e10vq
Table of Contents

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

For the quarterly period ended March 31, 2011
OR
            
         
         
         
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from           to          
Commission File No. 0-2989
 
 
COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
 
     
Missouri
(State of Incorporation)
  43-0889454
(IRS Employer Identification No.)
     
1000 Walnut,
Kansas City, MO
(Address of principal executive offices)
 
64106
(Zip Code)
     
(816) 234-2000
(Registrant’s telephone number, including area code)
   
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
  Yes o     No þ
 
As of April 27, 2011, the registrant had outstanding 87,118,698 shares of its $5 par value common stock, registrant’s only class of common stock.
 


 

 
Commerce Bancshares, Inc. and Subsidiaries
 
Form 10-Q
 
                 
INDEX           Page
 
  Financial Information        
                 
    Item 1.   Financial Statements        
                 
        Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010     3  
                 
        Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010 (unaudited)     4  
                 
        Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2011 and 2010 (unaudited)     5  
                 
        Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited)     6  
                 
        Notes to Consolidated Financial Statements     7  
                 
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     37  
                 
    Item 3.   Quantitative and Qualitative Disclosures about Market Risk     59  
                 
    Item 4.   Controls and Procedures     59  
             
  Other Information        
                 
    Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     60  
                 
    Item 6.   Exhibits     60  
Signatures     61  
         
    62  
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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PART I: FINANCIAL INFORMATION
 
Item 1.   FINANCIAL STATEMENTS
 
Commerce Bancshares, Inc. and Subsidiaries
 
CONSOLIDATED BALANCE SHEETS
                 
 
    March 31
  December 31
    2011   2010
 
    (Unaudited)    
    (In thousands)
 
ASSETS
Loans
  $ 9,374,923     $ 9,410,982  
Allowance for loan losses
    (194,538 )     (197,538 )
 
 
Net loans
    9,180,385       9,213,444  
 
 
Loans held for sale
    53,411       63,751  
Investment securities:
               
Available for sale ($431,614,000 and $429,439,000 pledged in 2011 and 2010, respectively, to secure structured repurchase agreements)
    7,499,577       7,294,303  
Trading
    17,000       11,710  
Non-marketable
    104,721       103,521  
 
 
Total investment securities
    7,621,298       7,409,534  
 
 
Short-term federal funds sold and securities purchased under agreements to resell
    3,600       10,135  
Long-term securities purchased under agreements to resell
    700,000       450,000  
Interest earning deposits with banks
    203,940       122,076  
Cash and due from banks
    362,148       328,464  
Land, buildings and equipment, net
    378,721       383,397  
Goodwill
    125,585       125,585  
Other intangible assets, net
    10,182       10,937  
Other assets
    378,026       385,016  
 
 
Total assets
  $ 19,017,296     $ 18,502,339  
 
 
 
LIABILITIES AND EQUITY
Deposits:
               
Non-interest bearing
  $ 4,558,630     $ 4,494,028  
Savings, interest checking and money market
    8,074,055       7,846,831  
Time open and C.D.’s of less than $100,000
    1,388,004       1,465,050  
Time open and C.D.’s of $100,000 and over
    1,518,786       1,279,112  
 
 
Total deposits
    15,539,475       15,085,021  
 
 
Federal funds purchased and securities sold under agreements to repurchase
    923,014       982,827  
Other borrowings
    111,972       112,273  
Other liabilities
    372,345       298,754  
 
 
Total liabilities
    16,946,806       16,478,875  
 
 
Commerce Bancshares, Inc. stockholders’ equity:
               
Preferred stock, $1 par value
               
Authorized and unissued 2,000,000 shares
           
Common stock, $5 par value
               
Authorized 100,000,000 shares; issued 87,208,655 shares in 2011 and 86,788,322 shares in 2010
    436,043       433,942  
Capital surplus
    976,101       971,293  
Retained earnings
    596,177       555,778  
Treasury stock of 17,951 shares in 2011 and 61,839 shares in 2010, at cost
    (733 )     (2,371 )
Accumulated other comprehensive income
    61,134       63,345  
 
 
Total Commerce Bancshares, Inc. stockholders’ equity
    2,068,722       2,021,987  
Non-controlling interest
    1,768       1,477  
 
 
Total equity
    2,070,490       2,023,464  
 
 
Total liabilities and equity
  $ 19,017,296     $ 18,502,339  
 
 
See accompanying notes to consolidated financial statements.


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Commerce Bancshares, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF INCOME
                 
   
    For the Three Months
 
    Ended March 31  
(In thousands, except per share data)   2011     2010  
   
    (Unaudited)  
 
INTEREST INCOME
               
Interest and fees on loans
  $ 118,377     $ 130,922  
Interest and fees on loans held for sale
    298       1,904  
Interest on investment securities
    54,889       55,163  
Interest on short-term federal funds sold and securities purchased under agreements to resell
    10       15  
Interest on long-term securities purchased under agreements to resell
    2,162        
Interest on deposits with banks
    90       65  
 
 
Total interest income
    175,826       188,069  
 
 
INTEREST EXPENSE
               
Interest on deposits:
               
Savings, interest checking and money market
    6,900       7,096  
Time open and C.D.’s of less than $100,000
    3,743       6,815  
Time open and C.D.’s of $100,000 and over
    2,673       3,923  
Interest on federal funds purchased and securities sold under agreements to repurchase
    622       820  
Interest on other borrowings
    915       6,705  
 
 
Total interest expense
    14,853       25,359  
 
 
Net interest income
    160,973       162,710  
Provision for loan losses
    15,789       34,322  
 
 
Net interest income after provision for loan losses
    145,184       128,388  
 
 
NON-INTEREST INCOME
               
Bank card transaction fees
    37,462       32,490  
Trust fees
    21,572       19,318  
Deposit account charges and other fees
    19,300       23,981  
Bond trading income
    4,720       5,004  
Consumer brokerage services
    2,663       2,117  
Loan fees and sales
    1,824       1,839  
Other
    8,365       8,440  
 
 
Total non-interest income
    95,906       93,189  
 
 
INVESTMENT SECURITIES GAINS (LOSSES), NET
               
Impairment (losses) reversals on debt securities
    6,305       1,295  
Less noncredit-related (losses) reversals on securities not expected to be sold
    (6,579 )     (2,752 )
 
 
Net impairment losses
    (274 )     (1,457 )
Realized gains (losses) on sales and fair value adjustments
    1,601       (2,208 )
 
 
Investment securities gains (losses), net
    1,327       (3,665 )
 
 
NON-INTEREST EXPENSE
               
Salaries and employee benefits
    87,392       87,438  
Net occupancy
    12,037       12,098  
Equipment
    5,577       5,901  
Supplies and communication
    5,532       7,338  
Data processing and software
    16,467       16,606  
Marketing
    4,258       4,718  
Deposit insurance
    4,891       4,750  
Indemnification obligation
    (1,359 )      
Other
    19,165       16,875  
 
 
Total non-interest expense
    153,960       155,724  
 
 
Income before income taxes
    88,457       62,188  
Less income taxes
    27,507       18,377  
 
 
Net income before non-controlling interest
    60,950       43,811  
Less non-controlling interest expense (income)
    497       (359 )
 
 
Net income
  $ 60,453     $ 44,170  
 
 
Net income per common share – basic
  $ .69     $ .50  
Net income per common share – diluted
  $ .69     $ .50  
 
 
See accompanying notes to consolidated financial statements.


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Commerce Bancshares, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
                                                         
   
    Commerce Bancshares, Inc. Shareholders              
                            Accumulated
             
                            Other
    Non-
       
(In thousands,
  Common
    Capital
    Retained
    Treasury
    Comprehensive
    Controlling
       
except per share data)   Stock     Surplus     Earnings     Stock     Income (Loss)     Interest     Total  
   
    (Unaudited)  
 
Balance January 1, 2011
  $ 433,942     $ 971,293     $ 555,778     $ (2,371 )   $ 63,345     $ 1,477     $ 2,023,464  
 
 
Net income
                    60,453                       497       60,950  
Change in unrealized gain (loss) related to available for sale securities for which a portion of an other-than-temporary impairment has been recorded in earnings, net of tax
                                    4,014               4,014  
Change in unrealized gain (loss) on all other available for sale securities, net of tax
                                    (6,560 )             (6,560 )
Amortization of pension loss, net of tax
                                    335               335  
                                                         
Total comprehensive income
                                                    58,739  
                                                         
Distributions to non-controlling interest
                                            (206 )     (206 )
Purchase of treasury stock
                            (4,311 )                     (4,311 )
Issuance of stock under purchase and equity compensation plans
    1,136       3,687               6,062                       10,885  
Net tax benefit related to equity compensation plans
            717                                       717  
Stock-based compensation
            1,256                                       1,256  
Issuance of nonvested stock awards
    965       (852 )             (113 )                      
Cash dividends paid ($.230 per share)
                    (20,054 )                             (20,054 )
 
 
Balance March 31, 2011
  $ 436,043     $ 976,101     $ 596,177     $ (733 )   $ 61,134     $ 1,768     $ 2,070,490  
 
 
Balance January 1, 2010
  $ 415,637     $ 854,490     $ 568,532     $ (838 )   $ 46,407     $ 1,677     $ 1,885,905  
 
 
Net income
                    44,170                       (359 )     43,811  
Change in unrealized gain (loss) related to available for sale securities for which a portion of an other-than-temporary impairment has been recorded in earnings, net of tax
                                    3,908               3,908  
Change in unrealized gain (loss) on all other available for sale securities, net of tax
                                    7,422               7,422  
Amortization of pension loss, net of tax
                                    351               351  
                                                         
Total comprehensive income
                                                    55,492  
                                                         
Distributions to non-controlling interest
                                            (185 )     (185 )
Purchase of treasury stock
                            (878 )                     (878 )
Issuance of stock under purchase and equity compensation plans
    927       3,312               (198 )                     4,041  
Net tax benefit related to equity compensation plans
            820                                       820  
Stock-based compensation
            1,840                                       1,840  
Issuance of nonvested stock awards
    751       (613 )             (138 )                      
Cash dividends paid ($.224 per share)
                    (19,600 )                             (19,600 )
 
 
Balance March 31, 2010
  $ 417,315     $ 859,849     $ 593,102     $ (2,052 )   $ 58,088     $ 1,133     $ 1,927,435  
 
 
See accompanying notes to consolidated financial statements.


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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
   
    For the Three Months
 
    Ended March 31  
(In thousands)   2011     2010  
   
    (Unaudited)  
 
OPERATING ACTIVITIES:
               
Net income
  $ 60,453     $ 44,170  
Adjustments to reconcile net income to net cash used in operating activities:
               
Provision for loan losses
    15,789       34,322  
Provision for depreciation and amortization
    11,868       12,564  
Amortization (accretion) of investment security premiums/discounts, net
    2,713       5,463  
Investment securities (gains) losses, net(A)
    (1,327 )     3,665  
Net gains on sales of loans held for sale
    (571 )     (569 )
Originations of loans held for sale
    (15,789 )     (227,463 )
Proceeds from sales of loans held for sale
    26,751       31,883  
Net decrease in trading securities
    2,009       897  
Stock-based compensation
    1,256       1,840  
(Increase) decrease in interest receivable
    (1,245 )     37  
Increase (decrease) in interest payable
    69       (2,121 )
Increase in income taxes payable
    27,052       18,525  
Net tax benefit related to equity compensation plans
    (717 )     (820 )
Other changes, net
    (26,341 )     22,869  
 
 
Net cash provided by (used in) operating activities
    101,970       (54,738 )
 
 
INVESTING ACTIVITIES:
               
Proceeds from sales of investment securities(A)
    11,202       19,991  
Proceeds from maturities/pay downs of investment securities(A)
    610,003       375,027  
Purchases of investment securities(A)
    (801,432 )     (305,499 )
Net decrease in loans
    17,270       279,520  
Long-term securities purchased under agreements to resell
    (350,000 )      
Repayments of long-term securities purchased under agreements to resell
    100,000        
Purchases of land, buildings and equipment
    (5,819 )     (2,782 )
Sales of land, buildings and equipment
    1,686       365  
 
 
Net cash provided by (used in) investing activities
    (417,090 )     366,622  
 
 
FINANCING ACTIVITIES:
               
Net increase (decrease) in non-interest bearing,
               
savings, interest checking and money market deposits
    334,382       (8,713 )
Net increase (decrease) in time open and C.D.’s
    162,628       (289,019 )
Net decrease in short-term federal funds purchased and securities sold
               
under agreements to repurchase
    (59,813 )     (104,418 )
Repayment of long-term borrowings
    (301 )     (4,555 )
Purchases of treasury stock
    (4,311 )     (878 )
Issuance of stock under stock purchase and equity compensation plans
    10,885       4,041  
Net tax benefit related to equity compensation plans
    717       820  
Cash dividends paid on common stock
    (20,054 )     (19,600 )
 
 
Net cash provided by (used in) financing activities
    424,133       (422,322 )
 
 
Increase (decrease) in cash and cash equivalents
    109,013       (110,438 )
Cash and cash equivalents at beginning of year
    460,675       463,834  
 
 
Cash and cash equivalents at March 31
  $ 569,688     $ 353,396  
 
 
(A) Available for sale and non-marketable securities
               
 
 
Income tax net payments (refunds)
  $ 455     $ (169 )
Interest paid on deposits and borrowings
  $ 14,784     $ 27,480  
Loans transferred to foreclosed real estate
  $ 16,246     $ 7,442  
 
 
See accompanying notes to consolidated financial statements.


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Commerce Bancshares, Inc. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
1.  Principles of Consolidation and Presentation
 
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2010 data to conform to current year presentation. These included the reclassification of certain non-interest bearing deposits from money market accounts to non-interest bearing deposits, in order to more accurately present the Company’s balances of non-interest bearing deposits. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of results to be attained for the full year or any other interim period.
 
The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2010 Annual Report on Form 10-K.
 
2.  Loans and Allowance for Loan Losses
 
Major classifications within the Company’s held to maturity loan portfolio at March 31, 2011 and December 31, 2010 are as follows:
 
                 
   
    March 31
    December 31
 
(In thousands)   2011     2010  
   
 
Commercial:
               
Business
  $ 3,025,633     $ 2,957,043  
Real estate – construction and land
    429,735       460,853  
Real estate – business
    2,095,473       2,065,837  
Personal Banking:
               
Real estate – personal
    1,443,980       1,440,386  
Consumer
    1,124,140       1,164,327  
Revolving home equity
    468,277       477,518  
Consumer credit card
    774,101       831,035  
Overdrafts
    13,584       13,983  
 
 
Total loans
  $ 9,374,923     $ 9,410,982  
 
 
 
At March 31, 2011, loans of $3.0 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.3 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.


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Allowance for loan losses
 
A summary of the activity in the allowance for loan losses during the three months ended March 31, 2011 follows:
 
                         
   
    For the Three Months Ended
 
    March 31, 2011  
          Personal
       
(In thousands)   Commercial     Banking     Total  
   
 
Balance at January 1, 2011
  $ 119,946     $ 77,592     $ 197,538  
 
 
Provision
    13,465       2,324       15,789  
 
 
Deductions:
                       
Loans charged off
    6,364       17,025       23,389  
Less recoveries on loans
    1,304       3,296       4,600  
 
 
Net loans charged off
    5,060       13,729       18,789  
 
 
Balance at March 31, 2011
  $ 128,351     $ 66,187     $ 194,538  
 
 
 
During the three months ended March 31, 2010, the provision to the allowance was $34.3 million, loans charged off were $35.5 million, and recoveries on loans were $4.3 million. As of March 31, 2010, the ending balance in the allowance was $197.5 million.
 
The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2011 and December 31, 2010, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics, which are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
 
                         
   
          Personal
       
(In thousands)   Commercial     Banking     Total  
   
 
March 31, 2011
                       
Allowance for loan losses:
                       
Impaired loans
  $ 6,854     $ 3,290     $ 10,144  
All other loans
    121,497       62,897       184,394  
 
 
Loans outstanding:
                       
Impaired loans
    116,094       28,663       144,757  
All other loans
    5,434,747       3,795,419       9,230,166  
 
 
December 31, 2010
                       
Allowance for loan losses:
                       
Impaired loans
  $ 6,127     $ 3,243     $ 9,370  
All other loans
    113,819       74,349       188,168  
 
 
Loans outstanding:
                       
Impaired loans
    118,532       26,828       145,360  
All other loans
    5,365,201       3,900,421       9,265,622  
 
 
 
Impaired loans
 
The table below shows the Company’s investment in impaired loans at March 31, 2011 and December 31, 2010. These loans consist of loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. The restructured loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession. They are largely comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt


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with similar risk, and as a result were classified as troubled debt restructurings. These loans totaled $46.6 million and $41.3 million at March 31, 2011 and December 31, 2010, respectively. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $20.2 million at March 31, 2011 and $18.8 million at December 31, 2010.
 
                 
   
    March 31
    December 31
 
(In thousands)   2011     2010  
   
 
Non-accrual loans
  $ 77,914     $ 85,275  
Restructured loans
    66,843       60,085  
 
 
Total impaired loans
  $ 144,757     $ 145,360  
 
 
 
The following table provides additional information about impaired loans held by the Company at March 31, 2011 and December 31, 2010, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.
 
                                 
   
          Unpaid
          Interest
 
    Recorded
    Principal
    Related
    Income
 
(In thousands)   Investment     Balance     Allowance     Recognized *  
   
 
March 31, 2011
                               
With no related allowance recorded:
                               
Business
  $ 4,094     $ 5,765     $     $  
Real estate – construction and land
    22,087       45,662              
Real estate – business
    7,448       9,363              
Real estate – personal
    755       755              
 
 
    $ 34,384     $ 61,545     $     $  
 
 
With an allowance recorded:
                               
Business
  $ 28,728     $ 32,408     $ 2,399     $ 101  
Real estate – construction and land
    39,074       47,761       2,999       260  
Real estate – business
    14,663       18,398       1,456       96  
Real estate – personal
    7,717       9,905       775       18  
Consumer credit card
    20,191       20,191       2,515       395  
 
 
    $ 110,373     $ 128,663     $ 10,144     $ 870  
 
 
Total
  $ 144,757     $ 190,208     $ 10,144     $ 870  
 
 
December 31, 2010
                               
With no related allowance recorded:
                               
Business
  $ 3,544     $ 5,095     $          
Real estate – construction and land
    30,979       55,790                
Real estate – business
    4,245       5,295                
Real estate – personal
    755       755                
         
         
    $ 39,523     $ 66,935     $          
         
         
With an allowance recorded:
                               
Business
  $ 18,464     $ 21,106     $ 1,665          
Real estate – construction and land
    39,719       52,587       2,538          
Real estate – business
    21,581       25,713       1,924          
Real estate – personal
    7,294       9,489       936          
Consumer credit card
    18,779       18,779       2,307          
         
         
    $ 105,837     $ 127,674     $ 9,370          
         
         
Total
  $ 145,360     $ 194,609     $ 9,370          
         
         
 
 
Represents interest income recognized since date of impairment. Interest shown is interest recognized during the first three months of 2011 on accruing restructured loans as noted above.


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Total average impaired loans, shown in the table below, were $145.8 million during the three months ended March 31, 2011, compared to total average impaired loans of $173.0 million during the entire year ended December 31, 2010.
 
                         
   
          Personal
       
(In thousands)   Commercial     Banking     Total  
   
 
Average impaired loans
                       
Non-accrual loans
  $ 75,302     $ 7,027     $ 82,329  
Restructured loans
    42,936       20,528       63,464  
 
 
Total at March 31, 2011
  $ 118,238     $ 27,555     $ 145,793  
 
 
 
Delinquent and non-accrual loans
 
The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at March 31, 2011 and December 31, 2010. As shown below, the March 31, 2011 balance of loans past due 30-89 days grew $12.5 million, while the balance of loans over 90 days past due and still accruing declined $1.7 million. The increase in loans 30-89 days past due was largely due to three business real estate loans with balances ranging from $3.5 million to $5.5 million.
 
                                         
   
    Current or
          90 Days
             
    Less Than
    30 – 89
    Past Due
             
    30 Days Past
    Days Past
    and Still
             
(In thousands)   Due     Due     Accruing     Non-accrual     Total  
   
March 31, 2011
                                       
Commercial:
                                       
Business
  $ 2,987,168     $ 17,932     $ 734     $ 19,799     $ 3,025,633  
Real estate – construction and land
    384,921       9,327       95       35,392       429,735  
Real estate – business
    2,051,666       28,144       26       15,637       2,095,473  
Personal Banking:
                                       
Real estate – personal
    1,419,923       13,550       3,421       7,086       1,443,980  
Consumer
    1,109,676       11,798       2,666             1,124,140  
Revolving home equity
    465,416       2,136       725             468,277  
Consumer credit card
    752,230       10,821       11,050             774,101  
Overdrafts
    13,325       259                   13,584  
 
 
Total
  $ 9,184,325     $ 93,967     $ 18,717     $ 77,914     $ 9,374,923  
 
 
December 31, 2010
                                       
Commercial:
                                       
Business
  $ 2,927,403     $ 19,853     $ 854     $ 8,933     $ 2,957,043  
Real estate – construction and land
    400,420       7,464       217       52,752       460,853  
Real estate – business
    2,040,794       8,801             16,242       2,065,837  
Personal Banking:
                                       
Real estate – personal
    1,413,905       15,579       3,554       7,348       1,440,386  
Consumer
    1,145,561       15,899       2,867             1,164,327  
Revolving home equity
    475,764       929       825             477,518  
Consumer credit card
    806,373       12,513       12,149             831,035  
Overdrafts
    13,555       428                   13,983  
 
 
Total
  $ 9,223,775     $ 81,466     $ 20,466     $ 85,275     $ 9,410,982  
 
 
 
Credit quality
 
The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The information below was updated as of March 31,


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2011 and December 31, 2010 for this indicator. The credit quality of Personal Banking loans is monitored on the basis of aging/delinquency, and this information is provided in the table above.
 
The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is attached to loans where the borrower exhibits material negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.
 
                                 
   
Commercial Loans  
          Real
    Real
       
          Estate-
    Estate-
       
(In thousands)   Business     Construction     Business     Total  
   
 
March 31, 2011
                               
Pass
  $ 2,855,895     $ 312,648     $ 1,919,811     $ 5,088,354  
Special mention
    60,584       23,746       57,490       141,820  
Substandard
    89,355       57,949       102,535       249,839  
Non-accrual
    19,799       35,392       15,637       70,828  
 
 
Total
  $ 3,025,633     $ 429,735     $ 2,095,473     $ 5,550,841  
 
 
December 31, 2010
                               
Pass
  $ 2,801,328     $ 327,167     $ 1,878,005     $ 5,006,500  
Special mention
    67,142       29,345       77,527       174,014  
Substandard
    79,640       51,589       94,063       225,292  
Non-accrual
    8,933       52,752       16,242       77,927  
 
 
Total
  $ 2,957,043     $ 460,853     $ 2,065,837     $ 5,483,733  
 
 
 
The Company’s holdings of foreclosed real estate totaled $25.1 million and $12.0 million at March 31, 2011 and December 31, 2010, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $5.0 million and $10.4 million at March 31, 2011 and December 31, 2010, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.
 
Loans held for sale
 
In addition to the portfolio of loans which are intended to be held to maturity, the Company originates loans which it intends to sell in secondary markets. Loans classified as held for sale primarily consist of loans originated to students while attending colleges and universities. Most of this portfolio was sold in 2010 under contracts with the Federal Department of Education and various student loan agencies. Significant future student loan originations are not anticipated, because under statutory requirements effective July 1, 2010, the Company is prohibited from making federally guaranteed student loans. Also included as held for sale are certain fixed rate residential mortgage loans which are sold in the secondary market, generally within three months of origination. The following table presents information about loans held for sale, including an


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impairment valuation allowance resulting from declines in fair value below cost, which is further discussed in Note 13 on Fair Value Measurements.
 
                 
   
    March 31
    December 31
 
(In thousands)   2011     2010  
   
 
Balance outstanding:
               
Student loans, at cost
  $ 50,413     $ 53,901  
Residential mortgage loans, at cost
    3,547       10,419  
Valuation allowance on student loans
    (549 )     (569 )
 
 
Total loans held for sale, at lower of cost or fair value
  $ 53,411     $ 63,751  
 
 
 
                 
   
    For the Three Months
 
    Ended March 31  
    2011     2010  
   
 
Net gains on sales:
               
Student loans
  $ 68     $ 149  
Residential mortgage loans
    503       420  
 
 
Total gains on sales of loans held for sale, net
  $ 571     $ 569  
 
 
 
3.  Investment Securities
 
Investment securities, at fair value, consisted of the following at March 31, 2011 and December 31, 2010.
 
                 
   
    March 31
    December 31
 
(In thousands)   2011     2010  
   
 
Available for sale:
               
U.S. government and federal agency obligations
  $ 461,235     $ 455,537  
Government-sponsored enterprise obligations
    199,169       201,895  
State and municipal obligations
    1,143,433       1,119,485  
Agency mortgage-backed securities
    2,618,380       2,491,199  
Non-agency mortgage-backed securities
    417,675       455,790  
Other asset-backed securities
    2,449,220       2,354,260  
Other debt securities
    165,243       176,964  
Equity securities
    45,222       39,173  
 
 
Total available for sale
    7,499,577       7,294,303  
 
 
Trading
    17,000       11,710  
Non-marketable
    104,721       103,521  
 
 
Total investment securities
  $ 7,621,298     $ 7,409,534  
 
 
 
Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank (FRB) stock held for debt and regulatory purposes, which totaled $45.3 million and $45.2 million at March 31, 2011 and December 31, 2010, respectively. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $59.4 million and $58.2 million at March 31, 2011 and December 31, 2010, respectively.
 
A summary of the available for sale investment securities by maturity groupings as of March 31, 2011 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities which have no guarantee. Also included are certain other asset-backed securities, which are


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primarily collateralized by credit cards, automobiles, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.
 
                 
   
    Amortized
       
(Dollars in thousands)   Cost     Fair Value  
   
 
U.S. government and federal agency obligations:
               
Within 1 year
  $ 168,963     $ 169,296  
After 1 but within 5 years
    132,811       144,121  
After 5 but within 10 years
    134,963       147,818  
 
 
Total U.S. government and federal agency obligations
    436,737       461,235  
 
 
Government-sponsored enterprise obligations:
               
Within 1 year
    60,742       61,312  
After 1 but within 5 years
    125,914       127,038  
After 5 but within 10 years
    11,380       10,819  
 
 
Total government-sponsored enterprise obligations
    198,036       199,169  
 
 
State and municipal obligations:
               
Within 1 year
    145,698       147,420  
After 1 but within 5 years
    447,810       456,746  
After 5 but within 10 years
    308,017       303,474  
After 10 years
    243,263       235,793  
 
 
Total state and municipal obligations
    1,144,788       1,143,433  
 
 
Mortgage and asset-backed securities:
               
Agency mortgage-backed securities
    2,573,078       2,618,380  
Non-agency mortgage-backed securities
    413,282       417,675  
Other asset-backed securities
    2,438,922       2,449,220  
 
 
Total mortgage and asset-backed securities
    5,425,282       5,485,275  
 
 
Other debt securities:
               
Within 1 year
    60,041       61,240  
After 1 but within 5 years
    95,862       104,003  
 
 
Total other debt securities
    155,903       165,243  
 
 
Equity securities
    13,397       45,222  
 
 
Total available for sale investment securities
  $ 7,374,143     $ 7,499,577  
 
 
 
Included in U.S. government securities are $451.4 million, at fair value, of U.S. Treasury inflation-protected securities. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $143.2 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $35.2 million at March 31, 2011.


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For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.
 
                                 
   
          Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
       
(In thousands)   Cost     Gains     Losses     Fair Value  
   
 
March 31, 2011
                               
U.S. government and federal agency obligations
  $ 436,737     $ 24,498     $     $ 461,235  
Government-sponsored enterprise obligations
    198,036       1,912       (779 )     199,169  
State and municipal obligations
    1,144,788       17,183       (18,538 )     1,143,433  
Mortgage and asset-backed securities:
                               
Agency mortgage-backed securities
    2,573,078       53,438       (8,136 )     2,618,380  
Non-agency mortgage-backed securities
    413,282       11,455       (7,062 )     417,675  
Other asset-backed securities
    2,438,922       11,052       (754 )     2,449,220  
 
 
Total mortgage and asset-backed securities
    5,425,282       75,945       (15,952 )     5,485,275  
 
 
Other debt securities
    155,903       9,340             165,243  
Equity securities
    13,397       31,825             45,222  
 
 
Total
  $ 7,374,143     $ 160,703     $ (35,269 )   $ 7,499,577  
 
 
December 31, 2010
                               
U.S. government and federal agency obligations
  $ 434,878     $ 20,659     $     $ 455,537  
Government-sponsored enterprise obligations
    200,061       2,364       (530 )     201,895  
State and municipal obligations
    1,117,020       19,108       (16,643 )     1,119,485  
Mortgage and asset-backed securities:
                               
Agency mortgage-backed securities
    2,437,123       57,516       (3,440 )     2,491,199  
Non-agency mortgage-backed securities
    459,363       10,940       (14,513 )     455,790  
Other asset-backed securities
    2,342,866       12,445       (1,051 )     2,354,260  
 
 
Total mortgage and asset-backed securities
    5,239,352       80,901       (19,004 )     5,301,249  
 
 
Other debt securities
    165,883       11,081             176,964  
Equity securities
    7,569       31,604             39,173  
 
 
Total
  $ 7,164,763     $ 165,717     $ (36,177 )   $ 7,294,303  
 
 
 
The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3/A-, whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2011, the fair value of securities on this watch list was $288.2 million.
 
As of March 31, 2011, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $154.9 million. The credit-related portion of the impairment totaled $7.8 million and was recorded in earnings. The noncredit-related portion of the impairment totaled $5.6 million on a pre-tax basis, and has been recognized in accumulated other comprehensive income. The Company does not intend to sell these securities and believes it is not more likely than not that it will be required to sell the securities before the recovery of their amortized cost bases.


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The credit portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities included the following:
 
         
 
Significant Inputs   Range
 
 
Prepayment CPR
    2% - 33%  
Projected cumulative default
    12% - 52%  
Credit support
    0% - 10%  
Loss severity
    33% - 57%  
 
 
 
The following table shows changes in the credit losses recorded in the three months ended March 31, 2011 and 2010, for which a portion of an OTTI was recognized in other comprehensive income.
 
                 
   
    For the
 
    Three Months
 
    Ended March 31  
(In thousands)   2011     2010  
   
 
Balance at January 1
  $ 7,542     $ 2,473  
Credit losses on debt securities for which impairment was not previously recognized
          20  
Credit losses on debt securities for which impairment was previously recognized
    274       1,437  
 
 
Balance at March 31
  $ 7,816     $ 3,930  
 
 
 
Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.
 
                                                 
   
    Less than 12 months     12 months or longer     Total  
          Unrealized
          Unrealized
          Unrealized
 
(In thousands)   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
   
 
At March 31, 2011
                                               
Government-sponsored enterprise obligations
  $ 59,465     $ 779     $     $     $ 59,465     $ 779  
State and municipal obligations
    379,092       7,434       98,054       11,104       477,146       18,538  
Mortgage and asset-backed securities:
                                               
Agency mortgage-backed securities
    860,561       8,136                   860,561       8,136  
Non-agency mortgage-backed securities
    23,296       6       150,538       7,056       173,834       7,062  
Other asset-backed securities
    320,738       747       24,965       7       345,703       754  
 
 
Total mortgage and asset-backed securities
    1,204,595       8,889       175,503       7,063       1,380,098       15,952  
 
 
Total
  $ 1,643,152     $ 17,102     $ 273,557     $ 18,167     $ 1,916,709     $ 35,269  
 
 
At December 31, 2010
                                               
Government-sponsored enterprise obligations
  $ 10,850     $ 530     $     $     $ 10,850     $ 530  
State and municipal obligations
    345,775       7,470       82,269       9,173       428,044       16,643  
Mortgage and asset-backed securities:
                                               
Agency mortgage-backed securities
    660,326       3,440                   660,326       3,440  
Non-agency mortgage-backed securities
    15,893       36       170,545       14,477       186,438       14,513  
Other asset-backed securities
    487,822       1,029       24,928       22       512,750       1,051  
 
 
Total mortgage and asset-backed securities
    1,164,041       4,505       195,473       14,499       1,359,514       19,004  
 
 
Total
  $ 1,520,666     $ 12,505     $ 277,742     $ 23,672     $ 1,798,408     $ 36,177  
 
 
 
The total available for sale portfolio consisted of approximately 1,350 individual securities at March 31, 2011. The portfolio included 289 securities, having an aggregate fair value of $1.9 billion, that were in a loss position at March 31, 2011. Securities identified as other-than-temporarily impaired which have been in a


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loss position for 12 months or longer totaled $131.4 million at fair value, or 1.8% of the total available for sale portfolio value. Securities with temporary impairment which have been in a loss position for 12 month or longer totaled $142.2 million, or 1.9% of the total portfolio value.
 
The Company’s holdings of state and municipal obligations included gross unrealized losses of $18.5 million at March 31, 2011. Of these losses, $11.1 million related to auction rate securities (ARS) and $7.4 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.0 billion at fair value, or 13.3% of total available for sale securities. The average credit quality of the portfolio, excluding ARS, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the largest holdings, by state and economic sector, is shown in the table below.
 
                         
   
          Average
    Average
 
    % of
    Life
    Rating
 
    Portfolio     (in years)     (Moody’s)  
   
 
At March 31, 2011
                       
Texas
    11.1 %     5.6       Aa1  
Florida
    7.0       5.1       Aa3  
Washington
    5.4       2.1       Aa2  
Illinois
    5.2       5.7       Aa2  
Arizona
    4.7       3.7       Aa3  
 
 
General obligation
    25.8 %     3.7       Aa2  
Housing
    19.3       5.2       Aa1  
Transportation
    16.6       3.6       Aa3  
Lease
    12.3       3.2       Aa3  
Refunded
    6.9       2.2       Aaa  
 
 
 
The remaining unrealized losses on the Company’s investments, as shown in the preceding tables, are largely contained in the portfolio of non-agency mortgage-backed securities. These securities are not guaranteed by an outside agency and are dependent on payments received from the underlying mortgage collateral. While virtually all of these securities, at purchase date, were comprised of senior tranches and were highly rated by various rating agencies, the adverse housing market, liquidity pressures and overall economic climate has resulted in low fair values for these securities. Also, as mentioned above, the Company maintains a watch list comprised mostly of these securities, and has recorded OTTI losses on certain of these securities. The Company continues to closely monitor the performance of these securities. Additional OTTI losses may arise in future periods, due to further deterioration in expected cash flows, loss severities and delinquency levels of the securities’ underlying collateral, which would negatively affect the Company’s financial results.
 
The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
 
                 
   
    For the Three
 
    Months Ended
 
    March 31  
(In thousands)   2011     2010  
   
 
Proceeds from sales of available for sale securities
  $ 11,202     $ 19,991  
 
 
Available for sale:
               
Gains realized on sales
  $ 176     $ 510  
Losses realized on sales
          (102 )
Other-than-temporary impairment recognized on debt securities
    (274 )     (1,457 )
Non-marketable:
               
Fair value adjustments, net
    1,425       (2,616 )
 
 
Investment securities gains (losses), net
  $ 1,327     $ (3,665 )
 
 


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At March 31, 2011, securities carried at $3.2 billion were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $431.6 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeds 10% of stockholders’ equity.
 
4.  Goodwill and Other Intangible Assets
 
The following table presents information about the Company’s intangible assets which have estimable useful lives.
 
                                                                 
   
    March 31, 2011     December 31, 2010  
    Gross
                      Gross
                   
    Carrying
    Accumulated
    Valuation
    Net
    Carrying
    Accumulated
    Valuation
    Net
 
(In thousands)   Amount     Amortization     Allowance     Amount     Amount     Amortization     Allowance     Amount  
   
 
Amortizable intangible assets:
                                                               
Core deposit premium
  $ 25,720     $ (16,819 )   $     $ 8,901     $ 25,720     $ (16,108 )   $     $ 9,612  
Mortgage servicing rights
    3,089       (1,674 )     (134 )     1,281       3,082       (1,572 )     (185 )     1,325  
 
 
Total
  $ 28,809     $ (18,493 )   $ (134 )   $ 10,182     $ 28,802     $ (17,680 )   $ (185 )   $ 10,937  
 
 
 
Aggregate amortization expense on intangible assets was $813 thousand and $905 thousand, respectively, for the three month periods ended March 31, 2011 and 2010. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2011. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.
 
         
   
(In thousands)      
   
 
2011
  $ 2,863  
2012
    2,329  
2013
    1,799  
2014
    1,324  
2015
    977  
 
 
 
Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2011 is as follows.
 
                         
   
                Mortgage
 
          Core Deposit
    Servicing
 
(In thousands)   Goodwill     Premium     Rights  
   
 
Balance at January 1, 2011
  $ 125,585     $ 9,612     $ 1,325  
Originations
                7  
Amortization
          (711 )     (102 )
Impairment
                51  
 
 
Balance at March 31, 2011
  $ 125,585     $ 8,901     $ 1,281  
 
 


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Goodwill allocated to the Company’s operating segments at March 31, 2011 and December 31, 2010 is shown below.
 
         
   
(In thousands)      
   
 
Consumer segment
  $ 67,765  
Commercial segment
    57,074  
Wealth segment
    746  
 
 
Total goodwill
  $ 125,585  
 
 
 
5.  Guarantees
 
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured and in the event of nonperformance by the customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.
 
Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2011 that net liability was $4.2 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $323.3 million at March 31, 2011.
 
The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at March 31, 2011, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term, with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 5 to 10 years. At March 31, 2011, the liability recorded for guarantor RPAs was $125 thousand, and the notional amount of the underlying swaps was $42.8 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated, but is dependent upon the fair value of the interest rate swaps at the time of default. If an event of default on all contracts had occurred at March 31, 2011, the Company would have been required to make payments of approximately $3.1 million.
 
At December 31, 2010 the Company carried a liability of $4.4 million representing its obligation to share certain estimated litigation costs of Visa, Inc. (Visa). An escrow account established by Visa is used to fund actual litigation settlements as they occur. The escrow account was funded initially with proceeds from an initial public offering and subsequently funded with contributions by Visa. The Company’s indemnification obligation is periodically adjusted to reflect changes in estimates of litigation costs and is reduced as funding occurs in the escrow account. Additional funding occurred during March 2011 when Visa contributed $400 million to the escrow account. As a result, the Company reduced its obligation by $1.4 million at that


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time, bringing its liability balance to $3.1 million as of March 31, 2011. The Company currently anticipates that its proportional share of eventual escrow funding will more than offset its liability related to the Visa litigation.
 
6.  Pension
 
The amount of net pension cost for the three months ended March 31, 2011 and 2010 is as follows.
 
                 
   
    For the
 
    Three Months
 
    Ended March 31  
(In thousands)   2011     2010  
   
 
Service cost – benefits earned during the period
  $ 88     $ 183  
Interest cost on projected benefit obligation
    1,362       1,367  
Expected return on plan assets
    (1,675 )     (1,640 )
Amortization of unrecognized net loss
    540       567  
 
 
Net periodic pension cost
  $ 315     $ 477  
 
 
 
Substantially all benefits accrued under the Company’s defined benefit pension plan were frozen effective January 1, 2005, and the remaining benefits were frozen effective January 1, 2011. During the first three months of 2011, the Company made no funding contributions to its defined benefit pension plan, and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2011.


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7.  Common Stock
 
Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 12.
 
                 
   
    For the
 
    Three Months
 
    Ended March 31  
(In thousands, except per share data)   2011     2010  
   
 
Basic income per common share:
               
Net income attributable to Commerce Bancshares, Inc. 
  $ 60,453     $ 44,170  
Less income allocated to nonvested restricted stockholders
    404       234  
 
 
Net income available to common stockholders
  $ 60,049     $ 43,936  
 
 
Distributed income
  $ 19,907     $ 19,487  
Undistributed income
  $ 40,142     $ 24,449  
 
 
Weighted average common shares outstanding
    86,467       87,017  
 
 
Distributed income per share
  $ .23     $ .22  
Undistributed income per share
    .46       .28  
 
 
Basic income per common share
  $ .69     $ .50  
 
 
Diluted income per common share:
               
Net income attributable to Commerce Bancshares, Inc. 
  $ 60,453     $ 44,170  
Less income allocated to nonvested restricted stockholders
    403       234  
 
 
Net income available to common stockholders
  $ 60,050     $ 43,936  
 
 
Distributed income
  $ 19,907     $ 19,487  
Undistributed income
  $ 40,143     $ 24,449  
 
 
Weighted average common shares outstanding
    86,467       87,017  
Net effect of the assumed exercise of stock-based awards – based on the treasury stock method using the average market price for the respective periods
    369       475  
 
 
Weighted average diluted common shares outstanding
    86,836       87,492  
 
 
Distributed income per share
  $ .23     $ .22  
Undistributed income per share
    .46       .28  
 
 
Diluted income per common share
  $ .69     $ .50  
 
 
 
The diluted income per common share computation for the periods ended March 31, 2011 and 2010 exclude 820 thousand and 1.7 million, respectively, in unexercised stock options and SARs because their inclusion would have been anti-dilutive to income per share.
 
8.  Other Comprehensive Income (Loss)
 
Activity in other comprehensive income (loss) for the first three months of 2011 and 2010 is shown in the table below. The first component of other comprehensive income is the unrealized holding gains and losses on available for sale securities. These gains and losses have been separated into two groups in the table below, as required by current accounting guidance for other-than-temporary impairment (OTTI) on debt securities. Under this guidance, credit-related losses on debt securities with OTTI are recorded in current earnings, while the noncredit-related portion of the overall gain or loss in fair value is recorded in other comprehensive


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income (loss). Changes in the noncredit-related gain or loss in fair value of these securities, after OTTI was initially recognized, are shown separately in the table below. The remaining unrealized holding gains and losses shown in the table apply to available for sale investment securities for which OTTI has not been recorded (and include holding gains and losses on certain securities prior to the recognition of OTTI).
 
In the calculation of other comprehensive income, certain reclassification adjustments are made to avoid double counting gains and losses that are included as part of net income for a period that also had been included as part of other comprehensive income in that period or earlier periods. These reclassification amounts are shown separately in the table below.
 
The second component of other comprehensive income is pension gains and losses that arise during the period but are not recognized as components of net periodic benefit cost, and corresponding adjustments when these gains and losses are subsequently amortized to net periodic benefit cost.
 
                 
   
    For the
 
    Three Months
 
    Ended March 31  
(In thousands)   2011     2010  
   
 
Available for sale debt securities for which a portion of OTTI has been recorded in earnings:
               
Unrealized holding gains subsequent to initial OTTI recognition
  $ 6,475     $ 6,302  
Income tax expense
    (2,461 )     (2,394 )
 
 
Net unrealized gains
    4,014       3,908  
 
 
Other available for sale investment securities:
               
Unrealized holding gains (losses)
    (10,405 )     12,380  
Reclassification adjustment for gains included in net income
    (176 )     (408 )
 
 
Net unrealized gains (losses) on securities
    (10,581 )     11,972  
Income tax (expense) benefit
    4,021       (4,550 )
 
 
Net unrealized gains (losses)
    (6,560 )     7,422  
 
 
Prepaid pension cost:
               
Amortization of accumulated pension loss
    540       567  
Income tax expense
    (205 )     (216 )
 
 
Pension loss amortization
    335       351  
 
 
Other comprehensive income (loss)
  $ (2,211 )   $ 11,681  
 
 
 
At March 31, 2011, accumulated other comprehensive income was $61.1 million, net of tax. It was comprised of $3.5 million in unrealized holding losses on available for sale debt securities for which a portion of OTTI has been recorded in earnings, $81.2 million in unrealized holding gains on other available for sale securities, and $16.6 million in accumulated pension loss.


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9.  Segments
 
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment includes the consumer portion of the retail branch network (loans, deposits, and other personal banking services), indirect and other consumer financing, consumer debit and credit bank cards, and student lending. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as Merchant and Commercial bank card products. The Wealth segment provides traditional trust and estate tax planning, advisory and discretionary investment management, as well as discount brokerage services, and the Private Banking product portfolio. The Capital Markets Group, which sells fixed income securities and provides investment safekeeping and bond accounting services, was transferred from the Wealth segment to the Commercial segment effective January 1, 2011. The information for 2010 in the table below has been revised to reflect this transfer.
 
The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues among the three segments.
 
                                                 
   
                      Segment
    Other/
    Consolidated
 
(In thousands)   Consumer     Commercial     Wealth     Totals     Elimination     Totals  
   
 
Three Months Ended March 31, 2011:
                                               
Net interest income
  $ 71,522     $ 68,159     $ 9,549     $ 149,230     $ 11,743     $ 160,973  
Provision for loan losses
    (13,637 )     (5,119 )     (28 )     (18,784 )     2,995       (15,789 )
Non-interest income
    31,994       39,146       25,186       96,326       (420 )     95,906  
Investment securities gains, net
                            1,327       1,327  
Non-interest expense
    (69,827 )     (55,714 )     (22,215 )     (147,756 )     (6,204 )     (153,960 )
 
 
Income before income taxes
  $ 20,052     $ 46,472     $ 12,492     $ 79,016     $ 9,441     $ 88,457  
 
 
Three Months Ended March 31, 2010:
                                               
Net interest income
  $ 81,033     $ 63,134     $ 9,013     $ 153,180     $ 9,530     $ 162,710  
Provision for loan losses
    (19,278 )     (11,928 )     (58 )     (31,264 )     (3,058 )     (34,322 )
Non-interest income
    34,380       35,307       22,229       91,916       1,273       93,189  
Investment securities losses, net
                            (3,665 )     (3,665 )
Non-interest expense
    (73,829 )     (54,036 )     (21,811 )     (149,676 )     (6,048 )     (155,724 )
 
 
Income before income taxes
  $ 22,306     $ 32,477     $ 9,373     $ 64,156     $ (1,968 )   $ 62,188  
 
 
 
The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies, which have been developed to reflect the underlying economics of the businesses. The policies address the methodologies applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided) by assets and liabilities based on their maturity, prepayment and/or repricing characteristics. In the second quarter of 2010, the Company determined that the internal interest rate ascribed to business units for providing non-contractual deposit funds should be adjusted to make it more reactive to market changes and reflect recent economic conditions. The resulting change to segment net interest income lowered total segment contribution and redistributed income among segments. The information for the first three months of 2010 in the table above has been revised to reflect the lower rate environment during that period.
 
The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for loan losses in this category contains the difference between loan charge-offs and recoveries


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assigned directly to the segments and the recorded provision for loan loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment.
 
The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments’ financial condition and results of operations if they were independent entities.
 
10.  Derivative Instruments
 
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties, and are not a measure of loss exposure. The largest group of notional amounts relate to interest rate swaps, which are discussed in more detail below. Through its International Department, the Company enters into foreign exchange contracts consisting mainly of contracts to purchase or deliver foreign currencies for customers at specific future dates. Also, mortgage loan commitments and forward sales contracts result from the Company’s mortgage banking operation, in which fixed rate personal real estate loans are originated and sold to other institutions. The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees.
 
                 
   
    March 31
    December 31
 
(In thousands)   2011     2010  
   
 
Interest rate swaps
  $ 528,231     $ 498,071  
Interest rate caps
    31,236       31,736  
Credit risk participation agreements
    46,306       40,661  
Foreign exchange contracts:
               
Forward contracts
    49,040       25,867  
Option contracts
    3,100        
Mortgage loan commitments
    8,283       12,125  
Mortgage loan forward sale contracts
    13,254       24,112  
 
 
Total notional amount
  $ 679,450     $ 632,572  
 
 
 
The Company’s interest rate risk management strategy includes the ability to modify the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Interest rate swaps are used on a limited basis as part of this strategy. At March 31, 2011, the Company had entered into three interest rate swaps with a notional amount of $15.4 million, included in the table above, which are designated as fair value hedges of certain fixed rate loans. Gains and losses on these derivative instruments, as well as the offsetting loss or gain on the hedged loans attributable to the hedged risk, are recognized in current earnings. These gains and losses are reported in interest and fees on loans in the accompanying statements of income. The table below shows gains and losses related to fair value hedges.
 
                 
   
    For the Three
 
    Months Ended
 
    March 31  
(In thousands)   2011     2010  
   
 
Gain (loss) on interest rate swaps
  $ 187     $ (81 )
Gain (loss) on loans
    (181 )     73  
 
 
Amount of hedge ineffectiveness
  $ 6     $ (8 )
 
 
 
The Company’s other derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings. These instruments include interest rate swap contracts sold to customers who wish to modify their interest rate sensitivity. These swaps are offset by matching contracts purchased by the Company from other financial institutions. Because of the


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matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings. The notional amount of these types of swaps at March 31, 2011 was $512.8 million. The Company is party to master netting arrangements with its institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements. Collateral, usually in the form of marketable securities, is posted by the counterparty with liability positions, in accordance with contract thresholds. At March 31, 2011, the Company had net liability positions with its financial institution counterparties totaling $14.8 million and had posted $15.1 million in collateral.
 
Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions, or can require instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.
 
The banking customer counterparties are engaged in a variety of businesses, including real estate, building materials, communications, consumer products, and manufacturing. The manufacturing group is the largest, with a combined notional amount of 24.3% of the total customer swap portfolio. If this group of manufacturing counterparties failed to perform, and if the underlying collateral proved to be of no value, the Company would incur a loss of $2.7 million, based on amounts at March 31, 2011.
 
The fair values of the Company’s derivative instruments, whose notional amounts are listed above, are shown in the following table. Information about the valuation methods used to determine fair value is provided in Note 13 on Fair Value Measurements.
 
                                         
   
    Asset Derivatives     Liability Derivatives  
        March 31
    Dec. 31
        March 31
    Dec. 31
 
        2011     2010         2011     2010  
                     
    Balance
              Balance
           
    Sheet
              Sheet
           
(In thousands)   Location   Fair Value     Location   Fair Value  
   
 
Derivatives designated as hedging instruments:
                                       
Interest rate swaps
  Other assets   $     $     Other liabilities   $ (972 )   $ (1,159 )
 
 
Total derivatives designated as hedging instruments
      $     $         $ (972 )   $ (1,159 )
 
 
Derivatives not designated as hedging instruments:
                                       
Interest rate swaps
  Other assets   $ 15,666     $ 17,712     Other liabilities   $ (15,745 )   $ (17,799 )
Interest rate caps
  Other assets     87       84     Other liabilities     (87 )     (84 )
Credit risk participation agreements
  Other assets     4           Other liabilities     (125 )     (130 )
Foreign exchange contracts:
                                       
Forward contracts
  Other assets     1,312       492     Other liabilities     (1,016 )     (359 )
Option contracts
  Other assets     5           Other liabilities     (5 )      
Mortgage loan commitments
  Other assets     115       101     Other liabilities           (30 )
Mortgage loan forward sale contracts
  Other assets     26       434     Other liabilities     (28 )     (23 )
 
 
Total derivatives not designated as hedging instruments
      $ 17,215     $ 18,823         $ (17,006 )   $ (18,425 )
 
 
Total derivatives
      $ 17,215     $ 18,823         $ (17,978 )   $ (19,584 )
 
 


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The effects of derivative instruments on the consolidated statements of income are shown in the table below.
 
                     
   
    Location of Gain or
  Amount of Gain or (Loss)
 
    (Loss) Recognized in
  Recognized in Income on
 
    Income on Derivative   Derivative  
       
        For the Three
 
        Months
 
        Ended
 
        March 31  
(In thousands)       2011     2010  
   
 
Derivatives in fair value hedging relationships:
                   
Interest rate swaps
  Interest and fees on loans   $ 187     $ (81 )
 
 
Total
      $ 187     $ (81 )
 
 
Derivatives not designated as hedging instruments:
                   
Interest rate swaps
  Other non-interest income   $ 389     $ 190  
Interest rate caps
  Other non-interest income            
Credit risk participation agreements
  Other non-interest income     6       5  
Foreign exchange contracts:
                   
Forward contracts
  Other non-interest income     164       276  
Option contracts
  Other non-interest income            
Mortgage loan commitments
  Loan fees and sales     44       84  
Mortgage loan forward sale contracts
  Loan fees and sales     (413 )     (102 )
 
 
Total
      $ 190     $ 453  
 
 
 
11.  Income Taxes
 
For the first quarter of 2011, income tax expense amounted to $27.5 million compared to $18.4 million in the first quarter of 2010. The effective tax rate for the Company, including the effect of non-controlling interest, was 31.3% in the current quarter compared to 29.4% in the same quarter last year.
 
12.  Stock-Based Compensation
 
The Company normally issues most of its annual stock-based compensation awards during the first quarter. Stock-based compensation has historically been issued in the form of options, stock appreciation rights (SARs) and nonvested stock. During the first quarters of 2011 and 2010, stock-based compensation was issued solely in the form of nonvested stock awards. The stock-based compensation expense that has been charged against income was $1.3 million in the first three months of 2011 and $1.8 million in the first three months of 2010.


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The 2011 stock awards generally vest in 5 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards, as of March 31, 2011, and changes during the three month period then ended is presented below.
 
                 
   
          Weighted
 
          Average
 
          Grant Date
 
    Shares     Fair Value  
   
 
Nonvested at January 1, 2011
    470,406     $ 36.00  
Granted
    193,609       40.58  
Vested
    (23,323 )     40.31  
Forfeited
    (3,510 )     37.71  
 
 
Nonvested at March 31, 2011
    637,182     $ 37.21  
 
 
 
SARs and stock options are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and have 10-year contractual terms. SARs, which the Company granted in 2006 through 2008 and on a limited basis in 2009, vest on a graded basis over 4 years of continuous service. All SARs must be settled in stock under provisions of the plan. Stock options, which were granted in 2005 and previous years, vest on a graded basis over 3 years of continuous service. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs and options on date of grant.
 
A summary of option activity during the first three months of 2011 is presented below.
 
                                 
   
                Weighted
       
          Weighted
    Average
       
          Average
    Remaining
    Aggregate
 
          Exercise
    Contractual
    Intrinsic
 
(Dollars in thousands, except per share data)   Shares     Price     Term     Value  
   
 
Outstanding at January 1, 2011
    1,806,110     $ 30.96                  
Granted
                           
Forfeited
                           
Expired
                           
Exercised
    (382,375 )     29.29                  
 
 
Outstanding at March 31, 2011
    1,423,735     $ 31.41       2.6 years     $ 12,861  
 
 
 
A summary of SAR activity during the first three months of 2011 is presented below.
 
                                 
   
                Weighted
       
          Weighted
    Average
       
          Average
    Remaining
    Aggregate
 
          Exercise
    Contractual
    Intrinsic
 
(Dollars in thousands, except per share data)   Shares     Price     Term     Value  
   
 
Outstanding at January 1, 2011
    1,710,108     $ 39.71                  
Granted
                           
Forfeited
    (1,953 )     38.01                  
Expired
    (5,156 )     40.28                  
Exercised
    (9,150 )     37.38                  
 
 
Outstanding at March 31, 2011
    1,693,849     $ 39.72       5.9 years     $ 1,454  
 
 
 
13.  Fair Value Measurements
 
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale and trading securities, certain non-marketable securities relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may


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be required to record at fair value other assets and liabilities on a nonrecurring basis, such as loans held for sale, mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting, or write-downs of individual assets.
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
 
  •  Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
 
  •  Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
 
  •  Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.
 
When determining the fair value measurements for assets and liabilities required or permitted to be recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets and the Company must use alternative valuation techniques to derive an estimated fair value measurement.
 
Valuation methods for instruments measured at fair value on a recurring basis
 
Following is a description of the Company’s valuation methodologies used for instruments measured at fair value on a recurring basis:
 
Available for sale investment securities
 
For available for sale securities, changes in fair value, including that portion of other-than-temporary impairment unrelated to credit loss, are recorded in other comprehensive income. As mentioned in Note 3 on Investment Securities, the Company records the credit-related portion of other-than-temporary impairment in current earnings. This portfolio comprises the majority of the assets which the Company records at fair value. Most of the portfolio, which includes government-sponsored enterprise, mortgage-backed and asset-backed securities, are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2 in the fair value hierarchy. Where quoted prices are available in an active market, the measurements are classified as Level 1. Most of the Level 1 measurements apply to common stock and U.S. Treasury obligations.
 
Valuation methods and inputs, by class of security:
 
  •  U.S. government and federal agency obligations
U.S. treasury bills, bonds and notes, including U.S. Treasury inflation-protected securities, are valued using live data from active market makers and inter-dealer brokers. Valuations for stripped coupon


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  and principal issues are derived from yield curves generated from various dealer contacts and live data sources.
 
  •  Government-sponsored enterprise obligations
Government-sponsored enterprise obligations are evaluated using cash flow valuation models. Inputs used are live market data, cash settlements, Treasury market yields, and floating rate indices such as LIBOR, CMT, and Prime.
 
  •  State and municipal obligations, excluding auction rate securities
A yield curve is generated and applied to bond sectors, and individual bond valuations are extrapolated. Inputs used to generate the yield curve are bellwether issue levels, established trading spreads between similar issuers or credits, historical trading spreads over widely accepted market benchmarks, new issue scales, and verified bid information. Bid information is verified by corroborating the data against external sources such as broker-dealers, trustees/paying agents, issuers, or non-affiliated bondholders.
 
  •  Mortgage and asset-backed securities
Collateralized mortgage obligations and other asset-backed securities are valued at the tranche level. For each tranche valuation, the process generates predicted cash flows for the tranche, applies a market based (or benchmark) yield/spread for each tranche, and incorporates deal collateral performance and tranche level attributes to determine tranche-specific spreads to adjust the benchmark yield. Tranche cash flows are generated from new deal files and prepayment/default assumptions. Tranche spreads are based on tranche characteristics such as average life, type, volatility, ratings, underlying collateral and performance, and prevailing market conditions. The appropriate tranche spread is applied to the corresponding benchmark, and the resulting value is used to discount the cash flows to generate an evaluated price.
 
Valuation of agency pass-through securities, typically issued under GNMA, FNMA, FHLMC, and SBA programs, are primarily derived from information from the To Be Announced (TBA) market. This market consists of generic mortgage pools which have not been received for settlement. Snapshots of the TBA market, using live data feeds distributed by multiple electronic platforms, and in conjunction with other indices, are used to compute a price based on discounted cash flow models.
 
  •  Other debt securities
Other debt securities are valued using active markets and inter-dealer brokers as well as bullet spread scales and option adjusted spreads. The spreads and models use yield curves, terms and conditions of the bonds, and any special features (i.e., call or put options, redemption features, etc.).
 
  •  Equity securities
Equity securities are priced using the market prices for each security from the major stock exchanges or other electronic quotation systems. These are generally classified as Level 1 measurements. Stocks which trade infrequently are classified as Level 2.
 
At March 31, 2011, the Company held certain auction rate securities (ARS) in its available for sale portfolio, totaling $143.2 million. The auction process by which the ARS are normally priced has not functioned since 2008, and the fair value of these securities cannot be based on observable market prices due to the illiquidity in the market. The fair values of the ARS are estimated using a discounted cash flows analysis. Estimated cash flows are based on mandatory interest rates paid under failing auctions and projected over an estimated market recovery period. The cash flows are discounted at an estimated market rate reflecting adjustments for liquidity premium and nonperformance risk. Because many of the inputs significant to the measurement are not observable, these measurements are classified as Level 3 measurements.
 
Trading securities
 
The securities in the Company’s trading portfolio are priced by averaging several broker quotes for similar instruments, and are classified as Level 2 measurements.


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Private equity investments
 
These securities are held by the Company’s venture capital subsidiaries and are included in non-marketable investment securities in the consolidated balance sheets. Valuation of these nonpublic investments requires significant management judgment due to the absence of quoted market prices. Each quarter, valuations are performed utilizing available market data and other factors. Market data includes published trading multiples for private equity investments of similar size. The multiples are considered in conjunction with current operating performance, future expectations, financing and sales transactions, and other investment-specific issues. The Company applies its valuation methodology consistently from period to period, and believes that its methodology is similar to that used by other market participants. These fair value measurements are classified as Level 3.
 
Derivatives
 
The Company’s derivative instruments include interest rate swaps, foreign exchange forward contracts, commitments and sales contracts related to personal mortgage loan origination activity, and certain credit risk guarantee agreements. When appropriate, the impact of credit standing as well as any potential credit enhancements, such as collateral, has been considered in the fair value measurement.
 
  •  Valuations for interest rate swaps are derived from proprietary models whose significant inputs are readily observable market parameters, primarily yield curves. The results of the models are constantly validated through comparison to active trading in the marketplace. These fair value measurements are classified as Level 2.
 
  •  Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations from global market makers, and are classified as Level 2.
 
  •  The fair values of mortgage loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market. However, these prices are adjusted by a factor which considers the likelihood that a commitment will ultimately result in a closed loan. This estimate is based on the Company’s historical data and its judgment about future economic trends. Based on the unobservable nature of this adjustment, these measurements are classified as Level 3.
 
  •  The Company’s contracts related to credit risk guarantees are valued under a proprietary model which uses significant unobservable inputs and assumptions about the creditworthiness of the counterparty to the guaranteed interest rate swap contract. Consequently, these measurements are classified as Level 3.
 
Assets held in trust
 
Assets held in an outside trust for the Company’s deferred compensation plan consist of investments in mutual funds. The fair value measurements are based on quoted prices in active markets and classified as Level 1. The Company has recorded an asset representing the total investment amount. The Company has also recorded a corresponding nonfinancial liability, representing the Company’s liability to the plan participants.


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The table below presents the March 31, 2011 and December 31, 2010 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first three months of 2011 or the twelve months ended December 31, 2010.
 
                                 
   
          Fair Value Measurements Using  
          Quoted
             
          Prices in
             
          Active
             
          Markets
    Significant
       
          for
    Other
    Significant
 
          Identical
    Observable
    Unobservable
 
          Assets
    Inputs
    Inputs
 
(In thousands)         (Level 1)     (Level 2)     (Level 3)  
   
 
March 31, 2011
                               
Assets:
                               
Available for sale securities:
                               
U.S. government and federal agency obligations
  $ 461,235     $ 453,776     $ 7,459     $  
Government-sponsored enterprise obligations
    199,169             199,169        
State and municipal obligations
    1,143,433             1,000,226       143,207  
Agency mortgage-backed securities
    2,618,380             2,618,380        
Non-agency mortgage-backed securities
    417,675             417,675        
Other asset-backed securities
    2,449,220             2,449,220        
Other debt securities
    165,243             165,243        
Equity securities
    45,222       28,352       16,870        
Trading securities
    17,000             17,000        
Private equity investments
    55,507                   55,507  
Derivatives*
    17,215             17,070       145  
Assets held in trust
    4,764       4,764              
 
 
Total assets
    7,594,063       486,892       6,908,312       198,859  
 
 
Liabilities:
                               
Derivatives*
    17,978             17,825       153  
 
 
Total liabilities
  $ 17,978     $     $ 17,825     $ 153  
 
 
December 31, 2010
                               
Assets:
                               
Available for sale securities:
                               
U.S. government and federal agency obligations
  $ 455,537     $ 448,087     $ 7,450     $  
Government-sponsored enterprise obligations
    201,895             201,895        
State and municipal obligations
    1,119,485             969,396       150,089  
Agency mortgage-backed securities
    2,491,199             2,491,199        
Non-agency mortgage-backed securities
    455,790             455,790        
Other asset-backed securities
    2,354,260             2,354,260        
Other debt securities
    176,964             176,964        
Equity securities
    39,173       22,900       16,273        
Trading securities
    11,710             11,710        
Private equity investments
    53,860                   53,860  
Derivatives*
    18,823             18,288       535  
Assets held in trust
    4,213       4,213              
 
 
Total assets
    7,382,909       475,200       6,703,225       204,484  
 
 
Liabilities:
                               
Derivatives*
    19,584             19,401       183  
 
 
Total liabilities
  $ 19,584     $     $ 19,401     $ 183  
 
 
 
* The fair value of each class of derivative is shown in Note 10.


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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
                                 
   
    Fair Value Measurements Using
 
    Significant Unobservable Inputs
 
    (Level 3)  
    State and
    Private
             
    Municipal
    Equity
             
(In thousands)   Obligations     Investments     Derivatives     Total  
   
 
For the three months ended March 31, 2011:
                               
 
 
Balance at January 1, 2011
  $ 150,089     $ 53,860     $ 352     $ 204,301  
Total gains or losses (realized/unrealized):
                               
Included in earnings
          1,425       (363 )     1,062  
Included in other comprehensive income
    (1,271 )                 (1,271 )
Investment securities called
    (5,918 )                 (5,918 )
Discount accretion
    307                   307  
Purchases of private equity securities
          179             179  
Capitalized interest/dividends
          43             43  
Purchase of risk participation agreement
                79       79  
Sale of risk participation agreement
                (76 )     (76 )
 
 
Balance at March 31, 2011
  $ 143,207     $ 55,507     $ (8 )   $ 198,706  
 
 
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2011
  $     $ 1,425     $ 119     $ 1,544  
 
 
For the three months ended March 31, 2010:
                               
 
 
Balance at January 1, 2010
  $ 167,836     $ 44,827     $ 108     $ 212,771  
Total gains or losses (realized/unrealized):
                               
Included in earnings
          (2,616 )     (13 )     (2,629 )
Included in other comprehensive income
    (8,487 )                 (8,487 )
Investment securities called
    (1,375 )                 (1,375 )
Discount accretion
    137                   137  
Purchases of private equity securities
          2,704             2,704  
Capitalized interest/dividends
          209             209  
Sale of risk participation agreement
                (110 )     (110 )
 
 
Balance at March 31, 2010
  $ 158,111     $ 45,124     $ (15 )   $ 203,220  
 
 
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2010
  $     $ (2,616 )   $ 195     $ (2,421 )
 
 


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Gains and losses on the Level 3 assets and liabilities in the table above are reported in the following income categories:
 
                                 
   
                Investment
       
                Securities
       
          Other Non-
    Gains
       
    Loan Fees
    Interest
    (Losses),
       
(In thousands)   and Sales     Income     Net     Total  
   
 
For the three months ended March 31, 2011:
                               
 
 
Total gains or losses included in earnings
  $ (369 )   $ 6     $ 1,425     $ 1,062  
 
 
Change in unrealized gains or losses relating to assets still held at March 31, 2011
  $ 113     $ 6     $ 1,425     $ 1,544  
 
 
For the three months ended March 31, 2010:
                               
 
 
Total gains or losses included in earnings
  $ (18 )   $ 5     $ (2,616 )   $ (2,629 )
 
 
Change in unrealized gains or losses relating to assets still held at March 31, 2010
  $ 190     $ 5     $ (2,616 )   $ (2,421 )
 
 
 
Valuation methods for instruments measured at fair value on a nonrecurring basis
 
Following is a description of the Company’s valuation methodologies used for other financial and nonfinancial instruments measured at fair value on a nonrecurring basis.
 
Collateral dependent impaired loans
 
While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external appraisals and assessment of property values by its internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Because many of these inputs are not observable, the measurements are classified as Level 3. Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company at March 31, 2011 and 2010 are shown in the table below.
 
Loans held for sale
 
Loans held for sale are carried at the lower of cost or fair value. The portfolio has historically consisted primarily of student loans, and to a lesser extent, residential real estate loans. Most of the Company’s student loan portfolio was sold under contract to the Federal Department of Education and various student loan agencies during 2010. A portion of the student loan portfolio is under contract to agencies which have been unable to consistently purchase loans under existing contractual terms. These loans have been evaluated using a fair value measurement method based on a discounted cash flows analysis, which is classified as Level 3. The fair value of these loans was $11.8 million at March 31, 2011, net of an impairment reserve of $549 thousand. The measurement of fair value for other student loans is based on the specific prices mandated in the underlying sale contracts, the estimated exit price, and is classified as Level 2. Fair value measurements on mortgage loans held for sale are based on quoted market prices for similar loans in the secondary market and are classified as Level 2.
 
Private equity investments and restricted stock
 
These assets are included in non-marketable investment securities in the consolidated balance sheets. They include investments in private equity concerns held by the Parent company which are carried at cost, reduced by other-than-temporary impairment. These investments are periodically evaluated for impairment


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based on their estimated fair value as determined by review of available information, most of which is provided as monthly or quarterly internal financial statements, annual audited financial statements, investee tax returns, and in certain situations, through research into and analysis of the assets and investments held by those private equity concerns. Restricted stock consists of stock issued by the Federal Reserve Bank and FHLB which is held by the bank subsidiary as required for regulatory purposes. Generally, there are restrictions on the sale and/or liquidation of these investments, and they are carried at cost, reduced by other-than-temporary impairment. Fair value measurements for these securities are classified as Level 3.
 
Mortgage servicing rights
 
The Company initially measures its mortgage servicing rights at fair value, and amortizes them over the period of estimated net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The fair value measurements are classified as Level 3.
 
Goodwill and core deposit premium
 
Valuation of goodwill to determine impairment is performed on an annual basis, or more frequently if there is an event or circumstance that would indicate impairment may have occurred. The process involves calculations to determine the fair value of each reporting unit on a stand-alone basis. A combination of formulas using current market multiples, based on recent sales of financial institutions within the Company’s geographic marketplace, is used to estimate the fair value of each reporting unit. That fair value is compared to the carrying amount of the reporting unit, including its recorded goodwill. Impairment is considered to have occurred if the fair value of the reporting unit is lower than the carrying amount of the reporting unit. The fair value of the Company’s common stock relative to its computed book value per share is also considered as part of the overall evaluation. These measurements are classified as Level 3.
 
Core deposit premiums are recognized at the time a portfolio of deposits is acquired, using valuation techniques which calculate the present value of the estimated net cost savings attributable to the core deposit base, relative to alternative costs of funds and tax benefits, if applicable, over the expected remaining economic life of the depositors. Subsequent evaluations are made when facts or circumstances indicate potential impairment may have occurred. The Company uses estimates of discounted future cash flows, comparisons with alternative sources for deposits, consideration of income potential generated in other product lines by current customers, geographic parameters, and other demographics to estimate a current fair value of a specific deposit base. If the calculated fair value is less than the carrying value, impairment is considered to have occurred. This measurement is classified as Level 3.
 
Foreclosed assets
 
Foreclosed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, marine and recreational vehicles. Foreclosed assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods. These measurements are classified as Level 3.


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Long-lived assets
 
In accordance with ASC 360-10-35, investments in branch facilities and various office buildings are written down to estimated fair value, or estimated fair value less cost to sell if the property is held for sale. Fair value is estimated in a process which considers current local commercial real estate market conditions and the judgment of the sales agent on pricing and sales strategy. These fair value measurements are classified as Level 3.
 
For assets measured at fair value on a nonrecurring basis during the first three months of 2011 and 2010, and still held as of March 31, 2011 and 2010, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation assumptions used to determine each adjustment, and the carrying value of the related individual assets or portfolios at March 31, 2011 and 2010.
 
                                         
   
          Fair Value Measurements Using        
          Quoted
                   
          Prices in
                   
          Active
                   
          Markets
    Significant
             
          for
    Other
    Significant
       
          Identical
    Observable
    Unobservable
       
          Assets
    Inputs
    Inputs
    Total Gains
 
(In thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)     (Losses)  
   
 
March 31, 2011
                                       
Loans
  $ 41,091     $     $     $ 41,091     $ (5,458 )
Mortgage servicing rights
    1,281                   1,281       51  
Foreclosed assets
    2,301                   2,301       (288 )
Long-lived assets
    3,300                   3,300       (1,000 )
 
 
March 31, 2010
                                       
Loans
  $ 26,244     $     $     $ 26,244     $ (9,179 )
Mortgage servicing rights
    1,501                   1,501       (42 )
Foreclosed assets
    8,646                   8,646       (780 )
 
 
 
14.  Fair Value of Financial Instruments
 
The carrying amounts and estimated fair values of financial instruments held by the Company, in addition to a discussion of the methods used and assumptions made in computing those estimates, are set forth below.
 
Loans
 
The fair value of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820 “Fair Value Measurements and Disclosures”.
 
Investment Securities
 
A detailed description of the fair value measurement of the debt and equity instruments in the available for sale and trading sections of the investment security portfolio is provided in Note 13 on Fair Value Measurements. A schedule of investment securities by category and maturity is provided in Note 3 on Investment Securities.
 
Federal Funds Sold and Securities Purchased under Agreements to Resell, Interest Earning Deposits With Banks and Cash and Due From Banks
 
The carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal


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funds sold and securities purchased under agreements to resell classified as short-term generally mature in 90 days or less. The fair value of long-term securities purchased under agreements to resell is estimated by discounting contractual maturities using an estimate of the current market rate for similar instruments.
 
Accrued Interest Receivable/Payable
 
The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values because of the relatively short time period between the accrual period and the expected receipt or payment due date.
 
Derivative Instruments
 
A description of the fair value measurement of derivative instruments is provided in Note 13 on Fair Value Measurements. Fair values are generally estimated using observable market prices or pricing models.
 
Deposits
 
The fair value of deposits with no stated maturity is equal to the amount payable on demand. Such deposits include savings and interest and non-interest bearing demand deposits. These fair value estimates do not recognize any benefit the Company receives as a result of being able to administer, or control, the pricing of these accounts. The fair value of certificates of deposit is based on the discounted value of cash flows, taking early withdrawal optionality into account. Discount rates are based on the Company’s approximate cost of obtaining similar maturity funding in the market.
 
Borrowings
 
The fair value of short-term borrowings such as federal funds purchased and securities sold under agreements to repurchase, which generally mature or reprice within 90 days, approximates their carrying value. The fair value of long-term structured repurchase agreements and other long-term debt is estimated by discounting contractual maturities using an estimate of the current market rate for similar instruments.


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The estimated fair values of the Company’s financial instruments are as follows:
 
                 
   
    March 31, 2011  
    Carrying
    Estimated
 
(In thousands)   Amount     Fair Value  
   
 
Financial Assets
               
Loans, including held for sale
  $ 9,428,334     $ 9,476,195  
Available for sale investment securities
    7,499,577       7,499,577  
Trading securities
    17,000       17,000  
Non-marketable securities
    104,721       104,721  
Short-term federal funds sold and securities purchased under agreements to resell
    3,600       3,600  
Long-term securities purchased under
               
agreements to resell
    700,000       704,975  
Interest earning deposits with banks
    203,940       203,940  
Cash and due from banks
    362,148       362,148  
Accrued interest receivable
    63,757       63,757  
Derivative instruments
    17,215       17,215  
 
 
Financial Liabilities
               
Non-interest bearing deposits
  $ 4,558,630     $ 4,558,630  
Savings, interest checking and money market deposits
    8,074,055       8,074,055  
Time open and C.D.’s
    2,906,790       2,918,922  
Federal funds purchased and securities sold under agreements to repurchase
    923,014       928,349  
Other borrowings
    111,972       120,893  
Accrued interest payable
    12,177       12,177  
Derivative instruments
    17,978       17,978  
 
 
 
Off-Balance Sheet Financial Instruments
 
The fair value of letters of credit and commitments to extend credit is based on the fees currently charged to enter into similar agreements. The aggregate of these fees is not material.
 
Limitations
 
Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
15.  Pending Litigation
 
On April 6, 2010 a suit was filed against Commerce Bank, N.A. (the Bank) in the U.S. District Court for the Western District of Missouri by a customer alleging that overdraft fees relating to debit card transactions have been unfairly assessed by the Bank. The suit seeks class-action status for Bank customers who may have been similarly affected. A second suit alleging the same facts and also seeking class-action status was filed on June 4, 2010 in Missouri state court. As these cases are in a very early stage, a probable outcome is presently not determinable. The Company has other lawsuits pending at March 31, 2011, arising in the normal course of business. In the opinion of management, after consultation with legal counsel, none of these suits will have a significant effect on the financial condition or results of operations of the Company.


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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company’s 2010 Annual Report on Form 10-K. Results of operations for the three month period ended March 31, 2011 are not necessarily indicative of results to be attained for any other period.
 
Forward Looking Information
 
This report may contain “forward-looking statements” that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as “expects”, “anticipates”, “believes”, “estimates”, variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company’s market area, and competition with other entities that offer financial services.
 
Critical Accounting Policies
 
The Company’s consolidated financial statements are prepared based on the application of certain accounting policies, some of which require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company’s reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Current economic conditions may require the use of additional estimates, and some estimates may be subject to a greater degree of uncertainty due to the current instability of the economy. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, the valuation of certain investment securities, and accounting for income taxes.
 
Allowance for Loan Losses
 
The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company’s estimate of the losses inherent in the loan portfolio at any point in time. While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, 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 Provision and Allowance for Loan Losses section of this discussion.


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Valuation of Investment Securities
 
The Company carries its investment securities at fair value, and employs valuation techniques which utilize observable inputs when those inputs are available. These observable inputs reflect assumptions market participants would use in pricing the security and are developed based on market data obtained from sources independent of the Company. When such information is not available, the Company employs valuation techniques which utilize unobservable inputs, or those which reflect the Company’s own assumptions about market participants, based on the best information available in the circumstances. These valuation methods typically involve cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, estimates, or other inputs to the valuation techniques could have a material impact on the Company’s future financial condition and results of operations. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Under the fair value measurement hierarchy, fair value measurements are classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on unobservable, internally-derived inputs), as discussed in more detail in Note 13 to the consolidated financial statements. 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 $6.9 billion, or 91.7% of the available for sale portfolio at March 31, 2011, and were classified as Level 2 measurements. The Company also holds $143.2 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 Company’s intent to sell the security and whether it is likely that it will be required to sell the security before the anticipated recovery of its amortized cost basis. If either of these conditions is met, the entire loss (the amount by which the amortized cost exceeds the fair value) must be recognized in current earnings. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company must determine whether a credit loss has occurred. This credit loss is the amount by which the amortized cost basis exceeds the present value of cash flows expected to be collected from the security. The credit loss, if any, must be recognized in current earnings, while the remainder of the loss, related to all other factors, is recognized in other comprehensive income.
 
The estimation of whether a credit loss exists and the period over which the security is expected to recover requires significant judgment. The Company must consider available information about the collectability of the security, including information about past events, current conditions, and reasonable forecasts, which includes payment structure, prepayment speeds, expected defaults, and collateral values. Changes in these factors could result in additional impairment, recorded in current earnings, in future periods.
 
At March 31, 2011, non-agency guaranteed mortgage-backed securities with a par value of $169.4 million were identified as other-than-temporarily impaired. The credit-related impairment loss on these securities amounted to $7.8 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 $5.6 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 totaled $59.4 million at March 31, 2011, and most are carried at fair value. 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 management’s 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 these companies, the evaluation of the investee company’s management


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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 Company’s financial position and results of operations.
 
Selected Financial Data
                 
   
    Three Months Ended
 
    March 31  
    2011     2010  
   
 
Per Share Data
               
Net income per common share – basic
  $ .69     $ .50  
Net income per common share – diluted
    .69       .50  
Cash dividends
    .230       .224  
Book value
    23.77       22.03  
Market price
    40.44       39.18  
Selected Ratios
               
(Based on average balance sheets)
               
Loans to deposits(1)
    62.47 %     74.98 %
Non-interest bearing deposits to total deposits
    29.20       27.77  
Equity to loans(1)
    21.62       18.38  
Equity to deposits
    13.51       13.79  
Equity to total assets
    11.06       10.70  
Return on total assets
    1.32       1.00  
Return on total equity
    11.95       9.32  
(Based on end-of-period data)
               
Non-interest income to revenue(2)
    37.34       36.42  
Efficiency ratio(3)
    59.64       60.48  
Tier I risk-based capital ratio
    14.75       13.43  
Total risk-based capital ratio
    16.12       14.79  
Tangible common equity to assets ratio(4)
    10.24       9.99  
Tier I leverage ratio
    10.27       9.81  
 
 
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity 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).


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Results of Operations
 
Summary
 
                                 
   
    Three Months Ended
    Increase
 
    March 31     (Decrease)  
(Dollars in thousands)   2011     2010     Amount     Percent  
   
 
Net interest income
  $ 160,973     $ 162,710     $ (1,737 )     (1.1 )%
Provision for loan losses
    (15,789 )     (34,322 )     (18,533 )     (54.0 )
Non-interest income
    95,906       93,189       2,717       2.9  
Investment securities gains (losses), net
    1,327       (3,665 )     4,992       N.M.  
Non-interest expense
    (153,960 )     (155,724 )     (1,764 )     (1.1 )
Income taxes
    (27,507 )     (18,377 )     9,130       49.7  
Non-controlling interest income (expense)
    (497 )     359       (856 )     N.M.  
 
 
Net income
  $ 60,453     $ 44,170     $ 16,283       36.9 %
 
 
 
For the quarter ended March 31, 2011, net income amounted to $60.5 million, an increase of $16.3 million, or 36.9%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.32%, the annualized return on average equity was 11.95%, and the efficiency ratio was 59.64%. Diluted earnings per share was $.69, an increase of 38.0% compared to $.50 per share in the first quarter of 2010.
 
Net income for first quarter of 2011 compared to the same period last year included a decline of $1.7 million, or 1.1%, in net interest income resulting from lower earnings on the Company’s loan portfolio, partly offset by lower rates paid on deposits and lower average balances of FHLB advances. Non-interest income increased $2.7 million, or 2.9%, due to solid growth in bank card and trust fees, which grew 15.3% and 11.7%, respectively. Non-interest expense declined $1.8 million, or 1.1%, from amounts recorded in the same period last year and was also lower than expense amounts in the last three quarters. The decline compared to the first quarter of 2010 was mainly due to a $1.4 million reduction in a Visa indemnification obligation, in addition to lower supplies and communication costs. These declines were partly offset by higher contribution expense resulting from the donation of appreciated securities and a termination fee paid on the early cancellation of a securities resell agreement. Investment securities gains grew $5.0 million, mainly due to fair value adjustments on private equity investments. The provision for loan losses totaled $15.8 million, a decrease of $18.5 million from the first quarter of 2010.
 
During the first quarter of 2011, the Company’s sole bank subsidiary (the Bank) applied to the Federal Reserve Bank of Kansas City and State of Missouri Division of Finance to become a state chartered Federal Reserve member bank. If the application is accepted, the Bank’s main regulator will change from the Office of the Comptroller to both the Federal Reserve of Kansas City and the Missouri Division of Finance. The Bank’s deposits continue to be fully insured by the FDIC in accordance with applicable laws and regulations. The Bank expects to receive its new state banking charter on or before June 30, 2011. The Company expects to reduce its examination fees by approximately $1.5 million on an annualized basis as a result of this change.


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Net Interest Income
 
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.
 
Analysis of Changes in Net Interest Income
                         
   
    Three Months Ended
 
    March 31, 2011 vs. 2010  
    Change due to        
    Average
    Average
       
(In thousands)   Volume     Rate     Total  
   
 
Interest income, fully taxable equivalent basis:
                       
Loans
  $ (5,053 )   $ (7,188 )   $ (12,241 )
Loans held for sale
    (1,679 )     73       (1,606 )
Investment securities:
                       
U.S. government and federal agency securities
    (24 )     1,975       1,951  
Government-sponsored enterprise obligations
    269       (269 )      
State and municipal obligations
    2,663       (1,121 )     1,542  
Mortgage and asset-backed securities
    5,559       (9,471 )     (3,912 )
Other securities
    (306 )     821       515  
 
 
Total interest on investment securities
    8,161       (8,065 )     96  
 
 
Short-term federal funds sold and securities purchased under agreements to resell
    (4 )     (1 )     (5 )
Long-term securities purchased under agreements to resell
    2,162             2,162  
Interest earning deposits with banks
    23       2       25  
 
 
Total interest income
    3,610       (15,179 )     (11,569 )
 
 
Interest expense:
                       
Deposits:
                       
Savings
    10       51       61  
Interest checking and money market
    1,008       (1,265 )     (257 )
Time open & C.D.’s of less than $100,000
    (989 )     (2,083 )     (3,072 )
Time open & C.D.’s of $100,000 and over
    370       (1,620 )     (1,250 )
 
 
Total interest on deposits
    399       (4,917 )     (4,518 )
 
 
Federal funds purchased and securities sold under
                       
agreements to repurchase
    (78 )     (120 )     (198 )
Other borrowings
    (5,576 )     (222 )     (5,798 )
 
 
Total interest expense
    (5,255 )     (5,259 )     (10,514 )
 
 
Net interest income, fully taxable equivalent basis
  $ 8,865     $ (9,920 )   $ (1,055 )
 
 
 
Net interest income for the first quarter of 2011 was $161.0 million, a $1.7 million, or 1.1%, decrease from the first quarter of 2010. On a tax equivalent (T/E) basis, net interest income totaled $166.5 million, up slightly over $166.0 million in the previous quarter and down $1.1 million from the same quarter last year. This decline from the same period last year was mainly the result of lower loan yields and loan balances, in conjunction with lower rates paid on deposits and a reduction in average borrowings. The Company’s net interest rate margin was 3.85% for the first quarter of 2011, compared to 3.83% in the previous quarter and 4.03% in the first quarter of 2010.
 
Total interest income (T/E) decreased $11.6 million, or 6.0%, from the first quarter of 2010. Interest income on loans, including loans held for sale, declined $13.8 million, due to a decrease of $964.3 million, or 9.2%, in average loan balances, coupled with a decrease in average rates earned. The overall average rate earned on the loan portfolio was 5.13% compared to 5.19% in the first quarter of 2010. The largest declines in


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average loan balances compared to the first quarter of 2010 occurred in construction real estate loans, consumer loans and student loans, which decreased by $182.2 million, $159.5 million, and $754.3 million, respectively. The decline in the student loan portfolios resulted from sales from these portfolios during the fourth quarter of 2010. Average business loan balances increased $222.2 million, or 7.8%, the impact of which was partially offset by a decrease in the average rate earned on those loans. Interest on construction loans in the current quarter included $404 thousand received on the pay off of a non-accrual loan. Average consumer credit card balances increased $12.3 million compared to the first quarter of 2010, while the average rate earned on these balances decreased to 10.92% from 12.58%, reflecting the impact of new credit card regulations enacted in 2010.
 
Interest income on investment securities (T/E) was $59.0 million during the first quarter of 2011 compared to $58.9 million during the same period last year. The average balance of the total portfolio increased $1.0 billion, or 16.3%, compared to the first quarter of 2010. This growth mainly occurred in mortgage and asset-backed securities and state and municipal obligations, which increased by $793.6 million and $214.2 million, respectively. The effect of higher balances was largely offset by lower overall average yields, which declined to 3.28% compared to 3.81% during the first quarter of 2010. The current quarter also included an increase of $1.9 million in interest earned on inflation-protected securities, in addition to $683 thousand in additional interest as a result of a corporate bond called at a premium.
 
In order to diversify its investment portfolio, the Company began investing in long-term securities purchased under agreements to resell in the second half of 2010. The average balance of these agreements during the first quarter of 2011 was $567.8 million while the average rate earned was 1.54%, generating $2.2 million in interest income during the period. These agreements, which are collateralized and due from other large financial institutions, have remaining terms ranging from 1.5 to 3 years.
 
The average tax equivalent yield on total interest earning assets was 4.20% in the first quarter of 2011 compared to 4.64% in the first quarter of 2010.
 
Total interest expense decreased $10.5 million, or 41.4%, compared to the first quarter of 2010, primarily due to a $4.5 million decrease in interest expense on interest bearing deposits, coupled with a $6.0 million decrease in interest expense on borrowings. The decrease in interest expense on deposits resulted from a 22 basis point decrease in average rates paid. Average balances of interest checking and money market accounts increased $877.0 million and average time open and certificates of deposit balances decreased $230.2 million. Interest expense on borrowings declined mainly due to lower FHLB advances, which declined $619.7 million, partly due to scheduled maturities of advances and partly due to the early pay off of $125.0 million in the fourth quarter of 2010. The overall average rate incurred on all interest bearing liabilities decreased to .51% in the first quarter of 2011 compared to .86% in the first quarter of 2010.
 
Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.


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Non-Interest Income
 
                                 
   
    Three Months
    Increase
 
    Ended March 31     (Decrease)  
(Dollars in thousands)   2011     2010     Amount     Percent  
   
 
Bank card transaction fees
  $ 37,462     $ 32,490     $ 4,972       15.3 %
Trust fees
    21,572       19,318       2,254       11.7  
Deposit account charges and other fees
    19,300       23,981       (4,681 )     (19.5 )
Bond trading income
    4,720       5,004       (284 )     (5.7 )
Consumer brokerage services
    2,663       2,117       546       25.8  
Loan fees and sales
    1,824       1,839       (15 )     (.8 )
Other
    8,365       8,440       (75 )     (.9 )
 
 
Total non-interest income
  $ 95,906     $ 93,189     $ 2,717       2.9 %
 
 
Non-interest income as a % of total revenue*
    37.3 %     36.4 %                
Total revenue per full-time equivalent employee
  $ 53.4     $ 50.2                  
 
 
 
 
* Total revenue includes net interest income and non-interest income.
 
For the first quarter of 2011, total non-interest income amounted to $95.9 million compared with $93.2 million in the same quarter last year, which was an increase of $2.7 million, or 2.9%. Bank card fees for the quarter increased $5.0 million, or 15.3%, over the first quarter of last year, primarily due to strong growth in transaction fees earned on corporate card and debit card transactions, which grew by 31.3% and 10.7%, respectively. Corporate card fees, which totaled $13.4 million this quarter, saw continued growth in transaction volumes from existing customers and activity from new customers. Debit card income in the first quarter of 2011 totaled $14.3 million and reflected continued volume growth. Credit card fees also increased 6.7% over the same quarter last year. Trust fees for the quarter increased $2.3 million, or 11.7%, over the same quarter last year which resulted from double digit growth in both personal and institutional trust business, but continued to be negatively affected by low interest rates on money market investments held in trust accounts. Deposit account fees declined $4.7 million, or 19.5%, from the same period last year due to a $4.3 million decline in overdraft fee income. The reduction in overdraft fees was the result of the Company’s implementation on July 1, 2010 of new overdraft regulations on debit card transactions. Corporate cash management fees, which comprised 41% of total deposit account fees, declined $659 thousand from the previous year. Bond trading income for the current quarter totaled $4.7 million, a decrease of $284 thousand, or 5.7%, due to lower sales volume. Consumer brokerage services revenue increased $546 thousand, or 25.8%, mainly due to growth in advisory, annuity and mutual fund fees. Loan fees and sales revenue totaled $1.8 million this quarter, down slightly from the same period last year, but included revenue only from mortgage banking and commercial loan commitment fees, as the Company exited from the student lending business last year. Other non-interest income for the current quarter decreased slightly from the same quarter last year, and included an impairment charge of $1.0 million on a Kansas City office building which was largely offset by a gain of $924 thousand on the sale of two branch properties in the Company’s Illinois market.
 
Investment Securities Gains (Losses), Net
 
Net gains and losses on investment securities which were recognized in earnings during the three months ended March 31, 2011 and 2010 are shown in the table below. Net securities gains amounted to $1.3 million in the first quarter of 2011, compared to losses of $3.7 million in the same quarter last year. During the current quarter, additional credit-related impairment losses of $274 thousand were recorded on certain non-agency guaranteed mortgage-backed securities which have been identified as other-than-temporarily impaired. These identified securities have a total par value of $169.4 million. The cumulative credit-related impairment loss on these securities, recorded in earnings, amounted to $7.8 million, while the cumulative noncredit-related loss on these securities, which has been recorded in other comprehensive income (loss), was $5.6 million. Also shown below are net gains and losses relating to non-marketable private equity investments, which are primarily held by the Parent’s majority-owned


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venture capital subsidiaries. These include fair value adjustments, in addition to gains and losses realized upon disposition. The portion of this activity attributable to minority interests is reported as non-controlling interest in the consolidated income statement, resulting in expense of $338 thousand during the first quarter of 2011 and income of $425 thousand for the same period last year.
 
                 
   
    Three Months
 
    Ended March 31  
(In thousands)   2011     2010  
   
 
Available for sale:
               
Municipal bonds
  $ 176     $ 408  
OTTI losses on non-agency mortgage-backed bonds
    (274 )     (1,457 )
Non-marketable:
               
Private equity investments
    1,425       (2,616 )
 
 
Total investment securities gains (losses), net
  $ 1,327     $ (3,665 )
 
 
 
Non-Interest Expense
 
                                 
   
    Three Months
    Increase
 
    Ended March 31     (Decrease)  
(Dollars in thousands)   2011     2010     Amount     Percent  
   
 
Salaries and employee benefits
  $ 87,392     $ 87,438     $ (46 )     (.1 )%
Net occupancy
    12,037       12,098       (61 )     (.5 )
Equipment
    5,577       5,901       (324 )     (5.5 )
Supplies and communication
    5,532       7,338       (1,806 )     (24.6 )
Data processing and software
    16,467       16,606       (139 )     (.8 )
Marketing
    4,258       4,718       (460 )     (9.7 )
Deposit insurance
    4,891       4,750       141       3.0  
Indemnification obligation
    (1,359 )           (1,359 )     N.M.  
Other
    19,165       16,875       2,290       13.6  
 
 
Total non-interest expense
  $ 153,960     $ 155,724     $ (1,764 )     (1.1 )%
 
 
 
Non-interest expense for the first quarter of 2011 amounted to $154.0 million, a decrease of $1.8 million, or 1.1%, compared with $155.7 million recorded in the first quarter of last year. In the first quarter of 2011, non-interest expense included an additional $1.4 million reduction in expense related to the Visa indemnification obligation. Salaries and benefits expense was well controlled in the current quarter, decreasing slightly, mainly due to lower salary costs but offset by higher incentive compensation. Full-time equivalent employees totaled 4,814 at March 31, 2011 compared to 5,094 at March 31, 2010. Equipment expense decreased $324 thousand, or 5.5%, from the same quarter last year, mainly due to lower equipment rental expense and lower depreciation expense on data processing equipment. Supplies and communication expense declined $1.8 million, or 24.6%, reflecting a continuation of initiatives to reduce paper supplies, customer checks, and postage costs. Marketing costs decreased $460 thousand, or 9.7%, while FDIC insurance expense increased $141 thousand, or 3.0%. Data processing and software costs decreased slightly, which was mainly the result of lower student loan servicing costs, partly offset by higher bank card processing fees (related to higher bank card revenues). Other non-interest expense increased $2.3 million, or 13.6%, over the same quarter last year and included a termination fee of $910 thousand on the cancellation of a securities resell agreement, expense of $877 thousand related to the donation of appreciated securities to a related charitable foundation, and higher credit card fraud losses. Other non-interest expense also included foreclosed real estate and other repossessed property expense totaling $1.2 million in the current quarter, compared to $1.5 million in the same period last year.


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Provision and Allowance for Loan Losses
 
                         
   
    Three Months Ended  
    Mar. 31
    Mar. 31
    Dec. 31
 
(Dollars in thousands)   2011     2010     2010  
   
 
Provision for loan losses
  $ 15,789     $ 34,322     $ 21,647  
 
 
Net loan charge-offs (recoveries):
                       
Business
    2,010       267       1,514  
Real estate-construction and land
    1,986       10,966       1,589  
Real estate-business
    1,064       431       1,829  
Consumer credit card
    9,038       13,065       9,736  
Consumer
    4,013       5,524       5,295  
Revolving home equity
    367       580       469  
Student
          3        
Real estate-personal
    274       201       961  
Overdrafts
    37       227       254  
 
 
Total net loan charge-offs
  $ 18,789     $ 31,264     $ 21,647  
 
 
 
                         
   
    Three Months Ended  
    Mar. 31
    Mar. 31
    Dec. 31
 
    2011     2010     2010  
   
 
Annualized net loan charge-offs*:
                       
Business
    .27 %     .04 %     .21 %
Real estate-construction and land
    1.78       7.02       1.27  
Real estate-business
    .21       .08       .36  
Consumer credit card
    4.73       6.95       4.97  
Consumer
    1.42       1.71       1.76  
Revolving home equity
    .31       .48       .39  
Real estate-personal
    .08       .05       .26  
Overdrafts
    2.11       12.11       12.49  
 
 
Total annualized net loan charge-offs
    .81 %     1.27 %     .92 %
 
 
 
* as a percentage of average loans (excluding loans held for sale)
 
The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of a specific allowance component based on certain individually evaluated loans and a general component based on estimates of reserves needed for pools of loans.
 
Loans subject to individual evaluation generally consist of business, construction, commercial real estate and personal real estate loans on non-accrual status. These impaired loans are evaluated individually for the impairment of repayment potential and collateral adequacy, and in conjunction with current economic conditions and loss experience, allowances are estimated. Loans which are not individually evaluated are segregated by loan type and sub-type, and are collectively evaluated. These include certain troubled debt restructurings, which are collectively evaluated because they have similar risk characteristics. 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 Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses is based upon various judgments and assumptions made by management. Factors that influence these judgments include past loan loss experience, current loan portfolio composition and characteristics, trends in portfolio risk ratings, levels of non-performing assets, and prevailing regional and national economic


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conditions. The Company has internal credit administration and loan review staffs that continuously review loan quality and report the results of their reviews and examinations to the Company’s senior management and Board of Directors. Such reviews also assist management in establishing the level of the allowance. In using this process and the information available, management must consider various assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these subjective factors, actual outcomes of inherent losses can differ from original estimates. The Company’s subsidiary bank continues to be subject to examination by several regulatory agencies, and examinations are conducted throughout the year, targeting various segments of the loan portfolio for review. Note 1 in the 2010 Annual Report on Form 10-K contains additional discussion on the allowance and charge-off policies.
 
Net loan charge-offs in the first quarter of 2011 amounted to $18.8 million, compared with $21.6 million in the prior quarter and $31.3 million in the first quarter of last year. The $2.9 million decrease in net loan charge-offs in the first quarter of 2011 compared to the previous quarter was mainly the result of lower consumer and consumer credit card loan losses, which decreased by $1.3 million and $698 thousand, respectively, reflecting continued improved delinquency and loss rates. Business real estate net loan charge-offs also declined by $765 thousand. Net loan losses on construction loans increased $397 thousand and totaled $2.0 million during the quarter, reflecting continued weakness in the housing sector and lower collateral values. The ratio of annualized net loan charge-offs to total average loans was .81% in the current quarter compared to .92% in the previous quarter and 1.27% in the same quarter last year.
 
For the first quarter of 2011, annualized net charge-offs on average consumer credit card loans amounted to 4.73%, compared with 4.97% in the previous quarter and 6.95% in the same period last year. Consumer loan net charge-offs for the quarter amounted to 1.42% of average consumer loans, compared to 1.76% in the previous quarter and 1.71% in the same quarter last year.
 
The provision for loan losses for the current quarter totaled $15.8 million, a decrease of $5.9 million from the previous quarter and $18.5 million lower than in the same period last year. The current quarter provision for loan losses was $3.0 million less than net loan charge-offs for the current quarter, thereby reducing the allowance to $194.5 million. At March 31, 2011 the allowance for loan losses was 2.08% of total loans, excluding loans held for sale, and was 250% of total non-accrual loans.
 
Risk Elements of Loan Portfolio
 
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process


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of collection, or they are consumer loans that are exempt under regulatory rules from being classified as non-accrual.
 
                 
   
    March 31
    December 31
 
(Dollars in thousands)   2011     2010  
   
 
Non-accrual loans:
               
Business
  $ 19,799     $ 8,933  
Real estate – construction and land
    35,392       52,752  
Real estate – business
    15,637       16,242  
Real estate – personal
    7,086       7,348  
 
 
Total non-accrual loans
    77,914       85,275  
 
 
Foreclosed real estate
    25,061       12,045  
 
 
Total non-performing assets
  $ 102,975     $ 97,320  
 
 
Non-performing assets as a percentage of total loans
    1.10 %     1.03 %
Non-performing assets as a percentage of total assets
    .54 %     .53 %
 
 
Loans past due 90 days and still accruing interest:
               
Business
  $ 734     $ 854  
Real estate – construction and land
    95       217  
Real estate – business
    26        
Real estate – personal
    3,421       3,554  
Consumer
    2,666       2,867  
Revolving home equity
    725       825  
Consumer credit card
    11,050       12,149  
 
 
Total loans past due 90 days and still accruing interest
  $ 18,717     $ 20,466  
 
 
 
Non-accrual loans, which are also classified as impaired, totaled $77.9 million at March 31, 2011, and decreased $7.4 million from amounts recorded at December 31, 2010. The decline from December 31, 2010 occurred mainly in construction and land real estate non-accrual loans, which decreased $17.4 million, partly offset by an increase of $10.9 million in business loans. At March 31, 2011, non-accrual loans were comprised mainly of construction and land real estate loans (45.4%), business loans (25.4%) and business real estate loans (20.1%). Foreclosed real estate increased $13.0 million to a balance of $25.1 million at March 31, 2011. The overall increase of $5.7 million in total non-performing assets was mainly related to one construction loan participated to several other banks. The balance of this loan totaled $6.0 million, net of participated amounts of $5.9 million, and was on non-accrual status. During the quarter, this loan was foreclosed on, and the full fair value of the property ($11.9 million) was transferred to foreclosed real estate, thus increasing total non-performing assets by the participated amounts. The participating banks’ interest in this property has been recorded as a liability on the Company’s balance sheet.
 
Total loans past due 90 days or more and still accruing interest amounted to $18.7 million as of March 31, 2011, which decreased $1.7 million when compared to December 31, 2010, resulting mainly from a decline in consumer credit card loan delinquencies.
 
In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are primarily classified as substandard under the Company’s internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $259.3 million at March 31, 2011 compared with $233.5 million at December 31, 2010, resulting in an increase of $25.8 million, or 11.1%. The rise was largely


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due to an increase of $9.7 million in business loans, $8.5 million in business real estate loans and $6.4 million in construction and land real estate loans.
 
                 
   
    March 31
    December 31
 
(In thousands)   2011     2010  
   
 
Potential problem loans:
               
Business
  $ 89,355     $ 79,640  
Real estate – construction and land
    57,949       51,589  
Real estate – business
    102,535       94,063  
Real estate – personal
    9,351