
|
|
|
|
|
Student(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331,698
|
|
|
|
|
|
Consumer credit
card(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799,503
|
|
|
|
|
|
Overdrafts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,080
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,145,324
|
|
|
|
|
|
|
|
Loans with fixed rates
|
|
$
|
614,446
|
|
|
$
|
1,622,946
|
|
|
$
|
465,016
|
|
|
$
|
2,702,408
|
|
|
|
|
|
Loans with floating rates
|
|
|
2,271,443
|
|
|
|
1,320,914
|
|
|
|
889,998
|
|
|
|
4,482,355
|
|
|
|
|
|
|
|
Total business and real estate loans
|
|
$
|
2,885,889
|
|
|
$
|
2,943,860
|
|
|
$
|
1,355,014
|
|
|
$
|
7,184,763
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consumer loans with floating
rates totaled $113.6 million. |
|
(2) |
|
Home equity loans with floating
rates totaled $483.9 million. |
|
(3) |
|
All student loans have floating
rates. |
|
(4) |
|
Consumer credit card loans with
floating rates totaled $732.3 million. |
Total loans at December 31, 2009 were $10.1 billion, a
decrease of $1.1 billion, or 10.1%, from balances at
December 31, 2008. The decline in loans during 2009 came
principally from business, construction, personal real estate
and consumer loans. Business loans declined $526.4 million,
or 15.5%, reflecting lower line of credit usage, lower demand
and pay-downs by business loan customers. Lease balances, which
are included in the business category, decreased
$26.8 million, or 8.7%, compared with the previous year end
balance, as demand for equipment financing weakened. Business
real estate loans were lower by $33.8 million, or 1.6%, and
construction loans decreased $172.3 million, or 20.6%. The
decline in construction loans reflected continued uncertain
economic conditions in the real estate markets and lower overall
demand. Personal real estate loans and consumer loans declined
$100.9 million and $281.7 million, respectively, as
loan pay-downs exceeded new loan originations. Consumer loans
also declined, as in mid 2008 the Company ceased most marine and
recreational vehicle lending from that portfolio. Home equity
loans decreased $14.6 million due to
29
fewer new account activations, and student loans declined
$26.4 million due to principal pay-downs. Consumer credit
card loans increased by $19.8 million, or 2.5%.
Period end loans increased $677.9 million, or 6.4%, in 2008
compared to 2007, resulting from increases in business, business
real estate and student loans. In December 2008, the Company
acquired $358.5 million of federally guaranteed student
loans from a student loan agency in exchange for certain auction
rate securities.
The Company currently generates approximately 31% of its loan
portfolio in the St. Louis market, 29% in the Kansas City
market, and 40% in various other regional markets. The portfolio
is diversified from a business and retail standpoint, with 56%
in loans to businesses and 44% 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.
Business
Total business loans amounted to $2.9 billion at
December 31, 2009 and include loans used mainly to fund
customer accounts receivable, inventories, and capital
expenditures. This portfolio also includes direct financing and
sales type leases totaling $281.4 million, which are used
by commercial customers to finance capital purchases ranging
from computer equipment to office and transportation equipment.
These leases comprise 2.8% of the Companys total loan
portfolio. Business 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. The portfolio is diversified from an industry
standpoint and includes businesses engaged in manufacturing,
wholesaling, retailing, agribusiness, insurance, financial
services, public utilities, and other service businesses.
Emphasis is upon middle-market and community businesses with
known local management and financial stability. The Company
participates in credits of large, publicly traded companies when
business operations are maintained in the local communities or
regional markets and opportunities to provide other banking
services are present. Consistent with managements 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
$12.8 million in 2009 and $4.4 million in 2008.
Non-accrual business loans were $12.9 million (.4% of
business loans) at December 31, 2009 compared to
$4.0 million at December 31, 2008. Included in these
totals were non-accrual lease-related loans of $3.3 million
and $1.0 million at December 31, 2009 and 2008,
respectively. Growth opportunities in business loans will
largely depend on economic and market conditions affecting
businesses and their ability to grow and invest in new capital,
and the Companys own solicitation efforts in attracting
new, high quality loans. Asset quality is, in part, a function
of managements consistent application of underwriting
standards and credit terms through stages in economic cycles.
Therefore, portfolio growth in 2010 will be dependent upon
1) the strength of the economy, 2) the actions of the
Federal Reserve with regard to targets for economic growth,
interest rates, and inflationary tendencies, 3) customer
demand, and 4) the competitive environment.
Real
Estate-Construction and Land
The portfolio of loans in this category amounted to
$665.1 million at December 31, 2009 and comprised 6.6%
of the Companys total loan portfolio. These loans are
predominantly made to businesses in the local markets of the
Companys banking subsidiary. 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 and land development loans relate to land owned or
developed for use in conjunction with business properties. The
largest percentage of residential construction and land
development loans are for projects located in the Kansas City
and St. Louis metropolitan areas. Credit risk in this
sector has risen over the last two years, especially in
residential construction and land development lending, as a
result of the slowdown in the housing industry and worsening
economic conditions. Net loan charge-offs increased to
$34.1 million in 2009, compared to net charge-offs of
$6.2 million in 2008. The increase in net charge-offs in
2009 was mainly comprised of
30
$28.1 million in charge-offs on nine specific loans.
Construction and land development loans on non-accrual status
rose to $62.5 million at year end 2009, compared to
$48.9 million at year end 2008. The non-accrual balance
included a $14.8 million residential construction loan
within the Banks market, which was placed on non-accrual
status in December 2008. The remainder of the non-accrual
balance at year end 2009 was mainly composed of loans to 15
borrowers, with balances ranging from $500 thousand to
$8.7 million. The Companys watch list, which includes
special mention and substandard categories, included
$149.3 million of residential land and construction loans
which are being closely monitored.
Real
Estate-Business
Total business real estate loans were $2.1 billion at
December 31, 2009 and comprised 20.7% of the Companys
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, and other commercial properties. Emphasis is placed
on owner-occupied and income producing commercial real estate
properties, which present 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 38. At December 31, 2009, non-accrual balances
amounted to $21.8 million, or 1.0%, of the loans in this
category, up from $13.1 million at year end 2008. The
Company experienced net charge-offs of $5.2 million in
2009, compared to net charge-offs of $2.2 million in 2008.
Real
Estate-Personal
At December 31, 2009, there were $1.5 billion in
outstanding personal real estate loans, which comprised 15.2% of
the Companys 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 retains adjustable rate
mortgage loans, and may from time to time retain certain fixed
rate loans (typically
15-year
fixed rate loans) as directed by its Asset/Liability Management
Committee. Other fixed rate loans in the portfolio have resulted
from previous bank acquisitions. The Company does not purchase
loans from outside parties or brokers, and has never maintained
or promoted subprime or reduced document products. At
December 31, 2009, 54% of the portfolio was comprised of
adjustable rate loans while 46% was comprised of fixed rate
loans. Levels of mortgage loan origination activity increased
slightly in 2009 compared to 2008, with originations of
$199 million in 2009 compared with $181 million in
2008. Growth in mortgage loan originations continued to be
constrained in 2009 as a result of the weakened economy, slower
housing starts, and lower resales within the Companys
markets. The Company has experienced lower loan losses in this
category than many others in the industry, and believes this is
partly because it does not offer subprime lending products or
purchase loans from brokers. Net loan charge-offs for 2009
amounted to $2.8 million, compared to $1.7 million in
the previous year. The non-accrual balances of loans in this
category increased to $9.4 million at December 31,
2009, compared to $6.8 million at year end 2008.
Personal
Banking
Total personal banking loans, which include consumer, student
and revolving home equity loans, totaled $2.2 billion at
December 31, 2009 and comprised 21.2% of the Companys
total loan portfolio. Consumer loans consist of auto, marine,
tractor/trailer, recreational vehicle (RV) and fixed rate home
equity loans, and totaled $1.3 billion at year end 2009.
Approximately 68% of consumer loans outstanding were originated
indirectly from auto and other dealers, while the remaining 32%
were direct loans made to consumers. Approximately 28% of the
consumer portfolio consists of automobile loans, 50% in marine
and RV loans and 10% in fixed rate home equity lending. As
mentioned above, total consumer loans declined
$281.7 million in 2009 as a result of a decrease of
$156.0 million in marine and RV loans, due to the
Companys decision in 2008 to cease most marine and RV
lending. In addition, auto lending declined $97.0 million,
or 20.8%. Net charge-offs on consumer loans were
$32.2 million in 2009 compared to $21.4 million in
2008. Net charge-offs increased to 2.2% of average consumer
loans in 2009 compared to 1.3% in 2008. The increase in net
charge-offs in 2009 compared to 2008 was mainly due to higher
marine and RV charge-offs. Net charge-offs on marine and RV
loans were $8.3 million higher in 2009 compared to 2008,
and were 3.0% of average marine and RV loans in 2009 compared to
1.7% in 2008.
31
Revolving home equity loans, of which 99% are adjustable rate
loans, totaled $489.5 million at year end 2009. An
additional $658.8 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. While in prior
years a small percentage of borrowers were permitted borrowing
up to 100% of appraised value, this practice was discontinued in
2009.
As mentioned above, in December 2008 the Company acquired
federally guaranteed student loans from a student loan agency.
The loans were acquired in exchange for certain auction rate
securities issued by that agency and purchased earlier in the
year by the Bank from its customers. The loans, which had an
average estimated life of approximately seven years at purchase
date, were recorded at fair value, which resulted in a discount
from their face value of approximately 2.5%. At
December 31, 2009, these student loan balances totaled
$331.7 million.
Consumer
Credit Card
Total consumer credit card loans amounted to $799.5 million
at December 31, 2009 and comprised 7.9% of the
Companys 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 65% of the households in
Missouri that own a Commerce credit card product also maintain a
deposit relationship with the subsidiary bank. Approximately 92%
of the outstanding credit card loans have a floating interest
rate. Net charge-offs amounted to $49.3 million in 2009,
which was a $17.8 million increase over 2008. The annual
ratio of net credit card loan charge-offs to total average
credit card loans totaled 6.8% in 2009 compared to 4.1% in 2008.
These ratios, however, remain below national loss averages.
Loans
Held for Sale
Total loans held for sale at December 31, 2009 were
$345.0 million, a decrease of $16.3 million, or 4.5%,
from $361.3 million at year end 2008. Loans classified as
held for sale consist of student loans and residential mortgage
loans.
Most of the portfolio is comprised of originated loans to
students attending colleges and universities. These loans are
normally sold to the secondary market when the student graduates
and the loan enters into repayment status. Nearly all of these
loans are based on variable rates. The Company maintains
agreements to sell these student loans to various student loan
servicing agencies, including the Missouri Higher Education Loan
Authority and the Student Loan Marketing Association. In mid
2008, the Company also entered into an agreement with the
Department of Education (DOE) which covers all new loans
originated beginning July 1, 2008. Under this agreement,
loans originated for the school year
2008-2009
were sold in 2009. Total student loans sold to the DOE and other
agencies were approximately $439 million in 2009 and
$164 million in 2008.
Due to uncertainties during 2008 surrounding some of the student
loan agencies future ability to fulfill these contracts,
the Company adjusted loans totaling $206.1 million to fair
value and recorded impairment charges of $9.4 million at
year end 2008. Of these losses, $8.6 million were reversed
during 2009, as various sales of the related loans were made in
accordance with contractual terms and performance concerns
diminished. Due to higher sales of student loans in 2009,
student loan balances declined by $24.0 million, or 6.7%,
to $334.5 million at year end 2009, compared to
$358.6 million at year end 2008.
The remainder of the held for sale portfolio consists of fixed
rate mortgage loans, which are sold in the secondary market,
generally within three months of origination. These loans
totaled $10.5 million and $2.7 million at
December 31, 2009 and 2008, respectively.
32
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 with
similar risk characteristics.
Loans subject to individual evaluation are defined by the
Company as impaired, and generally consist of business,
construction, commercial real estate and personal real estate
loans on non-accrual status. In addition, loans that have been
modified and meet the criteria for troubled debt restructuring
are also included in impaired loans. Impaired loans are
evaluated individually for the impairment of repayment potential
and collateral adequacy, and in conjunction with current
economic conditions and loss experience, allowances are
estimated. Loans not individually evaluated are aggregated and
reserves are recorded using a consistent methodology that
considers historical loan loss experience by loan type,
delinquencies, current economic factors, loan risk ratings and
industry concentrations.
The Companys estimate of the allowance for loan losses and
the corresponding provision for loan losses rests 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 portfolio risk ratings, levels of non-performing assets,
prevailing regional and national economic conditions, and the
Companys ongoing examination process including that of its
regulators. 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
Companys senior management and Board of Directors. Such
reviews also assist management in establishing the level of the
allowance. The Companys subsidiary bank continues to be
subject to examination by the Office of the Comptroller of the
Currency (OCC) and examinations are conducted throughout the
year, targeting various segments of the loan portfolio for
review. In addition to the examination of the subsidiary bank by
the OCC, the parent holding company and its non-bank
subsidiaries are examined by the Federal Reserve Bank.
At December 31, 2009, the allowance for loan losses was
$194.5 million compared to a balance at year end 2008 of
$172.6 million. The $21.9 million, or 12.7%, increase
in the allowance for loan losses during 2009 was primarily a
result of increasing levels of watch list loans and
deteriorating general economic conditions. Total loans
delinquent 90 days or more increased $2.7 million, or
6.7% at December 31, 2009 compared to year end 2008.
Delinquencies of 90 days or more on consumer credit card
loans increased $3.1 million, or 22.2%, compared to 2008.
Loans on non-accrual status increased $33.7 million to
$106.6 million in 2009 from $72.9 million in 2008.
This growth included increases of $13.6 million in
non-accrual construction and land loans, $8.6 million in
non-accrual business real estate loans, and $8.9 million in
business loans. Other loans identified as potential future
problem loans increased $8.9 million. This group of loans
saw a $58.0 million increase in business real estate loans
during the year, offset by declines in business and construction
and loans. These trends were reflective of the economic downturn
experienced in 2009. The Companys analysis of the
allowance considered these trends, which resulted in an increase
in the allowance balance during 2009 and 2008. The percentage of
allowance to loans increased to 1.92% at December 31, 2009
compared to 1.53% at year end 2008 as a result of the increase
in the allowance balance, coupled with a decrease in period end
loan balances of 10.1%.
Net loan charge-offs totaled $138.8 million in 2009, and
increased $69.0 million, compared to net charge-offs of
$69.9 million in 2008. Net charge-offs related to business
loans were $12.8 million in 2009 compared to
$4.4 million in 2008. Construction and land loans incurred
net charge-offs of $34.1 million in 2009 compared to
$6.2 million in 2008. Net charge-offs related to consumer
loans increased by $10.8 million to $32.2 million at
December 31, 2009, representing 23.2% of total net
charge-offs during 2009. This increase was due primarily to a
$8.3 million increase in net charge-offs related to marine
and recreational vehicle loans. Additionally, net charge-offs
related to consumer credit cards increased $17.8 million to
$49.3 million in 2009 compared to $31.5 million in
2008. Approximately 35.5% of total net loan charge-offs during
2009 were related to consumer credit card loans compared to
45.1% during 2008. Net consumer credit card charge-offs
increased to 6.8% of average consumer credit card loans in 2009
compared to 4.1% in 2008.
33
The ratio of net charge-offs to total average loans outstanding
in 2009 was 1.31% compared to .64% in 2008 and .42% in 2007. The
provision for loan losses in 2009 was $160.7 million,
compared to a provision of $108.9 million in 2008 and
$42.7 million in 2007.
The Company considers the allowance for loan losses of
$194.5 million adequate to cover losses inherent in the
loan portfolio at December 31, 2009.
The schedules which follow summarize the relationship between
loan balances and activity in the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net loans outstanding at end of
year(A)
|
|
$
|
10,145,324
|
|
|
$
|
11,283,246
|
|
|
$
|
10,605,368
|
|
|
$
|
9,681,520
|
|
|
$
|
8,893,011
|
|
|
|
Average loans
outstanding(A)
|
|
$
|
10,629,867
|
|
|
$
|
10,935,858
|
|
|
$
|
10,189,316
|
|
|
$
|
9,105,432
|
|
|
$
|
8,549,573
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
172,619
|
|
|
$
|
133,586
|
|
|
$
|
131,730
|
|
|
$
|
128,447
|
|
|
$
|
132,394
|
|
|
|
Additions to allowance through charges to expense
|
|
|
160,697
|
|
|
|
108,900
|
|
|
|
42,732
|
|
|
|
25,649
|
|
|
|
28,785
|
|
Allowances of acquired companies
|
|
|
|
|
|
|
|
|
|
|
1,857
|
|
|
|
3,688
|
|
|
|
|
|
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
15,762
|
|
|
|
7,820
|
|
|
|
5,822
|
|
|
|
1,343
|
|
|
|
1,083
|
|
Real estate construction and land
|
|
|
34,812
|
|
|
|
6,215
|
|
|
|
2,049
|
|
|
|
62
|
|
|
|
|
|
Real estate business
|
|
|
5,957
|
|
|
|
2,293
|
|
|
|
2,396
|
|
|
|
854
|
|
|
|
827
|
|
Real estate personal
|
|
|
3,150
|
|
|
|
1,765
|
|
|
|
181
|
|
|
|
119
|
|
|
|
87
|
|
Consumer
|
|
|
35,973
|
|
|
|
26,229
|
|
|
|
14,842
|
|
|
|
11,364
|
|
|
|
13,441
|
|
Home equity
|
|
|
1,197
|
|
|
|
447
|
|
|
|
451
|
|
|
|
158
|
|
|
|
34
|
|
Student
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer credit card
|
|
|
54,060
|
|
|
|
35,825
|
|
|
|
28,218
|
|
|
|
22,104
|
|
|
|
28,263
|
|
Overdrafts
|
|
|
3,493
|
|
|
|
4,499
|
|
|
|
4,909
|
|
|
|
4,940
|
|
|
|
3,485
|
|
|
|
Total loans charged off
|
|
|
154,410
|
|
|
|
85,093
|
|
|
|
58,868
|
|
|
|
40,944
|
|
|
|
47,220
|
|
|
|
Recovery of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
2,925
|
|
|
|
3,406
|
|
|
|
1,429
|
|
|
|
2,166
|
|
|
|
4,099
|
|
Real estate construction and land
|
|
|
720
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
Real estate business
|
|
|
709
|
|
|
|
117
|
|
|
|
1,321
|
|
|
|
890
|
|
|
|
330
|
|
Real estate personal
|
|
|
363
|
|
|
|
51
|
|
|
|
42
|
|
|
|
27
|
|
|
|
57
|
|
Consumer
|
|
|
3,772
|
|
|
|
4,782
|
|
|
|
5,304
|
|
|
|
5,263
|
|
|
|
4,675
|
|
Home equity
|
|
|
7
|
|
|
|
18
|
|
|
|
5
|
|
|
|
23
|
|
|
|
|
|
Consumer credit card
|
|
|
4,785
|
|
|
|
4,309
|
|
|
|
4,520
|
|
|
|
4,250
|
|
|
|
3,851
|
|
Overdrafts
|
|
|
2,293
|
|
|
|
2,543
|
|
|
|
3,477
|
|
|
|
2,271
|
|
|
|
1,476
|
|
|
|
Total recoveries
|
|
|
15,574
|
|
|
|
15,226
|
|
|
|
16,135
|
|
|
|
14,890
|
|
|
|
14,488
|
|
|
|
Net loans charged off
|
|
|
138,836
|
|
|
|
69,867
|
|
|
|
42,733
|
|
|
|
26,054
|
|
|
|
32,732
|
|
|
|
Balance at end of year
|
|
$
|
194,480
|
|
|
$
|
172,619
|
|
|
$
|
133,586
|
|
|
$
|
131,730
|
|
|
$
|
128,447
|
|
|
|
Ratio of allowance to loans at end of year
|
|
|
1.92
|
%
|
|
|
1.53
|
%
|
|
|
1.26
|
%
|
|
|
1.36
|
%
|
|
|
1.44
|
%
|
Ratio of provision to average loans outstanding
|
|
|
1.51
|
%
|
|
|
1.00
|
%
|
|
|
.42
|
%
|
|
|
.28
|
%
|
|
|
.34
|
%
|
|
|
|
|
|
(A) |
|
Net of unearned income, before
deducting allowance for loan losses, excluding loans held for
sale. |
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Ratio of net charge-offs to average loans outstanding, by loan
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
.41
|
%
|
|
|
.13
|
%
|
|
|
.14
|
%
|
|
|
NA
|
|
|
|
NA
|
|
Real estate construction and land
|
|
|
4.61
|
|
|
|
.89
|
|
|
|
.30
|
|
|
|
.01
|
|
|
|
|
|
Real estate business
|
|
|
.24
|
|
|
|
.10
|
|
|
|
.05
|
|
|
|
NA
|
|
|
|
.03
|
|
Real estate personal
|
|
|
.18
|
|
|
|
.11
|
|
|
|
.01
|
|
|
|
.01
|
|
|
|
|
|
Consumer
|
|
|
2.20
|
|
|
|
1.28
|
|
|
|
.61
|
|
|
|
.45
|
|
|
|
.71
|
|
Home equity
|
|
|
.24
|
|
|
|
.09
|
|
|
|
.10
|
|
|
|
.03
|
|
|
|
.01
|
|
Consumer credit card
|
|
|
6.77
|
|
|
|
4.06
|
|
|
|
3.56
|
|
|
|
3.00
|
|
|
|
4.40
|
|
Overdrafts
|
|
|
12.27
|
|
|
|
16.40
|
|
|
|
10.36
|
|
|
|
18.18
|
|
|
|
14.36
|
|
|
|
Ratio of total net charge-offs to total average loans outstanding
|
|
|
1.31
|
%
|
|
|
.64
|
%
|
|
|
.42
|
%
|
|
|
.29
|
%
|
|
|
.38
|
%
|
|
|
NA: Net recoveries were experienced in these years.
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)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
|
Allocation
|
|
|
Loans
|
|
|
Allocation
|
|
|
Loans
|
|
|
Allocation
|
|
|
Loans
|
|
|
Allocation
|
|
|
Loans
|
|
|
Allocation
|
|
|
Loans
|
|
|
|
|
Business
|
|
$
|
42,949
|
|
|
|
28.4
|
%
|
|
$
|
37,912
|
|
|
|
30.2
|
%
|
|
$
|
29,392
|
|
|
|
30.7
|
%
|
|
$
|
28,529
|
|
|
|
29.5
|
%
|
|
$
|
26,211
|
|
|
|
28.4
|
%
|
RE construction and land
|
|
|
30,776
|
|
|
|
6.6
|
|
|
|
23,526
|
|
|
|
7.4
|
|
|
|
8,507
|
|
|
|
6.3
|
|
|
|
4,605
|
|
|
|
6.8
|
|
|
|
3,375
|
|
|
|
4.8
|
|
RE business
|
|
|
30,640
|
|
|
|
20.7
|
|
|
|
25,326
|
|
|
|
19.0
|
|
|
|
14,842
|
|
|
|
21.1
|
|
|
|
19,343
|
|
|
|
22.2
|
|
|
|
19,432
|
|
|
|
21.6
|
|
RE personal
|
|
|
5,231
|
|
|
|
15.2
|
|
|
|
4,680
|
|
|
|
14.5
|
|
|
|
2,389
|
|
|
|
14.5
|
|
|
|
2,243
|
|
|
|
15.3
|
|
|
|
4,815
|
|
|
|
15.3
|
|
Consumer
|
|
|
29,994
|
|
|
|
13.1
|
|
|
|
28,638
|
|
|
|
14.3
|
|
|
|
24,611
|
|
|
|
15.6
|
|
|
|
18,655
|
|
|
|
14.8
|
|
|
|
18,951
|
|
|
|
14.5
|
|
Home equity
|
|
|
1,590
|
|
|
|
4.8
|
|
|
|
1,332
|
|
|
|
4.4
|
|
|
|
5,839
|
|
|
|
4.3
|
|
|
|
5,035
|
|
|
|
4.6
|
|
|
|
5,916
|
|
|
|
5.0
|
|
Student
|
|
|
229
|
|
|
|
3.3
|
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497
|
|
|
|
3.7
|
|
Consumer credit card
|
|
|
51,801
|
|
|
|
7.9
|
|
|
|
49,492
|
|
|
|
6.9
|
|
|
|
44,307
|
|
|
|
7.4
|
|
|
|
39,965
|
|
|
|
6.7
|
|
|
|
35,513
|
|
|
|
6.6
|
|
Overdrafts
|
|
|
1,270
|
|
|
|
|
|
|
|
1,713
|
|
|
|
.1
|
|
|
|
2,351
|
|
|
|
.1
|
|
|
|
3,592
|
|
|
|
.1
|
|
|
|
2,739
|
|
|
|
.1
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,348
|
|
|
|
|
|
|
|
9,763
|
|
|
|
|
|
|
|
10,998
|
|
|
|
|
|
|
|
Total
|
|
$
|
194,480
|
|
|
|
100.0
|
%
|
|
$
|
172,619
|
|
|
|
100.0
|
%
|
|
$
|
133,586
|
|
|
|
100.0
|
%
|
|
$
|
131,730
|
|
|
|
100.0
|
%
|
|
$
|
128,447
|
|
|
|
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. 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 consumer 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. 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
35
management, the borrower has demonstrated the ability to make
future payments of principal and interest as scheduled.
The following schedule shows non-performing assets and loans
past due 90 days and still accruing interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Non-performing assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
12,874
|
|
|
$
|
4,007
|
|
|
$
|
4,700
|
|
|
$
|
5,808
|
|
|
$
|
5,916
|
|
Real estate construction and land
|
|
|
62,509
|
|
|
|
48,871
|
|
|
|
7,769
|
|
|
|
120
|
|
|
|
|
|
Real estate business
|
|
|
21,756
|
|
|
|
13,137
|
|
|
|
5,628
|
|
|
|
9,845
|
|
|
|
3,149
|
|
Real estate personal
|
|
|
9,384
|
|
|
|
6,794
|
|
|
|
1,095
|
|
|
|
384
|
|
|
|
261
|
|
Consumer
|
|
|
90
|
|
|
|
87
|
|
|
|
547
|
|
|
|
551
|
|
|
|
519
|
|
|
|
Total non-accrual loans
|
|
|
106,613
|
|
|
|
72,896
|
|
|
|
19,739
|
|
|
|
16,708
|
|
|
|
9,845
|
|
|
|
Real estate acquired in foreclosure
|
|
|
10,057
|
|
|
|
6,181
|
|
|
|
13,678
|
|
|
|
1,515
|
|
|
|
1,868
|
|
|
|
Total non-performing assets
|
|
$
|
116,670
|
|
|
$
|
79,077
|
|
|
$
|
33,417
|
|
|
$
|
18,223
|
|
|
$
|
11,713
|
|
|
|
Non-performing assets as a percentage of total loans
|
|
|
1.15
|
%
|
|
|
.70
|
%
|
|
|
.32
|
%
|
|
|
.19
|
%
|
|
|
.13
|
%
|
|
|
Non-performing assets as a percentage of total assets
|
|
|
.64
|
%
|
|
|
.45
|
%
|
|
|
.21
|
%
|
|
|
.12
|
%
|
|
|
.08
|
%
|
|
|
Past due 90 days and still accruing interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
3,672
|
|
|
$
|
1,459
|
|
|
$
|
1,427
|
|
|
$
|
2,814
|
|
|
$
|
1,026
|
|
Real estate construction and land
|
|
|
1,184
|
|
|
|
466
|
|
|
|
768
|
|
|
|
593
|
|
|
|
|
|
Real estate business
|
|
|
402
|
|
|
|
1,472
|
|
|
|
281
|
|
|
|
1,336
|
|
|
|
1,075
|
|
Real estate personal
|
|
|
3,102
|
|
|
|
4,717
|
|
|
|
5,131
|
|
|
|
3,994
|
|
|
|
2,998
|
|
Consumer
|
|
|
2,045
|
|
|
|
3,478
|
|
|
|
1,914
|
|
|
|
1,255
|
|
|
|
1,069
|
|
Home equity
|
|
|
878
|
|
|
|
440
|
|
|
|
700
|
|
|
|
659
|
|
|
|
429
|
|
Student
|
|
|
14,346
|
|
|
|
14,018
|
|
|
|
1
|
|
|
|
1
|
|
|
|
74
|
|
Consumer credit card
|
|
|
17,003
|
|
|
|
13,914
|
|
|
|
10,664
|
|
|
|
9,724
|
|
|
|
7,417
|
|
|
|
Total past due 90 days and still accruing interest
|
|
$
|
42,632
|
|
|
$
|
39,964
|
|
|
$
|
20,886
|
|
|
$
|
20,376
|
|
|
$
|
14,088
|
|
|
|
The table below shows the effect on interest income in 2009 of
loans on non-accrual status at year end.
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Gross amount of interest that would have been recorded at
original rate
|
|
$
|
8,332
|
|
Interest that was reflected in income
|
|
|
2,136
|
|
|
|
Interest income not recognized
|
|
$
|
6,196
|
|
|
|
Total non-accrual loans at year end 2009 were
$106.6 million, an increase of $33.7 million over the
balance at year end 2008. Most of the increase occurred in
non-accrual construction and land loans, which included a
$19.9 million residential construction loan placed on
non-accrual status in December. In addition, business and
business real estate non-accrual loans increased
$8.9 million and $8.6 million, respectively.
Foreclosed real estate increased to a total of
$10.1 million at year end 2009. Total non-performing assets
remain low compared to the overall banking industry in 2009,
with the non-performing loans to total loans ratio at 1.05% at
December 31, 2009. Loans past due 90 days and still
accruing interest increased $2.7 million at year end 2009
compared to 2008, mainly due to higher credit card and business
loan delinquencies, partly offset by lower real estate and
consumer loan delinquencies. Loans past due 90 days
includes $13.8 million in federally guaranteed student
loans that the Company intends to hold to maturity.
Commercial loans (business, business real estate, and
construction) and personal real estate loans whose terms have
been modified in a troubled debt restructuring are generally
placed on non-accrual status until a six-month payment history
is sustained. Non-accrual loan balances at December 31,
2009 included $735 thousand of such loans.
36
The Company seeks to assist customers that are experiencing
financial difficulty through renegotiating credit card loans
under various debt management and assistance programs. At
December 31, 2009, the Company had renegotiated consumer
credit card loans of $16.0 million, of which
$8.4 million were current or less than 30 days past
due under the modified terms. These renegotiated loans are
excluded from non-performing loans, in accordance with the
Companys classification policy on the overall consumer
credit card portfolio.
In addition to non-accrual loans, renegotiated loans, and loans
past due 90 days and still accruing interest, the Company
also has identified loans for which management has concerns
about the ability of the borrowers to meet existing repayment
terms, which are shown in the table below. These loans are
primarily classified as substandard for regulatory purposes
under the Companys 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Potential problem loans:
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
93,256
|
|
|
$
|
126,409
|
|
Real estate construction and land
|
|
|
115,251
|
|
|
|
135,324
|
|
Real estate business
|
|
|
98,951
|
|
|
|
40,919
|
|
Real estate personal
|
|
|
12,013
|
|
|
|
8,336
|
|
Consumer
|
|
|
409
|
|
|
|
41
|
|
|
|
Total potential problem loans
|
|
$
|
319,880
|
|
|
$
|
311,029
|
|
|
|
Loans
with Special Risk Characteristics
Within the loan portfolio, certain types of loans are considered
at higher risk of loss due to their terms, location, or special
conditions. Certain personal real estate products 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. Loans might be considered at higher risk when
1) loan terms require a minimum monthly payment that covers
only interest, or
2) loan-to-collateral
value (LTV) ratios are above 80%, with no private mortgage
insurance. Information presented below is based on LTV ratios
which were generally calculated with valuations at loan
origination date.
Real
Estate Construction and Land Loans
The Companys portfolio of construction loans, as shown in
the table below, amounted to 6.6% of total loans outstanding at
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
December 31
|
|
|
% of
|
|
|
Total
|
|
|
December 31
|
|
|
% of
|
|
|
Total
|
|
(In thousands)
|
|
2009
|
|
|
Total
|
|
|
Loans
|
|
|
2008
|
|
|
Total
|
|
|
Loans
|
|
|
|
|
Residential land and land development
|
|
$
|
181,257
|
|
|
|
27.2
|
%
|
|
|
1.8
|
%
|
|
$
|
246,335
|
|
|
|
29.4
|
%
|
|
|
2.2
|
%
|
Residential construction
|
|
|
110,165
|
|
|
|
16.6
|
|
|
|
1.1
|
|
|
|
141,405
|
|
|
|
16.9
|
|
|
|
1.3
|
|
Commercial land and land development
|
|
|
144,880
|
|
|
|
21.8
|
|
|
|
1.4
|
|
|
|
139,726
|
|
|
|
16.7
|
|
|
|
1.2
|
|
Commercial construction
|
|
|
228,808
|
|
|
|
34.4
|
|
|
|
2.3
|
|
|
|
309,903
|
|
|
|
37.0
|
|
|
|
2.7
|
|
|
|
Total real estate construction and land loans
|
|
$
|
665,110
|
|
|
|
100.0
|
%
|
|
|
6.6
|
%
|
|
$
|
837,369
|
|
|
|
100.0
|
%
|
|
|
7.4
|
%
|
|
|
37
Real
Estate Business Loans
Total business real estate loans were $2.1 billion at
December 31, 2009 and comprised 20.7% of the Companys
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 52% of these loans
were for owner-occupied real estate properties, which present
lower risk profiles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
% of
|
|
|
% of
|
|
(In thousands)
|
|
2009
|
|
|
Total
|
|
|
Total Loans
|
|
|
|
|
Owner-occupied
|
|
$
|
1,101,870
|
|
|
|
52.4
|
%
|
|
|
10.9
|
%
|
Industrial
|
|
|
142,745
|
|
|
|
6.8
|
|
|
|
1.4
|
|
Office
|
|
|
214,408
|
|
|
|
10.2
|
|
|
|
2.1
|
|
Retail
|
|
|
210,619
|
|
|
|
10.0
|
|
|
|
2.1
|
|
Multi-family
|
|
|
112,664
|
|
|
|
5.3
|
|
|
|
1.1
|
|
Farm
|
|
|
131,245
|
|
|
|
6.2
|
|
|
|
1.3
|
|
Hotels
|
|
|
115,056
|
|
|
|
5.5
|
|
|
|
1.1
|
|
Other
|
|
|
75,423
|
|
|
|
3.6
|
|
|
|
.7
|
|
|
|
Total real estate business loans
|
|
$
|
2,104,030
|
|
|
|
100.0
|
%
|
|
|
20.7
|
%
|
|
|
Real
Estate Personal Loans
The Companys $1.5 billion personal real estate
portfolio is composed of loans collateralized with residential
real estate. Included in this portfolio are personal real estate
loans made to commercial customers, which totaled
$270.5 million at December 31, 2009. This group of
loans has an original weighted average term of approximately
5 years, with 58% of the balance in fixed rate loans and
42% in floating rate loans. The remainder of the personal real
estate portfolio, totaling $1.3 billion at
December 31, 2009, is comprised of loans made to the retail
customer base. It includes adjustable rate mortgage loans and
certain fixed rate loans, retained by the Company as directed by
its Asset/Liability Management Committee.
Within the larger mortgage loan group, only 2% were made with
interest only payments (see table below). These 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. At December 31, 2009, these loans
had a weighted average LTV and FICO score of 55.4% and 757
respectively, and there were no delinquencies noted in this
group. The majority of these loans (95.7%) consist of loans
written within the Companys five state branch network
territories of Missouri, Kansas, Illinois, Oklahoma, and
Colorado. Loans originated with interest only payments were not
made to qualify the borrower for a lower payment
amount.
The following table presents information about the retail based
personal real estate loan portfolio for 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Principal
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Outstanding at
|
|
|
% of Loan
|
|
|
Outstanding at
|
|
|
% of Loan
|
|
(Dollars in thousands)
|
|
December 31
|
|
|
Portfolio
|
|
|
December 31
|
|
|
Portfolio
|
|
|
|
|
Loans with interest only payments
|
|
$
|
25,201
|
|
|
|
2.0
|
%
|
|
$
|
35,649
|
|
|
|
2.6
|
%
|
|
|
Loans with no insurance and LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Between 80% and 90%
|
|
|
99,395
|
|
|
|
7.8
|
|
|
|
74,094
|
|
|
|
5.4
|
|
Between 90% and 95%
|
|
|
31,331
|
|
|
|
2.5
|
|
|
|
25,495
|
|
|
|
1.9
|
|
Over 95%
|
|
|
52,033
|
|
|
|
4.1
|
|
|
|
35,653
|
|
|
|
2.6
|
|
|
|
Over 80% LTV with no insurance
|
|
|
182,759
|
|
|
|
14.4
|
|
|
|
135,242
|
|
|
|
9.9
|
|
|
|
Total loan portfolio from which above loans were identified
|
|
|
1,267,156
|
|
|
|
|
|
|
|
1,360,204
|
|
|
|
|
|
|
|
38
Revolving
Home Equity Loans
The Company also has revolving home equity loans that are
generally collateralized by residential real estate. Most of
these loans (95.9%) are written with terms requiring interest
only monthly payments. These loans are offered in three main
product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. The
following tables break out the year end outstanding balances by
product for 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Unused Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
New Lines
|
|
|
|
|
|
of Available Lines
|
|
|
|
|
|
Balances
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
Originated During
|
|
|
|
|
|
at December 31
|
|
|
|
|
|
Over 30
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
|
*
|
|
|
2009
|
|
|
*
|
|
|
2009
|
|
|
*
|
|
|
Days Past Due
|
|
|
*
|
|
|
|
|
Loans with interest only payments
|
|
$
|
469,460
|
|
|
|
95.9
|
%
|
|
$
|
30,832
|
|
|
|
6.3
|
%
|
|
$
|
647,669
|
|
|
|
132.3
|
%
|
|
$
|
2,102
|
|
|
|
.4
|
%
|
|
|
Loans with LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Between 80% and 90%
|
|
|
63,369
|
|
|
|
12.9
|
|
|
|
3,181
|
|
|
|
.7
|
|
|
|
44,261
|
|
|
|
9.0
|
|
|
|
547
|
|
|
|
.1
|
|
Over 90%
|
|
|
23,369
|
|
|
|
4.8
|
|
|
|
104
|
|
|
|
|
|
|
|
16,751
|
|
|
|
3.5
|
|
|
|
504
|
|
|
|
.1
|
|
|
|
Over 80% LTV
|
|
|
86,738
|
|
|
|
17.7
|
|
|
|
3,285
|
|
|
|
.7
|
|
|
|
61,012
|
|
|
|
12.5
|
|
|
|
1,051
|
|
|
|
.2
|
|
|
|
Total loan portfolio from which above loans were identified
|
|
|
489,517
|
|
|
|
|
|
|
|
32,485
|
|
|
|
|
|
|
|
658,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentage of total principal
outstanding of $489.5 million at December 31,
2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Unused Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
New Lines
|
|
|
|
|
|
of Available Lines
|
|
|
|
|
|
Balances
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
Originated During
|
|
|
|
|
|
at December 31
|
|
|
|
|
|
Over 30
|
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
*
|
|
|
2008
|
|
|
*
|
|
|
2008
|
|
|
*
|
|
|
Days Past Due
|
|
|
*
|
|
|
|
|
Loans with interest only payments
|
|
$
|
476,354
|
|
|
|
94.5
|
%
|
|
$
|
172,868
|
|
|
|
34.3
|
%
|
|
$
|
675,819
|
|
|
|
134.1
|
%
|
|
$
|
1,217
|
|
|
|
.2
|
%
|
|
|
Loans with LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Between 80% and 90%
|
|
|
66,009
|
|
|
|
13.1
|
|
|
|
19,578
|
|
|
|
3.9
|
|
|
|
49,781
|
|
|
|
9.9
|
|
|
|
428
|
|
|
|
.1
|
|
Over 90%
|
|
|
28,292
|
|
|
|
5.6
|
|
|
|
3,815
|
|
|
|
.7
|
|
|
|
20,025
|
|
|
|
3.9
|
|
|
|
206
|
|
|
|
|
|
|
|
Over 80% LTV
|
|
|
94,301
|
|
|
|
18.7
|
|
|
|
23,393
|
|
|
|
4.6
|
|
|
|
69,806
|
|
|
|
13.8
|
|
|
|
634
|
|
|
|
.1
|
|
|
|
Total loan portfolio from which above loans were identified
|
|
|
504,069
|
|
|
|
|
|
|
|
174,903
|
|
|
|
|
|
|
|
690,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentage of total principal
outstanding of $504.1 million at December 31,
2008. |
39
Fixed
Rate Home Equity Loans
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 looking for 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. This portfolio of loans totaled
$132.6 million and $151.4 million at December 31,
2009 and 2008, respectively. At times, these loans are written
with interest only monthly payments and a balloon payoff at
maturity; however, less than 4% of the outstanding balance has
interest only payments. During 2009, the Company continued
limiting the offering of products with LTV ratios over 90%,
which resulted in a $3.5 million decrease in new loans with
LTV ratios over 90% in 2009 compared to 2008. The delinquency
history on this product has been low, as balances over
30 days past due totaled only $1.7 million and
$1.4 million, respectively, or 1.3% and .9%, respectively,
of the portfolio, at year end 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
New Loans
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
New Loans
|
|
|
|
|
(Dollars in thousands)
|
|
December 31
|
|
|
*
|
|
|
Originated
|
|
|
*
|
|
|
December 31
|
|
|
*
|
|
|
Originated
|
|
|
*
|
|
|
|
|
Loans with interest only payments
|
|
$
|
4,731
|
|
|
|
3.6
|
%
|
|
$
|
2,355
|
|
|
|
1.8
|
%
|
|
$
|
5,725
|
|
|
|
3.8
|
%
|
|
$
|
5,136
|
|
|
|
3.4
|
%
|
|
|
Loans with LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Between 80% and 90%
|
|
|
19,526
|
|
|
|
14.7
|
|
|
|
7,682
|
|
|
|
5.8
|
|
|
|
18,996
|
|
|
|
12.5
|
|
|
|
10,960
|
|
|
|
7.2
|
|
Over 90%
|
|
|
25,398
|
|
|
|
19.1
|
|
|
|
924
|
|
|
|
.7
|
|
|
|
34,772
|
|
|
|
23.0
|
|
|
|
4,431
|
|
|
|
3.0
|
|
|
|
Over 80% LTV
|
|
|
44,924
|
|
|
|
33.8
|
|
|
|
8,606
|
|
|
|
6.5
|
|
|
|
53,768
|
|
|
|
35.5
|
|
|
|
15,391
|
|
|
|
10.2
|
|
|
|
Total loan portfolio from which above loans were identified
|
|
|
132,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentage of total principal
outstanding of $132.7 million and $151.4 million at
December 31, 2009 and 2008, respectively. |
Management does not believe these loans collateralized by real
estate (personal real estate, revolving home equity, and fixed
rate home equity) represent any unusual concentrations of risk,
as evidenced by net charge-offs in 2009 of $2.8 million,
$1.2 million and $1.1 million, 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 loan products, which is
defined as those offerings made to customers with a FICO score
below 650, and has purchased no brokered loans.
Other
Consumer Loans
Within the consumer loan portfolio of several product lines, the
Company experienced rapid growth in marine and RV loans
outstanding from 2005 through 2007. The majority of these loans
were outside the Companys basic five state branch network.
The loss ratios experienced in this portion of the portfolio
recently were higher than for other consumer loan products, as
reflected in the delinquency figures in the table below. Due to
the continued weakening credit and economic conditions, this
loan product offering was curtailed in mid 2008, as less than
$10 million in new loans were written over the last three
months of 2008, and only $3.8 million new marine and RV
loans written the entire year of 2009. The table below provides
the total outstanding principal and other data for this group of
direct and indirect lending products at December 31, 2009
and 2008.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Principal
|
|
|
|
|
|
Balances
|
|
|
Principal
|
|
|
|
|
|
Balances
|
|
|
|
Outstanding at
|
|
|
New Loans
|
|
|
Over 30
|
|
|
Outstanding at
|
|
|
New Loans
|
|
|
Over 30
|
|
(Dollars in thousands)
|
|
December 31
|
|
|
Originated
|
|
|
Days Past Due
|
|
|
December 31
|
|
|
Originated
|
|
|
Days Past Due
|
|
|
|
|
Passenger vehicles
|
|
$
|
371,009
|
|
|
$
|
130,839
|
|
|
$
|
5,281
|
|
|
$
|
469,100
|
|
|
$
|
256,274
|
|
|
$
|
8,876
|
|
Marine
|
|
|
182,866
|
|
|
|
1,537
|
|
|
|
5,617
|
|
|
|
230,715
|
|
|
|
43,458
|
|
|
|
8,174
|
|
RV
|
|
|
466,757
|
|
|
|
2,214
|
|
|
|
10,793
|
|
|
|
566,429
|
|
|
|
150,792
|
|
|
|
10,265
|
|
Other
|
|
|
42,726
|
|
|
|
25,345
|
|
|
|
740
|
|
|
|
59,322
|
|
|
|
41,860
|
|
|
|
1,326
|
|
|
|
Total
|
|
$
|
1,063,358
|
|
|
$
|
159,935
|
|
|
$
|
22,431
|
|
|
$
|
1,325,566
|
|
|
$
|
492,384
|
|
|
$
|
28,641
|
|
|
|
Additionally, the Company offers low introductory rates on
selected consumer credit card products. Out of a portfolio at
December 31, 2009 of $799.5 million in consumer credit
card loans outstanding, approximately $152.0 million, or
19.0%, carried a low introductory rate. These loans are
scheduled to convert to the ongoing higher contractual rate on a
weighted average of approximately 7 months. 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.
Investment
Securities Analysis
Investment securities are comprised of securities which are
available for sale, non-marketable, and held for trading. During
2009, total investment securities increased $2.5 billion,
or 65.9%, to $6.4 billion (excluding unrealized
gains/losses) compared to $3.8 billion at the previous year
end. During 2009, securities of $4.1 billion were
purchased, which included $1.1 billion in agency
mortgage-backed securities, $1.6 billion in other
asset-backed securities, $538.5 million in
U.S. Treasury inflation-protected securities (TIPS), and
$339.7 million in state and municipal obligations. Total
maturities and paydowns were $1.3 billion during 2009.
Sales proceeds were $207.9 million, of which
$121.8 million related to TIPS sales. During 2010,
maturities of approximately $1.5 billion are expected to
occur. The average tax equivalent yield earned on total
investment securities was 4.54% in 2009 and 5.09% in 2008.
At December 31, 2009, the fair value of available for sale
securities was $6.3 billion, including a net unrealized
gain in fair value of $103.6 million, compared to a net
loss of $58.7 million at December 31, 2008. The
overall unrealized gain in fair value at December 31, 2009
included gains of $56.8 million in agency mortgage-backed
securities, $22.1 million in state and municipal
obligations, and $28.6 million in marketable equity
securities held by the Parent, partly offset by an unrealized
loss of $45.7 million in non-agency mortgage-backed
securities.
41
Available for sale investment securities at year end for the
past two years are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Amortized Cost
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
436,607
|
|
|
$
|
10,478
|
|
Government-sponsored enterprise obligations
|
|
|
162,191
|
|
|
|
135,825
|
|
State and municipal obligations
|
|
|
917,267
|
|
|
|
715,421
|
|
Agency mortgage-backed securities
|
|
|
2,205,177
|
|
|
|
1,685,821
|
|
Non-agency mortgage-backed securities
|
|
|
654,711
|
|
|
|
742,090
|
|
Other asset-backed securities
|
|
|
1,685,691
|
|
|
|
275,641
|
|
Other debt securities
|
|
|
164,402
|
|
|
|
116,527
|
|
Equity securities
|
|
|
11,285
|
|
|
|
7,680
|
|
|
|
Total available for sale investment securities
|
|
$
|
6,237,331
|
|
|
$
|
3,689,483
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
447,038
|
|
|
$
|
11,594
|
|
Government-sponsored enterprise obligations
|
|
|
165,814
|
|
|
|
141,957
|
|
State and municipal obligations
|
|
|
939,338
|
|
|
|
719,752
|
|
Agency mortgage-backed securities
|
|
|
2,262,003
|
|
|
|
1,711,404
|
|
Non-agency mortgage-backed securities
|
|
|
609,016
|
|
|
|
620,479
|
|
Other asset-backed securities
|
|
|
1,701,569
|
|
|
|
253,756
|
|
Other debt securities
|
|
|
176,331
|
|
|
|
121,861
|
|
Equity securities
|
|
|
39,866
|
|
|
|
49,950
|
|
|
|
Total available for sale investment securities
|
|
$
|
6,340,975
|
|
|
$
|
3,630,753
|
|
|
|
The largest component of the available for sale portfolio
consists of agency mortgage-backed securities, which are
collateralized bonds issued by government-sponsored agencies,
including FNMA, GNMA, FHLMC, FHLB, and Federal Farm Credit
Banks. Non-agency mortgage-backed securities totaled
$654.7 million, on an amortized cost basis, at
December 31, 2009, and included Alt-A type mortgage-backed
securities of $221.5 million and prime/jumbo loan type
securities of $433.1 million. Nearly all of these
securities had credit ratings of AAA (or the equivalent) from at
least two rating agencies at their purchase date. The portfolio
does not have exposure to subprime originated mortgage-backed or
collateralized debt obligation instruments.
At December 31, 2009, U.S. government obligations
included $435.0 million in TIPS, and state and municipal
obligations included $167.8 million in auction rate
securities. Other debt securities include corporate bonds, notes
and commercial paper. Available for sale equity securities are
mainly comprised of publicly traded stock held by the Parent.
A summary of maturities by category of investment securities and
the weighted average yield for each range of maturities as of
December 31, 2009, is presented in Note 4 on
Investment Securities in the consolidated financial statements.
The table below provides additional information for each
category of debt securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Percent
|
|
|
Weighted
|
|
|
Estimated
|
|
|
|
of Total
|
|
|
Average
|
|
|
Average
|
|
|
|
Debt Securities
|
|
|
Yield
|
|
|
Maturity*
|
|
|
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
|
7.1
|
%
|
|
|
1.07
|
%
|
|
|
4.4
|
years
|
Government-sponsored enterprise obligations
|
|
|
2.6
|
|
|
|
2.62
|
|
|
|
1.6
|
|
State and municipal obligations
|
|
|
14.9
|
|
|
|
3.23
|
|
|
|
9.4
|
|
Agency mortgage-backed securities
|
|
|
35.9
|
|
|
|
4.17
|
|
|
|
2.7
|
|
Non-agency mortgage-backed securities
|
|
|
9.7
|
|
|
|
6.21
|
|
|
|
3.0
|
|
Other asset-backed securities
|
|
|
27.0
|
|
|
|
2.51
|
|
|
|
1.2
|
|
Other debt securities
|
|
|
2.8
|
|
|
|
4.69
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
*
|
Based on call provisions and
estimated prepayment speeds.
|
|
42
Non-marketable securities, which totaled $122.1 million at
December 31, 2009, included $30.3 million in Federal
Reserve Bank stock and $42.3 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 through direct
private equity investments and through three private
equity/venture capital subsidiaries. The subsidiaries hold
investments in various portfolio concerns, which are carried at
fair value and totaled $44.8 million at December 31,
2009. The Company expects to fund an additional
$31.9 million to these subsidiaries for investment purposes
over the next several years. In addition to investments held by
its private equity/venture capital subsidiaries, the Parent
directly holds investments in several private equity concerns,
which totaled $3.9 million at year end 2009. 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, which believes the potential for long-term gains in
these investments outweighs the potential risks.
Non-marketable securities at year end for the past two years are
shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Debt securities
|
|
$
|
19,908
|
|
|
$
|
22,297
|
|
Equity securities
|
|
|
102,170
|
|
|
|
117,603
|
|
|
|
Total non-marketable investment securities
|
|
$
|
122,078
|
|
|
$
|
139,900
|
|
|
|
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
$14.2 billion at December 31, 2009, compared to
$12.9 billion last year, reflecting an increase of
$1.3 billion, or 10.2%. Average deposits grew by
$1.6 billion, or 12.8%, in 2009 compared to 2008 with most
of this growth centered in non-interest bearing demand deposits,
which grew $250.0 million, or 37.3%, in 2009 compared to
2008. Certificates of deposit with balances under $100,000 fell
on average by $93.2 million, or 4.3%, while certificates of
deposit over $100,000 grew $229.0 million, or 14.1%.
The following table shows year end deposits by type as a
percentage of total deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Non-interest bearing demand
|
|
|
12.6
|
%
|
|
|
10.7
|
%
|
Savings, interest checking and money market
|
|
|
64.8
|
|
|
|
59.0
|
|
Time open and C.D.s of less than $100,000
|
|
|
12.7
|
|
|
|
16.0
|
|
Time open and C.D.s of $100,000 and over
|
|
|
9.9
|
|
|
|
14.3
|
|
|
|
Total deposits
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
Core deposits, which include demand, interest checking, savings,
and money market deposits, supported 59% of average earning
assets in 2009 and 55% in 2008. Average balances by major
deposit category for the last six years appear at the end of
this discussion. A maturity schedule of time deposits
outstanding at December 31, 2009 is included in Note 7
on Deposits in the consolidated financial statements.
The Companys 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. The Company has
also entered into structured repurchase agreements totaling
$500.0 million which mature in mid 2010. Total balances
outstanding at year end 2009 were $1.1 billion, a
$76.7 million increase from $1.0 billion outstanding
at
43
year end 2008. On an average basis, these borrowings declined
$405.0 million, or 29.5% during 2009, with declines of
$251.1 million in federal funds purchased and
$153.8 million in repurchase agreements. The average rate
paid on total federal funds purchased and repurchase agreements
was .38% during 2009 and 1.83% during 2008.
Additional short-term borrowings may be periodically acquired
under the Federal Reserves temporary Term Auction Facility
(TAF) program, which was instituted in December 2007. The TAF is
a credit facility under which banking institutions may bid for
term borrowings in bi-weekly auctions. The TAF credit is
collateralized similarly to discount window borrowings,
generally with investment securities and loans. The amount
borrowed under this program totaled $700.0 million at
December 31, 2008. Borrowing activity under the program
declined during 2009, and there were no outstanding borrowings
at December 31, 2009.
Most of the Companys long-term debt is comprised of fixed
rate advances from the Federal Home Loan Bank (FHLB). These
borrowings declined from $1.0 billion at December 31,
2008 to $724.4 million outstanding at December 31,
2009. Approximately 59% of the outstanding balance is due within
the next year. The average rate paid on FHLB advances was 3.68%
during 2009 and 3.81% during 2008.
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
maintains 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 &
Poors and Moodys national rating services, and
|
|
|
|
Available borrowing capacity from outside sources.
|
During 2008, liquidity risk became a concern affecting the
general banking industry, as some of the major banking
institutions across the country experienced an unprecedented
erosion in capital. This erosion was fueled by declines in asset
values, losses in market and investor confidence, and higher
defaults, resulting in higher costing and less available credit.
The Company, as discussed below, took numerous steps to address
liquidity risk and over the past few years has developed a
variety of liquidity sources which it believes will provide the
necessary funds to grow its business into the future. During
2009, overall liquidity improved significantly throughout the
banking industry and in the Company by a combination of growth
in deposits and a decline in loans outstanding. The
Companys average loans to deposits ratio, one measure of
liquidity, decreased from 92.1% in 2008 to 79.8% in 2009.
The Company did not apply for funds through the Federal
Treasurys Capital Purchase Program. This program is part
of the federal governments Troubled Asset Relief Program
approved by Congress in October 2008 to build capital in
U.S. financial institutions and increase the flow of
financing to business and consumers. Under this program, the
Company, if approved, would have been eligible to issue senior
preferred stock to the Treasury, ranging from approximately
$140 million to $400 million, in addition to warrants
to purchase common stock. The program was carefully studied and
the Company made a business decision not to apply. Management
believes that the Companys earnings, capital and liquidity
are strong and sufficient to grow its business.
44
The Companys most liquid assets include available for sale
marketable investment securities, federal funds sold, balances
at the Federal Reserve Bank (FRB), and securities purchased
under agreements to resell (resale agreements). At
December 31, 2009 and 2008, such assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Available for sale investment securities
|
|
$
|
6,340,975
|
|
|
$
|
3,630,753
|
|
Federal funds sold
|
|
|
22,590
|
|
|
|
59,475
|
|
Resale agreements
|
|
|
|
|
|
|
110,000
|
|
Balances at the Federal Reserve Bank
|
|
|
24,118
|
|
|
|
638,158
|
|
|
|
Total
|
|
$
|
6,387,683
|
|
|
$
|
4,438,386
|
|
|
|
Federal funds sold and resale agreements normally have overnight
maturities and are used to satisfy the daily cash needs of the
Company. Effective October 1, 2008, required and excess
cash balances maintained at the FRB began earning interest.
These balances are also used for general daily liquidity
purposes. The interest rate on these balances during 2009 was
25 basis points. The Companys available for sale
investment portfolio has maturities of approximately
$1.5 billion which are scheduled to occur during 2010 and
offers substantial resources to meet either new loan demand or
reductions in the Companys 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 FRB. At December 31, 2009, total investment
securities pledged for these purposes were as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
|
|
Investment securities pledged for the purpose of securing:
|
|
|
|
|
Federal Reserve Bank borrowings
|
|
$
|
1,180,924
|
|
FHLB borrowings and letters of credit
|
|
|
395,925
|
|
Repurchase agreements
|
|
|
1,541,936
|
|
Other deposits
|
|
|
1,013,422
|
|
|
|
Total pledged, at fair value
|
|
$
|
4,132,207
|
|
|
|
Total unpledged and available for pledging, at fair value
|
|
$
|
1,765,214
|
|
|
|
Liquidity is also available from the Companys large base
of core customer deposits, defined as demand, interest checking,
savings, and money market deposit accounts. At December 31,
2009, such deposits totaled $11.0 billion and represented
77.4% of the Companys 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. During 2009,
total core deposits increased $2.0 billion, mainly in
non-interest bearing demand and money market accounts. This
increase was comprised of growth in consumer deposits of
$1.6 million and corporate and non-personal deposits of
$390.4 million. Some of the growth in corporate deposits
was the result of both extremely low interest rates and FDIC
insurance programs, which effectively guaranteed all such
deposits. While the Company considers core consumer deposits
less volatile, corporate deposits could decline if interest
rates increase significantly or if corporate customers move
funds from the Company. In order to address funding needs,
should these corporate deposits decline, the Company maintains
adequate levels of earning assets maturing in 2010. Time open
and certificates of deposit of $100,000 or greater totaled
$1.4 billion at December 31, 2009. These deposits are
normally considered more volatile and higher costing, and
comprised 9.9% of total deposits at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Core deposit base:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
1,793,816
|
|
|
$
|
1,375,000
|
|
Interest checking
|
|
|
735,870
|
|
|
|
700,714
|
|
Savings and money market
|
|
|
8,467,046
|
|
|
|
6,909,592
|
|
|
|
Total
|
|
$
|
10,996,732
|
|
|
$
|
8,985,306
|
|
|
|
45
Other important components of liquidity are the level of
borrowings from third party sources and the availability of
future credit. The Companys outside borrowings are mainly
comprised of federal funds purchased, repurchase agreements, and
advances from the FRB and the FHLB, as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
$
|
62,130
|
|
|
$
|
24,900
|
|
Repurchase agreements
|
|
|
1,041,061
|
|
|
|
1,001,637
|
|
FHLB advances
|
|
|
724,386
|
|
|
|
1,025,721
|
|
Subordinated debentures
|
|
|
4,000
|
|
|
|
14,310
|
|
Term auction facility
|
|
|
|
|
|
|
700,000
|
|
Other long-term debt
|
|
|
7,676
|
|
|
|
7,750
|
|
|
|
Total
|
|
$
|
1,839,253
|
|
|
$
|
2,774,318
|
|
|
|
Federal funds purchased and repurchase agreements are generally
borrowed overnight and amounted to $1.1 billion at
December 31, 2009. Federal funds purchased are unsecured
overnight borrowings obtained mainly from upstream correspondent
banks with which the Company maintains approved lines of credit.
Repurchase agreements are secured by a portion of the
Companys investment portfolio and are comprised of both
non-insured customer funds, totaling $541.1 million at
December 31, 2009, and structured repurchase agreements of
$500.0 million purchased from an upstream financial
institution. 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. Beginning in mid 2008, the
Company began to periodically borrow additional short-term funds
from the FRB through its Term Auction Facility (TAF). The TAF
offered attractive funding with low rates and made possible the
reduction in federal funds purchased during 2008. The Company
curtailed these borrowings during 2009 as rising deposit
balances provided other sources of liquidity, and at
December 31, 2009 the Company had no TAF borrowings
outstanding. The Company also borrows on a secured basis through
advances from the FHLB, which totaled $724.4 million at
December 31, 2009. Most of these advances have fixed
interest rates and mature in 2010 through 2011. The
Companys other borrowings are comprised of debentures
funded by trust preferred securities and debt related to the
Companys private equity business. The overall long-term
debt position of the Company is small relative to the
Companys 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. Also, this
collateral is used to enable the FHLB to issue letters of credit
in favor of public fund depositors of the Company. The Federal
Reserve Bank also establishes a collateral value of assets
pledged and permits borrowings from either the discount window
or the Term Auction Facility. 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, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
(In thousands)
|
|
FHLB
|
|
|
Federal Reserve
|
|
|
|
|
Total collateral value pledged
|
|
$
|
2,150,085
|
|
|
$
|
1,980,798
|
|
Advances outstanding
|
|
|
(724,386
|
)
|
|
|
|
|
Letters of credit issued
|
|
|
(533,309
|
)
|
|
|
|
|
|
|
Available for future advances
|
|
$
|
892,390
|
|
|
$
|
1,980,798
|
|
|
|
46
The Company had an average loans to deposits ratio of 79.8% at
December 31, 2009, which is considered in the banking
industry to be a conservative measure of good liquidity. Also,
the Company receives outside ratings from both
Standard & Poors and Moodys on both the
consolidated company and its subsidiary bank, Commerce Bank,
N.A. These ratings are as follows:
|
|
|
|
|
|
|
|
Standard & Poors
|
|
Moodys
|
|
|
Commerce Bancshares, Inc.
|
|
|
|
|
Counterparty rating
|
|
A-1
|
|
|
Commercial paper rating
|
|
A-1
|
|
P-1
|
Commerce Bank, N. A.
|
|
|
|
|
Issuer rating
|
|
A+
|
|
Aa2
|
Bank deposits
|
|
A+
|
|
Aa2
|
Bank financial strength rating
|
|
|
|
B+
|
|
|
The Company considers these ratings to be indications of a sound
capital base and good 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 over the past ten years. The Company has little
subordinated debt or hybrid instruments which would affect
future borrowings 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. Future financing could also include the issuance of common
or preferred stock.
The cash flows from the operating, investing and financing
activities of the Company resulted in a net decrease in cash and
cash equivalents of $835.5 million in 2009, as reported in
the consolidated statements of cash flows on page 67 of
this report. Operating activities, consisting mainly of net
income adjusted for certain non-cash items, provided cash flow
of $295.3 million and has historically been a stable source
of funds. Investing activities used total cash of
$1.6 billion in 2009, and consist mainly of purchases and
maturities of available for sale investment securities and
changes in the level of the Companys loan portfolio. The
investment securities portfolio grew during 2009, using cash of
$2.5 billion, while the loan portfolio decreased, providing
cash of $999.1 million. 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 $441.5 million,
resulting from a $1.3 billion increase in deposits, partly
offset by net debt repayments of $1.1 billion. The stock
sale program (described below) provided cash of
$98.2 million, while cash dividend payments totaled
$74.7 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 Companys 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 Companys transactions in its
common stock were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Stock sale program
|
|
$
|
98.2
|
|
|
$
|
|
|
|
$
|
|
|
Exercise of stock-based awards and sales to affiliate
non-employee directors
|
|
|
5.5
|
|
|
|
16.0
|
|
|
|
13.7
|
|
Purchases of treasury stock
|
|
|
(.5
|
)
|
|
|
(9.5
|
)
|
|
|
(128.6
|
)
|
Cash dividends paid
|
|
|
(74.7
|
)
|
|
|
(72.1
|
)
|
|
|
(68.9
|
)
|
|
|
Cash provided (used)
|
|
$
|
28.5
|
|
|
$
|
(65.6
|
)
|
|
$
|
(183.8
|
)
|
|
|
47
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 from management
fees charged to subsidiaries as reimbursement for services
provided by the Parent, as presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Dividends received from subsidiaries
|
|
$
|
45.1
|
|
|
$
|
76.2
|
|
|
$
|
179.5
|
|
Management fees
|
|
|
46.6
|
|
|
|
44.0
|
|
|
|
39.1
|
|
|
|
Total
|
|
$
|
91.7
|
|
|
$
|
120.2
|
|
|
$
|
218.6
|
|
|
|
These sources of funds are used mainly to pay cash dividends on
outstanding common stock, pay general operating expenses, and
purchase treasury stock when appropriate. At December 31,
2009, the Parents available for sale investment securities
totaled $115.2 million at fair value, consisting mainly of
publicly traded 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. The Parent had no
borrowings outstanding under the line at December 31, 2009.
Company senior management is responsible for measuring and
monitoring the liquidity profile of the organization with
oversight by the Companys Asset/Liability Committee. This
is done through a series of controls, including a written
Contingency Funding Policy and risk monitoring procedures,
including daily, weekly and monthly reporting. In addition, the
Company prepares forecasts which project changes in the balance
sheet affecting liquidity, and which 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 Companys capital ratios at the end of the
last three years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well-Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Guidelines
|
|
|
|
|
Risk-based capital ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
|
|
|
13.04
|
%
|
|
|
10.92
|
%
|
|
|
10.31
|
%
|
|
|
6.00
|
%
|
Total capital
|
|
|
14.39
|
|
|
|
12.31
|
|
|
|
11.49
|
|
|
|
10.00
|
|
Leverage ratio
|
|
|
9.58
|
|
|
|
9.06
|
|
|
|
8.76
|
|
|
|
5.00
|
|
Tangible equity to assets
|
|
|
9.71
|
|
|
|
8.25
|
|
|
|
8.61
|
|
|
|
|
|
Dividend payout ratio
|
|
|
44.15
|
|
|
|
38.54
|
|
|
|
33.76
|
|
|
|
|
|
|
|
The components of the Companys regulatory risked-based
capital and risk-weighted assets at the end of the last three
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Regulatory risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
|
|
$
|
1,708,901
|
|
|
$
|
1,510,959
|
|
|
$
|
1,375,035
|
|
Tier II capital
|
|
|
177,077
|
|
|
|
191,957
|
|
|
|
157,154
|
|
Total capital
|
|
|
1,885,978
|
|
|
|
1,702,916
|
|
|
|
1,532,189
|
|
Total risk-weighted assets
|
|
|
13,105,948
|
|
|
|
13,834,161
|
|
|
|
13,330,968
|
|
|
|
In February 2008, the Board of Directors authorized the Company
to purchase additional shares of common stock under its
repurchase program, which brought the total purchase
authorization to 3,000,000 shares. During 2009,
approximately 16,000 shares were acquired under the current
Board authorization at an average price of $33.50 per share.
48
The Companys 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 .8% in 2009
compared with 2008. The Company paid its sixteenth consecutive
annual stock dividend in December 2009.
Common
Equity Offering
On February 27, 2009, the Company entered into an equity
distribution agreement with a broker dealer, acting as the
Companys sales agent, relating to the offering of the
Companys common stock having aggregate gross sales
proceeds of up to $200 million. This offering was described
in a prospectus supplement, including the associated base
prospectus, which the Company filed with the SEC on
February 27, 2009.
Sales of these shares were made by means of brokers
transactions on or through the Nasdaq Global Select Market,
trading facilities of national securities associations or
alternative trading systems, block transactions and such other
transactions as agreed upon by the Company and the sales agent,
at market prices prevailing at the time of the sale or at prices
related to the prevailing market prices. The Company and the
sales agent determined jointly, as often as daily, how many
shares to sell under this offering. On July 31, 2009, the
Company terminated the offering.
Total shares sold under the offering amounted to 2,894,773.
Total gross proceeds for the entire offering were
$100.0 million, with an average sale price of $34.55 per
share, and total commissions paid to the sales agent for the
sale of these shares were $1.5 million. After payment of
commissions and SEC, legal and accounting fees relating to the
offering, net proceeds for the entire offering totaled
$98.2 million, with average net sale proceeds of $33.91 per
share.
Commitments,
Contractual Obligations, and Off-Balance Sheet
Arrangements
Various commitments and contingent liabilities arise in the
normal course of business, which are not required to be recorded
on the balance sheet. The most significant of these are loan
commitments, totaling $7.0 billion (including approximately
$3.3 billion in unused approved credit card lines), and the
contractual amount of standby letters of credit, totaling
$404.1 million at December 31, 2009. Since 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
and 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, 2009 and the expected timing of these
payments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
After One Year
|
|
|
After Three
|
|
|
After
|
|
|
|
|
|
|
In One Year
|
|
|
Through Three
|
|
|
Years Through
|
|
|
Five
|
|
|
|
|
(In thousands)
|
|
or Less
|
|
|
Years
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
|
|
Long-term debt obligations, including structured repurchase
agreements*
|
|
$
|
927,597
|
|
|
$
|
125,386
|
|
|
$
|
52,703
|
|
|
$
|
130,376
|
|
|
$
|
1,236,062
|
|
Operating lease obligations
|
|
|
5,805
|
|
|
|
8,226
|
|
|
|
6,211
|
|
|
|
21,227
|
|
|
|
41,469
|
|
Purchase obligations
|
|
|
36,640
|
|
|
|
58,189
|
|
|
|
17,210
|
|
|
|
4,149
|
|
|
|
116,188
|
|
Time open and C.D.s*
|
|
|
2,604,292
|
|
|
|
534,819
|
|
|
|
74,122
|
|
|
|
486
|
|
|
|
3,213,719
|
|
|
|
Total
|
|
$
|
3,574,334
|
|
|
$
|
726,620
|
|
|
$
|
150,246
|
|
|
$
|
156,238
|
|
|
$
|
4,607,438
|
|
|
|
|
|
* |
Includes principal payments
only.
|
As of December 31, 2009, the Company has unrecognized tax
benefits that, if recognized, would impact the effective tax
rate in future periods. Due to the uncertainty of the amounts to
be ultimately paid as well as the timing of such payments, all
uncertain tax liabilities that have not been paid have been
excluded from the table above. Further detail on the impact of
income taxes is located in Note 9 of the consolidated
financial statements.
49
The Company funds a defined benefit pension plan for a majority
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. During recent years, the Company has not
been required to make cash contributions to the plan and does
not expect to do so in 2010.
The Company has investments in several low-income housing
partnerships within the area it serves. At December 31,
2009, these investments totaled $4.7 million and were
recorded as other assets in the Companys consolidated
balance sheet. 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, state
and/or
federal 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. These
unfunded commitments are recorded as liabilities on the
Companys consolidated balance sheet, and aggregated
$3.7 million at December 31, 2009.
The Company regularly purchases various state tax credits
arising from third-party property redevelopment. While most of
the tax credits are resold to third parties, some are
periodically retained for use by the Company. During 2009,
purchases and sales of tax credits amounted to
$51.4 million and $42.5 million, respectively. At
December 31, 2009, the Company had outstanding purchase
commitments totaling $114.7 million.
The Parent has investments in several private equity concerns
which are classified as non-marketable securities in the
Companys consolidated balance sheet. Under the terms of
the agreements with three of these concerns, the Parent has
unfunded commitments outstanding of $1.4 million at
December 31, 2009. The Parent also expects to fund
$31.9 million to venture capital subsidiaries over the next
several years.
Interest
Rate Sensitivity
The Companys Asset/Liability Management Committee (ALCO)
measures and manages the Companys interest rate risk on a
monthly basis to identify trends and establish strategies to
maintain stability in earnings throughout various rate
environments. Analytical modeling techniques provide management
insight into the Companys exposure to changing rates.
These techniques include net interest income simulations and
market value analyses. 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 Companys 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 table below shows the expected effect
that gradual basis point shifts in the LIBOR/swap curve over a
twelve month period would have on the Companys net
interest income, given a static balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Increase
|
|
|
% of Net Interest
|
|
|
Increase
|
|
|
% of Net Interest
|
|
|
Increase
|
|
|
% of Net Interest
|
|
(Dollars in millions)
|
|
(Decrease)
|
|
|
Income
|
|
|
(Decrease)
|
|
|
Income
|
|
|
(Decrease)
|
|
|
Income
|
|
|
|
|
300 basis points rising
|
|
$
|
21.6
|
|
|
|
3.22
|
%
|
|
$
|
26.3
|
|
|
|
3.97
|
%
|
|
$
|
37.3
|
|
|
|
6.38
|
%
|
200 basis points rising
|
|
|
17.3
|
|
|
|
2.57
|
|
|
|
21.4
|
|
|
|
3.23
|
|
|
|
30.6
|
|
|
|
5.23
|
|
100 basis points rising
|
|
|
10.6
|
|
|
|
1.58
|
|
|
|
12.1
|
|
|
|
1.83
|
|
|
|
18.1
|
|
|
|
3.10
|
|
|
|
50
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 markets 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 LIBOR/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 Companys modeling of interest rate risk as of
December 31, 2009 shows that under various rising rate
scenarios, net interest income would show growth. The Company
has not modeled falling rate scenarios due the extremely low
interest rate environment. At December 31, 2009, the
Company calculated that a gradual increase in rates of
100 basis points would increase net interest income by
$10.6 million, or 1.6%, compared with an increase of
$18.1 million projected at December 31, 2008. A
200 basis point gradual rise in rates calculated at
December 31, 2009 would increase net interest income by
$17.3 million, or 2.6%, down from an increase of
$30.6 million last year. Also, a gradual increase of
300 basis points would increase net interest income by
$21.6 million, or 3.2%, compared to a growth of
$37.3 million at December 31, 2008.
Using rising rate models, the potential increase in net interest
income is lower at December 31, 2009 when compared to the
prior year due to several factors. These factors include a
decline of $255.8 million in average loan balances in 2009
compared to the previous year, which are mainly variable rate
assets, and average growth of $1.7 billion in available for
sale securities, most of which have fixed rates. In addition to
the change in earning assets, average interest bearing deposits
grew during 2009 by $1.3 billion, mainly in money market
deposit accounts, which have lower rates and can re-price
upwards more slowly.
Thus, under rising rate scenarios, the Company benefits from the
repricing of its loan portfolio, the majority of which is
variable rate. However, higher levels of fixed rate securities
will partly offset the effect of the loan portfolio on interest
income. Additionally, deposit balances have a smaller impact on
net interest income when rates are rising, due to lower overall
rates and fewer accounts that carry variable rates moving in
sequence with market rates.
Through review and oversight by the ALCO, the Company attempts
to engage in strategies that neutralize interest rate risk as
much as possible. The Companys 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 Companys
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. As
of December 31, 2009, the Company had entered into three
interest rate swaps with a notional amount of $16.9 million
which are designated as fair value hedges of certain fixed rate
loans. 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
51
matching contracts with offsetting pay/receive rates from other
financial institutions. The notional amount of these types of
swaps at December 31, 2009 was $486.6 million.
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. Hedge accounting has not been applied to
these foreign exchange activities. This trading activity is
managed within a policy of specific controls and limits. Most of
the foreign exchange contracts outstanding at December 31,
2009 mature within 90 days, and the longest period to
maturity is 12 months.
Additionally, interest rate lock commitments issued on
residential mortgage loans held for resale are considered
derivative instruments. The interest rate exposure on these
commitments is economically hedged primarily with forward sale
contracts in the secondary market.
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.
The following table summarizes the notional amounts and
estimated fair values of the Companys derivative
instruments at December 31, 2009 and 2008. 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. Positive fair values are recorded in other
assets and negative fair values are recorded in other
liabilities in the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Positive
|
|
|
Negative
|
|
|
|
|
|
Positive
|
|
|
Negative
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
Fair
|
|
(In thousands)
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
|
|
Interest rate swaps
|
|
$
|
503,530
|
|
|
$
|
16,962
|
|
|
$
|
(17,816
|
)
|
|
$
|
492,111
|
|
|
$
|
25,274
|
|
|
$
|
(26,568
|
)
|
Interest rate caps
|
|
|
16,236
|
|
|
|
239
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk participation agreements
|
|
|
53,246
|
|
|
|
140
|
|
|
|
(239
|
)
|
|
|
47,750
|
|
|
|
117
|
|
|
|
(178
|
)
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
|
17,475
|
|
|
|
415
|
|
|
|
(295
|
)
|
|
|
6,226
|
|
|
|
207
|
|
|
|
(217
|
)
|
Option contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,300
|
|
|
|
18
|
|
|
|
(18
|
)
|
Mortgage loan commitments
|
|
|
9,767
|
|
|
|
44
|
|
|
|
(16
|
)
|
|
|
23,784
|
|
|
|
198
|
|
|
|
(6
|
)
|
Mortgage loan forward sale contracts
|
|
|
19,986
|
|
|
|
184
|
|
|
|
(5
|
)
|
|
|
26,996
|
|
|
|
21
|
|
|
|
(88
|
)
|
|
|
Total at December 31
|
|
$
|
620,240
|
|
|
$
|
17,984
|
|
|
$
|
(18,610
|
)
|
|
$
|
600,167
|
|
|
$
|
25,835
|
|
|
$
|
(27,075
|
)
|
|
|
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
Companys 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 (formerly titled Money
Management). Additional information is presented in Note 13
on Segments in the consolidated financial statements.
52
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
LIBOR interest rates, thus determining an interest spread at the
time of the transaction. Non-maturity assets and liabilities are
assigned to LIBOR based funding pools. This method helps to
provide an accurate means of valuing fund sources and uses in a
varying interest rate environment. 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.
The table below is a summary of segment pre-tax income results
for the past three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
Other/
|
|
|
Consolidated
|
|
(Dollars in thousands)
|
|
Consumer
|
|
|
Commercial
|
|
|
Wealth
|
|
|
Totals
|
|
|
Elimination
|
|
|
Totals
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
348,362
|
|
|
$
|
258,886
|
|
|
$
|
42,074
|
|
|
$
|
649,322
|
|
|
$
|
(13,820
|
)
|
|
$
|
635,502
|
|
Provision for loan losses
|
|
|
(84,019
|
)
|
|
|
(54,230
|
)
|
|
|
(520
|
)
|
|
|
(138,769
|
)
|
|
|
(21,928
|
)
|
|
|
(160,697
|
)
|
Non-interest income
|
|
|
162,374
|
|
|
|
115,697
|
|
|
|
114,838
|
|
|
|
392,909
|
|
|
|
3,676
|
|
|
|
396,585
|
|
Investment securities losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,195
|
)
|
|
|
(7,195
|
)
|
Non-interest expense
|
|
|
(301,622
|
)
|
|
|
(192,722
|
)
|
|
|
(106,604
|
)
|
|
|
(600,948
|
)
|
|
|
(21,115
|
)
|
|
|
(622,063
|
)
|
|
|
Income (loss) before income taxes
|
|
$
|
125,095
|
|
|
$
|
127,631
|
|
|
$
|
49,788
|
|
|
$
|
302,514
|
|
|
$
|
(60,382
|
)
|
|
$
|
242,132
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
323,568
|
|
|
$
|
203,950
|
|
|
$
|
37,188
|
|
|
$
|
564,706
|
|
|
$
|
28,033
|
|
|
$
|
592,739
|
|
Provision for loan losses
|
|
|
(56,639
|
)
|
|
|
(13,526
|
)
|
|
|
(265
|
)
|
|
|
(70,430
|
)
|
|
|
(38,470
|
)
|
|
|
(108,900
|
)
|
Non-interest income
|
|
|
146,051
|
|
|
|
107,586
|
|
|
|
114,482
|
|
|
|
368,119
|
|
|
|
7,593
|
|
|
|
375,712
|
|
Investment securities gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,294
|
|
|
|
30,294
|
|
Non-interest expense
|
|
|
(285,466
|
)
|
|
|
(180,930
|
)
|
|
|
(131,982
|
)
|
|
|
(598,378
|
)
|
|
|
(17,002
|
)
|
|
|
(615,380
|
)
|
|
|
Income (loss) before income taxes
|
|
$
|
127,514
|
|
|
$
|
117,080
|
|
|
$
|
19,423
|
|
|
$
|
264,017
|
|
|
$
|
10,448
|
|
|
$
|
274,465
|
|
|
|
2009 vs. 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
(2,419
|
)
|
|
$
|
10,551
|
|
|
$
|
30,365
|
|
|
$
|
38,497
|
|
|
$
|
(70,830
|
)
|
|
$
|
(32,333
|
)
|
|
|
Percent
|
|
|
(1.9
|
)%
|
|
|
9.0
|
%
|
|
|
156.3
|
%
|
|
|
14.6
|
%
|
|
|
N.M.
|
|
|
|
(11.8
|
)%
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
318,970
|
|
|
$
|
184,263
|
|
|
$
|
34,484
|
|
|
$
|
537,717
|
|
|
$
|
355
|
|
|
$
|
538,072
|
|
Provision for loan losses
|
|
|
(34,737
|
)
|
|
|
(8,376
|
)
|
|
|
(154
|
)
|
|
|
(43,267
|
)
|
|
|
535
|
|
|
|
(42,732
|
)
|
Non-interest income
|
|
|
167,352
|
|
|
|
124,377
|
|
|
|
106,026
|
|
|
|
397,755
|
|
|
|
(26,174
|
)
|
|
|
371,581
|
|
Investment securities gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,234
|
|
|
|
8,234
|
|
Non-interest expense
|
|
|
(275,161
|
)
|
|
|
(180,389
|
)
|
|
|
(90,280
|
)
|
|
|
(545,830
|
)
|
|
|
(28,329
|
)
|
|
|
(574,159
|
)
|
|
|
Income (loss) before income taxes
|
|
$
|
176,424
|
|
|
$
|
119,875
|
|
|
$
|
50,076
|
|
|
$
|
346,375
|
|
|
$
|
(45,379
|
)
|
|
$
|
300,996
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
(48,910
|
)
|
|
$
|
(2,795
|
)
|
|
$
|
(30,653
|
)
|
|
$
|
(82,358
|
)
|
|
$
|
55,827
|
|
|
$
|
(26,531
|
)
|
|
|
Percent
|
|
|
(27.7
|
)%
|
|
|
(2.3
|
)%
|
|
|
(61.2
|
)%
|
|
|
(23.8
|
)%
|
|
|
N.M.
|
|
|
|
(8.8
|
)%
|
|
|
Consumer
The Consumer segment includes consumer deposits, consumer
finance, consumer debit and credit card bank cards, and student
lending. Pre-tax income for 2009 was $125.1 million, a
decrease of $2.4 million, or 1.9%, from 2008. The decline
in profitability was mainly due to an increase of
$27.4 million in net loan charge-offs and an increase of
$16.2 million in non-interest expense, which were partly
offset by higher net interest income of $24.8 million and
$16.3 million in non-interest income. The increase in net
interest income resulted
53
mainly from a $53.0 million decrease in deposit interest
expense, mainly in premium money market accounts and short-term
certificates of deposit. This effect was partly offset by a
decline of $7.8 million in net allocated funding credits
assigned to the Consumer segments loan and deposit
portfolios and a $20.4 million decrease in loan interest
income. The increase in net loan charge-offs occurred mainly in
consumer credit card and marine and RV loans. An increase of
$16.3 million, or 11.2%, in non-interest income resulted
mainly from higher gains on sales of student loans, including
the reversal of an impairment reserve discussed above in the
Non-Interest Income section of this discussion. This increase in
income was partly offset by a decline in overdraft charges.
Non-interest expense grew $16.2 million, or 5.7%, over the
prior year due to higher FDIC insurance expense and data
processing costs, partly offset by lower bank card servicing
expense. Total average loans increased slightly in 2009 over the
prior year due to the student loan portfolio acquired late in
2008, partly offset by declines in other types of consumer
loans. Average deposits increased 2.8% over the prior period,
resulting mainly from growth in interest checking and premium
money market deposit accounts, partly offset by a decline in
certificates of deposit.
Pre-tax profitability for 2008 was $127.5 million, a
decrease of $48.9 million, or 27.7%, from 2007. The
decrease was due to increases of $10.3 million in
non-interest expense and $21.9 million in net loan
charge-offs. In addition, non-interest income declined
$21.3 million, while net interest income increased
$4.6 million. The increase in net interest income resulted
mainly from an $83.9 million decline in deposit interest
expense, partly offset by a $64.5 million decrease in net
allocated funding credits assigned to the Consumer segment and a
$14.8 million decrease in loan interest income. The
decrease in non-interest income resulted largely from lower
overdraft and return item fees, an impairment charge taken on
certain held for sale student loans, and lower gains on student
loan sales. These declines were partly offset by an increase in
bank card fee income (primarily debit card fees). Non-interest
expense increased $10.3 million over the previous year
mainly due to higher bank card processing costs, telephone
support fees and teller services processing costs. Net loan
charge-offs increased $21.9 million, or 63.1%, in the
Consumer segment, with most of the increase due to higher
consumer credit card and marine and RV loan charge-offs. Total
average assets directly related to the segment rose 6.5% over
2007, mainly due to growth in consumer loans and consumer credit
card loans. Average deposits decreased slightly from the prior
year, mainly due to lower balances in long-term certificates of
deposit, partly offset by growth in premium money market deposit
accounts.
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. In 2009,
pre-tax profitability for the Commercial segment increased
$10.6 million, or 9.0%, compared to the prior year. The
growth was mainly due to a $54.9 million, or 26.9%,
increase in net interest income and an $8.1 million
increase in non-interest income. Partly offsetting the increases
in income were higher net loan charge-offs of $40.7 million
and non-interest expense of $11.8 million. The increase in
net interest income was mainly due to lower net allocated
funding costs of $129.6 million and a decrease of
$6.7 million in deposit interest expense, which were partly
offset by a decline in loan interest income of
$81.3 million. The growth in net loan charge-offs included
a $27.9 million increase in construction and land loan net
charge-offs and smaller increases in other commercial loan
categories. Non-interest income increased $8.1 million, or
7.5%, over the prior year and included higher commercial cash
management fees and bank card fees (mainly corporate card),
partly offset by lower cash sweep commissions. Non-interest
expense increased $11.8 million, or 6.5%, over the previous
year, mainly due to higher FDIC insurance expense and an
increase in salaries and benefits expense. Total average assets
directly related to the segment declined 4.7% from 2008. Average
segment loans decreased 4.9% compared to 2008 as a result of
declines in business and business real estate loans, while
average deposits increased 38.0% due to growth in non-interest
bearing demand and money market deposit accounts.
Pre-tax income for 2008 decreased $2.8 million, or 2.3%,
compared to the prior year. Most of the decrease was due to a
decline of $16.8 million in non-interest income and an
increase of $5.2 million in net loan charge-offs. Net
interest income increased $19.7 million, or 10.7%, which
resulted from lower net allocated funding costs of
$81.1 million and lower deposit interest expense of
$7.0 million, partly offset by a $68.3 million
54
decline in loan interest income. Non-interest income decreased
by 13.5% from the previous year largely due to lower bank card
fees, partly offset by higher commercial cash management fees.
Non-interest expense increased slightly over the prior year and
included higher salaries expense and impairment charges on
foreclosed land, partly offset by lower commercial card
servicing costs. Net loan charge-offs were $13.5 million in
2008 compared to $8.4 million in 2007. The increase was
mainly due to higher construction and land loan net charge-offs.
Total average assets directly related to the segment rose 7.0%
over 2007, largely due to growth in business and business real
estate loans. Average deposits increased 7.2% due to growth in
non-interest bearing demand, money market and interest checking
deposit accounts.
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, 2009 the Trust group managed
investments with a market value of $12.8 billion and
administered an additional $9.3 billion in non-managed
assets. It also provides investment management services to The
Commerce Funds, a series of mutual funds with $1.4 billion
in total assets at December 31, 2009. The Capital Markets
Group sells primarily fixed-income securities to individuals,
corporations, correspondent banks, public institutions, and
municipalities, and also provides investment safekeeping and
bond accounting services. Pre-tax profitability for the Wealth
segment was $49.8 million in 2009 compared to
$19.4 million in 2008, an increase of $30.4 million.
The profitability increase was the result of a
$25.4 million decline in non-interest expense, which was
due to a $33.3 million loss on the purchase of auction rate
securities in 2008, which is discussed above in the Non-Interest
Expense section of this discussion. Partly offsetting this
decline in expense were increases in FDIC insurance costs,
allocated processing costs, and salaries and benefits expense.
Net interest income increased $4.9 million, or 13.1%,
largely due to a $13.9 million decline in interest expense
on short-term jumbo certificates of deposit, and a
$7.6 million decline in overnight borrowings expense. These
effects were partly offset by a $13.2 million decrease in
assigned net funding credits. Non-interest income increased
slightly over the prior year due to higher bond trading income
in the Capital Markets Group, partly offset by lower trust fee
income and cash sweep commissions. Average assets decreased
$7.7 million during 2009 mainly due to a decline in the
trading securities portfolio. Average deposits increased
$400.3 million, or 25.3%, during 2009, due to growth in
premium money market accounts and certificates of deposit over
$100,000.
In 2008, pre-tax income for the Wealth segment was
$19.4 million compared to $50.1 million in 2007, a
$30.7 million decline mainly due to the auction rate
securities loss mentioned above. Excluding this loss, segment
profitability in 2008 would have been $52.7 million, a 5.2%
increase over 2007. Net interest income increased
$2.7 million, or 7.8%, over the prior year, due to lower
interest expense on short-term borrowings and deposits, partly
offset by lower interest income on overnight investments.
Non-interest income increased $8.5 million, or 8.0%, mainly
due to higher private client and corporate trust fees and bond
trading income. Non-interest expense, excluding the auction rate
securities loss, rose $8.4 million over 2007, mainly in
salary expense. Average assets decreased $305.2 million
during 2008 because of lower overnight investments of liquid
funds. Average deposits increased $306.5 million during
2008, due to growth in short-term certificates of deposit over
$100,000.
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 excess of the
Companys provision for loan losses over net loan
charge-offs, which are generally assigned directly to the
segments. In 2009, the pre-tax loss in this category was
$60.4 million, compared to profitability of
$10.4 million in 2008. The decline in profitability was
partly due to items relating to the Banks relationship
with Visa which were not assigned to a segment. As mentioned
earlier, Visa-related stock redemption gains of
$22.2 million and indemnification obligation reversals of
$9.6 million were recorded in 2008, compared to obligation
reversals of $2.5 million in 2009. In addition, unallocated
net interest income in this category, relating to earnings on
the Companys investment portfolio and interest expense on
overnight borrowings not allocated to the segments, decreased
$41.9 million
55
in 2009. These declines in profitability were partly offset by a
$16.5 million decrease in the unallocated loan loss
provision.
Impact
of Recently Issued Accounting Standards
Fair Value Measurements The Company adopted new
accounting guidance for determining fair value, issued by the
Financial Accounting Standards Board (FASB), on January 1,
2008. Under this guidance, fair value is defined as a
market-based measurement and should be determined based on
assumptions that a market participant would use when pricing an
asset or liability. Additionally, it establishes a fair value
hierarchy that provides the highest priority to measurements
using quoted prices in active markets and the lowest priority to
measurements based on unobservable data. No new fair value
measurements are required. The guidance for initial recognition
of fair value for certain derivative contracts held by the
Company was modified. Former accounting guidance precluded
immediate recognition in earnings of an unrealized gain or loss,
measured as the difference between the transaction price and
fair value of these instruments at initial recognition. This
guidance was nullified and in accordance with the new
recognition requirements, the Company increased equity by $903
thousand on January 1, 2008.
In April 2009, the FASB issued additional guidance on reliance
on transaction prices or quoted prices when estimating fair
value when market volume and activity have significantly
decreased. The guidance reaffirms the definition of fair value
as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants. It provides a two-step process to determine
whether there has been a significant decrease in the volume and
level of activity for an asset or liability when compared with
normal market activity for the asset or liability, and whether a
transaction is not orderly. If it is determined that there has
been a significant decrease in the volume and level of activity
for the asset or liability in relation to normal market activity
for the asset or liability, transactions or quoted prices may
not be determinative of fair value. Accordingly, further
analysis of the transactions or quoted prices is needed, and a
significant adjustment to the transactions or quoted prices may
be necessary to estimate fair value. The Company adopted the
guidance in March 2009, and its application did not result in a
change in valuation techniques and related inputs.
Business Combinations In December 2007, the FASB
issued guidance which, while retaining the fundamental
requirements of the acquisition method of accounting for
business combinations, broadened the scope and improved the
application of this method. Under the new guidance, the acquirer
in a business combination must recognize the assets acquired,
the liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values
as of that date. The recognition at the acquisition date of an
allowance for loan losses on acquired loans was eliminated, as
credit-related factors are now incorporated directly into the
fair value of the loans. Costs incurred to effect the
acquisition are to be recognized separately from the
acquisition. Assets and liabilities arising from contractual
contingencies must be measured at fair value as of the
acquisition date. Contingent consideration must also be measured
at fair value as of the acquisition date. The guidance also
changes the accounting for negative goodwill arising from a
bargain purchase, requiring recognition in earnings instead of
allocation to assets acquired. For business combinations
achieved in stages (step acquisitions), the assets and
liabilities must be recognized at the full amounts of their fair
values, while under former guidance the entity was acquired in a
series of purchases, with costs and fair values being identified
and measured at each step. The new accounting requirements apply
to business combinations occurring after January 1, 2009.
Non-controlling Interests Also in December 2007,
the FASB issued guidance which clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the
consolidated financial statements. A single method of accounting
exists for changes in a parents ownership interest if the
parent retains its controlling interest, deeming these to be
equity transactions. Such changes include the parents
purchases and sales of ownership interests in its subsidiary and
the subsidiarys acquisition and issuance of its ownership
interests. The parent must recognize a gain or loss in net
income when a subsidiary is deconsolidated. The guidance changed
the way the consolidated income statement is presented,
requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the
non-controlling interest, and requires disclosure of these
56
amounts on the face of the consolidated statement of income. The
guidance was effective on January 1, 2009, and its adoption
did not have a significant effect on the Companys
consolidated financial statements.
Income per Share In June 2008, the FASB issued
guidance which defined unvested stock awards which contain
nonforfeitable rights to dividends as securities which
participate in undistributed earnings. Such participating
securities must be included in the computation of income per
share under the two-class method. 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 was required to apply the two-class method
to its computation of income per share effective January 1,
2009, and its application did not have a significant effect on
the computation of income per share attributable to common
shareholders.
Benefit Plans In December 2008, the FASB expanded
its disclosure requirements about pension and other
postretirement benefit plan assets. These disclosures, for each
major asset category, include fair value measurements, valuation
techniques, risk concentrations, and rate of return assumptions.
Information about asset investment policies and strategies, such
as investment goals and risk management practices, must also be
provided. The new disclosures are required on an annual basis,
effective with the December 31, 2009 financial statements.
Other-Than-Temporary
Impairments In April 2009, the FASB issued new
accounting guidance for the measurement and recognition of
other-than-temporary
impairment for debt securities. The guidance addresses how to
evaluate whether an impairment of a debt security is other than
temporary, determination of the amount of impairment to be
recognized in earnings and other comprehensive income, and
subsequent accounting for these securities. It requires a new
presentation on the statement of earnings which shows the total
impairment, offset for that amount considered noncredit-related
and recognized in other comprehensive income. Various additional
disclosures are required for investments in an unrealized loss
position, in addition to information about the methodologies and
inputs used in calculating the portion of impairment recognized
in earnings. The Company adopted the new guidance in March 2009,
and has presented the required disclosures in Note 4 on
Investment Securities in the accompanying consolidated financial
statements.
Subsequent Events The FASB issued guidance in May
2009 for accounting and disclosures of events that occur after
the balance sheet date but before financial statements are
issued or are available to be issued. The guidance sets the
period after the balance sheet date during which management
should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
and the circumstances under which they should be recognized. The
guidance was effective with the June 30, 2009 financial
statements, and its application did not have a significant
effect on the Companys financial statements.
Accounting for Transfers of Financial Assets The
FASB issued additional guidance in June 2009 with the objective
of providing greater transparency about transfers of financial
assets and a transferors continuing involvement. The new
guidance limits the circumstances in which a financial asset
should be derecognized when the transferor has not transferred
the entire original financial asset, or when the transferor has
continuing involvement with the transferred asset. It
establishes conditions for reporting a transfer of a portion of
a financial asset as a sale. Also, it eliminates the exception
for qualifying special purpose entities from consolidation
guidance, and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not
surrendered control over the transferred assets. The new
accounting requirements must be applied to transactions
occurring on or after January 1, 2010. The Company does not
expect their adoption to have a significant effect on its
financial statements.
Variable Interest Entities In June 2009, the FASB
issued new accounting guidance related to variable interest
entities. This guidance replaces a quantitative-based risks and
rewards calculation for determining which entity, if any, has a
controlling financial interest in a variable interest entity
with an approach focused on identifying which entity has the
power to direct the activities of a variable interest entity
that most significantly impact its economic performance and the
obligation to absorb its losses or the right to receive its
benefits. This guidance requires reconsideration of whether an
entity is a variable interest entity when any changes in facts
or circumstances occur such that the holders of the equity
investment at risk, as a group, lose
57
the power to direct the activities of the entity that most
significantly impact the entitys economic performance. It
also requires ongoing assessments of whether a variable interest
holder is the primary beneficiary of a variable interest entity.
The guidance was effective on January 1, 2010, and its
adoption did not have a significant effect on the Companys
financial statements.
Effects
of Inflation
The impact of inflation on financial institutions differs
significantly from that exerted on industrial entities.
Financial institutions are not heavily involved in large capital
expenditures used in the production, acquisition or sale of
products. Virtually all assets and liabilities of financial
institutions are monetary in nature and represent obligations to
pay or receive fixed and determinable amounts not affected by
future changes in prices. Changes in interest rates have a
significant effect on the earnings of financial institutions.
Higher interest rates generally follow the rising demand of
borrowers and the corresponding increased funding requirements
of financial institutions. Although interest rates are viewed as
the price of borrowing funds, the behavior of interest rates
differs significantly from the behavior of the prices of goods
and services. Prices of goods and services may be directly
related to that of other goods and services while the price of
borrowing relates more closely to the inflation rate in the
prices of those goods and services. As a result, when the rate
of inflation slows, interest rates tend to decline while
absolute prices for goods and services remain at higher levels.
Interest rates are also subject to restrictions imposed through
monetary policy, usury laws and other artificial constraints.
During the second half of 2008, the national economy experienced
a significant deterioration which has continued throughout 2009.
As a result, interest rates fell significantly and have remained
at low levels, while prices of consumer goods and services have
been relatively constant. New legislation was enacted to
mitigate the effects of the recession and revive the economy,
and additional legislation is probable. It is difficult to
predict the inflationary impact of the recession and the
accompanying legislative measures taken to combat it.
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 Companys web site
www.commercebank.com under Investor Relations.
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 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: changes in economic conditions in the
Companys 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 Companys market area; changes in accounting
and tax principles; estimates made on income taxes; and
competition with other entities that offer financial services.
58
SUMMARY
OF QUARTERLY STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
For the Quarter Ended
|
|
(In thousands, except per share data)
|
|
12/31/09
|
|
|
9/30/09
|
|
|
6/30/09
|
|
|
3/31/09
|
|
|
|
Interest income
|
|
$
|
194,999
|
|
|
$
|
201,647
|
|
|
$
|
198,992
|
|
|
$
|
193,874
|
|
Interest expense
|
|
|
(30,496
|
)
|
|
|
(38,108
|
)
|
|
|
(41,547
|
)
|
|
|
(43,859
|
)
|
|
|
Net interest income
|
|
|
164,503
|
|
|
|
163,539
|
|
|
|
157,445
|
|
|
|
150,015
|
|
Non-interest income
|
|
|
103,457
|
|
|
|
102,135
|
|
|
|
98,562
|
|
|
|
92,431
|
|
Investment securities losses, net
|
|
|
(1,325
|
)
|
|
|
(945
|
)
|
|
|
(2,753
|
)
|
|
|
(2,172
|
)
|
Salaries and employee benefits
|
|
|
(85,480
|
)
|
|
|
(87,267
|
)
|
|
|
(86,279
|
)
|
|
|
(86,753
|
)
|
Other expense
|
|
|
(69,197
|
)
|
|
|
(67,222
|
)
|
|
|
(73,732
|
)
|
|
|
(66,133
|
)
|
Provision for loan losses
|
|
|
(41,002
|
)
|
|
|
(35,361
|
)
|
|
|
(41,166
|
)
|
|
|
(43,168
|
)
|
|
|
Income before income taxes
|
|
|
70,956
|
|
|
|
74,879
|
|
|
|
52,077
|
|
|
|
44,220
|
|
Income taxes
|
|
|
(21,493
|
)
|
|
|
(23,415
|
)
|
|
|
(15,257
|
)
|
|
|
(13,592
|
)
|
Non-controlling interest
|
|
|
159
|
|
|
|
185
|
|
|
|
148
|
|
|
|
208
|
|
|
|
Net income
|
|
$
|
49,622
|
|
|
$
|
51,649
|
|
|
$
|
36,968
|
|
|
$
|
30,836
|
|
|
|
Net income per common share basic*
|
|
$
|
.60
|
|
|
$
|
.63
|
|
|
$
|
.46
|
|
|
$
|
.38
|
|
Net income per common share diluted*
|
|
$
|
.60
|
|
|
$
|
.63
|
|
|
$
|
.46
|
|
|
$
|
.38
|
|
|
|
Weighted average shares basic*
|
|
|
82,684
|
|
|
|
82,169
|
|
|
|
80,251
|
|
|
|
79,487
|
|
Weighted average shares diluted*
|
|
|
83,040
|
|
|
|
82,491
|
|
|
|
80,524
|
|
|
|
79,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
For the Quarter Ended
|
|
(In thousands, except per share data)
|
|
12/31/08
|
|
|
9/30/08
|
|
|
6/30/08
|
|
|
3/31/08
|
|
|
|
Interest income
|
|
$
|
209,628
|
|
|
$
|
209,464
|
|
|
$
|
208,204
|
|
|
$
|
222,553
|
|
Interest expense
|
|
|
(53,339
|
)
|
|
|
(57,900
|
)
|
|
|
(63,425
|
)
|
|
|
(82,446
|
)
|
|
|
Net interest income
|
|
|
156,289
|
|
|
|
151,564
|
|
|
|
144,779
|
|
|
|
140,107
|
|
Non-interest income
|
|
|
85,226
|
|
|
|
95,593
|
|
|
|
102,733
|
|
|
|
92,160
|
|
Investment securities gains, net
|
|
|
4,814
|
|
|
|
1,149
|
|
|
|
1,008
|
|
|
|
23,323
|
|
Salaries and employee benefits
|
|
|
(83,589
|
)
|
|
|
(83,766
|
)
|
|
|
(83,247
|
)
|
|
|
(83,010
|
)
|
Other expense
|
|
|
(60,099
|
)
|
|
|
(100,680
|
)
|
|
|
(63,818
|
)
|
|
|
(57,171
|
)
|
Provision for loan losses
|
|
|
(41,333
|
)
|
|
|
(29,567
|
)
|
|
|
(18,000
|
)
|
|
|
(20,000
|
)
|
|
|
Income before income taxes
|
|
|
61,308
|
|
|
|
34,293
|
|
|
|
83,455
|
|
|
|
95,409
|
|
Income taxes
|
|
|
(17,757
|
)
|
|
|
(9,534
|
)
|
|
|
(27,118
|
)
|
|
|
(30,668
|
)
|
Non-controlling interest
|
|
|
285
|
|
|
|
(86
|
)
|
|
|
(358
|
)
|
|
|
(574
|
)
|
|
|
Net income
|
|
$
|
43,836
|
|
|
$
|
24,673
|
|
|
$
|
55,979
|
|
|
$
|
64,167
|
|
|
|
Net income per common share basic*
|
|
$
|
.55
|
|
|
$
|
.31
|
|
|
$
|
.70
|
|
|
$
|
.81
|
|
Net income per common share diluted*
|
|
$
|
.55
|
|
|
$
|
.31
|
|
|
$
|
.70
|
|
|
$
|
.80
|
|
|
|
Weighted average shares basic*
|
|
|
79,400
|
|
|
|
79,228
|
|
|
|
79,119
|
|
|
|
79,027
|
|
Weighted average shares diluted*
|
|
|
79,986
|
|
|
|
79,868
|
|
|
|
79,754
|
|
|
|
79,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
For the Quarter Ended
|
|
(In thousands, except per share data)
|
|
12/31/07
|
|
|
9/30/07
|
|
|
6/30/07
|
|
|
3/31/07
|
|
|
|
Interest income
|
|
$
|
236,752
|
|
|
$
|
238,274
|
|
|
$
|
232,808
|
|
|
$
|
228,267
|
|
Interest expense
|
|
|
(99,285
|
)
|
|
|
(103,012
|
)
|
|
|
(98,944
|
)
|
|
|
(96,788
|
)
|
|
|
Net interest income
|
|
|
137,467
|
|
|
|
135,262
|
|
|
|
133,864
|
|
|
|
131,479
|
|
Non-interest income
|
|
|
98,101
|
|
|
|
95,137
|
|
|
|
94,059
|
|
|
|
84,284
|
|
Investment securities gains (losses), net
|
|
|
3,270
|
|
|
|
1,562
|
|
|
|
(493
|
)
|
|
|
3,895
|
|
Salaries and employee benefits
|
|
|
(78,433
|
)
|
|
|
(77,312
|
)
|
|
|
(76,123
|
)
|
|
|
(76,900
|
)
|
Other expense
|
|
|
(84,204
|
)
|
|
|
(61,608
|
)
|
|
|
(60,251
|
)
|
|
|
(59,328
|
)
|
Provision for loan losses
|
|
|
(14,062
|
)
|
|
|
(11,455
|
)
|
|
|
(9,054
|
)
|
|
|
(8,161
|
)
|
|
|
Income before income taxes
|
|
|
62,139
|
|
|
|
81,586
|
|
|
|
82,002
|
|
|
|
75,269
|
|
Income taxes
|
|
|
(18,187
|
)
|
|
|
(25,515
|
)
|
|
|
(26,453
|
)
|
|
|
(23,582
|
)
|
Non-controlling interest
|
|
|
(260
|
)
|
|
|
(173
|
)
|
|
|
25
|
|
|
|
(191
|
)
|
|
|
Net income
|
|
$
|
43,692
|
|
|
$
|
55,898
|
|
|
$
|
55,574
|
|
|
$
|
51,496
|
|
|
|
Net income per common share basic*
|
|
$
|
.55
|
|
|
$
|
.70
|
|
|
$
|
.69
|
|
|
$
|
.64
|
|
Net income per common share diluted*
|
|
$
|
|