e10vk
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended
December 31, 2008 Commission File
No. 0-2989
COMMERCE
BANCSHARES, INC.
(Exact name of registrant as
specified in its charter)
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Missouri
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43-0889454
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(State of Incorporation)
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(IRS Employer Identification No.)
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1000 Walnut,
Kansas City, MO
(Address of principal
executive offices)
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64106
(Zip
Code)
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(816) 234-2000
(Registrants
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of class
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Name of exchange on which
registered
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$5 Par Value Common Stock
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NASDAQ Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
Indicate by check mark if the
Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
As of June 30, 2008, the aggregate market value of the
voting stock held by non-affiliates of the Registrant was
approximately $2,352,000,000.
As of February 11, 2009, there were 75,911,939 shares
of Registrants $5 Par Value Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for
its 2009 annual meeting of shareholders, which will be filed
within 120 days of December 31, 2008, are incorporated
by reference into Part III of this Report.
Commerce
Bancshares, Inc.
Form 10-K
2
PART I
General
Commerce Bancshares, Inc. (the Company), a bank
holding company as defined in the Bank Holding Company Act of
1956, as amended, was incorporated under the laws of Missouri on
August 4, 1966. The Company presently owns all of the
outstanding capital stock of one national banking association,
which is headquartered in Missouri (the Bank).
During 2008, two former banking subsidiaries, located in Kansas
and Nebraska, were merged into the Bank. The Bank engages in
general banking business, providing a broad range of retail,
corporate, investment, trust, and asset management products and
services to individuals and businesses. The Company also owns,
directly or through the Bank, various non-banking subsidiaries.
Their activities include underwriting credit life and credit
accident and health insurance, selling property and casualty
insurance (relating to consumer loans made by the Bank), venture
capital investment, securities brokerage, mortgage banking, and
leasing activities. The Company owns a second tier holding
company that is the direct owner of the Bank. A list of the
Companys subsidiaries is included as Exhibit 21.
The Company is one of the nations top 50 bank holding
companies, based on asset size. At December 31, 2008, the
Company had consolidated assets of $17.5 billion, loans of
$11.6 billion, deposits of $12.9 billion, and
stockholders equity of $1.6 billion. All of the
Companys operations conducted by subsidiaries are
consolidated for purposes of preparing the Companys
consolidated financial statements. The Company does not utilize
unconsolidated subsidiaries or special purpose entities to
provide off-balance sheet borrowings or securitizations.
The Companys goal is to be the preferred provider of
targeted financial services in its communities, based on strong
customer relationships. It believes in building long-term
relationships based on top quality service, high ethical
standards and safe, sound assets. The Company operates under a
super-community banking format with a local orientation,
augmented by experienced, centralized support in select critical
areas. The Companys local market orientation is reflected
in its financial centers and regional advisory boards, which are
comprised of local business persons, professionals and other
community representatives, that assist the Company in responding
to local banking needs. In addition to this local market,
community-based focus, the Company offers sophisticated
financial products available at much larger financial
institutions.
The Banks facilities are located throughout Missouri,
Kansas, and central Illinois, and it entered markets in Tulsa,
Oklahoma and Denver, Colorado during 2007. Its two largest
markets include St. Louis and Kansas City, which serve as
the central hubs for the entire company.
The markets the Bank serves, being located in the lower Midwest,
provide natural sites for production and distribution facilities
and also serve as transportation hubs. The economy has been
well-diversified in these markets with many major industries
represented, including telecommunications, automobile, aircraft
and general manufacturing, health care, numerous service
industries, food production, and agricultural production and
related industries. In addition, several of the Illinois markets
are located in areas with some of the most productive farmland
in the world. The real estate operations of the Bank are
centered in its lower Midwestern markets. Historically, these
markets have generally tended to be less volatile than in other
parts of the country. While a declining national real estate
market has resulted in significantly higher real estate loan
losses in 2008 for the banking industry, the Bank has avoided
much of the market deterioration seen in other areas of the
country.
The Company regularly evaluates the potential acquisition of,
and holds discussions with, various financial institutions
eligible for bank holding company ownership or control. In
addition, the Company regularly considers the potential
disposition of certain of its assets and branches. The Company
seeks merger or acquisition partners that are culturally similar
and have experienced management and possess either significant
market presence or have potential for improved profitability
through financial management, economies of scale and expanded
services. During 2007 the Company completed two acquisitions;
acquiring the outstanding stock of South Tulsa Financial
Corporation, located in Tulsa, Oklahoma, and Commerce
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Bank, located in Denver, Colorado. The Company also completed
two acquisitions in 2006; a purchase and assumption transaction
with Boone National Savings and Loan Association in Columbia,
Missouri, and the acquisition of the outstanding stock of West
Pointe Bancorp, Inc. in Belleville, Illinois. For additional
information on acquisition and branch disposition activity,
refer to pages 18 and 71.
Operating
Segments
The Company is managed in three operating segments. The Consumer
segment includes the retail branch network, consumer installment
lending, personal mortgage banking, bank card activities,
student lending, and discount brokerage services. It provides
services through a network of 217 full-service branches, a
widespread ATM network of 404 machines, and the use of
alternative delivery channels such as extensive online banking
and telephone banking services. In 2008 this retail segment
contributed 52% of total segment pre-tax income. The Commercial
segment provides a full array of corporate lending, leasing, and
international services, as well as business and government
deposit and cash management services. In 2008 it contributed 46%
of total segment pre-tax income. The Money Management segment
provides traditional trust and estate tax planning services, and
advisory and discretionary investment portfolio management
services to both personal and institutional corporate customers.
This segment also manages the Companys family of
proprietary mutual funds, which are available for sale to both
trust and general retail customers. Fixed income investments are
sold to individuals and institutional investors through the
Capital Markets group, which is also included in this segment.
At December 31, 2008 the Money Management segment managed
investments with a market value of $10.9 billion and
administered an additional $8.5 billion in non-managed
assets. Additional information relating to operating segments
can be found on pages 48 and 94.
Supervision
and Regulation
General
The Company, as a bank holding company, is primarily regulated
by the Board of Governors of the Federal Reserve System under
the Bank Holding Company Act of 1956 (BHC Act). Under the BHC
Act, the Federal Reserve Boards prior approval is required
in any case in which the Company proposes to acquire all or
substantially all of the assets of any bank, acquire direct or
indirect ownership or control of more than 5% of the voting
shares of any bank, or merge or consolidate with any other bank
holding company. The BHC Act also prohibits, with certain
exceptions, the Company from acquiring direct or indirect
ownership or control of more than 5% of any class of voting
shares of any non-banking company. Under the BHC Act, the
Company may not engage in any business other than managing and
controlling banks or furnishing certain specified services to
subsidiaries and may not acquire voting control of non-banking
companies unless the Federal Reserve Board determines such
businesses and services to be closely related to banking. When
reviewing bank acquisition applications for approval, the
Federal Reserve Board considers, among other things, the
Banks record in meeting the credit needs of the
communities it serves in accordance with the Community
Reinvestment Act of 1977, as amended (CRA). The Bank has a
current CRA rating of outstanding.
The Company is required to file with the Federal Reserve Board
various reports and such additional information as the Federal
Reserve Board may require. The Federal Reserve Board also makes
regular examinations of the Company and its subsidiaries. The
Companys banking subsidiary is organized as a national
banking association and is subject to regulation, supervision
and examination by the Office of the Comptroller of the Currency
(OCC). The Bank is also subject to regulation by the Federal
Deposit Insurance Corporation (FDIC). In addition, there are
numerous other federal and state laws and regulations which
control the activities of the Company and the Bank, including
requirements and limitations relating to capital and reserve
requirements, permissible investments and lines of business,
transactions with affiliates, loan limits, mergers and
acquisitions, issuance of securities, dividend payments, and
extensions of credit. If the Company fails to comply with these
or other applicable laws and regulations, it may be subject to
civil monetary penalties, imposition of cease and desist orders
or other written directives, removal of management and, in
certain circumstances, criminal penalties. This regulatory
framework is intended primarily for the protection of depositors
and the preservation of the federal deposit insurance funds, and
not for the protection
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of security holders. Statutory and regulatory controls increase
a bank holding companys cost of doing business and limit
the options of its management to employ assets and maximize
income.
In addition to its regulatory powers, the Federal Reserve Bank
impacts the conditions under which the Company operates by its
influence over the national supply of bank credit. The Federal
Reserve Board employs open market operations in
U.S. government securities, changes in the discount rate on
bank borrowings, changes in the federal funds rate on overnight
inter-bank borrowings, and changes in reserve requirements on
bank deposits in implementing its monetary policy objectives.
These instruments are used in varying combinations to influence
the overall level of the interest rates charged on loans and
paid for deposits, the price of the dollar in foreign exchange
markets and the level of inflation. The monetary policies of the
Federal Reserve have a significant effect on the operating
results of financial institutions, most notably on the interest
rate environment. In view of changing conditions in the national
economy and in the money markets, as well as the effect of
credit policies of monetary and fiscal authorities, no
prediction can be made as to possible future changes in interest
rates, deposit levels or loan demand, or their effect on the
financial statements of the Company.
Subsidiary
Bank
Under Federal Reserve policy, the Company is expected to act as
a source of financial strength to its bank subsidiary and to
commit resources to support it in circumstances when it might
not otherwise do so. In addition, any capital loans by a bank
holding company to any of its subsidiary banks are subordinate
in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank
holding companys bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain
the capital of a subsidiary bank will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
Substantially all of the deposits of the Bank are insured up to
the applicable limits by the Bank Insurance Fund of the FDIC.
Until recently these limits were $100,000 per insured depositor
and $250,000 for retirement accounts. The Emergency Economic
Stabilization Act of 2008 (discussed further under
Legislation) temporarily increased the general
depositor limit from $100,000 to $250,000, through
December 31, 2009. The Bank also participates in the
FDICs Transaction Account Guarantee Program. Under that
program, through December 31, 2009, all non-interest
bearing transaction accounts are fully guaranteed by the FDIC
for the entire amount of the account. Coverage under this
program is in addition to and separate from the coverage
available under the FDICs general deposit insurance rules.
The Bank pays deposit insurance premiums to the FDIC based on an
assessment rate established by the FDIC for Bank Insurance Fund
member institutions. The FDIC has established a risk-based
assessment system under which institutions are classified and
pay premiums according to their perceived risk to the federal
deposit insurance funds. The Banks premiums have been
relatively low in recent years. However, the Bank expects
premiums to rise to approximately $15.6 million in 2009, as
the FDIC replenishes the deposit insurance fund in the wake of
recent bank failures and expectations of future failures.
Payment
of Dividends
The principal source of the Companys cash revenues is
dividends paid by the Bank. The Federal Reserve Board may
prohibit the payment of dividends by bank holding companies if
their actions constitute unsafe or unsound practices. The OCC
limits the payment of dividends by the Bank in any calendar year
to the net profit of the current year combined with the retained
net profits of the preceding two years. Permission must be
obtained from the OCC for dividends exceeding these amounts. The
payment of dividends by the Bank may also be affected by factors
such as the maintenance of adequate capital.
Capital
Adequacy
The Company is required to comply with the capital adequacy
standards established by the Federal Reserve. These capital
adequacy guidelines generally require bank holding companies to
maintain minimum total capital equal to 8% of total
risk-adjusted assets and off-balance sheet items (the
Total Risk-Based Capital Ratio), with at least
one-half of that amount consisting of Tier I, or core
capital, and the remaining
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amount consisting of Tier II, or supplementary capital.
Tier I capital for bank holding companies generally
consists of the sum of common shareholders equity,
qualifying non-cumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated
subsidiaries, less goodwill and other non-qualifying intangible
assets. Tier II capital generally consists of hybrid
capital instruments, term subordinated debt and, subject to
limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account
different risk characteristics.
In addition, the Federal Reserve also requires bank holding
companies to comply with minimum leverage ratio requirements.
The leverage ratio is the ratio of a banking organizations
Tier I capital to its total consolidated quarterly average
assets (as defined for regulatory purposes), net of the
allowance for loan losses, goodwill and certain other intangible
assets. The minimum leverage ratio for bank holding companies is
4%. At December 31, 2008 the Bank was
well-capitalized under regulatory capital adequacy
standards, as further discussed on page 97.
Legislation
These laws and regulations are under constant review by various
agencies and legislatures, and are subject to sweeping change.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB
Act) contained major changes in laws that previously kept the
banking industry largely separate from the securities and
insurance industries. The GLB Act authorized the creation of a
new kind of financial institution, known as a financial
holding company and a new kind of bank subsidiary called a
financial subsidiary, which may engage in a broader
range of investment banking, insurance agency, brokerage, and
underwriting activities. The GLB Act also included privacy
provisions that limit banks abilities to disclose
non-public information about customers to non-affiliated
entities. Banking organizations are not required to become
financial holding companies, but instead may continue to operate
as bank holding companies, providing the same services they were
authorized to provide prior to the enactment of the GLB Act.
The Company must also comply with the requirements of the Bank
Secrecy Act (BSA). The BSA is designed to help fight drug
trafficking, money laundering, and other crimes. Compliance is
monitored by the OCC. The BSA was enacted to prevent banks and
other financial service providers from being used as
intermediaries for, or to hide the transfer or deposit of money
derived from, criminal activity. Since its passage, the BSA has
been amended several times. These amendments include the Money
Laundering Control Act of 1986 which made money laundering a
criminal act, as well as the Money Laundering Suppression Act of
1994 which required regulators to develop enhanced examination
procedures and increased examiner training to improve the
identification of money laundering schemes in financial
institutions.
In 2001, the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (USA Patriot Act) was signed into law. The USA
Patriot Act substantially broadened the scope of
U.S. anti-money laundering laws and regulations by imposing
significant new compliance and due diligence obligations,
creating new crimes and penalties and expanding the
extra-territorial jurisdiction of the United States. The
U.S. Treasury department issued a number of regulations
implementing the USA Patriot Act that apply certain of its
requirements to financial institutions such as the
Companys broker-dealer subsidiary. The regulations impose
obligations on financial institutions to maintain appropriate
policies, procedures and controls to detect, prevent and report
money laundering and terrorist financing.
In October 2008, the Emergency Economic Stabilization Act of
2008 was enacted in response to a global financial crisis
spurred by frozen credit markets, institution failures and loss
of investor confidence. Under the Act, the Troubled Asset Relief
Program (TARP) was created, which authorizes the
U.S. Treasury department to spend up to $700 billion
to purchase distressed assets and make capital injections into
banks. The stated goal of TARP is to improve the liquidity of
targeted illiquid, difficult-to-value assets by purchasing them
from banks and other financial institutions. Another important
goal of TARP is to encourage banks to resume lending again at
levels seen before the crisis, loosening credit and improving
the market order and investor confidence. The first
$350 billion of TARP funds were primarily used to buy
preferred stock and warrants of bank applicants. The Company
studied the program and made a business decision not to apply
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for funds under the TARP, believing its earnings, capital and
liquidity were strong and sufficient to grow its business in the
current challenging banking environment.
As mentioned earlier, the Company has chosen to participate in
the FDICs Temporary Liquidity Guarantee Program. Under
this program, the Company may in future issue senior unsecured
debt whose principal and interest payments would be guaranteed
by the FDIC. All newly issued debt must be issued on or before
June 30, 2009 to be covered. The expiration date of the
FDICs guarantee is the earlier of the maturity date of the
debt or June 30, 2012. The Company has not issued debt
under the program. Its debt guarantee limit is 2% of
consolidated total liabilities, or approximately
$300 million.
Competition
The Companys locations in regional markets throughout
Missouri, Kansas, central Illinois, Tulsa, Oklahoma, and Denver,
Colorado, face intense competition from hundreds of financial
service providers. The Company competes with national and state
banks for deposits, loans and trust accounts, and with savings
and loan associations and credit unions for deposits and
consumer lending products. In addition, the Company competes
with other financial intermediaries such as securities brokers
and dealers, personal loan companies, insurance companies,
finance companies, and certain governmental agencies. The
passage of the GLB Act, which removed barriers between banking
and the securities and insurance industries, has resulted in
greater competition among these industries. The Company
generally competes on the basis of customer services and
responsiveness to customer needs, interest rates on loans and
deposits, lending limits and customer convenience, such as
location of offices.
Employees
The Company and its subsidiaries employed 4,666 persons on
a full-time basis and 674 persons on a part-time basis at
December 31, 2008. The Company provides a variety of
benefit programs including a 401K plan as well as group life,
health, accident, and other insurance. The Company also
maintains training and educational programs designed to prepare
employees for positions of increasing responsibility.
Available
Information
The Companys principal offices are located at 1000 Walnut,
Kansas City, Missouri (telephone number
816-234-2000).
The Company makes available free of charge, through its web site
at www.commercebank.com, reports filed with the Securities and
Exchange Commission as soon as reasonably practicable after the
electronic filing. These filings include the annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports.
Statistical
Disclosure
The information required by Securities Act Guide 3
Statistical Disclosure by Bank Holding Companies is
located on the pages noted below.
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Page
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I.
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Distribution of Assets, Liabilities and Stockholders
Equity; Interest Rates and Interest Differential
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21, 56-59
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II.
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Investment Portfolio
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37-39,
75-79
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III.
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Loan Portfolio
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Types of Loans
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26
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Maturities and Sensitivities of Loans to Changes in Interest
Rates
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27
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Risk Elements
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33-37
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IV.
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Summary of Loan Loss Experience
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30-33
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V.
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Deposits
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56-57,
81-82
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VI.
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Return on Equity and Assets
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16
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VII.
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Short-Term Borrowings
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82-83
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Making or continuing an investment in securities issued by
Commerce Bancshares, Inc., including its common stock, involves
certain risks that you should carefully consider. The risks and
uncertainties described below are not the only risks that may
have a material adverse effect on the Company. Additional risks
and uncertainties also could adversely affect its business and
financial results. If any of the following risks actually occur,
its business, financial condition or results of operations could
be negatively affected, the market price for your securities
could decline, and you could lose all or a part of your
investment. Further, to the extent that any of the information
contained in this Annual Report on
Form 10-K
constitutes forward-looking statements, the risk factors set
forth below also are cautionary statements identifying important
factors that could cause the Companys actual results to
differ materially from those expressed in any forward-looking
statements made by or on behalf of Commerce Bancshares, Inc.
Difficult
market conditions have adversely affected the Companys
industry and may continue to do so.
Given the concentration of the Companys banking business
in the United States, it is particularly exposed to downturns in
the U.S. economy. Recent dramatic declines in the housing
market, falling home prices, increasing foreclosures,
unemployment and under-employment, have negatively impacted the
credit performance of mortgage loans and resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities, as well as major commercial and
investment banks. These write-downs, initially of
mortgage-backed securities but spreading to other complex
financial instruments and various classes of loans, in turn,
have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in
some cases, to fail. Reflecting concern about the stability of
the financial markets generally and the strength of
counterparties, many lenders and institutional investors have
reduced or ceased to provide funding to borrowers, including to
other financial institutions. This market turmoil and tightening
of credit have led to an increased level of commercial and
consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity
generally. The resulting economic pressure on consumers and lack
of confidence in the financial markets has adversely affected
our business, financial condition and results of operations.
Management does not expect that the difficult conditions in the
financial markets are likely to improve in the near future and
could likely worsen, further negatively affecting the
Companys financial results. In particular, the Company may
face the following risks in connection with these events:
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The Company may face increased regulation of the industry,
including as a result of the Emergency Economic Stabilization
Act of 2008. Compliance with such regulation may increase costs
and limit the ability to pursue business opportunities.
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Market developments may affect consumer confidence levels and
may cause declines in consumer credit usage and adverse changes
in payment patterns, causing increases in delinquencies and
default rates. These could impact the Companys loan losses
and provision for loan losses, as a significant part of the
Companys business includes consumer and credit card
lending.
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Reduced levels of economic activity may cause declines in
financial service transactions and the fees earned by the
Company on such transactions.
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The Companys ability to assess the creditworthiness of its
customers may be impaired if the models and approaches it uses
to select, manage, and underwrite its customers become less
predictive of future behaviors.
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The process used to estimate losses inherent in the
Companys credit exposure requires difficult, subjective,
and complex judgments, including forecasts of economic
conditions and how these economic predictions might impair the
ability of its borrowers to repay their loans, which may no
longer be capable of accurate estimation which may, in turn,
impact the reliability of the process.
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Competition in the industry could intensify as a result of the
increasing consolidation of financial services companies in
connection with current market conditions.
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The Company may be required to pay significantly higher Federal
Deposit Insurance Corporation premiums because market
developments have significantly depleted the insurance fund of
the FDIC and reduced the ratio of reserves to insured deposits.
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The
performance of the Company is dependent on the economic
conditions of the markets in which the Company operates.
The Companys success is heavily influenced by the general
economic conditions of the specific markets in which it
operates. Unlike larger national or other regional banks that
are more geographically diversified, the Company provides
financial services primarily throughout the states of Missouri,
Kansas, and central Illinois, and has recently begun to expand
into Oklahoma, Colorado and other surrounding states. Since the
Company does not have significant presence in other parts of the
country, a prolonged economic downturn in these markets could
have a material adverse effect on the Companys financial
condition and results of operations.
The
soundness of other financial institutions could adversely affect
the Company.
The Companys ability to engage in routine funding
transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading,
clearing, counterparty or other relationships. The Company has
exposure to many different industries and counterparties, and
routinely executes transactions with counterparties in the
financial industry, including brokers and dealers, commercial
banks, investment banks, mutual funds, and other institutional
clients. Transactions with these institutions include overnight
and term borrowings, interest rate swap agreements, securities
purchased and sold, short-term investments, and other such
transactions. As a result of this exposure, defaults by, or even
rumors or questions about, one or more financial services
institutions, or the financial services industry generally, have
led to market-wide liquidity problems and could lead to losses
or defaults by the Company or by other institutions. Many of
these transactions expose the Company to credit risk in the
event of default of its counterparty or client, while other
transactions expose the Company to liquidity risks should
funding sources quickly disappear. In addition, the
Companys credit risk may be exacerbated when the
collateral held cannot be realized upon or is liquidated at
prices not sufficient to recover the full amount of the
financial instrument exposure due to the Company. There is no
assurance that any such losses would not materially and
adversely affect results of operations.
Liquidity
is essential to the Companys businesses and it relies on
the securities market and other external sources to finance a
significant portion of its operations.
Liquidity affects the Companys ability to meet its
financial commitments. The Companys main source of funding
comes from customer deposits, which comprise 82% of its total
funding at December 31, 2008. The Companys other
funding sources include the Federal Home Loan Bank and other
wholesale providers. Its liquidity could be negatively affected
if these funding sources diminish or cease to be available.
Factors that the Company cannot control, such as disruption of
the financial markets or negative views about the general
financial services industry could impair its ability to raise or
maintain funding. If it is unable to raise funding, it would
likely need to sell assets, such as its investment and trading
portfolios, to meet maturing liabilities. The Company may be
unable to sell some of its assets on a timely basis, or it may
have to sell assets at a discount from market value, either of
which could adversely affect results of operations. The
Companys liquidity and funding policies have been designed
to ensure that it maintains sufficient liquid financial
resources to continue to conduct its business for an extended
period in a stressed liquidity environment. If its liquidity and
funding policies are not adequate, it may be unable to access
sufficient financing to service its financial obligations when
they come due, which could have a material adverse franchise or
business impact. See Liquidity and Capital Resources
in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, of this report
for a discussion of how the Company monitors and manages
liquidity risk.
9
The
Companys asset valuation may include methodologies,
estimations and assumptions which are subject to differing
interpretations and could result in changes to asset valuations
that may materially adversely affect its results of operations
or financial condition.
The Company uses estimates, assumptions, and judgments when
financial assets and liabilities are measured and reported at
fair value. Assets and liabilities carried at fair value
inherently result in a higher degree of financial statement
volatility. Fair values and the information used to record
valuation adjustments for certain assets and liabilities are
based on quoted market prices
and/or other
observable inputs provided by independent third-party sources,
when available. When such third-party information is not
available, fair value is estimated primarily by using cash flow
and other financial modeling techniques utilizing assumptions
such as credit quality, liquidity, interest rates and other
relevant inputs. Changes in underlying factors, assumptions, or
estimates in any of these areas could materially impact the
Companys future financial condition and results of
operations.
During periods of market disruption, including periods of
significantly rising or high interest rates, rapidly widening
credit spreads or illiquidity, it may be difficult to value
certain assets if trading becomes less frequent
and/or
market data becomes less observable. There may be certain asset
classes that were in active markets with significant observable
data that become illiquid due to the current financial
environment. In such cases, certain asset valuations may require
more subjectivity and management judgment. As such, valuations
may include inputs and assumptions that are less observable or
require greater estimation. Further, rapidly changing and
unprecedented credit and equity market conditions could
materially impact the valuation of assets as reported within our
consolidated financial statements and the period-to-period
changes in value could vary significantly. Decreases in value
may have a material adverse effect on results of operations or
financial condition.
Valuation methodologies which are particularly susceptible to
the conditions mentioned above include those used to value
certain securities in the Companys available for sale
investment portfolio such as auction rate securities and
non-agency mortgage and asset-backed securities, in addition to
non-marketable private equity securities, loans held for sale
and intangible assets.
The
Companys investment portfolio values may be adversely
impacted by changing interest rates and deterioration in the
credit quality of underlying collateral within mortgage and
other asset-backed investment securities.
The Company generally invests in securities issued by
government-backed agencies or privately issued securities that
are highly rated by credit rating agencies at the time of
purchase, but are subject to changes in market value due to
changing interest rates and implied credit spreads. Certain
mortgage and asset-backed securities represent beneficial
interests which are collateralized by residential mortgages,
credit cards, automobiles, mobile homes or other assets. While
these investment securities are highly rated at the time of
initial investment, the value of these securities may decline
significantly due to actual or expected deterioration in the
underlying collateral, especially residential mortgage
collateral. Recent market conditions have seen deterioration in
fair values for certain types of non-guaranteed mortgage-backed
securities. Furthermore, under impairment accounting rules,
securities that are determined to have some level of
other-than-temporary impairment due to declining expected cash
flows, etc., are required to be adjusted to fair value through
current earnings, which could result in significant non-cash
losses beyond calculated impairments.
The
Company is subject to interest rate risk.
The Companys net interest income is the largest source of
overall revenue to the Company, representing 61% of total
revenue. Interest rates are beyond the Companys control,
and they fluctuate in response to general economic conditions
and the policies of various governmental and regulatory
agencies, in particular, the Federal Reserve Board. Changes in
monetary policy, including changes in interest rates, will
influence the origination of loans, the purchase of investments,
the generation of deposits, and the rates received on loans and
investment securities and paid on deposits. Management believes
it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in
interest rates on the
10
Companys results of operations. However, any substantial,
prolonged change in market interest rates could have a material
adverse effect on the Companys financial condition and
results of operations.
Future
loan losses could increase.
The Company maintains an allowance for loan losses that
represents managements best estimate of probable losses
that have been incurred at the balance sheet date within the
existing portfolio of loans. The level of the allowance reflects
managements continuing evaluation of industry
concentrations, specific credit risks, loan loss experience,
current loan portfolio quality, present economic, political and
regulatory conditions and unidentified losses inherent in the
current loan portfolio. The Company has seen significant
increases in losses in its loan portfolio, particularly in
residential construction, consumer, and credit card loans, due
to the deterioration in the housing industry and general
economic conditions. Until the housing sector and overall
economy begin to recover, it is likely that these losses will
continue. While the Companys credit loss ratios remain
below industry averages, continued economic deterioration and
further loan losses may negatively affect its results of
operations and could further increase levels of its allowance.
In addition, the Companys allowance level is subject to
review by regulatory agencies, that could require adjustments to
the allowance. See the section captioned Allowance for
Loan Losses in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations,
of this report for further discussion related to the
Companys process for determining the appropriate level of
the allowance for possible loan loss.
The
Company operates in a highly competitive industry and market
area.
The Company operates in the financial services industry, a
rapidly changing environment having numerous competitors
including other banks and insurance companies, securities
dealers, brokers, trust and investment companies and mortgage
bankers. The pace of consolidation among financial service
providers is accelerating and there are many new changes in
technology, product offerings and regulation. New entrants
offering competitive products continually penetrate our markets.
The Company must continue to make investments in its products
and delivery systems to stay competitive with the industry as a
whole or its financial performance may suffer.
The
Companys reputation and future growth prospects could be
impaired if events occurred which breached our customers
privacy.
The Company relies heavily on communications and information
systems to conduct its business, and as part of our business we
maintain significant amounts of data about our customers and the
products they use. While the Company has policies and procedures
designed to prevent or limit the effect of failure, interruption
or security breach of its information systems, there can be no
assurances that any such failures, interruptions or security
breaches will not occur, or if they do occur, that they will be
adequately addressed. Should any of these systems become
compromised, the reputation of the Company could be damaged,
relationships with existing customers impaired and result in
lost business and incur significant expenses trying to remedy
the compromise.
The
Company may not attract and retain skilled employees.
The Companys success depends, in large part, on its
ability to attract and retain key people. Competition for the
best people in most activities engaged in by the Company can be
intense, and the Company spends considerable time and resources
attracting and hiring qualified people for its various business
lines and support units. The unexpected loss of the services of
one or more of the Companys key personnel could have a
material adverse impact on the Companys business because
of their skills, knowledge of the Companys market, years
of industry experience, and the difficulty of promptly finding
qualified replacement personnel.
|
|
Item 1b.
|
UNRESOLVED
STAFF COMMENTS
|
None
11
The main offices of the Bank are located in the larger
metropolitan areas of its markets in various multi-story office
buildings. The Bank owns its main offices and leases unoccupied
premises to the public. The larger offices include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rentable
|
|
|
% occupied
|
|
|
% occupied
|
|
Building
|
|
square footage
|
|
|
in total
|
|
|
by bank
|
|
|
|
|
922 Walnut
|
|
|
256,000
|
|
|
|
95
|
%
|
|
|
93
|
%
|
Kansas City, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
1000 Walnut
|
|
|
403,000
|
|
|
|
82
|
|
|
|
36
|
|
Kansas City, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
811 Main
|
|
|
237,000
|
|
|
|
100
|
|
|
|
100
|
|
Kansas City, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
8000 Forsyth
|
|
|
178,000
|
|
|
|
95
|
|
|
|
92
|
|
Clayton, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
1551 N. Waterfront
|
|
|
|
|
|
|
|
|
|
|
|
|
Pkwy
|
|
|
120,000
|
|
|
|
100
|
|
|
|
32
|
|
Wichita, KS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank leases offices in Omaha, Nebraska which house its
credit card operations. Additionally, certain other installment
loan, trust and safe deposit functions operate out of leased
offices in downtown Kansas City. The Company has an additional
211 branch locations in Missouri, Illinois, Kansas, Oklahoma and
Colorado which are owned or leased, and 151 off-site ATM
locations.
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
The information required by this item is set forth in
Item 8 under Note 19, Commitments, Contingencies and
Guarantees on page 107.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted during the fourth quarter of 2008 to a
vote of security holders through the solicitation of proxies or
otherwise.
Executive
Officers of the Registrant
The following are the executive officers of the Company, each of
whom is designated annually, and there are no arrangements or
understandings between any of the persons so named and any other
person pursuant to which such person was designated an executive
officer.
|
|
|
|
Name and Age
|
|
Positions with Registrant
|
|
|
Jeffery D. Aberdeen, 55
|
|
Controller of the Company since December 1995. Prior thereto he
was Assistant Controller of the Company. He is Controller of the
Companys subsidiary bank, Commerce Bank, N.A.
|
|
|
|
Kevin G. Barth, 48
|
|
Executive Vice President of the Company since April 2005 and
Executive Vice President of Commerce Bank, N.A. since October
1998. Senior Vice President of the Company and Officer of
Commerce Bank, N.A. prior thereto.
|
|
|
|
A. Bayard Clark, 63
|
|
Chief Financial Officer and Executive Vice President of the
Company since December 1995. Executive Vice President of the
Company prior thereto. Treasurer of the Company from December
1995 until February 2007.
|
12
|
|
|
|
Name and Age
|
|
Positions with Registrant
|
|
|
|
|
|
Sara E. Foster, 48
|
|
Senior Vice President of the Company since February 1998 and
Vice President of the Company prior thereto.
|
|
|
|
David W. Kemper, 58
|
|
Chairman of the Board of Directors of the Company since November
1991, Chief Executive Officer of the Company since June 1986,
and President of the Company since April 1982. He is Chairman of
the Board, President and Chief Executive Officer of Commerce
Bank, N.A. He is the son of James M. Kemper, Jr. (a former
Director and former Chairman of the Board of the Company) and
the brother of Jonathan M. Kemper, Vice Chairman of the Company.
|
|
|
|
Jonathan M. Kemper, 55
|
|
Vice Chairman of the Company since November 1991 and Vice
Chairman of Commerce Bank, N.A. since December 1997. Prior
thereto, he was Chairman of the Board, Chief Executive Officer,
and President of Commerce Bank, N.A. He is the son of James M.
Kemper, Jr. (a former Director and former Chairman of the Board
of the Company) and the brother of David W. Kemper, Chairman,
President, and Chief Executive Officer of the Company.
|
|
|
|
Charles G. Kim, 48
|
|
Executive Vice President of the Company since April 1995 and
Executive Vice President of Commerce Bank, N.A. since January
2004. Prior thereto, he was Senior Vice President of Commerce
Bank, N.A. (Clayton, MO), a former subsidiary of the Company.
|
|
|
|
Seth M. Leadbeater, 58
|
|
Vice Chairman of the Company since January 2004. Prior thereto
he was Executive Vice President of the Company. He has been Vice
Chairman of Commerce Bank, N.A. since September 2004. Prior
thereto he was Executive Vice President of Commerce Bank, N.A.
and President of Commerce Bank, N.A. (Clayton, MO).
|
|
|
|
Robert C. Matthews, Jr., 61
|
|
Executive Vice President of the Company since December 1989.
Executive Vice President of Commerce Bank, N.A. since December
1997.
|
|
|
|
Michael J. Petrie, 52
|
|
Senior Vice President of the Company since April 1995. Prior
thereto, he was Vice President of the Company.
|
|
|
|
Robert J. Rauscher, 51
|
|
Senior Vice President of the Company since October 1997. Senior
Vice President of Commerce Bank, N.A. prior thereto.
|
|
|
|
V. Raymond Stranghoener, 57
|
|
Executive Vice President of the Company since July 2005 and
Senior Vice President of the Company prior thereto. Prior to his
employment with the Company in October 1999, he was employed at
BankAmerica Corp. as National Executive of the Bank of America
Private Bank Wealth Strategies Group. He joined Boatmens
Trust Company in 1993, which subsequently merged with
BankAmerica Corp.
|
13
PART II
|
|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Commerce
Bancshares, Inc.
Common
Stock Data
The following table sets forth the high and low prices of actual
transactions for the Companys common stock and cash
dividends paid for the periods indicated (restated for the 5%
stock dividend distributed in December 2008).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
|
|
2008
|
|
First
|
|
$
|
43.43
|
|
|
$
|
36.19
|
|
|
$
|
.238
|
|
|
|
Second
|
|
|
43.49
|
|
|
|
37.55
|
|
|
|
.238
|
|
|
|
Third
|
|
|
50.47
|
|
|
|
34.76
|
|
|
|
.238
|
|
|
|
Fourth
|
|
|
52.86
|
|
|
|
35.44
|
|
|
|
.238
|
|
|
|
2007
|
|
First
|
|
$
|
46.05
|
|
|
$
|
42.26
|
|
|
$
|
.227
|
|
|
|
Second
|
|
|
44.37
|
|
|
|
40.51
|
|
|
|
.227
|
|
|
|
Third
|
|
|
43.90
|
|
|
|
39.26
|
|
|
|
.227
|
|
|
|
Fourth
|
|
|
44.11
|
|
|
|
39.96
|
|
|
|
.227
|
|
|
|
2006
|
|
First
|
|
$
|
45.38
|
|
|
$
|
42.45
|
|
|
$
|
.212
|
|
|
|
Second
|
|
|
45.96
|
|
|
|
42.62
|
|
|
|
.212
|
|
|
|
Third
|
|
|
44.27
|
|
|
|
41.99
|
|
|
|
.212
|
|
|
|
Fourth
|
|
|
45.90
|
|
|
|
41.36
|
|
|
|
.212
|
|
|
|
Commerce Bancshares, Inc. common shares are listed on the Nasdaq
Global Select Market under the symbol CBSH. The Company had
4,512 shareholders of record as of December 31, 2008.
The following table sets forth information about the
Companys purchases of its $5 par value common stock,
its only class of stock registered pursuant to Section 12
of the Exchange Act, during the fourth quarter of 2008. This
information has not been restated for the 5% stock dividend in
December 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Shares Purchased
|
|
|
Maximum Number that
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
as Part of Publicly
|
|
|
May Yet Be Purchased
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Announced Program
|
|
|
Under the Program
|
|
|
|
|
October 1 31, 2008
|
|
|
566
|
|
|
$
|
53.97
|
|
|
|
566
|
|
|
|
2,903,380
|
|
November 1 30, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,903,380
|
|
December 1 31, 2008
|
|
|
25,828
|
|
|
$
|
39.98
|
|
|
|
25,828
|
|
|
|
2,877,552
|
|
|
|
Total
|
|
|
26,394
|
|
|
$
|
40.28
|
|
|
|
26,394
|
|
|
|
2,877,552
|
|
|
|
The Companys stock purchases shown above were made under a
3,000,000 share authorization by the Board of Directors on
February 1, 2008. Under this authorization,
2,877,552 shares remained available for purchase at
December 31, 2008.
14
Performance
Graph
The following graph presents a comparison of Company (CBSH)
performance to the indices named below. It assumes $100 invested
on December 31, 2003 with dividends invested on a Total
Return basis.
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The required information is set forth below in Item 7.
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
Overview
Commerce Bancshares, Inc. (the Company) operates as a
super-community bank offering an array of sophisticated
financial products delivered with high-quality, personal
customer service. It is the largest bank holding company
headquartered in Missouri, with its principal offices in Kansas
City and St. Louis, Missouri. Customers are served from
approximately 360 locations in Missouri, Kansas, Illinois,
Oklahoma and Colorado using delivery platforms which include an
extensive network of branches and ATM machines, full-featured
online banking, and a central contact center.
15
The core of the Companys competitive advantage is its
focus on the local markets it services and its concentration on
relationship banking, with high service levels and competitive
products. In order to enhance shareholder value, the Company
grows its core revenue by expanding new and existing customer
relationships, utilizing improved technology, and enhancing
customer satisfaction.
Various indicators are used by management in evaluating the
Companys financial condition and operating performance.
Among these indicators are the following:
|
|
|
|
|
Growth in earnings per share Diluted earnings per
share declined 7.8% in 2008 compared to 2007.
|
|
|
|
Growth in total revenue Total revenue is comprised
of net interest income and non-interest income. Total revenue in
2008 grew 6.5% over 2007, which resulted from growth of
$54.7 million, or 10.2%, in net interest income coupled
with growth of $4.1 million, or 1.1%, in non-interest
income. Total revenue has risen 3.9%, compounded annually, over
the last five years.
|
|
|
|
Expense control Non-interest expense grew by 7.2%
this year. Salaries and employee benefits, the largest expense
component, grew by 8.0%, partly due to increased staffing in
areas such as commercial bank card, private banking, and
commercial banking, which were part of certain growth
initiatives established by the Company in 2007.
|
|
|
|
Asset quality Net loan charge-offs in 2008 increased
$27.1 million over those recorded in 2007, and averaged
.64% of loans compared to .42% in the previous year. Total
non-performing assets amounted to $79.1 million, an
increase of $45.7 million over balances at the previous
year end, and represented .70% of loans outstanding.
|
|
|
|
Shareholder return Total shareholder return,
including the change in stock price and dividend reinvestment,
was 4.8% over the past 5 years and 7.3% over the past
10 years.
|
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and
related notes. The historical trends reflected in the financial
information presented below are not necessarily reflective of
anticipated future results.
Key
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based on average balance sheets):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Return on total assets
|
|
|
1.15
|
%
|
|
|
1.33
|
%
|
|
|
1.54
|
%
|
|
|
1.60
|
%
|
|
|
1.56
|
%
|
Return on stockholders equity
|
|
|
11.83
|
|
|
|
14.00
|
|
|
|
15.96
|
|
|
|
16.19
|
|
|
|
15.19
|
|
Tier I capital ratio
|
|
|
10.92
|
|
|
|
10.31
|
|
|
|
11.25
|
|
|
|
12.21
|
|
|
|
12.21
|
|
Total capital ratio
|
|
|
12.31
|
|
|
|
11.49
|
|
|
|
12.56
|
|
|
|
13.63
|
|
|
|
13.57
|
|
Leverage ratio
|
|
|
9.06
|
|
|
|
8.76
|
|
|
|
9.05
|
|
|
|
9.43
|
|
|
|
9.60
|
|
Equity to total assets
|
|
|
9.69
|
|
|
|
9.54
|
|
|
|
9.68
|
|
|
|
9.87
|
|
|
|
10.25
|
|
Non-interest income to revenue*
|
|
|
38.80
|
|
|
|
40.85
|
|
|
|
40.72
|
|
|
|
40.03
|
|
|
|
38.84
|
|
Efficiency ratio**
|
|
|
63.16
|
|
|
|
62.72
|
|
|
|
60.55
|
|
|
|
59.30
|
|
|
|
59.16
|
|
Loans to deposits***
|
|
|
92.11
|
|
|
|
88.49
|
|
|
|
84.73
|
|
|
|
81.34
|
|
|
|
78.71
|
|
Net yield on interest earning assets (tax equivalent basis)
|
|
|
3.93
|
|
|
|
3.80
|
|
|
|
3.92
|
|
|
|
3.89
|
|
|
|
3.81
|
|
Non-interest bearing deposits to total deposits
|
|
|
5.47
|
|
|
|
5.45
|
|
|
|
5.78
|
|
|
|
6.23
|
|
|
|
12.47
|
|
Cash dividend payout ratio
|
|
|
38.39
|
|
|
|
33.76
|
|
|
|
30.19
|
|
|
|
28.92
|
|
|
|
28.26
|
|
|
|
|
|
|
* |
|
Revenue includes net interest
income and non-interest income. |
|
** |
|
The efficiency ratio is
calculated as non-interest expense (excluding intangibles
amortization) as a percent of revenue. |
|
*** |
|
Includes loans held for
sale. |
16
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Net interest income
|
|
$
|
592,739
|
|
|
$
|
538,072
|
|
|
$
|
513,199
|
|
|
$
|
501,702
|
|
|
$
|
497,331
|
|
Provision for loan losses
|
|
|
108,900
|
|
|
|
42,732
|
|
|
|
25,649
|
|
|
|
28,785
|
|
|
|
30,351
|
|
Non-interest income
|
|
|
375,712
|
|
|
|
371,581
|
|
|
|
352,586
|
|
|
|
334,837
|
|
|
|
315,839
|
|
Investment securities gains, net
|
|
|
30,294
|
|
|
|
8,234
|
|
|
|
9,035
|
|
|
|
6,362
|
|
|
|
11,092
|
|
Non-interest expense
|
|
|
616,113
|
|
|
|
574,758
|
|
|
|
525,425
|
|
|
|
496,522
|
|
|
|
482,769
|
|
Net income
|
|
|
188,655
|
|
|
|
206,660
|
|
|
|
219,842
|
|
|
|
223,247
|
|
|
|
220,341
|
|
Net income per share-basic*
|
|
|
2.50
|
|
|
|
2.72
|
|
|
|
2.84
|
|
|
|
2.77
|
|
|
|
2.59
|
|
Net income per share-diluted*
|
|
|
2.48
|
|
|
|
2.69
|
|
|
|
2.80
|
|
|
|
2.73
|
|
|
|
2.55
|
|
Cash dividends
|
|
|
72,055
|
|
|
|
68,915
|
|
|
|
65,758
|
|
|
|
63,421
|
|
|
|
61,135
|
|
Cash dividends per share*
|
|
|
.952
|
|
|
|
.907
|
|
|
|
.847
|
|
|
|
.790
|
|
|
|
.721
|
|
Market price per share*
|
|
|
43.95
|
|
|
|
42.72
|
|
|
|
43.91
|
|
|
|
45.02
|
|
|
|
41.30
|
|
Book value per share*
|
|
|
20.80
|
|
|
|
20.26
|
|
|
|
18.70
|
|
|
|
17.09
|
|
|
|
17.20
|
|
Common shares outstanding*
|
|
|
75,791
|
|
|
|
75,386
|
|
|
|
77,123
|
|
|
|
78,266
|
|
|
|
82,967
|
|
Total assets
|
|
|
17,532,447
|
|
|
|
16,204,831
|
|
|
|
15,230,349
|
|
|
|
13,885,545
|
|
|
|
14,250,368
|
|
Loans, including held for sale
|
|
|
11,644,544
|
|
|
|
10,841,264
|
|
|
|
9,960,118
|
|
|
|
8,899,183
|
|
|
|
8,305,359
|
|
Investment securities
|
|
|
3,780,116
|
|
|
|
3,297,015
|
|
|
|
3,496,323
|
|
|
|
3,770,181
|
|
|
|
4,837,368
|
|
Deposits
|
|
|
12,894,733
|
|
|
|
12,551,552
|
|
|
|
11,744,854
|
|
|
|
10,851,813
|
|
|
|
10,434,309
|
|
Long-term debt
|
|
|
1,447,781
|
|
|
|
1,083,636
|
|
|
|
553,934
|
|
|
|
269,390
|
|
|
|
389,542
|
|
Stockholders equity
|
|
|
1,576,632
|
|
|
|
1,527,686
|
|
|
|
1,442,114
|
|
|
|
1,337,838
|
|
|
|
1,426,880
|
|
Non-performing assets
|
|
|
79,077
|
|
|
|
33,417
|
|
|
|
18,223
|
|
|
|
11,713
|
|
|
|
18,775
|
|
|
|
|
|
|
* |
|
Restated for the 5% stock
dividend distributed in December 2008. |
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change
|
|
|
% Change
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
08-07
|
|
|
07-06
|
|
|
08-07
|
|
|
07-06
|
|
|
|
|
Net interest income
|
|
$
|
592,739
|
|
|
$
|
538,072
|
|
|
$
|
513,199
|
|
|
$
|
54,667
|
|
|
$
|
24,873
|
|
|
|
10.2
|
%
|
|
|
4.8
|
%
|
Provision for loan losses
|
|
|
(108,900
|
)
|
|
|
(42,732
|
)
|
|
|
(25,649
|
)
|
|
|
66,168
|
|
|
|
17,083
|
|
|
|
154.8
|
|
|
|
66.6
|
|
Non-interest income
|
|
|
375,712
|
|
|
|
371,581
|
|
|
|
352,586
|
|
|
|
4,131
|
|
|
|
18,995
|
|
|
|
1.1
|
|
|
|
5.4
|
|
Investment securities gains, net
|
|
|
30,294
|
|
|
|
8,234
|
|
|
|
9,035
|
|
|
|
22,060
|
|
|
|
(801
|
)
|
|
|
267.9
|
|
|
|
(8.9
|
)
|
Non-interest expense
|
|
|
(616,113
|
)
|
|
|
(574,758
|
)
|
|
|
(525,425
|
)
|
|
|
41,355
|
|
|
|
49,333
|
|
|
|
7.2
|
|
|
|
9.4
|
|
Income taxes
|
|
|
(85,077
|
)
|
|
|
(93,737
|
)
|
|
|
(103,904
|
)
|
|
|
(8,660
|
)
|
|
|
(10,167
|
)
|
|
|
(9.2
|
)
|
|
|
(9.8
|
)
|
|
|
Net income
|
|
$
|
188,655
|
|
|
$
|
206,660
|
|
|
$
|
219,842
|
|
|
$
|
(18,005
|
)
|
|
$
|
(13,182
|
)
|
|
|
(8.7
|
)%
|
|
|
(6.0
|
)%
|
|
|
For the year ended December 31, 2008, net income amounted
to $188.7 million, a decrease of $18.0 million, or
8.7%, compared to $206.7 million in 2007. The decline in
net income was mainly the result of an increase in the provision
for loan losses of $66.2 million coupled with a 7.2%
increase in non-interest expense, but partly offset by increases
in net interest income, investment securities gains and
non-interest income. Net interest income increased
$54.7 million, or 10.2%, in 2008 compared to 2007, mainly
as a result of growth in loans and investment securities,
coupled with a large reduction in rates paid on interest bearing
liabilities. These effects were partly offset by lower loan
yields and higher borrowings. In 2008, net investment securities
gains totaled $30.3 million compared to $8.2 million
in 2007. Gains in 2008 included a $22.2 million gain on the
redemption of Visa, Inc. (Visa) stock and a gain of
$7.9 million on the sale of certain auction rate securities
(ARS), further described in the Investment Securities Gains
section of this discussion.
Non-interest income totaled $375.7 million in 2008, an
increase of $4.1 million, or 1.1%, over amounts reported in
the previous year and included a $9.4 million impairment
charge on certain loans held for sale. Non-interest expense
totaled $616.1 million, an increase of $41.4 million,
or 7.2%, over 2007. Included in non-interest expense was a
non-cash loss of $33.3 million as a result of the
Companys purchase of ARS from its customers in the third
quarter of 2008. Non-interest expense also included a
$9.6 million reduction in an
17
indemnification obligation for the Companys share of
certain Visa litigation costs, which is discussed further in the
Non-Interest Expense section of this discussion. The provision
for loan losses totaled $108.9 million in 2008, an increase
of $66.2 million, and reflected higher net loan
charge-offs, mainly in consumer and consumer credit card loans,
and the need to increase loan loss reserves to address inherent
risk in the loan portfolio. Income tax expense declined 9.2% in
2008 and resulted in an effective tax rate of 31.1%, which was
slightly lower than the effective tax rate of 31.2% in the
previous year. The decrease in income tax expense in 2008
compared to 2007 was mainly due to lower pre-tax earnings.
For the year ended December 31, 2007, net income amounted
to $206.7 million, a decrease of $13.2 million, or
6.0%, from 2006. Net income in 2007 included a pre-tax charge of
$21.0 million recorded in the fourth quarter, related to
the Companys share of certain Visa litigation costs.
Exclusive of this item, net income in 2007 amounted to
$219.9 million, virtually the same as in 2006. Net interest
income increased $24.9 million, or 4.8%, reflecting growth
in average loan balances and higher average overall rates earned
on loans and investment securities, partly offset by declining
average balances in investment securities. Countering these
effects was a rise in interest expense on deposit accounts and
short-term borrowings, resulting from increases in interest
rates on virtually all deposit accounts, coupled with growth in
certificate of deposit balances and higher average short-term
borrowings. Non-interest income rose $19.0 million, or
5.4%, largely due to increases of 9.1% in bank card fees, 1.6%
in deposit account fees, and 9.2% in trust revenues. Exclusive
of the Visa charge, non-interest expense grew
$28.4 million, or 5.4%, which was mainly the result of a
7.1% increase in salaries and benefits. The provision for loan
losses increased $17.1 million to $42.7 million,
reflecting higher incurred losses in nearly all loan categories,
with the largest increases in business, consumer, and consumer
credit card loans. Income tax expense declined 9.8% in 2007 and
resulted in an effective tax rate of 31.2%, compared to an
effective tax rate of 32.1% in the prior year. The decrease in
income tax expense in 2007 occurred mainly due to the change in
the mix of taxable and non-taxable income.
The Company acquired two banking franchises during 2007. In
April 2007, the Company acquired South Tulsa Financial
Corporation. In this transaction, the Company acquired the
outstanding stock of South Tulsa and issued shares of Company
stock valued at $27.6 million. The Companys
acquisition of South Tulsa added two branch locations in Tulsa,
Oklahoma. In July 2007, the Company acquired Commerce Bank in
Denver, Colorado. In this transaction, the Company acquired all
of the outstanding stock of Commerce Bank for $29.5 million
in cash. The acquisition added the Companys first location
in Colorado.
During 2006, the Company also acquired two banks. The first
acquisition was in July 2006, when the Company, through a bank
subsidiary, acquired certain assets and assumed certain
liabilities of Boone National Savings and Loan Association in a
purchase and assumption agreement for cash of
$19.1 million. Boone operated four branches in central
Missouri. In September 2006, the Company acquired the
outstanding stock of West Pointe Bancorp, Inc. in Belleville,
Illinois, which operated five branch locations in the greater
St. Louis area. The total purchase price of
$80.5 million consisted of cash of $13.1 million and
shares of Company stock valued at $67.5 million.
The transactions discussed above are collectively referred to as
bank acquisitions throughout the remainder of this
report. Additional information about acquired balances and
intangible assets recognized is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
(In millions)
|
|
Denver
|
|
|
South Tulsa
|
|
|
Boone
|
|
|
West Pointe
|
|
|
|
|
Purchase price
|
|
$
|
29.5
|
|
|
$
|
27.6
|
|
|
$
|
19.1
|
|
|
$
|
80.5
|
|
Acquired balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
103.9
|
|
|
|
127.3
|
|
|
|
126.4
|
|
|
|
455.1
|
|
Loans
|
|
|
74.5
|
|
|
|
114.7
|
|
|
|
126.4
|
|
|
|
255.0
|
|
Deposits
|
|
|
72.2
|
|
|
|
103.9
|
|
|
|
100.9
|
|
|
|
381.8
|
|
Intangible assets recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
15.1
|
|
|
|
11.9
|
|
|
|
15.6
|
|
|
|
38.3
|
|
Core deposit premium
|
|
|
4.9
|
|
|
|
3.4
|
|
|
|
2.6
|
|
|
|
14.9
|
|
Mortgage servicing rights
|
|
|
|
|
|
|
|
|
|
|
.3
|
|
|
|
.5
|
|
|
|
18
The Company continually evaluates the profitability of its
network of bank branches throughout its markets. As a result of
this evaluation process, the Company may periodically sell the
assets and liabilities of certain branches, or may sell the
premises of specific banking facilities. In May 2008, the
Company sold its banking branch, including the facility, in
Independence, Kansas. In this transaction, approximately
$23.3 million in loans, $85.0 million in deposits, and
various other assets and liabilities were sold. The Company paid
$54.1 million in cash, representing the net liabilities
sold, and recorded a pre-tax gain of $6.9 million,
representing the approximate premium paid by the buyer. During
2007 and 2006, the Company sold several bank facilities each
year, realizing pre-tax gains on these sales of
$1.6 million and $579 thousand, respectively.
In February 2009, the Company sold its branch in Lakin, Kansas.
In this transaction, the Company sold the bank facility and
certain deposits of approximately $6.9 million, and paid
cash of approximately $5.6 million.
The Company distributed a 5% stock dividend for the fifteenth
consecutive year on December 1, 2008. All per share and
average share data in this report has been restated to reflect
the 2008 stock dividend.
Critical
Accounting Policies
The Companys consolidated financial statements are
prepared based on the application of certain accounting
policies, the most significant of which are described in
Note 1 to the consolidated financial statements. Certain of
these policies require numerous estimates and strategic or
economic assumptions that may prove inaccurate or be subject to
variations which may significantly affect the Companys
reported results and financial position for the current period
or future periods. The use of estimates, assumptions, and
judgments are necessary when financial assets and liabilities
are required to be recorded at, or adjusted to reflect, fair
value. Current economic conditions may require the use of
additional estimates, and some estimates may be subject to a
greater degree of uncertainty due to the current instability of
the economy. The Company has identified several policies as
being critical because they require management to make
particularly difficult, subjective
and/or
complex judgments about matters that are inherently uncertain
and because of the likelihood that materially different amounts
would be reported under different conditions or using different
assumptions. These policies relate to the allowance for loan
losses, the valuation of certain investment securities, and
accounting for income taxes.
Allowance
for Loan Losses
The Company performs periodic and systematic detailed reviews of
its loan portfolio to assess overall collectability. The level
of the allowance for loan losses reflects the Companys
estimate of the losses inherent in the loan portfolio at any
point in time. While these estimates are based on substantive
methods for determining allowance requirements, actual outcomes
may differ significantly from estimated results, especially when
determining allowances for business, lease, construction and
business real estate loans. These loans are normally larger and
more complex, and their collection rates are harder to predict.
Personal loans, including personal mortgage, credit card and
consumer loans, are individually smaller and perform in a more
homogenous manner, making loss estimates more predictable.
Further discussion of the methodologies used in establishing the
allowance is provided in the Provision and Allowance for Loan
Losses section of this discussion.
Valuation
of Investment Securities
The Company carries its investment securities at fair value, and
in accordance with the requirements of Statement of Financial
Accounting Standards (SFAS) No. 157, the Company employs
valuation techniques which utilize observable inputs when those
inputs are available. These observable inputs reflect
assumptions market participants would use in pricing the
security, developed based on market data obtained from sources
independent of the Company. When such information is not
available, the Company employs valuation techniques which
utilize unobservable inputs, or those which reflect the
Companys own assumptions about market participants, based
on the best information available in the circumstances. These
valuation methods typically involve cash flow and other
financial modeling techniques. Changes in underlying factors,
assumptions, estimates, or other inputs to the valuation
techniques could have a material impact on the Companys
19
future financial condition and results of operations. Assets and
liabilities carried at fair value inherently result in more
financial statement volatility. SFAS 157, which requires
fair value measurements to be classified as Level 1 (quoted
prices), Level 2 (based on observable inputs) or
Level 3 (based on unobservable, internally-derived inputs)
is discussed in more detail in Note 16 to the consolidated
financial statements.
Available for sale securities are reported at fair value, with
changes in fair value reported in other comprehensive income.
Most of the 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 $3.4 billion, or 94.6% of
the portfolio at December 31, 2008, and were classified as
Level 2 measurements. The Company also holds
$168.0 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. The Company periodically evaluates the available
for sale portfolio for other-than-temporary impairment.
Impairment which is deemed other-than-temporary is reflected in
current earnings and reported in investment securities gains and
losses in the consolidated statements of income. Evaluation for
other-than-temporary impairment includes an analysis of the
facts and circumstances of each individual security such as the
severity of loss, the length of time the fair value has been
below cost, the creditworthiness of the issuer, and the
Companys intent and ability to hold the security to
maturity. Impairment is measured using a cash flows modeling
technique whose results are highly dependent on estimates of
default rates, loss severities, and prepayment speeds. Future
economic trends which signal changes to these estimates may have
a negative effect on results of operations.
The Company, through its direct holdings and its Small Business
Investment subsidiaries, has numerous private equity and venture
capital investments, categorized as non-marketable securities in
the accompanying consolidated balance sheets. These investments
are reported at fair value, and totaled $55.4 million at
December 31, 2008. Changes in fair value are reflected in
current earnings, and reported in investment securities gains
and losses in the consolidated statements of income. Because
there is no observable market data for these securities, their
fair values are internally developed using available information
and managements judgment. 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 companys management team, and other economic and
market factors may affect the amounts that will ultimately be
realized from these investments.
Accounting
for Income Taxes
As more fully discussed in Notes 1 and 9 of the
consolidated financial statements, the Company accounts for
income taxes in accordance with SFAS No. 109,
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 the principles of
SFAS No. 109. The Company regularly monitors taxing
authorities for changes in laws and regulations and their
interpretations by the judicial systems. The aforementioned
changes, and changes that may result from the resolution of
income tax examinations by federal and state taxing authorities,
may impact the estimate of accrued income taxes and could
materially impact the Companys financial position and
results of operations.
20
Net
Interest Income
Net interest income, the largest source of revenue, results from
the Companys lending, investing, borrowing, and deposit
gathering activities. It is affected by both changes in the
level of interest rates and changes in the amounts and mix of
interest earning assets and interest bearing liabilities. The
following table summarizes the changes in net interest income on
a fully taxable equivalent basis, by major category of interest
earning assets and interest bearing liabilities, identifying
changes related to volumes and rates. Changes not solely due to
volume or rate changes are allocated to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Change due to
|
|
|
|
|
|
Change due to
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
(In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
Interest income, fully taxable equivalent basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
57,585
|
|
|
$
|
(137,217
|
)
|
|
$
|
(79,632
|
)
|
|
$
|
77,356
|
|
|
$
|
14,896
|
|
|
$
|
92,252
|
|
Loans held for sale
|
|
|
1,741
|
|
|
|
(8,713
|
)
|
|
|
(6,972
|
)
|
|
|
412
|
|
|
|
(260
|
)
|
|
|
152
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
|
(9,129
|
)
|
|
|
63
|
|
|
|
(9,066
|
)
|
|
|
(8,190
|
)
|
|
|
1,878
|
|
|
|
(6,312
|
)
|
State and municipal obligations
|
|
|
4,582
|
|
|
|
3,135
|
|
|
|
7,717
|
|
|
|
8,058
|
|
|
|
251
|
|
|
|
8,309
|
|
Mortgage and asset-backed securities
|
|
|
17,036
|
|
|
|
6,090
|
|
|
|
23,126
|
|
|
|
(3,547
|
)
|
|
|
9,520
|
|
|
|
5,973
|
|
Other securities
|
|
|
942
|
|
|
|
(2,396
|
)
|
|
|
(1,454
|
)
|
|
|
(3,126
|
)
|
|
|
(2,090
|
)
|
|
|
(5,216
|
)
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
(4,848
|
)
|
|
|
(12,746
|
)
|
|
|
(17,594
|
)
|
|
|
11,852
|
|
|
|
(1,608
|
)
|
|
|
10,244
|
|
Interest earning deposits with banks
|
|
|
198
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
68,107
|
|
|
|
(151,784
|
)
|
|
|
(83,677
|
)
|
|
|
82,815
|
|
|
|
22,587
|
|
|
|
105,402
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
42
|
|
|
|
(923
|
)
|
|
|
(881
|
)
|
|
|
(5
|
)
|
|
|
(132
|
)
|
|
|
(137
|
)
|
Interest checking and money market
|
|
|
7,117
|
|
|
|
(61,197
|
)
|
|
|
(54,080
|
)
|
|
|
8,541
|
|
|
|
11,248
|
|
|
|
19,789
|
|
Time open and C.D.s of less than $100,000
|
|
|
(9,775
|
)
|
|
|
(23,860
|
)
|
|
|
(33,635
|
)
|
|
|
11,563
|
|
|
|
13,970
|
|
|
|
25,533
|
|
Time open and C.D.s of $100,000 and over
|
|
|
7,566
|
|
|
|
(25,640
|
)
|
|
|
(18,074
|
)
|
|
|
9,001
|
|
|
|
6,357
|
|
|
|
15,358
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
(16,534
|
)
|
|
|
(41,845
|
)
|
|
|
(58,379
|
)
|
|
|
10,826
|
|
|
|
2,484
|
|
|
|
13,310
|
|
Other borrowings
|
|
|
38,018
|
|
|
|
(13,888
|
)
|
|
|
24,130
|
|
|
|
5,346
|
|
|
|
(315
|
)
|
|
|
5,031
|
|
|
|
Total interest expense
|
|
|
26,434
|
|
|
|
(167,353
|
)
|
|
|
(140,919
|
)
|
|
|
45,272
|
|
|
|
33,612
|
|
|
|
78,884
|
|
|
|
Net interest income, fully taxable equivalent basis
|
|
$
|
41,673
|
|
|
$
|
15,569
|
|
|
$
|
57,242
|
|
|
$
|
37,543
|
|
|
$
|
(11,025
|
)
|
|
$
|
26,518
|
|
|
|
Net interest income totaled $592.7 million in 2008,
representing an increase of $54.7 million, or 10.2%,
compared to $538.1 million in 2007. On a tax equivalent
basis, net interest income totaled $604.1 million and
increased $57.2 million, or 10.5%, over the previous year.
This increase was mainly the result of lower rates paid on
deposits and other borrowings, coupled with higher average loan
and investment securities balances during the year. The net
yield on earning assets (tax equivalent) was 3.93% in 2008
compared with 3.80% in the previous year.
Interest income on loans (tax equivalent) declined
$86.6 million due to lower rates earned on virtually all
lending products but offset by higher loan balances, especially
in business, consumer and consumer credit card loans. The lower
rates earned on the loan portfolio were related to the actions
taken by the Federal Reserve Bank during 2008 to reduce interest
rate levels, which caused the Companys portfolio to
re-price
21
quickly. Tax equivalent interest earned on investment securities
increased by $20.3 million, or 12.7%, due to higher average
balances of mortgage-backed and municipal securities, coupled
with higher rates earned on these investments. Included in
municipal securities were the Companys purchases of
auction rate securities in the third quarter of 2008, which
increased interest income. The majority of these securities were
sold in the fourth quarter. Interest earned on federal funds
sold and resale agreement assets declined $17.6 million,
mainly due to lower average balances coupled with much lower
overnight rates. Average rates (tax equivalent) earned on
interest earning assets in 2008 decreased to 5.60% compared to
6.56% in the previous year, or a decline of 96 basis points.
Interest expense on deposits decreased $106.7 million,
mainly the result of much lower rates paid on all deposit
products but partly offset by the effects of higher average
balances of money market accounts and certificates of deposit of
$100,000 and over. Average rates paid on deposit balances
declined 100 basis points from 2.68% in 2007 to 1.68% in
2008. Interest expense on borrowings declined
$34.2 million, or 35.2%, mainly as a result of lower rates
paid and lower average balances of federal funds purchased and
repurchase agreement borrowings. Also, while advances from the
Federal Home Loan Bank and the Federal Reserves Term
Auction Facility increased on average by $788.3 million,
rates on these borrowings dropped significantly in 2008. The
average rate paid on interest bearing liabilities decreased to
1.83% compared to 3.01% in 2007.
Net interest income in 2007 increased $24.9 million, or
4.8%, to $538.1 million, compared to $513.2 million in
2006. On a tax equivalent basis, net interest income increased
$26.5 million, or 5.1%, in 2007 compared to 2006. The
increase in net interest income in 2007 compared to 2006 was due
mainly to growth in interest on loans, investment securities and
short-term investments, offset by higher interest expense on
deposit accounts and borrowings. The increase in interest income
on loans was the result of increases in both rates and balances
of virtually all loan products. The effect on rates was mainly
due to Federal Reserve rate increases in 2006 which impacted
average balances and earnings for the full year in 2007. The
growth in average balances partly resulted from bank
acquisitions occurring in 2007 and 2006, which increased average
loan balances by $337.8 million in 2007. Tax equivalent
interest earned on investment securities increased by 1.8% due
to higher rates earned on mortgage and asset-backed securities
and U.S. government and federal agency securities, but was
partly offset by lower overall average balances. Interest earned
on federal funds sold and resale agreement assets rose by
$10.2 million, mainly due to higher average balances in
overnight resale agreements. Average rates earned on total
interest earning assets in 2007 increased to 6.56% compared to
6.32% in the previous year.
Interest expense on deposits increased $60.5 million in
2007 over 2006 due to higher average balances of money market
accounts and short-term certificates of deposit, in addition to
higher rates paid on most deposit products. Interest expense on
borrowings increased $18.4 million over 2006. This growth
resulted from an increase of $350.6 million in average
balances, mainly in securities sold under repurchase agreements
and Federal Home Loan Bank advances, coupled with higher average
rates paid on the repurchase agreements. The average rate paid
on interest bearing liabilities increased to 3.01% compared to
2.63% in 2006. The tax adjusted net yield on earning assets
totaled 3.80% in 2007 and 3.92% in 2006.
Provision
for Loan Losses
The provision for loan losses totaled $108.9 million in
2008, up from $42.7 million in the previous year, or an
increase of $66.2 million. In 2006 the provision totaled
$25.6 million. The growth in the provision in 2008 was the
result of deteriorating economic conditions affecting the
Companys loan portfolio, higher watch list loans totals,
and increasing loan losses experience, especially in consumer
and consumer credit card loans, during 2008. As a result, the
Company increased its allowance for loan losses by
$39.0 million in 2008. The provision for loan losses is
recorded to bring the allowance for loan losses to a level
deemed adequate by management based on the factors mentioned in
the following Allowance for Loan Losses section of
this discussion.
22
Non-Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
08-07
|
|
|
07-06
|
|
|
|
|
Deposit account charges and other fees
|
|
$
|
110,361
|
|
|
$
|
117,350
|
|
|
$
|
115,453
|
|
|
|
(6.0
|
)%
|
|
|
1.6
|
%
|
Bank card transaction fees
|
|
|
113,862
|
|
|
|
103,613
|
|
|
|
94,928
|
|
|
|
9.9
|
|
|
|
9.1
|
|
Trust fees
|
|
|
80,294
|
|
|
|
78,840
|
|
|
|
72,180
|
|
|
|
1.8
|
|
|
|
9.2
|
|
Trading account profits and commissions
|
|
|
14,268
|
|
|
|
8,647
|
|
|
|
8,132
|
|
|
|
65.0
|
|
|
|
6.3
|
|
Consumer brokerage services
|
|
|
13,553
|
|
|
|
12,445
|
|
|
|
9,954
|
|
|
|
8.9
|
|
|
|
25.0
|
|
Loan fees and sales
|
|
|
(2,413
|
)
|
|
|
8,835
|
|
|
|
10,503
|
|
|
|
N.M.
|
|
|
|
(15.9
|
)
|
Other
|
|
|
45,787
|
|
|
|
41,851
|
|
|
|
41,436
|
|
|
|
9.4
|
|
|
|
1.0
|
|
|
|
Total non-interest income
|
|
$
|
375,712
|
|
|
$
|
371,581
|
|
|
$
|
352,586
|
|
|
|
1.1
|
%
|
|
|
5.4
|
%
|
|
|
Non-interest income as a % of total revenue*
|
|
|
38.8
|
%
|
|
|
40.8
|
%
|
|
|
40.7
|
%
|
|
|
|
|
|
|
|
|
Total revenue per full-time equivalent employee
|
|
$
|
185.6
|
|
|
$
|
179.0
|
|
|
$
|
175.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Total revenue is calculated as
net interest income plus non-interest income. |
Non-interest income totaled $375.7 million, an increase of
$4.1 million or 1.1%, compared to $371.6 million in
2007. Non-interest income included an impairment charge of
$9.4 million, recorded in loan fees and sales, on certain
student loans held for sale. The Company has agreements to sell
its portfolio of originated student loans to various student
loan servicing agencies. Due to uncertainties surrounding some
of these agencies ability to fulfill these contracts in
the future, the Company adjusted a portion of the portfolio,
totaling $206.1 million, to fair value, and recorded the
above mentioned impairment charge. Bank card fee income grew by
$10.2 million, or 9.9%, due to solid growth in debit card
and corporate credit card fee income, which grew by 9.4% and
28.6%, respectively. However, deposit fees declined by
$7.0 million, or 6.0%, mainly due to a decrease of
$10.4 million in deposit account overdraft fees. This
decline was partly offset by growth in corporate cash management
fee income, which increased $4.5 million, or 17.2%. Trust
fee income grew by $1.5 million, or 1.8%, and was
especially affected in the fourth quarter by lower market values
of the trust assets on which fees are based. Market values of
total trust assets at year end 2008 were 14.6% lower than at
year end 2007. Consumer brokerage services revenue grew by
$1.1 million, or 8.9%, on higher bond sales and annuity
commissions. Bond trading income increased $5.6 million, or
65.0%, due to increased sales volumes from its correspondent
bank and commercial customers. Other non-interest income rose
$3.9 million over the prior year, largely due to a
$6.9 million gain on the sale of a bank branch. Additional
increases occurred in cash sweep commission income and fair
value gains on interest rate swaps. These were partly offset by
a $1.1 million impairment charge on an office building held
for sale, in addition to declines in official check sales and
equipment rental income.
In 2007, non-interest income increased $19.0 million, or
5.4%, to $371.6 million. Compared to 2006, deposit account
fees increased $1.9 million, or 1.6%, as a result of higher
corporate cash management fees, which grew by $2.8 million,
or 12.2%. This growth was partly offset by a slight decline in
deposit account overdraft fees. Bank card fees rose
$8.7 million, or 9.1% overall, primarily due to growth in
debit card and corporate card fee income, which grew by 12.2%
and 30.0%, respectively. Trust fees increased $6.7 million,
or 9.2%, due to an 8.3% increase in private client account fees
and a 14.7% increase in corporate and institutional trust
account fees. Bond trading income rose $515 thousand due to an
increase in underwriting fees on customer debt issues, in
addition to higher corporate and correspondent bank sales.
Consumer brokerage services revenue rose $2.5 million, or
25.0%, mainly due to growth in annuity commissions and mutual
fund fees. Loan fees and sales decreased by $1.7 million as
gains on sales of student loans declined from $6.3 million
in 2006 to $4.5 million in 2007, which resulted from
narrowing profit margins on loans sold to various servicing
agencies. Other non-interest income rose $415 thousand over the
prior year, largely due to increases of $1.1 million in
cash sweep commission income and $1.0 million in gains on
sales of various bank facilities. These increases were partly
offset by impairment losses of $1.3 million recorded on
several properties and the receipt in 2006 of $1.2 million
in non-recurring income from an equity investment held by
Commerce Bancshares, Inc., the parent holding company (the
Parent).
23
Investment
Securities Gains, Net
Net gains and losses on investment securities during 2008, 2007
and 2006 are shown in the table below. Included in these amounts
are gains and losses arising from sales of bonds from the
Banks available for sale portfolio and sales of publicly
traded equity securities held by the Parent. Also shown are
gains and losses relating to non-marketable private equity and
venture capital investments, which are primarily held by the
Parents majority-owned venture capital subsidiaries. These
include fair value adjustments, in addition to gains and losses
realized upon disposition. Minority interest expense pertaining
to these net gains is reported in other non-interest expense,
and totaled $299 thousand, $389 thousand, and $2.2 million
in 2008, 2007 and 2006, respectively.
Net securities gains of $30.3 million were recorded in
2008, compared to $8.2 million in 2007 and
$9.0 million in 2006. Most of the net gain in 2008 occurred
because of Visas redemption of certain Class B stock
held by its former member banks. The redemption occurred in
conjunction with an initial public offering by Visa in March
2008. Approximately 500 thousand shares of the Companys
Class B stock were redeemed, which resulted in a
$22.2 million gain. Also, in December 2008,
$341.4 million in auction rate securities were sold in
exchange for federally guaranteed student loans, resulting in a
gain of $7.9 million. Preferred equity securities issued by
the Student Loan Marketing Association and the Federal National
Mortgage Association, totaling $20.7 million, were sold
early in the year for a loss of $3.5 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred equity securities
|
|
$
|
(3,504
|
)
|
|
$
|
(663
|
)
|
|
$
|
|
|
Common stock
|
|
|
(296
|
)
|
|
|
2,521
|
|
|
|
|
|
Auction rate securities
|
|
|
7,861
|
|
|
|
|
|
|
|
|
|
Other bonds
|
|
|
1,140
|
|
|
|
1,069
|
|
|
|
(2,083
|
)
|
Non-marketable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity and venture investments
|
|
|
2,897
|
|
|
|
5,307
|
|
|
|
8,278
|
|
Visa Class B stock
|
|
|
22,196
|
|
|
|
|
|
|
|
|
|
MasterCard stock
|
|
|
|
|
|
|
|
|
|
|
2,840
|
|
|
|
Total investment securities gains, net
|
|
$
|
30,294
|
|
|
$
|
8,234
|
|
|
$
|
9,035
|
|
|
|
Non-Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
08-07
|
|
|
07-06
|
|
|
|
|
Salaries
|
|
$
|
286,161
|
|
|
$
|
265,378
|
|
|
$
|
244,887
|
|
|
|
7.8
|
%
|
|
|
8.4
|
%
|
Employee benefits
|
|
|
47,451
|
|
|
|
43,390
|
|
|
|
43,386
|
|
|
|
9.4
|
|
|
|
|
|
Net occupancy
|
|
|
46,317
|
|
|
|
45,789
|
|
|
|
43,276
|
|
|
|
1.2
|
|
|
|
5.8
|
|
Equipment
|
|
|
24,569
|
|
|
|
24,121
|
|
|
|
25,665
|
|
|
|
1.9
|
|
|
|
(6.0
|
)
|
Supplies and communication
|
|
|
35,335
|
|
|
|
34,162
|
|
|
|
32,670
|
|
|
|
3.4
|
|
|
|
4.6
|
|
Data processing and software
|
|
|
56,387
|
|
|
|
50,342
|
|
|
|
51,601
|
|
|
|
12.0
|
|
|
|
(2.4
|
)
|
Marketing
|
|
|
19,994
|
|
|
|
18,199
|
|
|
|
17,317
|
|
|
|
9.9
|
|
|
|
5.1
|
|
Loss on purchase of auction rate securities
|
|
|
33,266
|
|
|
|
|
|
|
|
|
|
|
|
N.M.
|
|
|
|
N.M.
|
|
Indemnification obligation
|
|
|
(9,619
|
)
|
|
|
20,951
|
|
|
|
|
|
|
|
N.M.
|
|
|
|
N.M.
|
|
Other
|
|
|
76,252
|
|
|
|
72,426
|
|
|
|
66,623
|
|
|
|
5.3
|
|
|
|
8.7
|
|
|
|
Total non-interest expense
|
|
$
|
616,113
|
|
|
$
|
574,758
|
|
|
$
|
525,425
|
|
|
|
7.2
|
%
|
|
|
9.4
|
%
|
|
|
Efficiency ratio
|
|
|
63.2
|
%
|
|
|
62.7
|
%
|
|
|
60.6
|
%
|
|
|
|
|
|
|
|
|
Salaries and benefits as a % of total non-interest expense
|
|
|
54.1
|
%
|
|
|
53.7
|
%
|
|
|
54.9
|
%
|
|
|
|
|
|
|
|
|
Number of full-time equivalent employees
|
|
|
5,217
|
|
|
|
5,083
|
|
|
|
4,932
|
|
|
|
|
|
|
|
|
|
|
|
24
Non-interest expense was $616.1 million in 2008, an
increase of 7.2% over the previous year. Salaries and benefits
expense grew by $24.8 million, or 8.0%, due to merit
increases, higher incentive payments, and increased medical
insurance costs. In addition, increased salary costs resulted
from higher staffing in areas such as commercial bank card,
private banking, and commercial banking, which were part of
certain growth initiatives established by the Company in 2007.
Occupancy, supplies and communication, and equipment costs grew
by 1.2%, 3.4%, and 1.9%, respectively, and were well controlled.
Occupancy costs increased mainly as a result of higher building
services and repairs expense. Equipment expense grew mainly due
to higher repairs and maintenance expense, partly offset by a
decline in equipment depreciation expense. Supplies and
communication costs were higher due to increased costs for
supplies and courier expense. Data processing and software
expense increased $6.0 million, or 12.0%, mainly due to
higher bank card processing costs which increased in relation to
higher bank card revenues. Exclusive of bank card costs, core
data processing expense increased $2.1 million, or 6.7%,
over the prior year due to investments in new software and
servicing systems. Marketing expense also rose by
$1.8 million, or 9.9%, over the prior year mainly related
to deposit account product marketing and other campaigns
supporting Company initiatives. Other non-interest expense
increased $3.8 million, or 5.3%, in 2008 partly due to an
impairment charge of $2.5 million related to foreclosed
land sold in the third quarter of 2008. Other increases occurred
in travel and entertainment, FHLB letter of credit fees, and
credit card rewards expense. Partly offsetting these increases
were declines in professional fees and leased equipment
depreciation.
Non-interest expense in 2008 included a $33.3 million
non-cash loss related to the purchase of auction rate securities
from customers in the third quarter. The securities were
purchased at par value from the customers, and this loss
represents the amount by which par value exceeded estimated fair
value on the purchase date. Most of these securities were
subsequently sold in the fourth quarter, and the gain relating
to that transaction was recorded in investments securities
gains, as noted above.
Also included in non-interest expense are adjustments to the
Companys estimate of its share of certain litigation costs
arising from its member bank relationship with Visa. A non-cash
expense charge of $21.0 million was recorded in the fourth
quarter of 2007 to establish the Companys obligation for
its portion of litigation costs relating to various suits
against Visa. The obligation was reduced in the first quarter of
2008 upon the funding of an escrow account for these suits, in
conjunction with Visas initial public offering. The
obligation was subsequently adjusted during the year to reflect
changes in estimates of litigation costs and additional escrow
funding. As a result of these adjustments, an overall reduction
in the obligation of $9.6 million was recorded during 2008.
In 2007, non-interest expense was $574.8 million, which
included the charge of $21.0 million related to the Visa
indemnification obligation. Excluding this charge, non-interest
expense was $553.8 million in 2007, and grew 5.4% over
2006. Salaries and benefits expense grew by $20.5 million,
or 7.1%, due to merit increases, incentive compensation, payroll
taxes and the effects of the 2007 and 2006 bank acquisitions,
which contributed $5.4 million of this increase. Partly
offsetting these increases was a decline in employee group
medical plan expense, resulting from favorable claims
experience. Occupancy expense increased by $2.5 million, or
5.8%, over 2006 mainly as a result of seasonal maintenance
costs, higher building depreciation and real estate taxes.
Higher rent income from tenants, resulting from an increase in
overall building occupancy, partly offset these expenses.
Equipment expense declined by $1.5 million, or 6.0%, mainly
due to declines in depreciation expense on data processing
equipment and maintenance contract expense, in addition to
relocation costs of a check processing function in 2006.
Supplies and communication costs grew by $1.5 million, or
4.6%, mainly due to higher costs for supplies, postage and
courier expense, partly offset by a decline in data network
expense. Data processing and software expense declined
$1.3 million, or 2.4%, mainly due to lower license costs
related to online banking systems and a decline in bank card
processing fees. A smaller variance occurred in marketing
expense, which increased $882 thousand, or 5.1%, over the prior
year. Other non-interest expense increased $5.8 million, or
8.7%, in 2007 due to increases in intangible asset amortization
(resulting from recent bank acquisitions), bank card and other
fraud losses, and dues and subscription expense. Partly
offsetting these increases were declines in minority interest
expense and foreclosed property expense.
25
Income
Taxes
Income tax expense was $85.1 million in 2008, compared to
$93.7 million in 2007 and $103.9 million in 2006.
Income tax expense in 2008 decreased 9.2% from 2007, compared to
an 8.9% decrease in pre-tax income. The effective tax rate was
31.1%, 31.2% and 32.1% in 2008, 2007 and 2006, respectively. The
Companys effective tax rates in those years were lower
than the federal statutory rate of 35% mainly due to tax-exempt
interest on state and municipal obligations.
Financial
Condition
Loan
Portfolio Analysis
A schedule of average balances invested in each category of
loans appears on page 56. Classifications of consolidated
loans by major category at December 31 for each of the past five
years are as follows. In 2008, the Company acquired a portfolio
of student loans which it intends to hold until maturity, which
is shown in the table below. The Companys portfolio of
originated student loans was classified as held for sale in
2006, and is included in the table below only for years 2004 and
2005. Refer to the following section, Loans Held for Sale, for
information regarding originated student loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Business
|
|
$
|
3,404,371
|
|
|
$
|
3,257,047
|
|
|
$
|
2,860,692
|
|
|
$
|
2,527,654
|
|
|
$
|
2,246,287
|
|
Real estate construction and land
|
|
|
837,369
|
|
|
|
668,701
|
|
|
|
658,148
|
|
|
|
424,561
|
|
|
|
427,124
|
|
Real estate business
|
|
|
2,137,822
|
|
|
|
2,239,846
|
|
|
|
2,148,195
|
|
|
|
1,919,045
|
|
|
|
1,743,293
|
|
Real estate personal
|
|
|
1,638,553
|
|
|
|
1,540,289
|
|
|
|
1,478,669
|
|
|
|
1,352,339
|
|
|
|
1,329,568
|
|
Consumer
|
|
|
1,615,455
|
|
|
|
1,648,072
|
|
|
|
1,435,038
|
|
|
|
1,287,348
|
|
|
|
1,193,822
|
|
Home equity
|
|
|
504,069
|
|
|
|
460,200
|
|
|
|
441,851
|
|
|
|
448,507
|
|
|
|
411,541
|
|
Student
|
|
|
358,049
|
|
|
|
|
|
|
|
|
|
|
|
330,238
|
|
|
|
357,991
|
|
Consumer credit card
|
|
|
779,709
|
|
|
|
780,227
|
|
|
|
648,326
|
|
|
|
592,465
|
|
|
|
561,054
|
|
Overdrafts
|
|
|
7,849
|
|
|
|
10,986
|
|
|
|
10,601
|
|
|
|
10,854
|
|
|
|
23,673
|
|
|
|
Total loans
|
|
$
|
11,283,246
|
|
|
$
|
10,605,368
|
|
|
$
|
9,681,520
|
|
|
$
|
8,893,011
|
|
|
$
|
8,294,353
|
|
|
|
In December 2008, the Company elected to reclassify certain
segments of its real estate, business, and consumer portfolios.
The reclassifications were made to better align the loan
reporting with its related collateral and purpose. Amounts
reclassified to real estate construction and land pertained
mainly to commercial or residential land and lots which were
held by borrowers for future development. Amounts reclassified
to personal real estate related mainly to one to four family
rental property secured by residential mortgages. The table
below shows the effect of the reclassifications on the various
lending categories as of the transfer date. Because the
information was not readily available and it was impracticable
to do so, prior periods were not restated.
|
|
|
|
|
|
|
|
|
Effect of
|
|
(In thousands)
|
|
reclassification
|
|
|
|
|
Business
|
|
$
|
(55,991
|
)
|
Real estate construction and land
|
|
|
158,268
|
|
Real estate business
|
|
|
(214,071
|
)
|
Real estate personal
|
|
|
142,093
|
|
Consumer
|
|
|
(30,299
|
)
|
|
|
Net reclassification
|
|
$
|
|
|
|
|
26
The contractual maturities of loan categories at
December 31, 2008, and a breakdown of those loans between
fixed rate and floating rate loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Payments Due
|
|
|
|
|
|
|
In
|
|
|
After One
|
|
|
After
|
|
|
|
|
|
|
One Year
|
|
|
Year Through
|
|
|
Five
|
|
|
|
|
(In thousands)
|
|
or Less
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
|
|
Business
|
|
$
|
1,879,301
|
|
|
$
|
1,321,504
|
|
|
$
|
203,566
|
|
|
$
|
3,404,371
|
|
Real estate construction and land
|
|
|
527,974
|
|
|
|
282,944
|
|
|
|
26,451
|
|
|
|
837,369
|
|
Real estate business
|
|
|
575,279
|
|
|
|
1,287,961
|
|
|
|
274,582
|
|
|
|
2,137,822
|
|
Real estate personal
|
|
|
188,639
|
|
|
|
391,782
|
|
|
|
1,058,132
|
|
|
|
1,638,553
|
|
|
|
Total business and real estate loans
|
|
$
|
3,171,193
|
|
|
$
|
3,284,191
|
|
|
$
|
1,562,731
|
|
|
|
8,018,115
|
|
|
|
Consumer(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615,455
|
|
Home
equity(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504,069
|
|
Student(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358,049
|
|
Consumer credit
card(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
779,709
|
|
Overdrafts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,849
|
|
|
|
Total loans, net of unearned income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,283,246
|
|
|
|
Loans with fixed rates
|
|
$
|
664,714
|
|
|
$
|
1,714,646
|
|
|
$
|
479,711
|
|
|
$
|
2,859,071
|
|
Loans with floating rates
|
|
|
2,506,479
|
|
|
|
1,569,545
|
|
|
|
1,083,020
|
|
|
|
5,159,044
|
|
|
|
Total business and real estate loans
|
|
$
|
3,171,193
|
|
|
$
|
3,284,191
|
|
|
$
|
1,562,731
|
|
|
$
|
8,018,115
|
|
|
|
(1) Consumer loans with floating rates totaled
$88.5 million.
(2) Home equity loans with floating rates totaled
$497.1 million.
(3) All student loans have floating rates.
(4) Consumer credit card loans with floating rates
totaled $709.0 million.
Total loans at December 31, 2008 were $11.3 billion,
an increase of $677.9 million, or 6.4%, over balances at
December 31, 2007. Excluding the effects of the
reclassification mentioned above, loan growth during 2008 came
principally from business, business real estate, and student
loans. Business loans grew $203.3 million, or 6.2%,
reflecting continued customer demand and higher line of credit
usage. Lease balances, which are included in the business
category, increased $32.2 million, or 11.7%, compared with
the previous year end balance, as equipment financing remained
strong. Business real estate loans rose $112.0 million, or
5.0%, and construction loans increased $10.4 million, or
1.6%. The increase in construction loans pertained to commercial
construction, as opposed to land development and residential
construction, which declined approximately $40 million in
2008. Consumer loans declined $2.3 million, partly as a
result of a decline in automobile lending, but offset by growth
in marine and recreational vehicle loans, which grew
$27.6 million. Beginning in the third quarter, the Company
elected to reduce its originations of certain types of marine
and recreational vehicle loans due to current market conditions.
Personal real estate loans decreased by $43.8 million, or
2.8%, while consumer credit card loans decreased slightly by
$518 thousand. During 2008, home equity loans increased
$43.9 million, or 9.5%, due to an increase in new account
activations. In December 2008, the Company acquired
$358.5 million of federally guaranteed student loans from a
student loan agency in exchange for certain auction rate
securities acquired by the Company in the previous quarter, and
issued by that agency. The loans, which have an average
estimated life of approximately seven years, were recorded at
fair value, which resulted in a discount from their face value
of approximately 2.5%. The Company intends to hold these loans
to maturity.
Period end loans increased $923.8 million, or 9.5%, in 2007
compared to 2006, resulting from increases in business, business
real estate, personal real estate, consumer and credit card
loans.
The Company currently generates approximately 31% of its loan
portfolio in the St. Louis market, 30% in the Kansas City
market, and 39% in various other regional markets. The portfolio
is diversified from a business and retail standpoint, with 57%
in loans to businesses and 43% in loans to consumers. A balanced
27
approach to loan portfolio management and an historical aversion
toward credit concentrations, from an industry, geographic and
product perspective, have contributed to low levels of problem
loans and loan losses.
Business
Total business loans amounted to $3.4 billion at
December 31, 2008 and include loans used mainly to fund
customer accounts receivable, inventories, and capital
expenditures. This portfolio also includes sales type and direct
financing leases totaling $308.2 million, which are used by
commercial customers to finance capital purchases ranging from
computer equipment to office and transportation equipment. These
leases comprise 2.7% of the Companys total loan portfolio.
Business loans are made primarily to customers in the regional
trade area of the Company, generally the central Midwest,
encompassing the states of Missouri, Kansas, Illinois, and
nearby Midwestern markets, including Iowa, Oklahoma, Colorado
and Ohio. The portfolio is diversified from an industry
standpoint and includes businesses engaged in manufacturing,
wholesaling, retailing, agribusiness, insurance, financial
services, public utilities, and other service businesses.
Emphasis is upon middle-market and community businesses with
known local management and financial stability. The Company
participates in credits of large, publicly traded companies when
business operations are maintained in the local communities or
regional markets and opportunities to provide other banking
services are present. Consistent with managements strategy
and emphasis upon relationship banking, most borrowing customers
also maintain deposit accounts and utilize other banking
services. Net loan charge-offs in this category totaled
$4.4 million in both 2008 and in 2007. Non-accrual business
loans were $4.0 million (.1% of business loans) at
December 31, 2008 compared to $4.7 million at
December 31, 2007. Included in these totals were
non-accrual lease-related loans of $1.0 million and $167
thousand at December 31, 2008 and 2007, respectively.
Growth opportunities in business loans will largely depend on
economic and market conditions affecting businesses and their
ability to grow and invest in new capital, and the
Companys own solicitation efforts in attracting new, high
quality loans. Asset quality is, in part, a function of
managements consistent application of underwriting
standards and credit terms through stages in economic cycles.
Therefore, portfolio growth in 2009 will be dependent upon
1) the strength of the economy, 2) the actions of the
Federal Reserve with regard to targets for economic growth,
interest rates, and inflationary tendencies, and 3) the
competitive environment.
Real
Estate-Construction and Land
The portfolio of loans in this category amounted to
$837.4 million at December 31, 2008 and comprised 7.4%
of the Companys total loan portfolio. The table below
shows the Companys holdings of the major types of
construction loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
December 31
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
% of Total
|
|
|
|
|
Residential land and land development
|
|
$
|
139,726
|
|
|
|
16.7
|
%
|
Residential construction
|
|
|
141,405
|
|
|
|
16.9
|
|
Commercial land and land development
|
|
|
246,335
|
|
|
|
29.4
|
|
Commercial construction
|
|
|
309,903
|
|
|
|
37.0
|
|
|
|
Total real estate-construction and land loans
|
|
$
|
837,369
|
|
|
|
100.0
|
%
|
|
|
These loans are predominantly made to businesses in the local
markets of the Companys banking subsidiaries. Commercial
construction loans are made during the construction phase for
small and medium-sized office and medical buildings,
manufacturing and warehouse facilities, apartment complexes,
shopping centers, hotels and motels, and other commercial
properties. Exposure to larger speculative office properties
remains low. Commercial land and land development loans relate
to land owned or developed for use in conjunction with business
properties. The largest percentage of residential construction
and land development loans are for projects located in the
Kansas City and St. Louis metropolitan areas. Credit
exposure in this sector has risen over the last two years,
especially in residential construction and land development
lending, as a result of the slowdown in the housing industry and
worsening economic conditions. Net loan charge-offs increased to
$6.2 million in 2008, compared to net charge-offs of
$2.0 million in 2007. The increase
28
in net charge-offs in 2008 was mainly related to charge-offs of
$4.3 million on four specific loans. In addition,
construction and land loans on non-accrual status rose to
$48.9 million at year end 2008, compared to
$7.8 million at year end 2007. Much of the increase was the
result of placing a $19.9 million residential construction
loan within our market on non-accrual status in December 2008.
The remainder of the non-accrual balance is composed of
approximately 14 borrowers, whose loan balances range from $700
thousand to $6.6 million. The Companys watch list,
which includes special mention and substandard categories,
includes $124.7 million of residential land and
construction loans which are being closely monitored.
Real
Estate-Business
Total business real estate loans were $2.1 billion at
December 31, 2008 and comprised 18.9% of the Companys
total loan portfolio. This category includes mortgage loans for
small and medium-sized office and medical buildings,
manufacturing and warehouse facilities, shopping centers, hotels
and motels, and other commercial properties. Emphasis is placed
on owner-occupied and income producing commercial real estate
properties, which present lower risk levels. The borrowers
and/or the
properties are generally located in the local and regional
markets of the affiliate banks. At December 31, 2008,
non-accrual balances amounted to $13.1 million, or .6% of
the loans in this category, up from $5.6 million at year
end 2007. The Company experienced net charge-offs of
$2.2 million in 2008, compared to net charge-offs of
$1.1 million in 2007.
Real
Estate-Personal
At December 31, 2008, there were $1.6 billion in
outstanding personal real estate loans, which comprised 14.5% of
the Companys total loan portfolio. The mortgage loans in
this category are mainly for owner-occupied residential
properties. The Company originates both adjustable rate and
fixed rate mortgage loans. The Company retains adjustable rate
mortgage loans, and may from time to time retain certain fixed
rate loans (typically
15-year
fixed rate loans) as directed by its Asset/Liability Management
Committee. Other fixed rate loans in the portfolio have resulted
from previous bank acquisitions. The Company does not purchase
loans from outside parties or brokers, and has never maintained
or promoted subprime or reduced document products. At
December 31, 2008, 59% of the portfolio was comprised of
adjustable rate loans while 41% was comprised of fixed rate
loans. Levels of mortgage loan origination activity declined in
2008 compared to 2007, with originations of $181 million in
2008 compared with $283 million in 2007. Growth in mortgage
loan originations was constrained in 2008 as a result of the
deteriorating economy, slower housing starts, and lower resales
within the Companys markets. The Company has not
experienced significant loan losses in this category, and
believes this is partly because it does not offer subprime
lending products or purchase loans from brokers. While loan
losses have remained low during the year, the Company saw an
increase in losses in the fourth quarter of 2008, and recorded
net loan charge-offs of $1.4 million in that quarter. Net
loan charge-offs for 2008 amounted to $1.7 million,
compared to $139 thousand in the previous year. The non-accrual
balances of loans in this category increased to
$8.4 million at December 31, 2008, compared to
$1.1 million at year end 2007.
Personal
Banking
Total personal banking loans, which include consumer, student
and revolving home equity loans, totaled $2.5 billion at
December 31, 2008 and, excluding the reclassification
mentioned above, increased 19.0% during 2008. These categories
comprised 22.0% of the total loan portfolio at December 31,
2008. Consumer loans consist of auto, marine, tractor/trailer,
recreational vehicle (RV) and fixed rate home equity loans, and
totaled $1.6 billion at year end 2008. Approximately 70% of
consumer loans outstanding were originated indirectly from auto
and other dealers, while the remaining 30% were direct loans
made to consumers. Approximately 29% of the consumer portfolio
consists of automobile loans, 51% in marine and RV loans and 9%
in fixed rate home equity lending. As mentioned above, total
consumer loans declined $2.3 million in 2008 as a result of
a decline in auto lending, which decreased $15.6 million,
or 3.2%, but was offset by a $27.6 million increase in
marine and RV lending. Since July 2008 and in conjunction with
the Companys decision to reduce marine and RV
originations, these loans have declined $38.7 million. Net
charge-offs on consumer loans were $21.4 million in 2008
compared to $9.5 million in 2007. Net charge-offs increased
to 1.3% of average consumer loans in 2008 compared to .6% in
2007. The increase in net charge-offs in 2008 compared to 2007
was mainly due to higher marine and RV charge-offs. Net
charge-offs on marine and RV
29
loans were $9.9 million higher in 2008 compared to 2007,
and were 1.7% of average marine and RV loans in 2008 compared to
.6% in 2007.
Revolving home equity loans, of which 99% are adjustable rate
loans, totaled $504.1 million at year end 2008. An
additional $690.8 million was outstanding in unused lines
of credit, which can be drawn at the discretion of the borrower.
Home equity loans are secured mainly by second mortgages (and
less frequently, first mortgages) on residential property of the
borrower. The underwriting terms for the home equity line
product permit borrowing availability, in the aggregate,
generally up to 80% or 90% of the appraised value of the
collateral property at the time of origination, although a small
percentage may permit borrowing up to 100% of appraised value.
As mentioned previously, in December 2008, the Company acquired
federally guaranteed student loans from a student loan agency in
exchange for certain auction rate securities issued by that
agency. At December 31, 2008, these student loans totaled
$358.0 million.
Consumer
Credit Card
Total consumer credit card loans amounted to $779.7 million
at December 31, 2008 and comprised 6.9% of the
Companys total loan portfolio. The credit card portfolio
is concentrated within regional markets served by the Company.
The Company offers a variety of credit card products, including
affinity cards, rewards cards, and standard and premium credit
cards, and emphasizes its credit card relationship product,
Special Connections. Approximately 63% of the households in
Missouri that own a Commerce credit card product also maintain a
deposit relationship with the subsidiary bank. Approximately 91%
of the outstanding credit card loans have a floating interest
rate. Net charge-offs amounted to $31.5 million in 2008,
which was a $7.8 million increase over 2007. While the
annual ratio of net credit card loan charge-offs to total
average credit card loans totaled 4.1% in 2008 compared to 3.6%
in 2007, annualized 2008 fourth quarter net credit card
charge-offs on average loans increased to 4.5%. These ratios,
however, remain below national loss averages.
Loans
Held for Sale
Total loans held for sale at December 31, 2008 were
$361.3 million, an increase of $125.4 million, or
53.2%, from $235.9 million at year end 2007. Loans
classified as held for sale consist of residential mortgage
loans and student loans.
Mortgage loans are fixed rate loans, which are sold in the
secondary market, generally within three months of origination,
and totaled $2.7 million and $6.9 million at
December 31, 2008 and 2007, respectively.
The Company originates loans to students attending colleges and
universities and these loans are normally sold to the secondary
market when the student graduates and the loan enters into
repayment status. Nearly all of these loans are based on
variable rates. The Company maintains agreements to sell these
student loans to various student loan servicing agencies,
including the Missouri Higher Education Loan Authority and the
Student Loan Marketing Association. In mid 2008, the Company
also entered into an agreement with the Department of Education
(DOE) which covers all new loans originated beginning
July 1, 2008. Under this agreement, loans originated for
the school year
2008-2009
are expected to be sold in September 2009.
Due to uncertainties surrounding some of the student loan
agencies ability to fulfill these contracts in the future,
the Company adjusted loans totaling $206.1 million to fair
value and recorded impairment charges of $9.4 million
during the second half of 2008. Student loan balances grew by
$129.5 million, or 56.6%, to $358.6 million at year
end 2008, compared to $229.0 million at year end 2007. This
growth was mainly due to continued loan originations under the
DOE agreement, coupled with fewer sales of those loans
originated prior to July 1, 2008. At December 31,
2008, student loans held for sale to the DOE totaled
$158.2 million.
Allowance
for Loan Losses
The Company has an established process to determine the amount
of the allowance for loan losses, which assesses the risks and
losses inherent in its portfolio. This process provides an
allowance consisting of a
30
specific allowance component based on certain individually
evaluated loans and a general component based on estimates of
reserves needed for pools of loans with similar risk
characteristics.
Loans subject to individual evaluation are defined by the
Company as impaired, and generally consist of business,
construction, commercial real estate and personal real estate
loans on non-accrual status. These loans are evaluated
individually for the impairment of repayment potential and
collateral adequacy, and in conjunction with current economic
conditions and loss experience, allowances are estimated. Loans
not individually evaluated are aggregated and reserves are
recorded using a consistent methodology that considers
historical loan loss experience by loan type, delinquencies,
current economic factors, loan risk ratings and industry
concentrations.
The Companys estimate of the allowance for loan losses and
the corresponding provision for loan losses rests upon various
judgments and assumptions made by management. Factors that
influence these judgments include past loan loss experience,
current loan portfolio composition and characteristics, trends
in portfolio risk ratings, levels of non-performing assets,
prevailing regional and national economic conditions, and the
Companys ongoing examination process including that of its
regulators. The Company has internal credit administration and
loan review staffs that continuously review loan quality and
report the results of their reviews and examinations to the
Companys senior management and Board of Directors. Such
reviews also assist management in establishing the level of the
allowance. The Companys subsidiary bank continues to be
subject to examination by the Office of the Comptroller of the
Currency (OCC) and examinations are conducted throughout the
year, targeting various segments of the loan portfolio for
review. In addition to the examination of the subsidiary bank by
the OCC, the parent holding company and its non-bank
subsidiaries are examined by the Federal Reserve Bank.
At December 31, 2008, the allowance for loan losses was
$172.6 million compared to a balance at year end 2007 of
$133.6 million. The $39.0 million, or 29.2%, increase
in the allowance for loan losses during 2008 was primarily a
result of increasing levels of watch list loans and
deteriorating general economic conditions. Loans delinquent
90 days or more increased $19.1 million in 2008
compared to 2007 primarily due to the acquisition of a
$358.5 million, federally guaranteed, student loan
portfolio in the fourth quarter of 2008 that had
$13.9 million of loans in 90 days past due status.
Delinquencies of 90 days or more on consumer credit card
loans increased $3.3 million, or 30.5% compared to 2007.
Loans on non-accrual status increased $53.2 million to
$72.9 million in 2008 from $19.7 million in 2007. This
growth included increases of $41.1 million in non-accrual
construction and land loans, $7.5 million in non-accrual
business real estate loans, and $5.7 million in non-accrual
personal real estate loans. Other loans identified as potential
future problem loans increased $211.5 million, primarily
due to increases in business loans and construction and land
loans. These trends were reflective of the economic downturn
experienced in 2008. The Companys analysis of the
allowance considered these trends, which resulted in an increase
in the allowance balance during 2008. The percentage of
allowance to loans increased to 1.53% in 2008 compared to 1.26%
in 2007 as a result of the increase in the allowance balance,
offset slightly by an increase in loan balances of 6.4%.
Net charge-offs totaled $69.9 million in 2008, and
increased $27.1 million, or 63.5%, compared to net
charge-offs of $42.7 million in 2007. Net charge-offs
related to business loans were $4.4 million annually in
2008 and 2007. Construction and land loans incurred net
charge-offs of $6.2 million in 2008 compared to
$2.0 million in 2007. Certain construction and land loans
have experienced lower credit quality in 2008 resulting from the
slowdown in the housing market, which has affected the
construction business. Net charge-offs related to consumer loans
increased by $11.9 million to $21.4 million at
December 31, 2008, representing 30.7% of total net
charge-offs during 2008. This increase was due primarily to a
$9.9 million increase in net charge-offs related to marine
and recreational vehicle loans. Additionally, net charge-offs
related to consumer credit cards increased $7.8 million to
$31.5 million in 2008 compared to $23.7 million in
2007. Approximately 45.1% of total net loan charge-offs during
2008 were related to consumer credit card loans compared to
55.5% during 2007. Net consumer credit card charge-offs
increased to 4.1% of average consumer credit card loans in 2008
compared to 3.6% in 2007. At year end 2008, the ratio of
consumer credit card loans 30 days or more delinquent to
the total outstanding balance was 3.9%, compared to 2.8% at year
end 2007.
31
The ratio of net charge-offs to average loans outstanding in
2008 was .64% compared to .42% in 2007 and .29% in 2006. The
provision for loan losses was $108.9 million, compared to a
provision of $42.7 million in 2007 and $25.6 million
in 2006.
The Company considers the allowance for loan losses of
$172.6 million adequate to cover losses inherent in the
loan portfolio at December 31, 2008.
The schedules which follow summarize the relationship between
loan balances and activity in the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Net loans outstanding at end of
year(A)
|
|
$
|
11,283,246
|
|
|
$
|
10,605,368
|
|
|
$
|
9,681,520
|
|
|
$
|
8,893,011
|
|
|
$
|
8,294,353
|
|
|
|
Average loans
outstanding(A)
|
|
$
|
10,935,858
|
|
|
$
|
10,189,316
|
|
|
$
|
9,105,432
|
|
|
$
|
8,549,573
|
|
|
$
|
8,117,608
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
133,586
|
|
|
$
|
131,730
|
|
|
$
|
128,447
|
|
|
$
|
132,394
|
|
|
$
|
135,221
|
|
|
|
Additions to allowance through charges to expense
|
|
|
108,900
|
|
|
|
42,732
|
|
|
|
25,649
|
|
|
|
28,785
|
|
|
|
30,351
|
|
Allowances of acquired companies
|
|
|
|
|
|
|
1,857
|
|
|
|
3,688
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
7,820
|
|
|
|
5,822
|
|
|
|
1,343
|
|
|
|
1,083
|
|
|
|
8,047
|
|
Real estate construction and land
|
|
|
6,215
|
|
|
|
2,049
|
|
|
|
62
|
|
|
|
|
|
|
|
7
|
|
Real estate business
|
|
|
2,293
|
|
|
|
2,396
|
|
|
|
854
|
|
|
|
827
|
|
|
|
747
|
|
Real estate personal
|
|
|
1,765
|
|
|
|
181
|
|
|
|
119
|
|
|
|
87
|
|
|
|
355
|
|
Consumer(B)
|
|
|
26,229
|
|
|
|
14,842
|
|
|
|
11,364
|
|
|
|
13,441
|
|
|
|
12,764
|
|
Home
equity(B)
|
|
|
447
|
|
|
|
451
|
|
|
|
158
|
|
|
|
34
|
|
|
|
|
|
Consumer credit card
|
|
|
35,825
|
|
|
|
28,218
|
|
|
|
22,104
|
|
|
|
28,263
|
|
|
|
23,682
|
|
Overdrafts
|
|
|
4,499
|
|
|
|
4,909
|
|
|
|
4,940
|
|
|
|
3,485
|
|
|
|
2,551
|
|
|
|
Total loans charged off
|
|
|
85,093
|
|
|
|
58,868
|
|
|
|
40,944
|
|
|
|
47,220
|
|
|
|
48,153
|
|
|
|
Recovery of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
3,406
|
|
|
|
1,429
|
|
|
|
2,166
|
|
|
|
4,099
|
|
|
|
2,405
|
|
Real estate construction and land
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Real estate business
|
|
|
117
|
|
|
|
1,321
|
|
|
|
890
|
|
|
|
330
|
|
|
|
978
|
|
Real estate personal
|
|
|
51
|
|
|
|
42
|
|
|
|
27
|
|
|
|
57
|
|
|
|
138
|
|
Consumer(B)
|
|
|
4,782
|
|
|
|
5,304
|
|
|
|
5,263
|
|
|
|
4,675
|
|
|
|
5,288
|
|
Home
equity(B)
|
|
|
18
|
|
|
|
5
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Consumer credit card
|
|
|
4,309
|
|
|
|
4,520
|
|
|
|
4,250
|
|
|
|
3,851
|
|
|
|
4,249
|
|
Overdrafts
|
|
|
2,543
|
|
|
|
3,477
|
|
|
|
2,271
|
|
|
|
1,476
|
|
|
|
1,914
|
|
|
|
Total recoveries
|
|
|
15,226
|
|
|
|
16,135
|
|
|
|
14,890
|
|
|
|
14,488
|
|
|
|
14,975
|
|
|
|
Net loans charged off
|
|
|
69,867
|
|
|
|
42,733
|
|
|
|
26,054
|
|
|
|
32,732
|
|
|
|
33,178
|
|
|
|
Balance at end of year
|
|
$
|
172,619
|
|
|
$
|
133,586
|
|
|
$
|
131,730
|
|
|
$
|
128,447
|
|
|
$
|
132,394
|
|
|
|
Ratio of allowance to loans at end of year
|
|
|
1.53
|
%
|
|
|
1.26
|
%
|
|
|
1.36
|
%
|
|
|
1.44
|
%
|
|
|
1.60
|
%
|
Ratio of provision to average loans outstanding
|
|
|
1.00
|
%
|
|
|
.42
|
%
|
|
|
.28
|
%
|
|
|
.34
|
%
|
|
|
.37
|
%
|
|
|
|
|
|
(A) |
|
Net of unearned income, before
deducting allowance for loan losses, excluding loans held for
sale. |
(B) |
|
For 2004, amounts for home
equity loans are included in the consumer category. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Ratio of net charge-offs to average loans outstanding, by loan
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
.13
|
%
|
|
|
.14
|
%
|
|
|
NA
|
|
|
|
NA
|
|
|
|
.27
|
%
|
Real estate construction and land
|
|
|
.89
|
|
|
|
.30
|
|
|
|
.01
|
|
|
|
|
|
|
|
|
|
Real estate business
|
|
|
.10
|
|
|
|
.05
|
|
|
|
NA
|
|
|
|
.03
|
|
|
|
NA
|
|
Real estate personal
|
|
|
.11
|
|
|
|
.01
|
|
|
|
.01
|
|
|
|
|
|
|
|
.02
|
|
Consumer*
|
|
|
1.28
|
|
|
|
.61
|
|
|
|
.45
|
|
|
|
.71
|
|
|
|
.39
|
|
Home equity*
|
|
|
.09
|
|
|
|
.10
|
|
|
|
.03
|
|
|
|
.01
|
|
|
|
|
|
Consumer credit card
|
|
|
4.06
|
|
|
|
3.56
|
|
|
|
3.00
|
|
|
|
4.40
|
|
|
|
3.77
|
|
Overdrafts
|
|
|
16.40
|
|
|
|
10.36
|
|
|
|
18.18
|
|
|
|
14.36
|
|
|
|
4.78
|
|
|
|
Ratio of total net charge-offs to total average loans outstanding
|
|
|
.64
|
%
|
|
|
.42
|
%
|
|
|
.29
|
%
|
|
|
.38
|
%
|
|
|
.41
|
%
|
|
|
* For 2004, the consumer charge-off ratio is the
combined ratio for consumer and home equity loans.
NA: Net recoveries were experienced in these years.
The following schedule provides a breakdown of the allowance for
loan losses by loan category and the percentage of each loan
category to total loans outstanding at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
Loan Loss
|
|
|
% of Loans
|
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
|
Allocation
|
|
|
Loans
|
|
|
Allocation
|
|
|
Loans
|
|
|
Allocation
|
|
|
Loans
|
|
|
Allocation
|
|
|
Loans
|
|
|
Allocation
|
|
|
Loans
|
|
|
|
|
Business
|
|
$
|
37,912
|
|
|
|
30.2
|
%
|
|
$
|
29,392
|
|
|
|
30.7
|
%
|
|
$
|
28,529
|
|
|
|
29.5
|
%
|
|
$
|
26,211
|
|
|
|
28.4
|
%
|
|
$
|
39,312
|
|
|
|
27.0
|
%
|
RE construction and land
|
|
|
23,526
|
|
|
|
7.4
|
|
|
|
8,507
|
|
|
|
6.3
|
|
|
|
4,605
|
|
|
|
6.8
|
|
|
|
3,375
|
|
|
|
4.8
|
|
|
|
1,420
|
|
|
|
5.2
|
|
RE business
|
|
|
25,326
|
|
|
|
19.0
|
|
|
|
14,842
|
|
|
|
21.1
|
|
|
|
19,343
|
|
|
|
22.2
|
|
|
|
19,432
|
|
|
|
21.6
|
|
|
|
15,910
|
|
|
|
21.0
|
|
RE personal
|
|
|
4,680
|
|
|
|
14.5
|
|
|
|
2,389
|
|
|
|
14.5
|
|
|
|
2,243
|
|
|
|
15.3
|
|
|
|
4,815
|
|
|
|
15.3
|
|
|
|
7,620
|
|
|
|
16.1
|
|
Consumer*
|
|
|
28,638
|
|
|
|
14.3
|
|
|
|
24,611
|
|
|
|
15.6
|
|
|
|
18,655
|
|
|
|
14.8
|
|
|
|
18,951
|
|
|
|
14.5
|
|
|
|
22,652
|
|
|
|
14.4
|
|
Home equity*
|
|
|
1,332
|
|
|
|
4.4
|
|
|
|
5,839
|
|
|
|
4.3
|
|
|
|
5,035
|
|
|
|
4.6
|
|
|
|
5,916
|
|
|
|
5.0
|
|
|
|
|
|
|
|
4.9
|
|
Student*
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497
|
|
|
|
3.7
|
|
|
|
|
|
|
|
4.3
|
|
Consumer credit card
|
|
|
49,492
|
|
|
|
6.9
|
|
|
|
44,307
|
|
|
|
7.4
|
|
|
|
39,965
|
|
|
|
6.7
|
|
|
|
35,513
|
|
|
|
6.6
|
|
|
|
28,895
|
|
|
|
6.8
|
|
Overdrafts
|
|
|
1,713
|
|
|
|
.1
|
|
|
|
2,351
|
|
|
|
.1
|
|
|
|
3,592
|
|
|
|
.1
|
|
|
|
2,739
|
|
|
|
.1
|
|
|
|
4,895
|
|
|
|
.3
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
1,348
|
|
|
|
|
|
|
|
9,763
|
|
|
|
|
|
|
|
10,998
|
|
|
|
|
|
|
|
11,690
|
|
|
|
|
|
|
|
Total
|
|
$
|
172,619
|
|
|
|
100.0
|
%
|
|
$
|
133,586
|
|
|
|
100.0
|
%
|
|
$
|
131,730
|
|
|
|
100.0
|
%
|
|
$
|
128,447
|
|
|
|
100.0
|
%
|
|
$
|
132,394
|
|
|
|
100.0
|
%
|
|
|
|
|
|
* |
|
In 2004, the allowance
allocation to the consumer loan category included allocations
for home equity and student loans. |
Risk
Elements of Loan Portfolio
Management reviews the loan portfolio continuously for evidence
of problem loans. During the ordinary course of business,
management becomes aware of borrowers that may not be able to
meet the contractual requirements of loan agreements. Such loans
are placed under close supervision with consideration given to
placing the loan on non-accrual status, the need for an
additional allowance for loan loss, and (if appropriate) partial
or full loan charge-off. Loans are placed on non-accrual status
when management does not expect to collect payments consistent
with acceptable and agreed upon terms of repayment. Loans that
are 90 days past due as to principal
and/or
interest payments are generally placed on non-accrual, unless
they are both well-secured and in the process of collection, or
they are consumer loans that are exempt under regulatory rules
from being classified as non-accrual. Consumer installment loans
and related accrued interest are normally charged down to the
fair value of related collateral (or are charged off in full if
no collateral) once the loans are more than 120 days
delinquent. Credit card loans and the related accrued interest
are charged off when the receivable is more than 180 days
past due. After a loan is placed on non-accrual status, any
interest previously accrued but not yet collected is reversed
against current income. Interest is included in income only as
received and only after all previous loan charge-offs have been
recovered, so long as management is satisfied there is no
33
impairment of collateral values. The loan is returned to accrual
status only when the borrower has brought all past due principal
and interest payments current and, in the opinion of management,
the borrower has demonstrated the ability to make future
payments of principal and interest as scheduled.
The following schedule shows non-performing assets and loans
past due 90 days and still accruing interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
4,007
|
|
|
$
|
4,700
|
|
|
$
|
5,808
|
|
|
$
|
5,916
|
|
|
$
|
9,547
|
|
Real estate construction and land
|
|
|
48,871
|
|
|
|
7,769
|
|
|
|
120
|
|
|
|
|
|
|
|
685
|
|
Real estate business
|
|
|
13,137
|
|
|
|
5,628
|
|
|
|
9,845
|
|
|
|
3,149
|
|
|
|
6,558
|
|
Real estate personal
|
|
|
6,794
|
|
|
|
1,095
|
|
|
|
384
|
|
|
|
261
|
|
|
|
458
|
|
Consumer
|
|
|
87
|
|
|
|
547
|
|
|
|
551
|
|
|
|
519
|
|
|
|
370
|
|
|
|
Total non-accrual loans
|
|
|
72,896
|
|
|
|
19,739
|
|
|
|
16,708
|
|
|
|
9,845
|
|
|
|
17,618
|
|
|
|
Real estate acquired in foreclosure
|
|
|
6,181
|
|
|
|
13,678
|
|
|
|
1,515
|
|
|
|
1,868
|
|
|
|
1,157
|
|
|
|
Total non-performing assets
|
|
$
|
79,077
|
|
|
$
|
33,417
|
|
|
$
|
18,223
|
|
|
$
|
11,713
|
|
|
$
|
18,775
|
|
|
|
Non-performing assets as a percentage of total loans
|
|
|
.70
|
%
|
|
|
.32
|
%
|
|
|
.19
|
%
|
|
|
.13
|
%
|
|
|
.23
|
%
|
|
|
Non-performing assets as a percentage of total assets
|
|
|
.45
|
%
|
|
|
.21
|
%
|
|
|
.12
|
%
|
|
|
.08
|
%
|
|
|
.13
|
%
|
|
|
Past due 90 days and still accruing interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
1,459
|
|
|
$
|
1,427
|
|
|
$
|
2,814
|
|
|
$
|
1,026
|
|
|
$
|
357
|
|
Real estate construction and land
|
|
|
466
|
|
|
|
768
|
|
|
|
593
|
|
|
|
|
|
|
|
|
|
Real estate business
|
|
|
1,472
|
|
|
|
281
|
|
|
|
1,336
|
|
|
|
1,075
|
|
|
|
520
|
|
Real estate personal
|
|
|
4,717
|
|
|
|
5,131
|
|
|
|
3,994
|
|
|
|
2,998
|
|
|
|
3,165
|
|
Consumer
|
|
|
3,478
|
|
|
|
1,914
|
|
|
|
1,255
|
|
|
|
1,069
|
|
|
|
916
|
|
Home equity
|
|
|
440
|
|
|
|
700
|
|
|
|
659
|
|
|
|
429
|
|
|
|
317
|
|
Student
|
|
|
14,018
|
|
|
|
1
|
|
|
|
1
|
|
|
|
74
|
|
|
|
199
|
|
Consumer credit card
|
|
|
13,914
|
|
|
|
10,664
|
|
|
|
9,724
|
|
|
|
7,417
|
|
|
|
7,311
|
|
Overdrafts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
|
|
Total past due 90 days and still accruing interest
|
|
$
|
39,964
|
|
|
$
|
20,886
|
|
|
$
|
20,376
|
|
|
$
|
14,088
|
|
|
$
|
13,067
|
|
|
|
The effect on interest income in 2008 of loans on non-accrual
status at year end is presented below:
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Gross amount of interest that would have been recorded at
original rate
|
|
$
|
5,676
|
|
Interest that was reflected in income
|
|
|
2,960
|
|
|
|
Interest income not recognized
|
|
$
|
2,716
|
|
|
|
Total non-accrual loans at year end 2008 were
$72.9 million, an increase of $53.2 million over the
balance at year end 2007. Most of the increase occurred in
non-accrual construction and land loans, which included a
$19.9 million residential construction loan placed on
non-accrual status in December. In addition, business real
estate and personal real estate non-accrual loans increased
$7.5 million and $5.7 million, respectively.
Foreclosed real estate decreased to a total of $6.2 million
at year end 2008. Total non-performing assets remain low
compared to the Companys peers, with the non-performing
loans to total loans ratio at .65%. Loans past due 90 days
and still accruing interest increased $19.1 million at year
end 2008 compared to 2007, mainly due to delinquencies in the
student loan portfolio acquired in December.
In addition to the non-accrual 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. These loans are primarily classified as
substandard for regulatory purposes under the Companys
internal rating system. The loans are generally secured by
either real estate or other borrower assets, reducing the
potential for loss should they become non-performing. Although
these loans are generally identified as potential problem loans,
they may never become non-performing. Such loans totaled
$338.7 million at December 31, 2008 compared with
$127.2 million at December 31, 2007. The balance at
December 31, 2008 included $135.3 million in
construction real estate loans, $125.6 million in business
loans and $41.8 million in business real estate loans.
34
Loans
with Special Risk Characteristics
Within the loan portfolio, certain types of loans are considered
at higher risk of loss due to their terms, location, or special
conditions. Certain personal real estate products have
contractual features that could increase credit exposure in a
market of declining real estate prices, when interest rates are
steadily increasing, or when a geographic area experiences an
economic downturn. Loans might be considered at higher risk when
1) loan terms require a minimum monthly payment that covers
only interest, or 2) loan-to-collateral value (LTV) ratios
are above 80%, with no private mortgage insurance. Information
presented below is based on LTV ratios which were generally
calculated with valuations at loan origination date.
Personal
Real Estate Loans
Out of the Companys $1.6 billion personal real estate
loan portfolio, approximately 2.6% of the current outstandings
are structured with interest only payments. Loans originated
with interest only payments were not made to qualify
the borrower for a lower payment amount. These loans are made to
high net-worth borrowers and generally have low LTV ratios or
have additional collateral pledged to secure the loan and,
therefore, they are not perceived to represent above normal
credit risk. At December 31, 2008, these loans had a
weighted average LTV of 68%, and there were no delinquencies
noted in this group. The majority of the personal real estate
portfolio (96.0%) consists of loans written within the
Companys five state branch network territories of
Missouri, Kansas, Illinois, Oklahoma, and Colorado.
The following table presents information about the personal real
estate loan portfolio for 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Principal
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Outstanding at
|
|
|
% of Loan
|
|
|
Outstanding at
|
|
|
% of Loan
|
|
(Dollars in thousands)
|
|
December 31
|
|
|
Portfolio
|
|
|
December 31
|
|
|
Portfolio
|
|
|
|
|
Loans with interest only payments
|
|
$
|
35,649
|
|
|
|
2.6
|
%
|
|
$
|
42,309
|
|
|
|
3.0
|
%
|
|
|
Loans with no insurance and LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Between 80% and 90%
|
|
|
111,220
|
|
|
|
8.2
|
|
|
|
94,681
|
|
|
|
6.6
|
|
Between 90% and 100%
|
|
|
104,718
|
|
|
|
7.7
|
|
|
|
72,438
|
|
|
|
5.1
|
|
Over 100%
|
|
|
6,068
|
|
|
|
.4
|
|
|
|
3,221
|
|
|
|
.2
|
|
|
|
Over 80% LTV with no insurance
|
|
|
222,006
|
|
|
|
16.3
|
|
|
|
170,340
|
|
|
|
11.9
|
|
|
|
Total loan portfolio from which above loans were identified
|
|
|
1,360,204
|
|
|
|
|
|
|
|
1,431,172
|
|
|
|
|
|
|
|
The weighted average credit score and LTV for this portfolio
of personal real estate loans was 732 and 63%, respectively, at
December 31, 2008.
Revolving
Home Equity Loans
The Company also has revolving home equity loans that are
generally collateralized by residential real estate. Most of
these loans (94.5%) are written with terms requiring interest
only monthly payments. These loans are offered in three main
product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. The
following tables break out the year end outstanding balances by
product for 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Unused Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
New Lines
|
|
|
|
|
|
of Available Lines
|
|
|
|
|
|
Balances
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
Originated During
|
|
|
|
|
|
at December 31
|
|
|
|
|
|
Over 30
|
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
*
|
|
|
2008
|
|
|
*
|
|
|
2008
|
|
|
*
|
|
|
Days Past Due
|
|
|
*
|
|
|
|
|
Loans with interest only payments
|
|
$
|
476,354
|
|
|
|
94.5
|
%
|
|
$
|
172,868
|
|
|
|
34.3
|
%
|
|
$
|
675,819
|
|
|
|
134.1
|
%
|
|
$
|
1,217
|
|
|
|
.2
|
%
|
|
|
Loans with LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Between 80% and 90%
|
|
|
66,009
|
|
|
|
13.1
|
|
|
|
19,578
|
|
|
|
3.9
|
|
|
|
49,781
|
|
|
|
9.9
|
|
|
|
428
|
|
|
|
.1
|
|
Over 90%
|
|
|
28,292
|
|
|
|
5.6
|
|
|
|
3,815
|
|
|
|
.7
|
|
|
|
20,025
|
|
|
|
3.9
|
|
|
|
206
|
|
|
|
|
|
|
|
Over 80% LTV
|
|
|
94,301
|
|
|
|
18.7
|
|
|
|
23,393
|
|
|
|
4.6
|
|
|
|
69,806
|
|
|
|
13.8
|
|
|
|
634
|
|
|
|
.1
|
|
|
|
Total loan portfolio from which above loans were identified
|
|
|
504,069
|
|
|
|
|
|
|
|
174,903
|
|
|
|
|
|
|
|
690,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentage of total principal
outstanding of $504.1 million at December 31,
2008. |
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Unused Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
New Lines
|
|
|
|
|
|
of Available Lines
|
|
|
|
|
|
Balances
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
Originated During
|
|
|
|
|
|
at December 31
|
|
|
|
|
|
Over 30
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
*
|
|
|
2007
|
|
|
*
|
|
|
2007
|
|
|
*
|
|
|
Days Past Due
|
|
|
*
|
|
|
|
|
Loans with interest only payments
|
|
$
|
429,875
|
|
|
|
93.4
|
%
|
|
$
|
193,158
|
|
|
|
42.0
|
%
|
|
$
|
668,686
|
|
|
|
145.3
|
%
|
|
$
|
2,764
|
|
|
|
.6
|
%
|
|
|
Loans with LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Between 80% and 90%
|
|
|
57,587
|
|
|
|
12.5
|
|
|
|
20,998
|
|
|
|
4.6
|
|
|
|
50,406
|
|
|
|
11.0
|
|
|
|
677
|
|
|
|
.2
|
|
Over 90%
|
|
|
30,451
|
|
|
|
6.6
|
|
|
|
17,310
|
|
|
|
3.8
|
|
|
|
22,794
|
|
|
|
5.0
|
|
|
|
172
|
|
|
|
|
|
|
|
Over 80% LTV
|
|
|
88,038
|
|
|
|
19.1
|
|
|
|
38,308
|
|
|
|
8.4
|
|
|
|
73,200
|
|
|
|
16.0
|
|
|
|
849
|
|
|
|
.2
|
|
|
|
Total loan portfolio from which above loans were identified
|
|
|
460,200
|
|
|
|
|
|
|
|
203,454
|
|
|
|
|
|
|
|
685,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentage of total principal
outstanding of $460.2 million at December 31,
2007. |
Fixed
Rate Home Equity Loans
In addition to the residential real estate mortgage loans and
the revolving floating rate line product discussed above, the
Company offers a third choice to those consumers looking for a
fixed rate loan and a fixed maturity date. This fixed rate home
equity loan, typically for home repair or remodeling, is an
alternative for individuals who want to finance a specific
project or purchase, and decide to lock in a specific monthly
payment over a defined period. This portfolio of loans totaled
$151.4 million and $153.2 million at December 31,
2008 and 2007, respectively. At times, these loans are written
with interest only monthly payments and a balloon payoff at
maturity; however, less than 5% of the outstanding balance has
interest only payments. During 2008, the Company stopped
offering products with LTV ratios over 90%, which resulted in a
$15.5 million decrease in new loans with LTV ratios over
90% in 2008 compared to 2007. The delinquency history on this
product has been low, as balances over 30 days past due
totaled only $1.4 million and $1.3 million,
respectively, or .9% of the portfolio, at year end 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
New Loans
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
New Loans
|
|
|
|
|
(Dollars in thousands)
|
|
December 31
|
|
|
*
|
|
|
Originated
|
|
|
*
|
|
|
December 31
|
|
|
*
|
|
|
Originated
|
|
|
*
|
|
|
|
|
Loans with interest only payments
|
|
$
|
5,725
|
|
|
|
3.8
|
%
|
|
$
|
5,136
|
|
|
|
3.4
|
%
|
|
$
|
3,534
|
|
|
|
2.3
|
%
|
|
$
|
954
|
|
|
|
.6
|
%
|
|
|
Loans with LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Between 80% and 90%
|
|
|
18,996
|
|
|
|
12.5
|
|
|
|
10,960
|
|
|
|
7.2
|
|
|
|
13,049
|
|
|
|
8.5
|
|
|
|
5,093
|
|
|
|
3.3
|
|
Over 90%
|
|
|
34,772
|
|
|
|
23.0
|
|
|
|
4,431
|
|
|
|
3.0
|
|
|
|
43,140
|
|
|
|
28.2
|
|
|
|
19,952
|
|
|
|
13.0
|
|
|
|
Over 80% LTV
|
|
|
53,768
|
|
|
|
35.5
|
|
|
|
15,391
|
|
|
|
10.2
|
|
|
|
56,189
|
|
|
|
36.7
|
|
|
|
25,045
|
|
|
|
16.3
|
|
|
|
Total loan portfolio from which above loans were identified
|
|
|
151,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentage of total principal
outstanding of $151.4 million and $153.2 million at
December 31, 2008 and 2007, respectively. |
Management does not believe these loans collateralized by real
estate (personal real estate, revolving home equity, and fixed
rate home equity) represent any unusual concentrations of risk,
as evidenced by net charge-offs in 2008 of $1.7 million,
$429 thousand and $447 thousand, respectively. The amount of any
increased potential loss on high LTV agreements relates mainly
to amounts advanced that are in excess of the 80% collateral
calculation, not the entire approved line. The Company currently
offers no subprime loan products, which is defined as those
offerings made to customers with a FICO score below 650, and has
purchased no brokered loans.
Other
Consumer Loans
Within the consumer loan portfolio of several product lines, the
Company has experienced rapid growth in marine and RV loans
outstanding over the past 3 years. The majority of these
loans were outside the
36
Companys basic five state branch network. The loss ratios
experienced in this portion of the portfolio recently were
higher than for other consumer loan products, as reflected in
the delinquency figures in the table below. Due to the continued
weakening credit and economic conditions, this loan product
offering was curtailed in mid 2008, as less than
$10 million in new loans were written over the last three
months of the year. The table below provides the total
outstanding principal and other data for this group of direct
and indirect lending products at December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Principal
|
|
|
|
|
|
Balances
|
|
|
Principal
|
|
|
|
|
|
Balances
|
|
|
|
Outstanding at
|
|
|
New Loans
|
|
|
Over 30
|
|
|
Outstanding at
|
|
|
New Loans
|
|
|
Over 30
|
|
(Dollars in thousands)
|
|
December 31
|
|
|
Originated
|
|
|
Days Past Due
|
|
|
December 31
|
|
|
Originated
|
|
|
Days Past Due
|
|
|
|
|
Passenger Vehicles
|
|
$
|
485,237
|
|
|
$
|
264,096
|
|
|
$
|
9,193
|
|
|
$
|
500,368
|
|
|
$
|
223,995
|
|
|
$
|
11,966
|
|
Marine
|
|
|
230,715
|
|
|
|
43,458
|
|
|
|
8,174
|
|
|
|
238,336
|
|
|
|
100,476
|
|
|
|
5,471
|
|
RV
|
|
|
565,807
|
|
|
|
150,678
|
|
|
|
10,264
|
|
|
|
526,791
|
|
|
|
311,132
|
|
|
|
6,659
|
|
Other
|
|
|
43,833
|
|
|
|
34,093
|
|
|
|
634
|
|
|
|
58,649
|
|
|
|
65,713
|
|
|
|
1,156
|
|
|
|
Total
|
|
$
|
1,325,592
|
|
|
$
|
492,325
|
|
|
$
|
28,265
|
|
|
$
|
1,324,144
|
|
|
$
|
701,316
|
|
|
$
|
25,252
|
|
|
|
Additionally, the Company offers low introductory
teaser rates on selected consumer credit card
products. Out of a portfolio at December 31, 2008 of
$779.7 million in consumer credit card loans outstanding,
approximately $151.3 million, or 19.4%, carried a low
introductory rate. Within the next 6 months, 75% of these
loans are scheduled to convert to the ongoing higher contractual
rate. To mitigate some of the risk involved with this credit
card product, the Company performs credit checks and detailed
analysis of the customer borrowing profile before approving the
loan application.
Investment
Securities Analysis
Investment securities are comprised of securities which are
available for sale, non-marketable, and held for trading. During
2008, total investment securities increased $590.3 million
to $3.8 billion (excluding unrealized gains/losses)
compared to $3.2 billion at the previous year end. During
2008, securities of $2.4 billion were purchased, which
included $602.1 million in agency mortgage-backed
securities, $366.7 million in
non-agency
mortgage-backed securities, $212.6 million in other
asset-backed securities, and $539.9 million in auction rate
securities (which are included in the state and municipal
obligations category). As discussed further in Note 4 to
the consolidated financial statements, these auction rate
securities (ARS) were purchased from customers with cash flow
needs arising from illiquidity in the ARS market. Approximately
$341.4 million of these securities were subsequently
exchanged for certain loans in December 2008. Total maturities
and paydowns were $1.3 billion during 2008. The average tax
equivalent yield earned on total investment securities was 4.99%
in 2008 and 4.75% in 2007.
At December 31, 2008, the fair value of available for sale
securities was $3.6 billion, including a net unrealized
loss in fair value of $58.7 million, compared to a net gain
of $48.4 million at December 31, 2007. The amount of
the related after tax unrealized loss reported in
stockholders equity was $36.4 million at year end
2008. The unrealized loss in fair value was the result of
unrealized losses of $121.6 million that relate to
non-agency mortgage-backed securities, partly offset by an
unrealized gain of $42.3 million on marketable equity
securities held by the Parent.
37
Available for sale investment securities at year end for the
past two years are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Amortized Cost
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations*
|
|
$
|
146,303
|
|
|
$
|
359,118
|
|
State and municipal obligations
|
|
|
715,421
|
|
|
|
498,628
|
|
Agency mortgage-backed securities
|
|
|
1,685,821
|
|
|
|
1,523,941
|
|
Non-agency mortgage-backed securities
|
|
|
742,090
|
|
|
|
404,909
|
|
Other asset-backed securities
|
|
|
275,641
|
|
|
|
218,504
|
|
Other debt securities
|
|
|
116,527
|
|
|
|
21,397
|
|
Equity securities
|
|
|
7,680
|
|
|
|
90,083
|
|
|
|
Total available for sale investment securities
|
|
$
|
3,689,483
|
|
|
$
|
3,116,580
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations*
|
|
$
|
153,551
|
|
|
$
|
360,317
|
|
State and municipal obligations
|
|
|
719,752
|
|
|
|
503,363
|
|
Agency mortgage-backed securities
|
|
|
1,711,404
|
|
|
|
1,525,122
|
|
Non-agency mortgage-backed securities
|
|
|
620,479
|
|
|
|
398,375
|
|
Other asset-backed securities
|
|
|
253,756
|
|
|
|
216,988
|
|
Other debt securities
|
|
|
121,861
|
|
|
|
21,327
|
|
Equity securities
|
|
|
49,950
|
|
|
|
139,528
|
|
|
|
Total available for sale investment securities
|
|
$
|
3,630,753
|
|
|
$
|
3,165,020
|
|
|
|
|
|
|
|
|
*
|
This category includes
obligations of government sponsored enterprises, such as FNMA
and FHLMC, which are not backed by the full faith and credit of
the United States government. Such obligations are separately
disclosed in Note 4 on Investment Securities in the
consolidated financial statements.
|
|
The Companys investments in agency mortgage-backed
securities are collateralized by U.S. federal agencies,
including FNMA, GNMA, FHLMC, FHLB, and Federal Farm Credit
Banks. The amortized cost of non-agency mortgage-backed
securities at December 31, 2008 totaled $742.1 million
and included Alt-A type mortgage-backed securities of
$261.7 million and prime/jumbo loan type securities of
$480.3 million. At purchase date, these securities all had
credit ratings of AAA (or the equivalent) from at least two
ratings agencies. The Companys investment securities
portfolio does not have any exposure to subprime originated
mortgage-backed or collateralized debt obligation instruments.
Other available for sale debt securities, as shown in the table
above, include corporate bonds, notes and commercial paper.
Available for sale equity securities are comprised of publicly
traded stock and short-term investments in money market mutual
funds, which totaled $47.0 million and $3.0 million,
respectively, at December 31, 2008. In September 2008, the
Company shifted much of its investment in mutual funds, which
totaled $58.9 million at year end 2007, into other types of
securities. Publicly traded stock is held by the Parent.
A summary of maturities by category of investment securities and
the weighted average yield for each range of maturities as of
December 31, 2008, is presented in Note 4 on
Investment Securities in the consolidated financial statements.
The table below provides summarized information for each
category of debt securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Percent
|
|
|
Weighted
|
|
|
Estimated
|
|
|
|
of Total
|
|
|
Average
|
|
|
Average
|
|
|
|
Debt Securities
|
|
|
Yield
|
|
|
Maturity*
|
|
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
|
4.3
|
%
|
|
|
3.62
|
%
|
|
|
1.8
|
years
|
State and municipal obligations
|
|
|
20.0
|
|
|
|
4.01
|
|
|
|
8.6
|
|
Agency mortgage-backed securities
|
|
|
47.9
|
|
|
|
4.94
|
|
|
|
3.2
|
|
Non-agency mortgage-backed securities
|
|
|
17.3
|
|
|
|
5.90
|
|
|
|
5.0
|
|
Other asset-backed securities
|
|
|
7.1
|
|
|
|
5.53
|
|
|
|
1.5
|
|
Other debt securities
|
|
|
3.4
|
|
|
|
6.25
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
*
|
Based on call provisions and
estimated prepayment speeds
|
|
38
Non-marketable securities, which totaled $139.9 million at
December 31, 2008, included $28.7 million in Federal
Reserve Bank stock and $55.7 million in Federal Home Loan
Bank (Des Moines) stock held by the bank subsidiary in
accordance with debt and regulatory requirements. These are
restricted securities which, lacking a market, are carried at
cost. Other non-marketable securities also include private
equity and venture capital securities which are carried at
estimated fair value.
The Company engages in private equity and venture capital
activities through direct private equity investments and through
three private equity/venture capital subsidiaries. The
subsidiaries hold investments in various portfolio concerns,
which are carried at fair value and totaled $49.5 million
at December 31, 2008. The Company expects to fund an
additional $25.9 million to these subsidiaries for
investment purposes over the next several years. In addition to
investments held by its private equity/venture capital
subsidiaries, the Parent directly holds investments in several
private equity concerns, which totaled $5.2 million at year
end 2008. Most of the venture capital and private equity
investments are not readily marketable. While the nature of
these investments carries a higher degree of risk than the
normal lending portfolio, this risk is mitigated by the overall
size of the investments and oversight provided by management,
which believes the potential for long-term gains in these
investments outweighs the potential risks.
Non-marketable securities at year end for the past two years are
shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
Debt securities
|
|
$
|
22,297
|
|
|
$
|
17,055
|
|
Equity securities
|
|
|
117,603
|
|
|
|
88,462
|
|
|
|
Total non-marketable investment securities
|
|
$
|
139,900
|
|
|
$
|
105,517
|
|
|
|
Deposits
and Borrowings
Deposits are the primary funding source for the Companys
subsidiary bank, and are acquired from a broad base of local
markets, including both individual and corporate customers.
Total deposits were $12.9 billion at December 31,
2008, compared to $12.6 billion last year, reflecting an
increase of $343.2 million, or 2.7%. Average deposits grew
by $371.8 million, or 3.1%, in 2008 compared to 2007 with
most of this growth centered in money market accounts, which
grew $401.9 million, or 5.9% in 2008 compared to 2007.
Certificates of deposit with balances under $100,000 fell on
average by $210.3 million, or 8.9%, while certificates of
deposit over $100,000 grew $148.6 million, or 10.0%.
The following table shows year end deposits by type as a
percentage of total deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Non-interest bearing demand
|
|
|
10.7
|
%
|
|
|
11.3
|
%
|
Savings, interest checking and money market
|
|
|
59.0
|
|
|
|
57.0
|
|
Time open and C.D.s of less than $100,000
|
|
|
16.0
|
|
|
|
18.9
|
|
Time open and C.D.s of $100,000 and over
|
|
|
14.3
|
|
|
|
12.8
|
|
|
|
Total deposits
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
Core deposits (defined as all non-interest and interest bearing
deposits, excluding short-term C.D.s of $100,000 and over)
supported 71% of average earning assets in 2008 and 75% in 2007.
Average balances by major deposit category for the last six
years appear at the end of this discussion. A maturity schedule
of time deposits outstanding at December 31, 2008 is
included in Note 7 on Deposits in the consolidated
financial statements.
The Companys primary sources of overnight borrowings are
federal funds purchased and repurchase agreements. Balances in
these accounts can fluctuate significantly on a day-to-day
basis, and generally have one day maturities. Balances
outstanding at year end 2008 were $1.0 billion, a
$212.7 million decrease from $1.2 billion outstanding
at year end 2007. On an average basis, these borrowings declined
$323.0 million, or 19.0% during 2008. Most of this decline
occurred in federal funds purchased which, on an average basis,
39
declined $332.9 million, or 52.3% in 2008 compared to 2007,
as the Company took steps to reduce its inter-bank borrowings
exposure. At December 31, 2008, federal funds purchased
totaled $24.9 million. The average rate paid on federal
funds purchased and repurchase agreements was 1.83% during 2008
and 4.92% during 2007.
Additional short-term borrowings are periodically acquired under
the Federal Reserves temporary Term Auction Facility (TAF)
program, which was instituted in December 2007. The TAF is a
credit facility under which banking institutions may bid for
term borrowings in bi-weekly auctions. The TAF credit is
collateralized similarly to discount window borrowings,
generally with investment securities and loans. These borrowings
totaled $700.0 million at December 31, 2008, with the
latest maturity occurring in March 2009. Rates are fixed
throughout the term of the advance, and the average rate paid by
the Company on its TAF borrowings was 1.36% during 2008.
Most of the Companys long-term debt is comprised of fixed
rate advances from the Federal Home Loan Bank (FHLB). As the
Company further diversified its funding sources during 2008,
these borrowings rose from $561.5 million at
December 31, 2007 to $1.0 billion outstanding at
December 31, 2008. Approximately 70% of the outstanding
balance is due within two years. The average rate paid on FHLB
advances was 3.81% during 2008 and 4.68% during 2007.
Liquidity
and Capital Resources
Liquidity
Management
Liquidity is managed within the Company in order to satisfy cash
flow requirements of deposit and borrowing customers while at
the same time meeting its own cash flow needs. The Company
maintains its liquidity position through a variety of sources
including:
|
|
|
|
|
A portfolio of liquid assets including marketable investment
securities and overnight investments,
|
|
|
|
A large customer deposit base and limited exposure to large,
volatile certificates of deposit,
|
|
|
|
Lower long-term borrowings that might place a demand on Company
cash flow,
|
|
|
|
Relatively low loan to deposit ratio promoting strong liquidity,
|
|
|
|
Excellent debt ratings from both Standard &
Poors and Moodys national rating services, and
|
|
|
|
Available borrowing capacity from outside sources.
|
During 2008, liquidity risk became a concern affecting the
general banking industry, as some of the major banking
institutions across the country experienced an unprecedented
erosion in capital. This erosion was fueled by declines in asset
values, losses in market and investor confidence, and higher
defaults, resulting in higher costing and less available credit.
The Company, as discussed below, has taken numerous steps to
address liquidity risk and over the past few years has developed
a variety of liquidity sources which it believes will provide
the necessary funds to grow its business into the future.
The Company did not apply for funds through the Federal
Treasurys Capital Purchase Program. This program is part
of the federal governments Troubled Asset Relief Program
approved by Congress in October 2008 to build capital in
U.S. financial institutions and increase the flow of
financing to business and consumers. Under this program, the
Company, if approved, would have been eligible to issue senior
preferred stock to the Treasury, ranging from approximately
$140 million to $400 million, in addition to warrants
to purchase common stock. The program was carefully studied and
the Company made a business decision not to apply. Management
believes that the Companys earnings, capital and liquidity
are strong and sufficient to grow its business. Conditions that
might induce the Company to seek additional capital include
acquisition opportunities or events discussed under Risk Factors
on page 8. While the current troubled banking and economic
environment is historic and has understandably created a high
degree of uncertainty, the Company believes it is well
positioned to face this challenge.
40
The Companys most liquid assets include available for sale
marketable investment securities, federal funds sold, balances
at the Federal Reserve Bank (FRB), and securities purchased
under agreements to resell (resale agreements). At
December 31, 2008 and 2007, such assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
Available for sale investment securities
|
|
$
|
3,630,753
|
|
|
$
|
3,165,020
|
|
Federal funds sold
|
|
|
59,475
|
|
|
|
261,165
|
|
Resale agreements
|
|
|
110,000
|
|
|
|
394,000
|
|
Balances at the Federal Reserve Bank
|
|
|
638,158
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,438,386
|
|
|
$
|
3,820,185
|
|
|
|
Federal funds sold and resale agreements normally have overnight
maturities and are used to satisfy the daily cash needs of the
Company. Effective October 1, 2008, cash balances
maintained at the FRB began earning interest. These balances are
also used for general daily liquidity purposes. The
Companys available for sale investment portfolio has
maturities of approximately $516 million which will occur
during 2009 and offers substantial resources to meet either new
loan demand or reductions in the Companys deposit funding
base. The Company pledges portions of its investment securities
portfolio to secure public fund deposits, securities sold under
agreements to repurchase (repurchase agreements), trust funds,
letters of credit issued by the FHLB, and borrowing capacity at
the FRB. At December 31, 2008, total investment securities
pledged for these purposes were as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
|
Investment securities pledged for the purpose of securing:
|
|
|
|
|
Federal Reserve Bank borrowings
|
|
$
|
268,967
|
|
FHLB borrowings and letters of credit
|
|
|
418,293
|
|
Repurchase agreements
|
|
|
1,363,294
|
|
Other deposits
|
|
|
544,580
|
|
|
|
Total pledged, at fair value
|
|
$
|
2,595,134
|
|
|
|
Liquidity is also available from the Companys large base
of core customer deposits, defined as demand, interest checking,
savings, and money market deposit accounts. At December 31,
2008, such deposits totaled $9.0 billion and represented
69.7% of the Companys total deposits. These core deposits
are normally less volatile, often with customer relationships
tied to other products offered by the Company promoting long
lasting relationships and stable funding sources. Time open and
certificates of deposit of $100,000 or greater totaled
$1.8 billion at December 31, 2008. These deposits are
normally considered more volatile and higher costing, and
comprised 14.3% of total deposits at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
Core deposit base:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
1,375,000
|
|
|
$
|
1,413,849
|
|
Interest checking
|
|
|
700,714
|
|
|
|
580,048
|
|
Savings and money market
|
|
|
6,909,592
|
|
|
|
6,575,318
|
|
|
|
Total
|
|
$
|
8,985,306
|
|
|
$
|
8,569,215
|
|
|
|
41
Other important components of liquidity are the level of
borrowings from third party sources and the availability of
future credit. The Companys outside borrowings are mainly
comprised of federal funds purchased, repurchase agreements, and
advances from the FRB and the FHLB, as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
$
|
24,900
|
|
|
$
|
126,077
|
|
Repurchase agreements
|
|
|
1,001,637
|
|
|
|
1,113,142
|
|
FHLB advances
|
|
|
1,025,721
|
|
|
|
561,475
|
|
Subordinated debentures
|
|
|
14,310
|
|
|
|
14,310
|
|
Term auction facility
|
|
|
700,000
|
|
|
|
|
|
Other long-term debt
|
|
|
7,750
|
|
|
|
7,851
|
|
|
|
Total
|
|
$
|
2,774,318
|
|
|
$
|
1,822,855
|
|
|
|
Federal funds purchased and repurchase agreements are generally
borrowed overnight and amounted to $1.0 billion at
December 31, 2008. Federal funds purchased are unsecured
overnight borrowings obtained mainly from upstream correspondent
banks with which the Company maintains approved lines of credit.
Repurchase agreements are secured by a portion of the
Companys investment portfolio and are comprised of both
non-insured customer funds, totaling $501.6 million at
December 31, 2008, and structured repurchase agreements of
$500.0 million purchased from an upstream financial
institution. Customer repurchase agreements are offered to
customers wishing to earn interest in highly liquid balances and
are used by the Company as a funding source considered to be
stable, but short-term in nature. Beginning in mid 2008, the
Company began to periodically borrow additional short-term funds
from the FRB through its Term Auction Facility (TAF), of which
$700.0 million were outstanding at December 31, 2008.
The TAF offered attractive funding with low rates and made
possible the reduction in federal funds purchased. The Company
also borrows on a secured basis through advances from the FHLB,
which totaled $1.0 billion at December 31, 2008. Most
of these advances have fixed interest rates and mature in 2009
through 2010. The Companys other borrowings are comprised
of debentures funded by trust preferred securities and debt
related to the Companys venture capital business. The
overall long-term debt position of the Company is small relative
to the Companys overall liability position.
The Company pledges certain assets, including loans and
investment securities, to both the Federal Reserve Bank and the
FHLB as security to establish lines of credit and borrow from
these entities. Based on the amount and type of collateral
pledged, the FHLB establishes a collateral value from which the
Company may draw advances against the collateral. Also, this
collateral is used to enable the FHLB to issue letters of credit
in favor of public fund depositors of the Company. The Federal
Reserve Bank also establishes a collateral value of assets
pledged and permits borrowings from either the discount window
or the Term Auction Facility. The following table reflects the
collateral value of assets pledged, borrowings, and letters of
credit outstanding, in addition to the estimated future funding
capacity available to the Company at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
(In thousands)
|
|
FHLB
|
|
|
Federal Reserve
|
|
|
|
Collateral value pledged
|
|
$
|
2,533,656
|
|
|
$
|
1,327,851
|
|
Advances outstanding
|
|
|
(1,025,721
|
)
|
|
|
|
|
Letters of credit issued
|
|
|
(1,068,990
|
)
|
|
|
|
|
Term auction facility
|
|
|
|
|
|
|
(700,000
|
)
|
|
|
Available for future advances
|
|
$
|
438,945
|
|
|
$
|
627,851
|
|
|
|
42
The Company had an average loans to deposits ratio of 92% at
December 31, 2008, which is considered in the banking
industry to be a conservative measure of good liquidity. Also,
the Company receives outside ratings from both
Standard & Poors and Moodys on both the
consolidated company and its subsidiary bank, Commerce Bank,
N.A. These ratings are as follows:
|
|
|
|
|
|
|
|
Standard & Poors
|
|
Moodys
|
|
Commerce Bancshares, Inc.
|
|
|
|
|
Counterparty rating
|
|
A-1
|
|
|
Commercial paper rating
|
|
A-1
|
|
|
Short-term
|
|
|
|
P-1
|
Rating outlook
|
|
Stable
|
|
Stable
|
Commerce Bank, N. A.
|
|
|
|
|
Counterparty credit
|
|
A+
|
|
|
Senior long-term rating
|
|
A+
|
|
|
Long-term bank deposits
|
|
|
|
Aa2
|
Bank financial strength rating
|
|
|
|
B+
|
|
|
The Company considers these ratings to be indications of a sound
capital base and good liquidity, and believes that these ratings
would help ensure the ready marketability of its commercial
paper, should the need arise. No commercial paper was
outstanding over the past ten years. The Company has little
subordinated debt or hybrid instruments which would affect
future borrowings capacity. Because of its lack of significant
long-term debt, the Company believes that, through its Capital
Markets Group or in other public debt markets, it could generate
additional liquidity from sources such as jumbo certificates of
deposit, privately-placed corporate notes or other debt. Future
financing could also include the issuance of common or preferred
stock.
The Company funds a defined benefit pension plan for a majority
of its current employees. Under the funding policy for the plan,
contributions are made as necessary to provide for current
service and for any unfunded accrued actuarial liabilities over
a reasonable period. During the period 2006 through 2008, the
Company has not been required to make cash contributions to the
plan and does not expect to do so in 2009.
The cash flows from the operating, investing and financing
activities of the Company resulted in a net decrease in cash and
cash equivalents of $28.9 million in 2008, as reported in
the consolidated statements of cash flows on page 64 of
this report. Operating activities, consisting mainly of net
income adjusted for certain non-cash items, provided cash flow
of $217.3 million and has historically been a stable source
of funds. Investing activities used total cash of
$1.5 billion in 2008, and consist mainly of purchases and
maturities of available for sale investment securities and
changes in the level of the Companys loan portfolio. Both
the investment securities and loan portfolios grew during 2008,
using cash of $952.7 million and $412.6 million,
respectively. Investing activities are somewhat unique to
financial institutions in that, while large sums of cash flow
are normally used to fund growth in investment securities,
loans, or other bank assets, they are normally dependent on the
financing activities described below.
Financing activities provided total cash of $1.2 billion,
resulting from increases of $800.0 million in short-term
borrowings and $364.1 million in long-term borrowings, in
addition to a net increase in deposits of $344.7 million.
Partly offsetting these cash inflows were a decline in federal
funds purchased and repurchase agreements of $212.4 million
and cash dividend payments of $72.1 million. Future
short-term liquidity needs for daily operations are not expected
to vary significantly and the Company maintains adequate
liquidity to meet these cash flows. The Companys sound
equity base, along with its low debt level, common and preferred
stock availability, and excellent debt ratings, provide several
alternatives for future financing. Future acquisitions may
utilize partial funding through one or more of these options.
43
Cash used for treasury stock purchases, net of cash received in
connection with stock programs, and dividend payments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Purchases of treasury stock
|
|
$
|
9.5
|
|
|
$
|
128.6
|
|
|
$
|
135.0
|
|
Exercise of stock options and sales to affiliate non-employee
directors
|
|
|
(16.0
|
)
|
|
|
(13.7
|
)
|
|
|
(7.3
|
)
|
Cash dividends
|
|
|
72.1
|
|
|
|
68.9
|
|
|
|
65.8
|
|
|
|
Total
|
|
$
|
65.6
|
|
|
$
|
183.8
|
|
|
$
|
193.5
|
|
|
|
In the first quarter of 2008, given the challenging banking
environment, the Company elected to cease market purchases of
treasury stock and preserve its cash and capital position.
Accordingly, cash purchases of treasury stock declined
$119.1 million in 2008 compared to 2007.
The Parent faces unique liquidity constraints due to legal
limitations on its ability to borrow funds from its bank
subsidiary. The Parent obtains funding to meet its obligations
from two main sources: dividends received from bank and non-bank
subsidiaries (within regulatory limitations) and from management
fees charged to subsidiaries as reimbursement for services
provided by the Parent, as presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Dividends received from subsidiaries
|
|
$
|
76.2
|
|
|
$
|
179.5
|
|
|
$
|
140.5
|
|
Management fees
|
|
|
44.0
|
|
|
|
39.1
|
|
|
|
37.7
|
|
|
|
Total
|
|
$
|
120.2
|
|
|
$
|
218.6
|
|
|
$
|
178.2
|
|
|
|
These sources of funds are used mainly to purchase treasury
stock, pay cash dividends on outstanding common stock, and pay
general operating expenses. At December 31, 2008, the
Parents available for sale investment securities totaled
$47.5 million at fair value, consisting mainly of publicly
traded common stock. To support its various funding commitments,
the Parent maintains a $20.0 million line of credit with
its subsidiary bank. The Parent had no borrowings outstanding
under the line at December 31, 2008.
Company senior management is responsible for measuring and
monitoring the liquidity profile of the organization with
oversight by the Companys Asset/Liability Committee
(ALCO). This is done through a series of controls, including a
written Contingency Funding Policy and risk monitoring
procedures, including daily, weekly and monthly reporting. In
addition, the Company prepares forecasts which project changes
in the balance sheet affecting liquidity, and which allow the
Company to better plan for forecasted changes.
Capital
Management
The Company maintains strong regulatory capital ratios,
including those of its principal banking subsidiaries, in excess
of the well-capitalized guidelines under federal
banking regulations. The Companys capital ratios at the
end of the last three years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well-Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Guidelines
|
|
|
|
Risk-based capital ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
|
|
|
10.92
|
%
|
|
|
10.31
|
%
|
|
|
11.25
|
%
|
|
|
6.00
|
%
|
Total capital
|
|
|
12.31
|
|
|
|
11.49
|
|
|
|
12.56
|
|
|
|
10.00
|
|
Leverage ratio
|
|
|
9.06
|
|
|
|
8.76
|
|
|
|
9.05
|
|
|
|
5.00
|
|
Common equity/assets
|
|
|
9.69
|
|
|
|
9.54
|
|
|
|
9.68
|
|
|
|
|
|
Dividend payout ratio
|
|
|
38.39
|
|
|
|
33.76
|
|
|
|
30.19
|
|
|
|
|
|
|
|
44
The components of the Companys regulatory risked-based
capital and risk-weighted assets at the end of the last three
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Regulatory risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
|
|
$
|
1,510,959
|
|
|
$
|
1,375,035
|
|
|
$
|
1,345,378
|
|
Tier II capital
|
|
|
191,957
|
|
|
|
157,154
|
|
|
|
157,008
|
|
Total capital
|
|
|
1,702,916
|
|
|
|
1,532,189
|
|
|
|
1,502,386
|
|
Total risk-weighted assets
|
|
|
13,834,161
|
|
|
|
13,330,968
|
|
|
|
11,959,757
|
|
|
|
In February 2008, the Board of Directors authorized the Company
to purchase additional shares of common stock under its
repurchase program, which brought the total purchase
authorization to 3,000,000 shares. During 2008,
approximately 231,000 shares were acquired under the
current Board authorization at an average price of $41.15 per
share.
The Companys common stock dividend policy reflects its
earnings outlook, desired payout ratios, the need to maintain
adequate capital levels and alternative investment options. Per
share cash dividends paid by the Company increased 5.0% in 2008
compared with 2007. The Company paid its fifteenth consecutive
annual stock dividend in December 2008.
Commitments,
Contractual Obligations, and Off-Balance Sheet
Arrangements
Various commitments and contingent liabilities arise in the
normal course of business, which are not required to be recorded
on the balance sheet. The most significant of these are loan
commitments, totaling $7.9 billion (including approximately
$3.6 billion in unused approved credit card lines), and the
contractual amount of standby letters of credit, totaling
$418.0 million at December 31, 2008. The Company has
various other financial instruments with off-balance sheet risk,
such as commercial letters of credit and commitments to purchase
and sell when-issued securities. Since many commitments expire
unused or only partially used, these totals do not necessarily
reflect future cash requirements. Management does not anticipate
any material losses arising from commitments and contingent
liabilities and believes there are no material commitments to
extend credit that represent risks of an unusual nature.
A table summarizing contractual cash obligations of the Company
at December 31, 2008 and the expected timing of these
payments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
After One Year
|
|
|
After Three
|
|
|
After
|
|
|
|
|
|
|
In One Year
|
|
|
Through Three
|
|
|
Years Through
|
|
|
Five
|
|
|
|
|
(In thousands)
|
|
or Less
|
|
|
Years
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
|
|
Long-term debt obligations, including structured repurchase
agreements*
|
|
$
|
301,140
|
|
|
$
|
920,171
|
|
|
$
|
59,734
|
|
|
$
|
166,736
|
|
|
$
|
1,447,781
|
|
Operating lease obligations
|
|
|
5,860
|
|
|
|
8,236
|
|
|
|
5,350
|
|
|
|
23,008
|
|
|
|
42,454
|
|
Purchase obligations
|
|
|
27,933
|
|
|
|
33,180
|
|
|
|
18,853
|
|
|
|
300
|
|
|
|
80,266
|
|
Time open and C.D.s*
|
|
|
3,432,816
|
|
|
|
425,068
|
|
|
|
51,235
|
|
|
|
308
|
|
|
|
3,909,427
|
|
|
|
Total
|
|
$
|
3,767,749
|
|
|
$
|
1,386,655
|
|
|
$
|
135,172
|
|
|
$
|
190,352
|
|
|
$
|
5,479,928
|
|
|
|
|
|
* |
Includes principal payments
only
|
As of December 31, 2008, the Company has unrecognized tax
benefits that, if recognized, would impact the effective tax
rate in future periods. Due to the uncertainty of the amounts to
be ultimately paid as well as the timing of such payments, all
uncertain tax liabilities that have not been paid have been
excluded from the table above. Further detail on the impact of
income taxes is located in Note 9 of the consolidated
financial statements.
The Company has investments in several low-income housing
partnerships within the area it serves. At December 31,
2008, these investments totaled $4.3 million and were
recorded as other assets in the Companys consolidated
balance sheet. These partnerships supply funds for the
construction and operation of apartment complexes that provide
affordable housing to that segment of the population with lower
family
45
income. If these developments successfully attract a specified
percentage of residents falling in that lower income range,
state and/or
federal income tax credits are made available to the partners.
The tax credits are normally recognized over ten years, and they
play an important part in the anticipated yield from these
investments. In order to continue receiving the tax credits each
year over the life of the partnership, the low-income residency
targets must be maintained. Under the terms of the partnership
agreements, the Company has a commitment to fund a specified
amount that will be due in installments over the life of the
agreements, which ranges from 10 to 15 years. These
unfunded commitments are recorded as liabilities on the
Companys consolidated balance sheet, and aggregated
$3.3 million at December 31, 2008.
The Company periodically purchases various state tax credits
arising from third-party property redevelopment. Most of the tax
credits are resold to third parties, although some may be
retained for use by the Company. During 2008, purchases and
sales of tax credits amounted to $41.6 million and
$43.3 million, respectively, generating combined gains on
sales and tax savings of $2.2 million. At December 31,
2008, the Company had outstanding purchase commitments totaling
$135.2 million.
The Parent has investments in several private equity concerns
which are classified as non-marketable securities in the
Companys consolidated balance sheet. Under the terms of
the agreements with three of these concerns, the Parent has
unfunded commitments outstanding of $1.6 million at
December 31, 2008. The Parent also expects to fund
$25.9 million to venture capital subsidiaries over the next
several years.
Interest
Rate Sensitivity
The Companys Asset/Liability Management Committee (ALCO)
measures and manages the Companys interest rate risk on a
monthly basis to identify trends and establish strategies to
maintain stability in earnings throughout various rate
environments. Analytical modeling techniques provide management
insight into the Companys exposure to changing rates.
These techniques include net interest income simulations and
market value analyses. Management has set guidelines specifying
acceptable limits within which net interest income and market
value may change under various rate change scenarios. These
measurement tools indicate that the Company is currently within
acceptable risk guidelines as set by management.
The Companys main interest rate measurement tool, income
simulations, projects net interest income under various rate
change scenarios in order to quantify the magnitude and timing
of potential rate-related changes. Income simulations are able
to capture option risks within the balance sheet where expected
cash flows may be altered under various rate environments.
Modeled rate movements include shocks, ramps and
twists. Shocks are intended to capture interest rate risk
under extreme conditions by immediately shifting rates up and
down, while ramps measure the impact of gradual changes and
twists measure yield curve risk. The size of the balance sheet
is assumed to remain constant so that results are not influenced
by growth predictions. The table below shows the expected effect
that gradual basis point shifts in the LIBOR/swap curve over a
twelve month period would have on the Companys net
interest income, given a static balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Increase
|
|
|
% of Net Interest
|
|
|
Increase
|
|
|
% of Net Interest
|
|
|
Increase
|
|
|
% of Net Interest
|
|
(Dollars in millions)
|
|
(Decrease)
|
|
|
Income
|
|
|
(Decrease)
|
|
|
Income
|
|
|
(Decrease)
|
|
|
Income
|
|
|
|
300 basis points rising
|
|
$
|
37.3
|
|
|
|
6.38
|
%
|
|
$
|
10.6
|
|
|
|
1.77
|
%
|
|
$
|
(.7
|
)
|
|
|
(.12
|
)%
|
200 basis points rising
|
|
|
30.6
|
|
|
|
5.23
|
|
|
|
8.7
|
|
|
|
1.46
|
|
|
|
2.3
|
|
|
|
.40
|
|
100 basis points rising
|
|
|
18.1
|
|
|
|
3.10
|
|
|
|
4.7
|
|
|
|
.79
|
|
|
|
2.0
|
|
|
|
.34
|
|
100 basis points falling
|
|
|
N.A.
|
|
|
|
N.A.
|
|
|
|
(3.1
|
)
|
|
|
(.51
|
)
|
|
|
(1.2
|
)
|
|
|
(.20
|
)
|
|
|
The Company also employs a sophisticated simulation technique
known as a stochastic income simulation. This technique allows
management to see a range of results from hundreds of income
simulations. The stochastic simulation creates a vector of
potential rate paths around the markets best guess
(forward rates) concerning the future path of interest rates and
allows rates to randomly follow paths throughout the vector.
This allows for the modeling of non-biased rate forecasts around
the market consensus. Results give management insight into a
likely range of rate-related risk as well as worst and best-case
rate scenarios.
46
The Company also uses market value analyses to help identify
longer-term risks that may reside on the balance sheet. This is
considered a secondary risk measurement tool by management. The
Company measures the market value of equity as the net present
value of all asset and liability cash flows discounted along the
current LIBOR/swap curve plus appropriate market risk spreads.
It is the change in the market value of equity under different
rate environments, or effective duration, that gives insight
into the magnitude of risk to future earnings due to rate
changes. Market value analyses also help management understand
the price sensitivity of non-marketable bank products under
different rate environments.
The Companys modeling of interest rate risk as of
December 31, 2008 shows that under various rising rate
scenarios, net interest income would show growth. The Company
has not modeled a 100 basis point falling scenario due to
the already extremely low interest rate environment. At
December 31, 2008, the Company calculated that a gradual
increase in rates of 100 basis points would increase net
interest income by $18.1 million, or 3.1% of total net
interest income, compared with an increase of $2.0 million
calculated at December 31, 2007. A 200 basis point
gradual rise in rates calculated at December 31, 2008 would
increase net interest income by $30.6 million, or 5.2%, up
from an increase of $2.3 million last year. Also, a gradual
increase of 300 basis points would increase net interest
income by $37.3 million, or 6.4%, compared to a decline of
$700 thousand at December 31, 2007.
The projected increase in net interest income in various rising
rate environments is due to several factors, including higher
average loan balances in 2008 compared to the previous year
(average increase of $746.5 million) which contain both
variable and fixed rate loans, but with relatively short
maturities and growth of $411.2 million in average
non-maturity deposits, which have lower rates and can re-price
upwards more slowly. Also, average certificates of deposit
balances, which carry higher rates and re-price more slowly,
declined $61.6 million from the prior year. Overnight
borrowings with variable rates declined $323.0 million,
while other borrowed funds, mostly with fixed rates, increased
$800.3 million over 2007. The simulation models also
calculate a slower upward re-pricing of non-maturity deposits,
while the overall loan portfolio, due to its average life and
composition of variable rate loans, will re-price more quickly.
Through review and oversight by the ALCO, the Company attempts
to engage in strategies that neutralize interest rate risk as
much as possible. The Companys balance sheet remains
well-diversified with moderate interest rate risk and is
well-positioned for future growth. The use of derivative
products is limited and the deposit base is strong and stable.
The loan to deposit ratio is still at relatively low levels,
which should present the Company with opportunities to fund
future loan growth at reasonable costs. The Company believes
that its approach to interest rate risk has appropriately
considered its susceptibility to both rising and falling rates
and has adopted strategies which minimize impacts of interest
rate risk.
Derivative
Financial Instruments
The Company maintains an overall interest rate risk management
strategy that permits the use of derivative instruments to
modify exposure to interest rate risk. The Companys
interest rate risk management strategy includes the ability to
modify the re-pricing characteristics of certain assets and
liabilities so that changes in interest rates do not adversely
affect the net interest margin and cash flows. Interest rate
swaps are used on a limited basis as part of this strategy. As
of December 31, 2008, the Company had entered into two
interest rate swaps with a notional amount of $12.2 million
which are designated as fair value hedges of certain fixed rate
loans. The Company also sells swap contracts to customers who
wish to modify their interest rate sensitivity. The Company
offsets the interest rate risk of these swaps by purchasing
matching contracts with offsetting pay/receive rates from other
financial institutions. The notional amount of these types of
swaps at December 31, 2008 was $479.9 million.
The Company enters into foreign exchange derivative instruments
as an accommodation to customers and offsets the related foreign
exchange risk by entering into offsetting third-party forward
contracts with approved, reputable counterparties. In addition,
the Company takes proprietary positions in such contracts based
on market expectations. This trading activity is managed within
a policy of specific controls and limits.
47
Most of the foreign exchange contracts outstanding at
December 31, 2008 mature within 90 days, and the
longest period to maturity is 11 months.
Additionally, interest rate lock commitments issued on
residential mortgage loans held for resale are considered
derivative instruments. The interest rate exposure on these
commitments is economically hedged primarily with forward sale
contracts in the secondary market.
In all of these contracts, the Company is exposed to credit risk
in the event of nonperformance by counterparties, who may be
bank customers or other financial institutions. The Company
controls the credit risk of its financial contracts through
credit approvals, limits and monitoring procedures. Because the
Company generally enters into transactions only with high
quality counterparties, there have been no losses associated
with counterparty nonperformance on derivative financial
instruments.
Effective January 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements.
This Statement modified the accounting for initial recognition
of fair value for certain interest rate swap contracts held by
the Company. Former accounting guidance precluded immediate
recognition in earnings of an unrealized gain or loss, measured
as the difference between the transaction price and fair value
of these instruments at initial recognition. This former
guidance was nullified by SFAS No. 157, which allows
for the immediate recognition of a gain or loss under certain
circumstances. In accordance with the new recognition
requirements, the Company increased equity by $903 thousand on
January 1, 2008 to reflect the swaps at fair value as
defined by SFAS No. 157.
The following table summarizes the notional amounts and
estimated fair values of the Companys derivative
instruments at December 31, 2008 and 2007. Notional amount,
along with the other terms of the derivative, is used to
determine the amounts to be exchanged between the
counterparties. Because the notional amount does not represent
amounts exchanged by the parties, it is not a measure of loss
exposure related to the use of derivatives nor of exposure to
liquidity risk. Positive fair values are recorded in other
assets and negative fair values are recorded in other
liabilities in the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Positive
|
|
|
Negative
|
|
|
|
|
|
Positive
|
|
|
Negative
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
Fair
|
|
(In thousands)
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
|
|
Interest rate swaps
|
|
$
|
492,111
|
|
|
$
|
25,274
|
|
|
$
|
(26,568
|
)
|
|
$
|
308,361
|
|
|
$
|
4,766
|
|
|
$
|
(6,333
|
)
|
Credit risk participation agreements
|
|
|
47,750
|
|
|
|
117
|
|
|
|
(178
|
)
|
|
|
25,389
|
|
|
|
|
|
|
|
(174
|
)
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
|
6,226
|
|
|
|
207
|
|
|
|
(217
|
)
|
|
|
12,212
|
|
|
|
105
|
|
|
|
(149
|
)
|
Option contracts
|
|
|
3,300
|
|
|
|
18
|
|
|
|
(18
|
)
|
|
|
3,120
|
|
|
|
9
|
|
|
|
(9
|
)
|
Mortgage loan commitments
|
|
|
23,784
|
|
|
|
198
|
|
|
|
(6
|
)
|
|
|
7,123
|
|
|
|
18
|
|
|
|
(10
|
)
|
Mortgage loan forward sale contracts
|
|
|
26,996
|
|
|
|
21
|
|
|
|
(88
|
)
|
|
|
15,017
|
|
|
|
25
|
|
|
|
(34
|
)
|
|
|
Total at December 31
|
|
$
|
600,167
|
|
|
$
|
25,835
|
|
|
$
|
(27,075
|
)
|
|
$
|
371,222
|
|
|
$
|
4,923
|
|
|
$
|
(6,709
|
)
|
|
|
Operating
Segments
The Company segregates financial information for use in
assessing its performance and allocating resources among three
operating segments. The results are determined based on the
Companys management accounting process, which assigns
balance sheet and income statement items to each responsible
segment. These segments are defined by customer base and product
type. The management process measures the performance of the
operating segments based on the management structure of the
Company and is not necessarily comparable with similar
information for any other financial institution. Each segment is
managed by executives who, in conjunction with the Chief
Executive Officer, make strategic business decisions regarding
that segment. The three reportable operating segments are
Consumer, Commercial and Money Management. Additional
information is presented in Note 13 on Segments in the
consolidated financial statements.
48
The Company uses a funds transfer pricing method to value funds
used (e.g., loans, fixed assets, cash, etc.) and funds provided
(deposits, borrowings, and equity) by the business segments and
their components. This process assigns a specific value to each
new source or use of funds with a maturity, based on current
LIBOR interest rates, thus determining an interest spread at the
time of the transaction. Non-maturity assets and liabilities are
assigned to LIBOR based funding pools. This method helps to
provide an accurate means of valuing fund sources and uses in a
varying interest rate environment. The Company also assigns loan
charge-offs and recoveries directly to each operating segment
instead of allocating a portion of actual loan loss provision to
the segments. The operating segments also include a number of
allocations of income and expense from various support and
overhead centers within the Company. Management periodically
makes changes to the method of assigning costs and income to its
business segments to better reflect operating results. Beginning
in 2008, modifications were made to the funds transfer pricing
process which eliminated allocations to net interest income for
capital. This change was also reflected in the prior year
information presented below.
The table below is a summary of segment pre-tax income results
for the past three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
|
|
|
Segment
|
|
|
Other/
|
|
|
Consolidated
|
|
(Dollars in thousands)
|
|
Consumer
|
|
|
Commercial
|
|
|
Management
|
|
|
Totals
|
|
|
Elimination
|
|
|
Totals
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
351,387
|
|
|
$
|
208,348
|
|
|
$
|
8,192
|
|
|
$
|
567,927
|
|
|
$
|
24,812
|
|
|
$
|
592,739
|
|
Provision for loan losses
|
|
|
(57,044
|
)
|
|
|
(13,389
|
)
|
|
|
|
|
|
|
(70,433
|
)
|
|
|
(38,467
|
)
|
|
|
(108,900
|
)
|
Non-interest income
|
|
|
166,968
|
|
|
|
97,038
|
|
|
|
100,381
|
|
|
|
364,387
|
|
|
|
11,325
|
|
|
|
375,712
|
|
Investment securities gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,294
|
|
|
|
30,294
|
|
Non-interest expense
|
|
|
(322,978
|
)
|
|
|
(169,834
|
)
|
|
|
(103,632
|
)
|
|
|
(596,444
|
)
|
|
|
(19,669
|
)
|
|
|
(616,113
|
)
|
|
|
Income before income taxes
|
|
$
|
138,333
|
|
|
$
|
122,163
|
|
|
$
|
4,941
|
|
|
$
|
265,437
|
|
|
$
|
8,295
|
|
|
$
|
273,732
|
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
344,640
|
|
|
$
|
191,248
|
|
|
$
|
8,468
|
|
|
$
|
544,356
|
|
|
$
|
(6,284
|
)
|
|
$
|
538,072
|
|
Provision for loan losses
|
|
|
(34,787
|
)
|
|
|
(8,026
|
)
|
|
|
|
|
|
|
(42,813
|
)
|
|
|
81
|
|
|
|
(42,732
|
)
|
Non-interest income
|
|
|
186,792
|
|
|
|
85,151
|
|
|
|
92,628
|
|
|
|
364,571
|
|
|
|
7,010
|
|
|
|
371,581
|
|
Investment securities gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,234
|
|
|
|
8,234
|
|
Non-interest expense
|
|
|
(305,718
|
)
|
|
|
(158,017
|
)
|
|
|
(65,722
|
)
|
|
|
(529,457
|
)
|
|
|
(45,301
|
)
|
|
|
(574,758
|
)
|
|
|
Income (loss) before income taxes
|
|
$
|
190,927
|
|
|
$
|
110,356
|
|
|
$
|
35,374
|
|
|
$
|
336,657
|
|
|
$
|
(36,260
|
)
|
|
$
|
300,397
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
(52,594
|
)
|
|
$
|
11,807
|
|
|
$
|
(30,433
|
)
|
|
$
|
(71,220
|
)
|
|
$
|
44,555
|
|
|
$
|
(26,665
|
)
|
|
|
Percent
|
|
|
(27.5
|
)%
|
|
|
10.7
|
%
|
|
|
(86.0
|
)%
|
|
|
(21.2
|
)%
|
|
|
N.M.
|
|
|
|
(8.9
|
)%
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
330,935
|
|
|
$
|
184,245
|
|
|
$
|
8,019
|
|
|
$
|
523,199
|
|
|
$
|
(10,000
|
)
|
|
$
|
513,199
|
|
Provision for loan losses
|
|
|
(26,338
|
)
|
|
|
295
|
|
|
|
|
|
|
|
(26,043
|
)
|
|
|
394
|
|
|
|
(25,649
|
)
|
Non-interest income
|
|
|
179,401
|
|
|
|
79,427
|
|
|
|
85,235
|
|
|
|
344,063
|
|
|
|
8,523
|
|
|
|
352,586
|
|
Investment securities gains, net
|
|
|
2,839
|
|
|
|
|
|
|
|
|
|
|
|
2,839
|
|
|
|
6,196
|
|
|
|
9,035
|
|
Non-interest expense
|
|
|
(286,011
|
)
|
|
|
(143,970
|
)
|
|
|
(60,388
|
)
|
|
|
(490,369
|
)
|
|
|
(35,056
|
)
|
|
|
(525,425
|
)
|
|
|
Income (loss) before income taxes
|
|
$
|
200,826
|
|
|
$
|
119,997
|
|
|
$
|
32,866
|
|
|
$
|
353,689
|
|
|
$
|
(29,943
|
)
|
|
$
|
323,746
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
(9,899
|
)
|
|
$
|
(9,641
|
)
|
|
$
|
2,508
|
|
|
$
|
(17,032
|
)
|
|
$
|
(6,317
|
)
|
|
$
|
(23,349
|
)
|
|
|
Percent
|
|
|
(4.9
|
)%
|
|
|
(8.0
|
)%
|
|
|
7.6
|
%
|
|
|
(4.8
|
)%
|
|
|
(21.1
|
)%
|
|
|
(7.2
|
)%
|
|
|
Consumer
The Consumer segment includes the retail branch network,
consumer finance, bank card, student loans and discount
brokerage services. Pre-tax income for 2008 was
$138.3 million, a decrease of $52.6 million, or
49
27.5% from 2007. The decrease was due to increases of
$17.3 million in non-interest expense and
$22.3 million in net loan charge-offs. In addition,
non-interest income declined $19.8 million, while net
interest income increased $6.7 million. The increase in net
interest income resulted mainly from a $92.2 million
decline in deposit interest expense, partly offset by a
$71.8 million decrease in net allocated funding credits
assigned to the Consumer segments deposit and loan
portfolio and a $14.1 million decrease in loan interest
income. The decrease in non-interest income resulted largely
from lower overdraft and return item fees, an impairment charge
taken on certain held for sale student loans, and lower gains on
student loan sales. The declines were partly offset by an
increase in bank card fee income (primarily debit card fees).
Non-interest expense increased $17.3 million, or 5.6%, over
the previous year mainly due to higher bank card processing
costs, salaries expense, corporate management fees and telephone
support fees. Net loan charge-offs increased $22.3 million,
or 64.0%, in the Consumer segment, with most of the increase due
to higher consumer credit card and marine and RV loan
charge-offs. Total average assets directly related to the
segment rose 7.0% over 2007. During 2008, total average loans
increased 6.9%, compared to a 9.7% increase in 2007. The
increase in average loans during 2008 resulted mainly from
growth in consumer loans and consumer credit card loans. Average
deposits increased slightly over the prior year, mainly due to
growth in premium money market deposit accounts, partly offset
by a decline in long-term certificates of deposit.
Pre-tax income for 2007 was $190.9 million, a decrease of
$9.9 million, or 4.9%, from 2006. This decrease was due to
an increase of $19.7 million, or 6.9%, in non-interest
expense, coupled with an $8.4 million increase in net loan
charge-offs, mainly relating to consumer credit card and marine
and RV loans. The increase in non-interest expense over the
previous year was mainly due to higher salaries expense,
occupancy expense, corporate management fees and various
assigned processing costs. In addition, net investment
securities gains declined by $2.8 million due to a gain
recorded in 2006 on the sale of MasterCard Inc. shares. Partly
offsetting these effects was a $13.7 million increase in
net interest income. This growth resulted mainly from a
$32.3 million increase in net allocated funding credits
assigned to the Consumer segments deposit and loan
portfolios, and higher loan interest income of
$38.2 million, which more than offset growth of
$56.6 million in deposit interest expense. Non-interest
income increased $7.4 million, or 4.1%, mainly due to
higher bank card transaction fees (primarily debit card) and
consumer brokerage and insurance fees, partly offset by a
decline in overdraft and return item fees and lower gains on
sales of student loans. Total average assets directly related to
the segment rose 10.5% over 2006. During 2007, total average
loans increased 9.7%, mainly from growth in consumer, personal
real estate and consumer credit card loans. Average deposits
increased 9.8% over the prior year, mainly due to growth in
short-term certificates of deposit and premium money market
deposit accounts.
Commercial
The Commercial segment provides corporate lending, leasing,
international services, and corporate cash management services.
Pre-tax profitability for the Commercial segment increased
$11.8 million, or 10.7%, compared to the prior year. Most
of the increase was due to a $17.1 million, or 8.9%,
increase in net interest income and an $11.9 million
increase in non-interest income. The increase in net interest
income resulted from lower net allocated funding costs of
$80.2 million and lower deposit interest expense of
$7.1 million, partly offset by a $70.1 million decline
in loan interest income. Non-interest income increased by 14.0%
over the previous year largely due to higher commercial cash
management fees and bank card fees (mainly corporate card fees).
Partly offsetting these increases in income was an increase in
non-interest expense, which rose $11.8 million, or 7.5%,
over the prior year. The increase included a $2.5 million
impairment charge on foreclosed land (which was sold in the
third quarter of 2008), in addition to higher salaries expense
and commercial card servicing costs. Net loan charge-offs were
$13.4 million in 2008 compared to $8.0 million in
2007. The increase was mainly due to higher construction and
land loan net charge-offs. Total average assets directly related
to the segment rose 8.1% over 2007. Average segment loans
increased 8.2% compared to 2007 as a result of growth in
business and business real estate loans. Average deposits
increased 7.5% due to growth in non-interest bearing demand,
money market and interest checking deposit accounts.
In 2007, income before income taxes for the Commercial segment
decreased $9.6 million, or 8.0%, compared to the prior
year. Most of the decrease was due to a $14.0 million, or
9.8%, increase in non-interest expense and an $8.3 million
increase in net loan charge-offs. Partly offsetting these
increases in expense were
50
a $7.0 million, or 3.8%, increase in net interest income
and a $5.7 million increase in non-interest income.
Included in net interest income was a $57.9 million
increase in loan interest income, which was partly offset by
higher assigned net funding costs of $46.5 million and
higher deposit interest expense of $4.4 million.
Non-interest income increased by 7.2% over the previous year as
a result of higher commercial cash management fees, overdraft
fees, bank card fees (mainly corporate card) and cash sweep
commissions. The increase in non-interest expense resulted from
higher salaries expense, commercial deposit account processing
costs and corporate management fees, partly offset by a decline
in foreclosed property expense. Net loan charge-offs were
$8.0 million in 2007 compared to net recoveries of $295
thousand in 2006. The increase over 2006 was due to charge-offs
related to several specific commercial borrowers. Total average
assets directly related to the segment rose 14.4% over 2006.
Average segment loans increased 14.1% compared to 2006 as a
result of growth in business, construction real estate and
business real estate loans, while average deposits increased
1.7% due to growth in interest checking deposit accounts.
Money
Management
The Money Management segment consists of the trust and capital
markets activities. The Trust group provides trust and estate
planning services, and advisory and discretionary investment
management services. At December 31, 2008 the Trust group
managed investments with a market value of $10.9 billion
and administered an additional $8.5 billion in non-managed
assets. It also provides investment management services to The
Commerce Funds, a series of mutual funds with $1.2 billion
in total assets at December 31, 2008. The Capital Markets
Group sells primarily fixed-income securities to individuals,
corporations, correspondent banks, public institutions, and
municipalities, and also provides investment safekeeping and
bond accounting services. Pre-tax income for the segment was
$4.9 million in 2008 compared to $35.4 million in
2007, mainly due to a $33.3 million loss on the purchase of
auction rate securities, which is discussed above in the
Non-Interest Expense section of this discussion. Excluding this
charge, segment profitability would have been
$38.2 million, an 8.0% increase over 2007. Net interest
income decreased $276 thousand, or 3.3%, from the prior year,
due to a decline in interest income on overnight investments,
offset by lower interest expense on short-term borrowings.
Non-interest income increased $7.8 million, or 8.4%, mainly
due to higher private client and corporate trust fees and bond
trading income in the Capital Markets Group. Average assets
decreased $345.1 million during 2008 because of lower
overnight investments of liquid funds. Average deposits
increased $213.3 million during 2008, due to continuing
growth in short-term certificates of deposit over $100,000.
Pre-tax income for the Money Management segment was
$35.4 million in 2007 compared to $32.9 million in
2006, an increase of $2.5 million, or 7.6%. The increase
over the prior year was mainly due to higher non-interest
income. Non-interest income increased $7.4 million, or
8.7%, due to higher private client, institutional and corporate
trust fees, bond trading income and cash sweep commissions. Net
interest income increased $449 thousand, or 5.6%, over the prior
year. Growth in interest income on short-term investments was
partly offset by higher net funding charges assigned to the
segments short-term investments and borrowings, in
addition to an increase in interest expense on deposits and
borrowings. Non-interest expense increased $5.3 million, or
8.8%, over the prior year mainly due to higher salaries expense,
assigned processing costs and corporate management fees. Average
assets increased $148.0 million during 2007 because of
higher overnight investments. Average deposits increased
$14.8 million during 2007, mainly due to growth in
short-term certificates of deposit over $100,000.
The segment activity, as shown above, includes both direct and
allocated items. Amounts in the Other/Elimination
column include activity not related to the segments, such as
certain administrative functions, the investment securities
portfolio, and the effect of certain expense allocations to the
segments. Also included in this category is the excess of the
Companys provision for loan losses over net loan
charge-offs, which are generally assigned directly to the
segments. In 2008, the pre-tax profitability in this category
was $8.3 million, compared to a loss of $36.3 million
in 2007. The profitability increase was partly due to items
relating to the Banks relationship with Visa, as discussed
earlier, which were not assigned to a segment. In 2008, Visa
stock redemption gains of $22.2 million and indemnification
obligation reversals of $9.6 million were recorded,
compared to obligation charges of $21.0 million in 2007. In
addition, unallocated net interest income in this category,
relating to earnings on the Companys investment portfolio
and interest expense on
51
overnight borrowings not allocated to the segments, rose
$31.1 million in 2008. These increases were partly offset
by a $38.5 million loan loss provision in this category, as
described above.
Impact
of Recently Issued Accounting Standards
In June 2006, the FASB issued Financial Accounting Standards
Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48), which prescribes the
recognition threshold and measurement attributes necessary for
recognition in the financial statements of a tax position taken,
or expected to be taken, in a tax return. Under FIN 48, an
income tax position will be recognized if it is more likely than
not that it will be sustained upon IRS examination, based upon
its technical merits. Once that status is met, the amount
recorded will be the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate
settlement. It also provides guidance on derecognition,
classification, interest and penalties, interim period
accounting, disclosure, and transition requirements. As a result
of the Companys adoption of FIN 48, additional income
tax benefits of $446 thousand were recognized as of
January 1, 2007 as an increase to equity.
The Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements, on
January 1, 2008. This Statement defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. It emphasizes that fair value is a
market-based measurement and should be determined based on
assumptions that a market participant would use when pricing an
asset or liability. Additionally, it establishes a fair value
hierarchy that provides the highest priority to measurements
using quoted prices in active markets and the lowest priority to
measurements based on unobservable data. The Statement does not
require any new fair value measurements. The Statement also
modifies the guidance for initial recognition of fair value for
certain derivative contracts held by the Company. Former
accounting guidance precluded immediate recognition in earnings
of an unrealized gain or loss, measured as the difference
between the transaction price and fair value of these
instruments at initial recognition. This guidance was nullified
by the Statement. In accordance with the new recognition
requirements of the Statement, the Company increased equity by
$903 thousand on January 1, 2008.
The Company adopted Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, at
December 31, 2006. The Statement requires an employer to
recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through
other comprehensive income. The Companys initial
recognition at December 31, 2006 of the funded status of
its defined benefit pension plan reduced its prepaid pension
asset by $17.5 million, reduced deferred tax liabilities by
$6.6 million, and reduced the equity component of
accumulated other comprehensive income by $10.9 million.
Beginning in 2008, the Statement also requires an employer to
measure plan assets and obligations as of the date of its fiscal
year end statement of financial position. In order to transition
to a fiscal year end measurement date, the Company used earlier
measurements to allocate net periodic benefit cost for the
period between September 30, 2007 (the previous measurement
date) and December 31, 2008 proportionately between
retained earnings and net periodic benefit cost recognized
during 2008. The Company recorded the transition adjustment,
which increased retained earnings by $348 thousand, on
December 31, 2008.
In September 2006, the Emerging Issues Task Force (EITF) reached
a consensus on EITF Issue
06-4,
Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. This EITF Issue addresses accounting for
separate agreements which split life insurance policy benefits
between an employer and employee. The Issue requires the
employer to recognize a liability for future benefits payable to
the employee based on the substantive agreement with the
employee, because the postretirement benefit obligation is not
effectively settled through the purchase of the insurance
policy. The EITF Issue was effective January 1, 2008, and
the Companys adoption on that date resulted in a reduction
to equity of $716 thousand.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement
52
No. 115. This Statement permits entities to choose to
measure many financial instruments and certain other items at
fair value, on an
instrument-by-instrument
basis. Once an entity has elected to record eligible items at
fair value, the decision is irrevocable and the entity should
report unrealized gains and losses for which the fair value
option has been elected in earnings. The Statements
objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair
value measurement, which is consistent with the Boards
long-term measurement objectives for accounting for financial
instruments. The Statement may be applied to financial
instruments existing at the January 1, 2008 adoption date,
financial instruments recognized after the adoption date, and
upon certain other events. As of the adoption date and
subsequent to that date, the Company has chosen not to elect the
fair value option, but continues to consider future election and
the effect on its consolidated financial statements.
In November 2007, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin No. 109
(SAB 109). SAB 109 provides revised guidance on the
valuation of written loan commitments accounted for at fair
value through earnings. Former guidance under SAB 105
indicated that the expected net future cash flows related to the
associated servicing of the loan should not be incorporated into
the measurement of the fair value of a derivative loan
commitment. The new guidance under SAB 109 requires these
cash flows to be included in the fair value measurement, and the
SAB requires this view to be applied on a prospective basis to
derivative loan commitments issued or modified after
January 1, 2008. The Companys application of
SAB 109 in 2008 did not have a material effect on its
consolidated financial statements.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141(revised), Business
Combinations. The Statement retains the fundamental
requirements in Statement 141 that the acquisition method of
accounting be used for business combinations, but broadens the
scope of Statement 141 and contains improvements to the
application of this method. The Statement requires an acquirer
to recognize the assets acquired, the liabilities assumed, and
any non-controlling interest in the acquiree at the acquisition
date, measured at their fair values as of that date. Costs
incurred to effect the acquisition are to be recognized
separately from the acquisition. Assets and liabilities arising
from contractual contingencies must be measured at fair value as
of the acquisition date. Contingent consideration must also be
measured at fair value as of the acquisition date. The Statement
also changes the accounting for negative goodwill arising from a
bargain purchase, requiring recognition in earnings instead of
allocation to assets acquired. For business combinations
achieved in stages (step acquisitions), the assets and
liabilities must be recognized at the full amounts of their fair
values, while under former guidance the entity was acquired in a
series of purchases, with costs and fair values being identified
and measured at each step. The Statement applies to business
combinations occurring after January 1, 2009.
Also in December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling
Interests in Consolidated Financial Statements an
amendment of ARB No. 51. The Statement clarifies that
a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. The Statement
establishes a single method of accounting for changes in a
parents ownership interest if the parent retains its
controlling interest, deeming these to be equity transactions.
Such changes include the parents purchases and sales of
ownership interests in its subsidiary and the subsidiarys
acquisition and issuance of its ownership interests. The
Statement also requires that a parent recognize a gain or loss
in net income when a subsidiary is deconsolidated. It changes
the way the consolidated income statement is presented,
requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the
noncontrolling interest, and requires disclosure of these
amounts on the face of the consolidated statement of income. The
Statement is effective on January 1, 2009. The Company does
not expect adoption of the Statement to have a significant
effect on its consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of
FASB Statement No. 133. This Statement requires
enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items
are accounted for, and how these activities affect its
53
financial position, financial performance, and cash flows. The
Statement is effective for financial statements issued in 2009.
The Company does not expect adoption of the Statement to have a
significant effect on its consolidated financial statements.
In June 2008, the FASB posted Staff Position
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. This
pronouncement defines unvested stock awards which contain
nonforfeitable rights to dividends as securities which
participate in undistributed earnings. Such participating
securities must be included in the computation of earnings per
share under the two-class method. The two-class method is an
earnings allocation formula that determines earnings per share
for common stock and participating securities according to
dividends declared and participation rights in undistributed
earnings. The Company is required to apply the two-class method
to its computation of earnings per share effective
January 1, 2009, and does not expect its application to
have a significant effect on the computation of earnings per
share attributable to common shareholders.
In January 2009, the FASB issued Staff Position
No. EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue
No. 99-20.
The amendments purpose is to achieve a more consistent
determination of whether an other-than-temporary impairment has
occurred on beneficial interests. Specifically, the new
pronouncement no longer requires the usage of market participant
assumptions about future cash flows in determining
other-than-temporary impairment under the
EITF 99-20
model, and aligns that models impairment guidance with
SFAS 115. The Company has not yet been required to assess
impairment under
EITF 99-20,
and its assessments have been in accordance with SFAS 115
guidelines.
Effects
of Inflation
The impact of inflation on financial institutions differs
significantly from that exerted on industrial entities.
Financial institutions are not heavily involved in large capital
expenditures used in the production, acquisition or sale of
products. Virtually all assets and liabilities of financial
institutions are monetary in nature and represent obligations to
pay or receive fixed and determinable amounts not affected by
future changes in prices. Changes in interest rates have a
significant effect on the earnings of financial institutions.
Higher interest rates generally follow the rising demand of
borrowers and the corresponding increased funding requirements
of financial institutions. Although interest rates are viewed as
the price of borrowing funds, the behavior of interest rates
differs significantly from the behavior of the prices of goods
and services. Prices of goods and services may be directly
related to that of other goods and services while the price of
borrowing relates more closely to the inflation rate in the
prices of those goods and services. As a result, when the rate
of inflation slows, interest rates tend to decline while
absolute prices for goods and services remain at higher levels.
Interest rates are also subject to restrictions imposed through
monetary policy, usury laws and other artificial constraints.
During the second half of 2008, the national economy experienced
a significant downturn. Because of this downturn, interest rates
fell significantly while the price of consumer goods and
services remained constant. New legislation was enacted to help
mitigate any negative impact of the economic downturn. As a
result, it is difficult to predict what inflationary impacts the
economic slowdown will have on the Company and its operations.
Corporate
Governance
The Company has adopted a number of corporate governance
measures. These include corporate governance guidelines, a code
of ethics that applies to its senior financial officers and the
charters for its audit committee, its committee on compensation
and human resources, and its committee on governance/directors.
This information is available on the Companys web site
www.commercebank.com under Investor Relations.
Forward-Looking
Statements
This report may contain forward-looking statements
that are subject to risks and uncertainties and include
information about possible or assumed future results of
operations. Many possible events or factors
54
could affect the future financial results and performance of the
Company. This could cause results or performance to differ
materially from those expressed in the forward-looking
statements. Words such as expects,
anticipates, believes,
estimates, variations of such words and other
similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties
and assumptions which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is
expressed or forecasted in, or implied by, such forward-looking
statements. Readers should not rely solely on the
forward-looking statements and should consider all uncertainties
and risks discussed throughout this report. Forward-looking
statements speak only as of the date they are made. The Company
does not undertake to update forward-looking statements to
reflect circumstances or events that occur after the date the
forward-looking statements are made or to reflect the occurrence
of unanticipated events. Such possible events or factors
include: changes in economic conditions in the Companys
market area; changes in policies by regulatory agencies,
governmental legislation and regulation; fluctuations in
interest rates; changes in liquidity requirements; demand for
loans in the Companys market area; changes in accounting
and tax principles; estimates made on income taxes; and
competition with other entities that offer financial services.
55
AVERAGE
BALANCE SHEETS AVERAGE RATES AND YIELDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Rates
|
|
|
|
|
|
Interest
|
|
|
Rates
|
|
|
|
|
|
Interest
|
|
|
Rates
|
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Paid
|
|
|
Balance
|
|
|
Expense
|
|
|
Paid
|
|
|
Balance
|
|
|
Expense
|
|
|
Paid
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business(B)
|
|
$
|
3,478,927
|
|
|
$
|
169,767
|
|
|
|
4.88
|
%
|
|
$
|
3,110,386
|
|
|
$
|
208,819
|
|
|
|
6.71
|
%
|
|
$
|
2,688,722
|
|
|
$
|
177,313
|
|
|
|
6.59
|
%
|
Real estate construction and land
|
|
|
701,519
|
|
|
|
34,445
|
|
|
|
4.91
|
|
|
|
671,986
|
|
|
|
49,436
|
|
|
|
7.36
|
|
|
|
540,574
|
|
|
|
40,477
|
|
|
|
7.49
|
|
Real estate business
|
|
|
2,281,664
|
|
|
|
136,955
|
|
|
|
6.00
|
|
|
|
2,204,041
|
|
|
|
154,819
|
|
|
|
7.02
|
|
|
|
2,053,455
|
|
|
|
140,659
|
|
|
|
6.85
|
|
Real estate personal
|
|
|
1,522,172
|
|
|
|
88,322
|
|
|
|
5.80
|
|
|
|
1,521,066
|
|
|
|
90,537
|
|
|
|
5.95
|
|
|
|
1,415,321
|
|
|
|
79,816
|
|
|
|
5.64
|
|
Consumer
|
|
|
1,674,497
|
|
|
|
119,837
|
|
|
|
7.16
|
|
|
|
1,558,302
|
|
|
|
115,184
|
|
|
|
7.39
|
|
|
|
1,352,047
|
|
|
|
95,074
|
|
|
|
7.03
|
|
Home equity
|
|
|
474,635
|
|
|
|
23,960
|
|
|
|
5.05
|
|
|
|
443,748
|
|
|
|
33,526
|
|
|
|
7.56
|
|
|
|
445,376
|
|
|
|
33,849
|
|
|
|
7.60
|
|
Student(C)
|
|
|
13,708
|
|
|
|
287
|
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer credit card
|
|
|
776,810
|
|
|
|
83,972
|
|
|
|
10.81
|
|
|
|
665,964
|
|
|
|
84,856
|
|
|
|
12.74
|
|
|
|
595,252
|
|
|
|
77,737
|
|
|
|
13.06
|
|
Overdrafts
|
|
|
11,926
|
|
|
|
|
|
|
|
|
|
|
|
13,823
|
|
|
|
|
|
|
|
|
|
|
|
14,685
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
10,935,858
|
|
|
|
657,545
|
|
|
|
6.01
|
|
|
|
10,189,316
|
|
|
|
737,177
|
|
|
|
7.23
|
|
|
|
9,105,432
|
|
|
|
644,925
|
|
|
|
7.08
|
|
|
|
Loans held for sale
|
|
|
347,441
|
|
|
|
14,968
|
|
|
|
4.31
|
|
|
|
321,916
|
|
|
|
21,940
|
|
|
|
6.82
|
|
|
|
315,950
|
|
|
|
21,788
|
|
|
|
6.90
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government & federal agency
|
|
|
183,083
|
|
|
|
7,439
|
|
|
|
4.06
|
|
|
|
410,170
|
|
|
|
16,505
|
|
|
|
4.02
|
|
|
|
640,239
|
|
|
|
22,817
|
|
|
|
3.56
|
|
State & municipal
obligations(B)
|
|
|
695,542
|
|
|
|
34,572
|
|
|
|
4.97
|
|
|
|
594,154
|
|
|
|
26,855
|
|
|
|
4.52
|
|
|
|
414,282
|
|
|
|
18,546
|
|
|
|
4.48
|
|
Mortgage and asset-backed securities
|
|
|
2,469,467
|
|
|
|
125,369
|
|
|
|
5.08
|
|
|
|
2,120,521
|
|
|
|
102,243
|
|
|
|
4.82
|
|
|
|
2,201,685
|
|
|
|
96,270
|
|
|
|
4.37
|
|
Trading securities
|
|
|
28,840
|
|
|
|
1,154
|
|
|
|
4.00
|
|
|
|
22,321
|
|
|
|
1,057
|
|
|
|
4.73
|
|
|
|
17,444
|
|
|
|
762
|
|
|
|
4.37
|
|
Other marketable
securities(B)
|
|
|
98,650
|
|
|
|
4,283
|
|
|
|
4.34
|
|
|
|
129,622
|
|
|
|
7,795
|
|
|
|
6.01
|
|
|
|
200,013
|
|
|
|
11,248
|
|
|
|
5.62
|
|
Non-marketable securities
|
|
|
133,996
|
|
|
|
7,378
|
|
|
|
5.51
|
|
|
|
92,251
|
|
|
|
5,417
|
|
|
|
5.87
|
|
|
|
85,211
|
|
|
|
7,475
|
|
|
|
8.77
|
|
|
|
Total investment securities
|
|
|
3,609,578
|
|
|
|
180,195
|
|
|
|
4.99
|
|
|
|
3,369,039
|
|
|
|
159,872
|
|
|
|
4.75
|
|
|
|
3,558,874
|
|
|
|
157,118
|
|
|
|
4.41
|
|
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
425,273
|
|
|
|
8,287
|
|
|
|
1.95
|
|
|
|
527,304
|
|
|
|
25,881
|
|
|
|
4.91
|
|
|
|
299,554
|
|
|
|
15,637
|
|
|
|
5.22
|
|
Interest earning deposits with banks
|
|
|
46,670
|
|
|
|
198
|
|
|
|
.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
15,364,820
|
|
|
|
861,193
|
|
|
|
5.60
|
|
|
|
14,407,575
|
|
|
|
944,870
|
|
|
|
6.56
|
|
|
|
13,279,810
|
|
|
|
839,468
|
|
|
|
6.32
|
|
|
|
Less allowance for loan losses
|
|
|
(145,176
|
)
|
|
|
|
|
|
|
|
|
|
|
(132,234
|
)
|
|
|
|
|
|
|
|
|
|
|
(129,224
|
)
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investment securities
|
|
|
27,068
|
|
|
|
|
|
|
|
|
|
|
|
25,333
|
|
|
|
|
|
|
|
|
|
|
|
(9,443
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
451,105
|
|
|
|
|
|
|
|
|
|
|
|
463,970
|
|
|
|
|
|
|
|
|
|
|
|
470,826
|
|
|
|
|
|
|
|
|
|
Land, buildings and equipment net
|
|
|
412,852
|
|
|
|
|
|
|
|
|
|
|
|
400,161
|
|
|
|
|
|
|
|
|
|
|
|
376,375
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
343,664
|
|
|
|
|
|
|
|
|
|
|
|
315,522
|
|
|
|
|
|
|
|
|
|
|
|
250,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,454,333
|
|
|
|
|
|
|
|
|
|
|
$
|
15,480,327
|
|
|
|
|
|
|
|
|
|
|
$
|
14,238,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
400,948
|
|
|
|
1,186
|
|
|
|
.30
|
|
|
$
|
392,942
|
|
|
|
2,067
|
|
|
|
.53
|
|
|
$
|
393,870
|
|
|
|
2,204
|
|
|
|
.56
|
|
Interest checking and money market
|
|
|
7,400,125
|
|
|
|
59,947
|
|
|
|
.81
|
|
|
|
6,996,943
|
|
|
|
114,027
|
|
|
|
1.63
|
|
|
|
6,717,280
|
|
|
|
94,238
|
|
|
|
1.40
|
|
Time open & C.D.s of less than $100,000
|
|
|
2,149,119
|
|
|
|
77,322
|
|
|
|
3.60
|
|
|
|
2,359,386
|
|
|
|
110,957
|
|
|
|
4.70
|
|
|
|
2,077,257
|
|
|
|
85,424
|
|
|
|
4.11
|
|
Time open & C.D.s of $100,000 and over
|
|
|
1,629,500
|
|
|
|
55,665
|
|
|
|
3.42
|
|
|
|
1,480,856
|
|
|
|
73,739
|
|
|
|
4.98
|
|
|
|
1,288,845
|
|
|
|
58,381
|
|
|
|
4.53
|
|
|
|
Total interest bearing deposits
|
|
|
11,579,692
|
|
|
|
194,120
|
|
|
|
1.68
|
|
|
|
11,230,127
|
|
|
|
300,790
|
|
|
|
2.68
|
|
|
|
10,477,252
|
|
|
|
240,247
|
|
|
|
2.29
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
1,373,625
|
|
|
|
25,085
|
|
|
|
1.83
|
|
|
|
1,696,613
|
|
|
|
83,464
|
|
|
|
4.92
|
|
|
|
1,455,544
|
|
|
|
70,154
|
|
|
|
4.82
|
|
Other
borrowings(D)
|
|
|
1,092,746
|
|
|
|
37,905
|
|
|
|
3.47
|
|
|
|
292,446
|
|
|
|
13,775
|
|
|
|
4.71
|
|
|
|
182,940
|
|
|
|
8,744
|
|
|
|
4.78
|
|
|
|
Total borrowings
|
|
|