COMMERCE BANCSHARES INC /MO/
10-Ks and 10-Qs
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Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended
December 31, 2009 — Commission File
No. 0-2989
COMMERCE
BANCSHARES, INC.
(Exact name of registrant as
specified in its charter)
|
Missouri
|
43-0889454
|
|
| (State of Incorporation) | (IRS Employer Identification No.) | |
|
1000 Walnut,
Kansas City, MO |
64106
|
|
|
(816) 234-2000
|
Securities
registered pursuant to Section 12(b) of the Act:
| Title of class | Name of exchange on which registered | |
|
$5 Par Value Common Stock
|
NASDAQ Global Select Market |
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
þ
No
o
Indicate by check mark if the
Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes
o
No
þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
|
Large accelerated filer
þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
o
No
þ
As of June 30, 2009, the aggregate market value of the
voting stock held by non-affiliates of the Registrant was
approximately $2,065,000,000. As of February 10, 2010,
there were 83,195,752 shares of Registrant’s
$5 Par Value Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for
its 2010 annual meeting of shareholders, which will be filed
within 120 days of December 31, 2009, are incorporated
by reference into Part III of this Report.
Commerce
Bancshares, Inc.
Form 10-K
2
Table of Contents
| Item 1. | BUSINESS |
General
Commerce Bancshares, Inc. (the “Company”), a bank
holding company as defined in the Bank Holding Company Act of
1956, as amended, was incorporated under the laws of Missouri on
August 4, 1966. The Company owns all of the outstanding
capital stock of one national banking association, Commerce
Bank, N.A. (the “Bank”), which is headquartered in
Missouri. The Bank engages in general banking business,
providing a broad range of retail, corporate, investment, trust,
and asset management products and services to individuals and
businesses. The Company also owns, directly or through the Bank,
various non-banking subsidiaries. Their activities include
underwriting credit life and credit accident and health
insurance, selling property and casualty insurance (relating to
consumer loans made by the Bank), private equity investment,
securities brokerage, mortgage banking, and leasing activities.
The Company owns a second tier holding company that is the
direct owner of the Bank. A list of the Company’s
subsidiaries is included as Exhibit 21.
The Company is one of the nation’s top 50 bank holding
companies, based on asset size. At December 31, 2009, the
Company had consolidated assets of $18.1 billion, loans of
$10.5 billion, deposits of $14.2 billion, and equity
of $1.9 billion. All of the Company’s operations
conducted by subsidiaries are consolidated for purposes of
preparing the Company’s consolidated financial statements.
The Company does not utilize unconsolidated subsidiaries or
special purpose entities to provide off-balance sheet borrowings
or securitizations.
The Company’s goal is to be the preferred provider of
targeted financial services in its communities, based on strong
customer relationships. It believes in building long-term
relationships based on top quality service, 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 Company’s 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 Bank’s facilities are located throughout Missouri,
Kansas, and central Illinois, and in Tulsa, Oklahoma and Denver,
Colorado. Its two largest markets include St. Louis and
Kansas City, which serve as the central hubs for the entire
company.
The markets the Bank serves, being located in the lower Midwest,
provide natural sites for production and distribution facilities
and also serve as transportation hubs. The economy has been
well-diversified in these markets with many major industries
represented, including telecommunications, automobile, aircraft
and general manufacturing, health care, numerous service
industries, food production, and agricultural production and
related industries. In addition, several of the Illinois markets
are located in areas with some of the most productive farmland
in the world. The real estate lending operations of the Bank are
centered in its lower Midwestern markets. Historically, these
markets have generally tended to be less volatile than in other
parts of the country. While the decline in the national real
estate market resulted in significantly higher real estate loan
losses during 2008 and 2009 for the banking industry, management
believes the diversity and nature of the Bank’s markets has
resulted in lower real estate loan losses in these markets and
is a key factor in the Bank’s relatively lower loan loss
levels.
The Company regularly evaluates the potential acquisition of,
and holds discussions with, various financial institutions
eligible for bank holding company ownership or control. In
addition, the Company regularly considers the potential
disposition of certain of its assets and branches. The Company
seeks merger or acquisition partners that are culturally similar
and have experienced management and possess either significant
market presence or have potential for improved profitability
through financial management, economies of scale and expanded
services. The Company’s most recent acquisitions were in
2007, when it
3
Table of Contents
acquired the outstanding stock of South Tulsa Financial
Corporation, located in Tulsa, Oklahoma, and Commerce Bank,
located in Denver, Colorado. For additional information on
acquisition and branch disposition activity, refer to
page 74.
Operating
Segments
The Company is managed in three operating segments. The Consumer
segment includes the retail branch network, consumer installment
lending, personal mortgage banking, consumer debit and credit
bank card activities, and student lending. It provides services
through a network of 214 full-service branches, a widespread ATM
network of 412 machines, and the use of alternative delivery
channels such as extensive online banking and telephone banking
services. In 2009, this retail segment contributed 41% of total
segment pre-tax income. The Commercial segment provides a full
array of corporate lending, merchant and commercial bank card
products, leasing, and international services, as well as
business and government deposit and cash management services. In
2009, it contributed 42% of total segment pre-tax income. The
Wealth segment provides traditional trust and estate tax
planning services, brokerage services, and advisory and
discretionary investment portfolio management services to both
personal and institutional corporate customers. This segment
also manages the Company’s family of proprietary mutual
funds, which are available for sale to both trust and general
retail customers. Fixed income investments are sold to
individuals and institutional investors through the Capital
Markets Group, which is also included in this segment. At
December 31, 2009, the Wealth segment managed investments
with a market value of $12.8 billion and administered an
additional $9.3 billion in non-managed assets. Additional
information relating to operating segments can be found on pages
52 and 96.
Supervision
and Regulation
General
The Company, as a bank holding company, is primarily regulated
by the Board of Governors of the Federal Reserve System under
the Bank Holding Company Act of 1956 (BHC Act). Under the BHC
Act, the Federal Reserve Board’s prior approval is required
in any case in which the Company proposes to acquire all or
substantially all of the assets of any bank, acquire direct or
indirect ownership or control of more than 5% of the voting
shares of any bank, or merge or consolidate with any other bank
holding company. 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
Bank’s record in meeting the credit needs of the
communities it serves in accordance with the Community
Reinvestment Act of 1977, as amended (CRA). 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
Company’s banking subsidiary is organized as a national
banking association and is subject to regulation, supervision
and examination by the Office of the Comptroller of the Currency
(OCC). The Bank is also subject to regulation by the Federal
Deposit Insurance Corporation (FDIC). In addition, there are
numerous other federal and state laws and regulations which
control the activities of the Company and the Bank, including
requirements and limitations relating to capital and reserve
requirements, permissible investments and lines of business,
transactions with affiliates, loan limits, mergers and
acquisitions, issuance of securities, dividend payments, and
extensions of credit. If the Company fails to comply with these
or other applicable laws and regulations, it may be subject to
civil monetary penalties, imposition of cease and desist orders
or other written directives, removal of management and, in
certain circumstances, criminal penalties. This regulatory
framework is intended primarily for the protection of depositors
and the preservation of the federal deposit insurance funds, and
not for the protection
4
Table of Contents
of security holders. Statutory and regulatory controls increase
a bank holding company’s cost of doing business and limit
the options of its management to employ assets and maximize
income.
In addition to its regulatory powers, the Federal Reserve Bank
affects the conditions under which the Company operates by its
influence over the national supply of bank credit. The Federal
Reserve Board employs open market operations in
U.S. government securities, 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 company’s bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain
the capital of a subsidiary bank will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
Substantially all of the deposits of the Bank are insured up to
the applicable limits by the Bank Insurance Fund of the FDIC.
The Emergency Economic Stabilization Act of 2008 (discussed
further under “Legislation”) temporarily increased the
general depositor limit from $100,000 to $250,000, through
December 31, 2013. During 2009, the Bank also participated
in the FDIC’s Transaction Account Guarantee Program. Under
that program, all non-interest bearing transaction accounts were
fully guaranteed by the FDIC for the entire amount of the
account. Coverage under this program was in addition to and
separate from the coverage available under the FDIC’s
general deposit insurance rules. Effective January 1, 2010,
the Bank no longer participates in the program, and depositor
accounts are insured up to $250,000 under the FDIC’s
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
Bank’s premiums had been relatively low prior to the 2008
economic crisis. These rose significantly in 2009 due to higher
fees charged by the FDIC in order to replenish its insurance
fund, which has been depleted by the recent high levels of bank
failures across the country. The Bank’s FDIC expense,
including its portion of an industry-wide special assessment,
totaled $27.4 million in 2009, compared to
$2.1 million in 2008. In late 2009, the FDIC Board ruled
that insured institutions must prepay their quarterly risk-based
assessments for the fourth quarter of 2009 and subsequent years
2010 through 2012, in order to cover the costs of future
expected bank failures. The Bank’s pre-payment on
December 30, 2009 totaled $68.7 million.
Payment
of Dividends
The principal source of the Company’s cash revenues is
dividends paid by the Bank. The Federal Reserve Board may
prohibit the payment of dividends by bank holding companies if
their actions constitute unsafe or unsound practices. The OCC
limits the payment of dividends by the Bank in any calendar year
to the net profit of the current year combined with the retained
net profits of the preceding two years. Permission must be
obtained from the OCC for dividends exceeding these amounts. The
payment of dividends by the Bank may also be affected by factors
such as the maintenance of adequate capital.
5
Table of Contents
Capital
Adequacy
The Company is required to comply with the capital adequacy
standards established by the Federal Reserve. These capital
adequacy guidelines generally require bank holding companies to
maintain minimum total capital equal to 8% of total
risk-adjusted assets and off-balance sheet items (the
“Total Risk-Based Capital Ratio”), with at least
one-half of that amount consisting of Tier I, or core
capital, and the remaining amount consisting of Tier II, or
supplementary capital. Tier I capital for bank holding
companies generally consists of the sum of common
shareholders’ equity, qualifying non-cumulative perpetual
preferred stock, a limited amount of qualifying cumulative
perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill and other
non-qualifying intangible assets. Tier II capital generally
consists of hybrid capital instruments, term subordinated debt
and, subject to limitations, general allowances for loan losses.
Assets are adjusted under the risk-based guidelines to take into
account different risk characteristics.
In addition, the Federal Reserve also requires bank holding
companies to comply with minimum leverage ratio requirements.
The leverage ratio is the ratio of a banking organization’s
Tier I capital to its total consolidated quarterly average
assets (as defined for regulatory purposes), net of the
allowance for loan losses, goodwill and certain other intangible
assets. The minimum leverage ratio for bank holding companies is
4%. At December 31, 2009, the Bank was
“well-capitalized” under regulatory capital adequacy
standards, as further discussed on page 100.
Legislation
These laws and regulations are under constant review by various
agencies and legislatures, and are subject to sweeping change.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB
Act) contained major changes in laws that previously kept the
banking industry largely separate from the securities and
insurance industries. The GLB Act authorized the creation of a
new kind of financial institution, known as a “financial
holding company”, and a new kind of bank subsidiary, called
a “financial subsidiary”, which may engage in a
broader range of investment banking, insurance agency,
brokerage, and underwriting activities. The GLB Act also
included privacy provisions that limit banks’ abilities to
disclose non-public information about customers to
non-affiliated entities. Banking organizations are not required
to become financial holding companies, but instead may continue
to operate as bank holding companies, providing the same
services they were authorized to provide prior to the enactment
of the GLB Act. The Company currently operates as a bank holding
company.
The Company must also comply with the requirements of the Bank
Secrecy Act (BSA). The BSA is designed to help fight drug
trafficking, money laundering, and other crimes. Compliance is
monitored by the OCC. The BSA was enacted to prevent banks and
other financial service providers from being used as
intermediaries for, or to hide the transfer or deposit of money
derived from, criminal activity. Since its passage, the BSA has
been amended several times. These amendments include the Money
Laundering Control Act of 1986 which made money laundering a
criminal act, as well as the Money Laundering Suppression Act of
1994 which required regulators to develop enhanced examination
procedures and increased examiner training to improve the
identification of money laundering schemes in financial
institutions.
In 2001, the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (USA PATRIOT Act) was signed into law. The USA
PATRIOT Act substantially broadened the scope of
U.S. anti-money laundering laws and regulations by imposing
significant new compliance and due diligence obligations,
creating new crimes and penalties and expanding the
extra-territorial jurisdiction of the United States. The
U.S. Treasury Department issued a number of regulations
implementing the USA PATRIOT Act that apply certain of its
requirements to financial institutions such as the
Company’s 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.
6
Table of Contents
In October 2008, the Emergency Economic Stabilization Act of
2008 was enacted in response to a global financial crisis
spurred by frozen credit markets, institution failures and loss
of investor confidence. Under the Act, the Troubled Asset Relief
Program (TARP) was created, which authorized the
U.S. Treasury department to spend up to $700 billion
to purchase distressed assets and make capital injections into
banks. The stated goal of TARP was to improve the liquidity of
targeted illiquid,
difficult-to-value
assets by purchasing them from banks and other financial
institutions, thus encouraging banks to resume lending again at
levels seen before the crisis, loosening credit and improving
the market order and investor confidence. The Company did not
apply for TARP funds.
The FDIC’s Debt Guarantee Program allowed eligible
financial institutions to issue senior unsecured debt whose
principal and interest payments would be guaranteed by the FDIC.
The Company did not issue debt under this program, which
guaranteed debt issued on or before October 31, 2009 and
maturing on or before December 31, 2012. The program has
been extended through April 30, 2010 on a limited,
emergency basis, which the Company does not expect to utilize.
The Credit Card Accountability, Responsibility, and Disclosure
Act of 2009 (the Credit CARD Act) was signed into law in May
2009. It is comprehensive credit card legislation that aims to
establish fair and transparent practices relating to open end
consumer credit plans. The first phase of the legislation began
in August 2009, under which the payment period (with no late
fees) was extended from 14 days to 21 days, the
advance warning period for significant changes to credit card
accounts was extended from 15 days to 45 days, and
opt-out provisions were made available to customers. A second
phase began in February 2010, which includes provisions
governing when rate increases can be applied on late accounts,
requirements for clearer disclosures of terms before opening an
account, prohibitions on charging over-limit fees and
double-cycle billing, and various other restrictions. Additional
rules will become effective in July 2010, which deal with
interest rate reinstatements on former overdue accounts, and
gift card expiration dates and inactivity fees.
In November 2009, the Federal Reserve announced that starting
July 1, 2010, banks may not charge fees for paying
overdrafts on ATM and debit card transactions unless the
customer gives consent. Additional federal legislation has been
introduced which would limit the number and amount of overdraft
fees which banks can charge, prohibit ordering the posting of
transactions to cause consumers to incur higher fees, prohibit
non-sufficient funds fees on ATM or debit card transactions, and
require banks to provide a consumer notice and opportunity to
cancel transactions that would trigger an overdraft. The new
regulations, including the Credit CARD Act, could result in
lower fees earned on overdraft and credit card transactions.
In 2009 legislation was proposed by the President which could
affect the way student loans are originated in the U.S. The
proposed legislation would expand Pell Grants and Perkins Loan
programs and require all colleges and universities to convert to
direct lending programs with the U.S. government as of
July 1, 2010. Currently, colleges and universities have the
choice of participating in either direct lending with the
U.S. government or a program whereby loans are originated
by banks, but guaranteed by the U.S. government. Should
this legislation ultimately be passed, the Company may not be
able to continue its guaranteed student loan origination
business.
Congress is considering sweeping legislation that would overhaul
regulation of the financial services industry. The proposals
include the creation of an independent Consumer Financial
Protection Agency. The new agency would take consumer regulatory
responsibility of financial products from other agencies and
centralize it in one office. It would have the authority and
accountability to supervise, examine, and enforce consumer
financial protection laws, and any institution that provides
consumer financial products would fall under its jurisdiction.
The establishment of the proposed agency effectively separates
two types of regulation: consumer protection and safety and
soundness that are presently mutually reinforced within the
existing agencies. This possible separation is of special
concern to the financial industry, as it could result in
weakening both of these aims. Other proposed legislation
includes the creation of an agency to protect against systemic
risk, the creation of a single Federal bank regulator, further
regulation of the
over-the-counter
derivatives market, stricter capital and liquidity standards for
large institutions, provisions for non-binding
“say-on-pay”
shareholder voting on executive compensation, and creation of a
Securities and Exchange Commission (SEC) office with regulatory
authority over credit rating agencies. Recent proposals from the
administration include assessing fees totaling $170 billion
against larger banks (those with assets in
7
Table of Contents
excess of $50 billion) to recoup TARP losses, in addition
to prohibitions on proprietary trading activities and ownership
of hedge and private equity funds.
Competition
The Company’s locations in regional markets throughout
Missouri, Kansas, central Illinois, Tulsa, Oklahoma, and Denver,
Colorado, face intense competition from hundreds of financial
service providers. The Company competes with national and state
banks for deposits, loans and trust accounts, and with savings
and loan associations and credit unions for deposits and
consumer lending products. In addition, the Company competes
with other financial intermediaries such as securities brokers
and dealers, personal loan companies, insurance companies,
finance companies, and certain governmental agencies. The
passage of the GLB Act, which removed barriers between banking
and the securities and insurance industries, has resulted in
greater competition among these industries. The Company
generally competes on the basis of customer services and
responsiveness to customer needs, interest rates on loans and
deposits, lending limits and customer convenience, such as
location of offices.
Employees
The Company and its subsidiaries employed 4,565 persons on
a full-time basis and 674 persons on a part-time basis at
December 31, 2009. The Company provides a variety of
benefit programs including a 401K plan as well as group life,
health, accident, and other insurance. The Company also
maintains training and educational programs designed to prepare
employees for positions of increasing responsibility.
Available
Information
The Company’s principal offices are located at 1000 Walnut,
Kansas City, Missouri (telephone number
816-234-2000).
The Company makes available free of charge, through its web site
at www.commercebank.com, reports filed with the Securities and
Exchange Commission as soon as reasonably practicable after the
electronic filing. These filings include the annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports.
Statistical
Disclosure
The information required by Securities Act Guide 3 —
“Statistical Disclosure by Bank Holding Companies” is
located on the pages noted below.
|
Page
|
||||||||
| I. |
Distribution of Assets, Liabilities and Stockholders’
Equity; Interest Rates and Interest Differential
|
23, 60-63 | ||||||
| II. |
Investment Portfolio
|
41-43, 77-82 | ||||||
| III. |
Loan Portfolio
|
|||||||
|
Types of Loans
|
28 | |||||||
|
Maturities and Sensitivities of Loans to Changes in Interest
Rates
|
29 | |||||||
|
Risk Elements
|
35-41 | |||||||
| IV. |
Summary of Loan Loss Experience
|
33-35 | ||||||
| V. |
Deposits
|
43-44, 84 | ||||||
| VI. |
Return on Equity and Assets
|
18 | ||||||
| VII. |
Short-Term Borrowings
|
85-86 | ||||||
8
Table of Contents
| Item 1a. | RISK FACTORS |
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 Company’s actual results to
differ materially from those expressed in any forward-looking
statements made by or on behalf of Commerce Bancshares, Inc.
Difficult
market conditions have adversely affected the Company’s
industry and may continue to do so.
Given the concentration of the Company’s banking business
in the United States, it is particularly exposed to downturns in
the U.S. economy. The economic trends which began in 2008,
such as declines in the housing market, falling home prices,
increasing foreclosures, unemployment and under-employment, have
negatively impacted the credit performance of mortgage loans and
resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities as well as
major commercial and investment banks. These write-downs,
initially of mortgage-backed securities and other complex
financial instruments, but spreading to various classes of real
estate, commercial and consumer loans in turn, have caused many
financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and
institutional investors have reduced or ceased providing funding
to borrowers, including to other financial institutions. This
market turmoil and tightening of credit have led to an increased
level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction
of business activity generally. The resulting economic pressure
on consumers and lack of confidence in the financial markets has
adversely affected the Company’s business, financial
condition and results of operations through higher levels of
loan losses and lower loan demand. While there have been some
recent indications of stabilization, management does not expect
significant economic improvement in the near future. In
particular, the Company may face the following risks in
connection with these market conditions:
| • | The Company may face increased regulation of the industry. Compliance with such regulation may divert resources from other areas of the business and limit the ability to pursue other opportunities. Recently adopted regulation over credit card and overdraft account practices could result in lower revenues from these products. | |
| • | 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 Company’s loan losses and provision for loan losses, as a significant part of the Company’s business includes consumer and credit card lending. | |
| • | Reduced levels of economic activity may cause declines in financial service transactions and the fees earned by the Company on such transactions. | |
| • | The Company’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches it uses to select, manage, and underwrite its customers become less predictive of future behaviors. | |
| • | The process used to estimate losses inherent in the Company’s credit exposure requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of its borrowers to repay their loans, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process. |
9
Table of Contents
| • | Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions. | |
| • | With higher bank failures occurring in 2009 and more expected in the future, the Company may be required to pay significantly higher FDIC premiums for extended periods of time because of the low funding levels within the FDIC insurance fund. |
Significant
changes in banking laws and regulations could materially affect
the Company’s business.
Increased regulation of the banking industry is being demanded
by the current political administration. Certain regulation has
already been imposed during the past year, and much additional
regulation has been proposed. Such regulation, along with
possible changes in tax laws and accounting rules, may have a
significant impact on the ways that financial institutions
conduct business, implement strategic initiatives, engage in tax
planning and make financial disclosures. Compliance with such
regulation may increase costs and limit the ability to pursue
business opportunities.
The
performance of the Company is dependent on the economic
conditions of the markets in which the Company
operates.
The Company’s success is heavily influenced by the general
economic conditions of the specific markets in which it
operates. Unlike larger national or other regional banks that
are more geographically diversified, the Company provides
financial services primarily throughout the states of Missouri,
Kansas, and central Illinois, and has recently begun to expand
into Oklahoma, Colorado and other surrounding states. Since the
Company does not have a significant presence in other parts of
the country, a prolonged economic downtown in these markets
could have a material adverse effect on the Company’s
financial condition and results of operations.
Significant
changes in federal monetary policy could materially affect the
Company’s business.
The Federal Reserve System regulates the supply of money and
credit in the United States. Its polices determine in large part
the cost of funds for lending and investing by influencing the
interest rate earned on loans and paid on borrowings and
interest bearing deposits. Credit conditions are influenced by
its open market operations in U.S. government securities,
changes in the member bank discount rate, and bank reserve
requirements. Changes in Federal Reserve Board policies are
beyond the Company’s control and difficult to predict.
The
soundness of other financial institutions could adversely affect
the Company.
The Company’s ability to engage in routine funding
transactions could be adversely affected by the actions and
commercial soundness of other financial institution
counterparties. Financial services institutions are interrelated
as a result of trading, clearing, counterparty or other
relationships. The Company has exposure to many different
industries and counterparties, and routinely executes
transactions with counterparties in the financial industry,
including brokers and dealers, commercial banks, investment
banks, mutual funds, and other institutional clients.
Transactions with these institutions include overnight and term
borrowings, interest rate swap agreements, securities purchased
and sold, short-term investments, and other such transactions.
As a result of this exposure, defaults by, or 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 Company’s credit risk
may be exacerbated when the collateral held cannot be realized
upon or is liquidated at prices not sufficient to recover the
full amount of the financial instrument exposure due to the
Company. There is no assurance that any such losses would not
materially and adversely affect results of operations.
10
Table of Contents
The
Company’s asset valuation may include methodologies,
estimations and assumptions which are subject to differing
interpretations and could result in changes to asset valuations
that may materially adversely affect its results of operations
or financial condition.
The Company uses estimates, assumptions, and judgments when
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
Company’s future financial condition and results of
operations.
During periods of market disruption, including periods of
significantly rising or high interest rates, rapidly widening
credit spreads or illiquidity, it may be difficult to value
certain assets if trading becomes less frequent
and/or
market data becomes less observable. There may be certain asset
classes that were in active markets with significant observable
data that become illiquid due to the current financial
environment. In such cases, certain asset valuations may require
more subjectivity and management judgment. As such, valuations
may include inputs and assumptions that are less observable or
require greater estimation. Further, rapidly changing and
unprecedented credit and equity market conditions could
materially impact the valuation of assets as reported within our
consolidated financial statements and the
period-to-period
changes in value could vary significantly. Decreases in value
may have a material adverse effect on results of operations or
financial condition.
The
Company’s investment portfolio values may be adversely
impacted by changing interest rates and deterioration in the
credit quality of underlying collateral within mortgage and
other asset-backed investment securities.
The Company generally invests in securities issued by
government-backed agencies or privately issued securities that
are highly rated by credit rating agencies at the time of
purchase, but are subject to changes in market value due to
changing interest rates and implied credit spreads. Certain
mortgage and asset-backed securities represent beneficial
interests which are collateralized by residential mortgages,
credit cards, automobiles, mobile homes or other assets. While
these investment securities are highly rated at the time of
initial investment, the value of these securities may decline
significantly due to actual or expected deterioration in the
underlying collateral, especially residential mortgage
collateral. Market conditions have resulted in a deterioration
in fair values for non-guaranteed mortgage-backed and other
asset-backed securities. Under accounting rules, when the
impairment is due to declining expected cash flows, some portion
of the impairment, depending on the Company’s intent to
sell and the likelihood of being required to sell before
recovery, must be recognized in current earnings. This could
result in significant non-cash losses.
The
Company is subject to interest rate risk.
The Company’s net interest income is the largest source of
overall revenue to the Company, representing 62% of total
revenue. Interest rates are beyond the Company’s 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 Company’s results of operations.
However, any substantial, prolonged change in market interest
rates could have a material adverse effect on the Company’s
financial condition and results of operations.
11
Table of Contents
Future
loan losses could increase.
The Company maintains an allowance for loan losses that
represents management’s best estimate of probable losses
that have been incurred at the balance sheet date within the
existing portfolio of loans. The level of the allowance reflects
management’s continuing evaluation of industry
concentrations, specific credit risks, loan loss experience,
current loan portfolio quality, present economic, political and
regulatory conditions and unidentified losses inherent in the
current loan portfolio. 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 Company’s 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 Company’s 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, Management’s Discussion
and Analysis of Financial Condition and Results of Operations,
of this report for further discussion related to the
Company’s process for determining the appropriate level of
the allowance for possible loan loss.
The
Company 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
Company’s reputation and future growth prospects could be
impaired if events occur which breach its customers’
privacy.
The Company relies heavily on communications and information
systems to conduct its business, and as part of its business the
Company maintains significant amounts of data about its
customers and the products they use. 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 Company’s 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 Company’s key personnel could have a
material adverse impact on the Company’s business because
of their skills, knowledge of the Company’s market, years
of industry experience, and the difficulty of promptly finding
qualified replacement personnel.
| Item 1b. | UNRESOLVED STAFF COMMENTS |
None
12
Table of Contents
| Item 2. | PROPERTIES |
The main offices of the Bank are located in the larger
metropolitan areas of its markets in various multi-story office
buildings. The Bank owns its main offices and leases unoccupied
premises to the public. The larger offices include:
|
|
||||||||||||
|
Net rentable
|
% occupied
|
% occupied
|
||||||||||
| Building | square footage | in total | by bank | |||||||||
|
|
||||||||||||
|
922 Walnut
|
256,000 | 95 | % | 93 | % | |||||||
|
Kansas City, MO
|
||||||||||||
|
1000 Walnut
|
403,000 | 84 | 36 | |||||||||
|
Kansas City, MO
|
||||||||||||
|
811 Main
|
237,000 | 100 | 100 | |||||||||
|
Kansas City, MO
|
||||||||||||
|
8000 Forsyth
|
178,000 | 95 | 92 | |||||||||
|
Clayton, MO
|
||||||||||||
| 1551 N. Waterfront | 120,000 | 100 | 32 | |||||||||
|
Pkwy, Wichita, KS
|
||||||||||||
The Bank leases offices in Omaha, Nebraska which house its
credit card operations. Additionally, certain other installment
loan, trust and safe deposit functions operate out of leased
offices in downtown Kansas City. The Company has an additional
208 branch locations in Missouri, Illinois, Kansas, Oklahoma and
Colorado which are owned or leased, and 160 off-site ATM
locations.
| Item 3. | LEGAL PROCEEDINGS |
The information required by this item is set forth in
Item 8 under Note 19, Commitments, Contingencies and
Guarantees on page 112.
| Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted during the fourth quarter of 2009 to a
vote of security holders through the solicitation of proxies or
otherwise.
Executive
Officers of the Registrant
The following are the executive officers of the Company, each of
whom is designated annually, and there are no arrangements or
understandings between any of the persons so named and any other
person pursuant to which such person was designated an executive
officer.
|
|
||
| Name and Age | Positions with Registrant | |
|
|
||
|
Jeffery D. Aberdeen, 56
|
Controller of the Company since December 1995. Prior thereto he was Assistant Controller of the Company. He is Controller of the Company’s subsidiary bank, Commerce Bank, N.A. | |
|
Kevin G. Barth, 49
|
Executive Vice President of the Company since April 2005 and Executive Vice President of Commerce Bank, N.A. since October 1998. Senior Vice President of the Company and Officer of Commerce Bank, N.A. prior thereto. | |
|
Sara E. Foster, 49
|
Senior Vice President of the Company since February 1998 and Vice President of the Company prior thereto. | |
13
Table of Contents
|
|
||
| Name and Age | Positions with Registrant | |
|
|
||
|
David W. Kemper, 59
|
Chairman of the Board of Directors of the Company since November 1991, Chief Executive Officer of the Company since June 1986, and President of the Company since April 1982. He is Chairman of the Board, President and Chief Executive Officer of Commerce Bank, N.A. He is the son of James M. Kemper, Jr. (a former Director and former Chairman of the Board of the Company) and the brother of Jonathan M. Kemper, Vice Chairman of the Company. | |
|
Jonathan M. Kemper, 56
|
Vice Chairman of the Company since November 1991 and Vice Chairman of Commerce Bank, N.A. since December 1997. Prior thereto, he was Chairman of the Board, Chief Executive Officer, and President of Commerce Bank, N.A. He is the son of James M. Kemper, Jr. (a former Director and former Chairman of the Board of the Company) and the brother of David W. Kemper, Chairman, President, and Chief Executive Officer of the Company. | |
|
Charles G. Kim, 49
|
Chief Financial Officer of the Company since July 2009. Executive Vice President of the Company since April 1995 and Executive Vice President of Commerce Bank, N.A. since January 2004. Prior thereto, he was Senior Vice President of Commerce Bank, N.A. (Clayton, MO), a former subsidiary of the Company. | |
|
Seth M. Leadbeater, 59
|
Vice Chairman of the Company since January 2004. Prior thereto he was Executive Vice President of the Company. He has been Vice Chairman of Commerce Bank, N.A. since September 2004. Prior thereto he was Executive Vice President of Commerce Bank, N.A. and President of Commerce Bank, N.A. (Clayton, MO). | |
|
Robert C. Matthews, Jr., 62
|
Executive Vice President and Chief Credit Officer of the Company since December 1989. Executive Vice President of Commerce Bank, N.A. since December 1997. | |
|
Michael J. Petrie, 53
|
Senior Vice President of the Company since April 1995. Prior thereto, he was Vice President of the Company. | |
|
Robert J. Rauscher, 52
|
Senior Vice President of the Company since October 1997. Senior Vice President of Commerce Bank, N.A. prior thereto. | |
|
V. Raymond Stranghoener, 58
|
Executive Vice President of the Company since July 2005 and Senior Vice President of the Company prior thereto. Prior to his employment with the Company in October 1999, he was employed at BankAmerica Corp. as National Executive of the Bank of America Private Bank Wealth Strategies Group. | |
14
Table of Contents
| Item 5. |
MARKET
FOR REGISTRANT’S 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 Company’s common stock and cash
dividends paid for the periods indicated (restated for the 5%
stock dividend distributed in December 2009).
|
Cash
|
||||||||||||||
| Quarter | High | Low | Dividends | |||||||||||
|
2009
|
First | $ | 42.30 | $ | 26.48 | $ | .229 | |||||||
| Second | 37.38 | 28.31 | .229 | |||||||||||
| Third | 38.08 | 29.47 | .229 | |||||||||||
| Fourth | 40.38 | 34.19 | .229 | |||||||||||
|
2008
|
First | $ | 41.36 | $ | 34.47 | $ | .227 | |||||||
| Second | 41.41 | 35.76 | .227 | |||||||||||
| Third | 48.06 | 33.11 | .227 | |||||||||||
| Fourth | 50.34 | 33.75 | .227 | |||||||||||
|
2007
|
First | $ | 43.86 | $ | 40.25 | $ | .216 | |||||||
| Second | 42.26 | 38.58 | .216 | |||||||||||
| Third | 41.81 | 37.39 | .216 | |||||||||||
| Fourth | 42.01 | 38.06 | .216 | |||||||||||
Commerce Bancshares, Inc. common shares are listed on the Nasdaq
Global Select Market (NASDAQ) under the symbol CBSH. The Company
had 4,444 shareholders of record as of December 31,
2009.
15
Table of Contents
Performance
Graph
The following graph presents a comparison of Company (CBSH)
performance to the indices named below. It assumes $100 invested
on December 31, 2004 with dividends invested on a Total
Return basis.
The following table sets forth information about the
Company’s purchases of its $5 par value common stock,
its only class of stock registered pursuant to Section 12
of the Exchange Act, during the fourth quarter of 2009.
|
|
||||||||||||||||
|
Total
|
Total Number of
|
|||||||||||||||
|
Number
|
Average
|
Shares Purchased
|
Maximum Number that
|
|||||||||||||
|
of Shares
|
Price Paid
|
as Part of Publicly
|
May Yet Be Purchased
|
|||||||||||||
| Period | Purchased | per Share | Announced Program | Under the Program | ||||||||||||
|
|
||||||||||||||||
|
October 1 – 31, 2009
|
1,459 | $ | 39.72 | 1,459 | 2,861,999 | |||||||||||
|
November 1 – 30, 2009
|
216 | $ | 38.64 | 216 | 2,861,783 | |||||||||||
|
December 1 – 31, 2009
|
— | $ | — | — | 2,861,783 | |||||||||||
|
Total
|
1,675 | $ | 39.58 | 1,675 | 2,861,783 | |||||||||||
The Company’s stock purchases shown above were made under a
3,000,000 share authorization by the Board of Directors on
February 1, 2008. Under this authorization,
2,861,783 shares remained available for purchase at
December 31, 2009.
16
Table of Contents
| Item 6. | SELECTED FINANCIAL DATA |
The required information is set forth below in Item 7.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Commerce Bancshares, Inc. (the Company) operates as a
super-community bank offering an array of sophisticated
financial products delivered with high-quality, personal
customer service. It is the largest bank holding company
headquartered in Missouri, with its principal offices in Kansas
City and St. Louis, Missouri. Customers are served from
approximately 370 locations in Missouri, Kansas, Illinois,
Oklahoma and Colorado using delivery platforms which include an
extensive network of branches and ATM machines, full-featured
online banking, and a central contact center.
The core of the Company’s 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
Company’s financial condition and operating performance.
Among these indicators are the following:
| • | Net income and growth in earnings per share – Net income was $169.1 million, a decline of 10.4% compared to the previous year. The return on average assets was .96%. Diluted earnings per share declined 12.3% in 2009 compared to 2008. | |
| • | Growth in total revenue – Total revenue is comprised of net interest income and non-interest income. Total revenue in 2009 grew 6.6% over 2008, which resulted from growth of $42.8 million, or 7.2%, in net interest income coupled with growth of $20.9 million, or 5.6%, in non-interest income. Total revenue has risen 4.9%, compounded annually, over the last five years. | |
| • | Expense control – Non-interest expense grew by 1.1% this year. Salaries and employee benefits, the largest expense component, grew by 3.6%, due to merit increases and higher pension and medical costs. | |
| • | Asset quality – Net loan charge-offs in 2009 increased $69.0 million over those recorded in 2008, and averaged 1.31% of loans compared to .64% in the previous year. Total non-performing assets amounted to $116.7 million, an increase of $37.6 million over balances at the previous year end, and represented 1.15% of loans outstanding. | |
| • | Shareholder return – Total shareholder return, including the change in stock price and dividend reinvestment, was 1.9% over the past 5 years and 8.5% over the past 10 years. |
17
Table of Contents
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and
related notes. The historical trends reflected in the financial
information presented below are not necessarily reflective of
anticipated future results.
Key
Ratios
|
|
||||||||||||||||||||
| (Based on average balances) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Return on total assets
|
.96 | % | 1.15 | % | 1.33 | % | 1.54 | % | 1.60 | % | ||||||||||
|
Return on total equity
|
9.76 | 11.81 | 13.97 | 15.92 | 16.16 | |||||||||||||||
|
Equity to total assets
|
9.83 | 9.71 | 9.55 | 9.70 | 9.89 | |||||||||||||||
|
Loans to
deposits
(1)
|
79.79 | 92.11 | 88.49 | 84.73 | 81.34 | |||||||||||||||
|
Non-interest bearing deposits to total deposits
|
6.66 | 5.47 | 5.45 | 5.78 | 6.23 | |||||||||||||||
|
Net yield on interest earning assets (tax equivalent basis)
|
3.93 | 3.96 | 3.85 | 3.95 | 3.89 | |||||||||||||||
|
(Based on end of period data)
|
||||||||||||||||||||
|
Non-interest income to
revenue
(2)
|
38.43 | 38.80 | 40.85 | 40.72 | 40.03 | |||||||||||||||
|
Efficiency
ratio
(3)
|
59.89 | 63.08 | 62.65 | 60.20 | 59.20 | |||||||||||||||
|
Tier I risk-based capital ratio
|
13.04 | 10.92 | 10.31 | 11.25 | 12.21 | |||||||||||||||
|
Total risk-based capital ratio
|
14.39 | 12.31 | 11.49 | 12.56 | 13.63 | |||||||||||||||
|
Tier I leverage ratio
|
9.58 | 9.06 | 8.76 | 9.05 | 9.43 | |||||||||||||||
|
Tangible equity to assets
ratio
(4)
|
9.71 | 8.25 | 8.61 | 8.77 | 9.32 | |||||||||||||||
|
Cash dividend payout ratio
|
44.15 | 38.54 | 33.76 | 30.19 | 28.92 | |||||||||||||||
| (1) | Includes loans held for sale. | |
| (2) | Revenue includes net interest income and non-interest income. | |
| (3) | The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue. | |
| (4) | The tangible equity ratio is calculated as stockholders’ equity reduced by goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights). |
Selected
Financial Data
|
|
||||||||||||||||||||
| (In thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net interest income
|
$ | 635,502 | $ | 592,739 | $ | 538,072 | $ | 513,199 | $ | 501,702 | ||||||||||
|
Provision for loan losses
|
160,697 | 108,900 | 42,732 | 25,649 | 28,785 | |||||||||||||||
|
Non-interest income
|
396,585 | 375,712 | 371,581 | 352,586 | 334,837 | |||||||||||||||
|
Investment securities gains (losses), net
|
(7,195 | ) | 30,294 | 8,234 | 9,035 | 6,362 | ||||||||||||||
|
Non-interest expense
|
622,063 | 615,380 | 574,159 | 522,391 | 495,649 | |||||||||||||||
|
Net income
|
169,075 | 188,655 | 206,660 | 219,842 | 223,247 | |||||||||||||||
|
Net income per common share-basic*
|
2.07 | 2.37 | 2.58 | 2.70 | 2.64 | |||||||||||||||
|
Net income per common share-diluted*
|
2.07 | 2.36 | 2.56 | 2.67 | 2.60 | |||||||||||||||
|
Cash dividends
|
74,720 | 72,055 | 68,915 | 65,758 | 63,421 | |||||||||||||||
|
Cash dividends per share*
|
.914 | .907 | .864 | .806 | .752 | |||||||||||||||
|
Market price per share*
|
38.72 | 41.86 | 40.69 | 41.82 | 42.88 | |||||||||||||||
|
Book value per share*
|
22.72 | 19.85 | 19.33 | 17.86 | 16.31 | |||||||||||||||
|
Common shares outstanding*
|
83,008 | 79,580 | 79,155 | 80,979 | 82,179 | |||||||||||||||
|
Total assets
|
18,120,189 | 17,532,447 | 16,204,831 | 15,230,349 | 13,885,545 | |||||||||||||||
|
Loans, including held for sale
|
10,490,327 | 11,644,544 | 10,841,264 | 9,960,118 | 8,899,183 | |||||||||||||||
|
Investment securities
|
6,473,388 | 3,780,116 | 3,297,015 | 3,496,323 | 3,770,181 | |||||||||||||||
|
Deposits
|
14,210,451 | 12,894,733 | 12,551,552 | 11,744,854 | 10,851,813 | |||||||||||||||
|
Long-term debt
|
1,236,062 | 1,447,781 | 1,083,636 | 553,934 | 269,390 | |||||||||||||||
|
Equity
|
1,885,905 | 1,579,467 | 1,530,156 | 1,446,536 | 1,340,475 | |||||||||||||||
|
Non-performing assets
|
116,670 | 79,077 | 33,417 | 18,223 | 11,713 | |||||||||||||||
| * | Restated for the 5% stock dividend distributed in December 2009. |
18
Table of Contents
Results
of Operations
|
|
||||||||||||||||||||||||||||
| $ Change | % Change | |||||||||||||||||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | ’09-’08 | ’08-’07 | ’09-’08 | ’08-’07 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net interest income
|
$ | 635,502 | $ | 592,739 | $ | 538,072 | $ | 42,763 | $ | 54,667 | 7.2 | % | 10.2 | % | ||||||||||||||
|
Provision for loan losses
|
(160,697 | ) | (108,900 | ) | (42,732 | ) | 51,797 | 66,168 | 47.6 | 154.8 | ||||||||||||||||||
|
Non-interest income
|
396,585 | 375,712 | 371,581 | 20,873 | 4,131 | 5.6 | 1.1 | |||||||||||||||||||||
|
Investment securities gains (losses), net
|
(7,195 | ) | 30,294 | 8,234 | (37,489 | ) | 22,060 | (123.8 | ) | 267.9 | ||||||||||||||||||
|
Non-interest expense
|
(622,063 | ) | (615,380 | ) | (574,159 | ) | 6,683 | 41,221 | 1.1 | 7.2 | ||||||||||||||||||
|
Income taxes
|
(73,757 | ) | (85,077 | ) | (93,737 | ) | (11,320 | ) | (8,660 | ) | (13.3 | ) | (9.2 | ) | ||||||||||||||
|
Non-controlling interest (expense) income
|
700 | (733 | ) | (599 | ) | 1,433 | (134 | ) | 195.5 | (22.4 | ) | |||||||||||||||||
|
Net income
|
$ | 169,075 | $ | 188,655 | $ | 206,660 | $ | (19,580 | ) | $ | (18,005 | ) | (10.4 | )% | (8.7 | )% | ||||||||||||
Net income for 2009 was $169.1 million, a decline of
$19.6 million, or 10.4%, compared to $188.7 million in
2008. The decline in net income resulted from a
$51.8 million increase in the provision for loan losses and
a $37.5 million decrease in investment securities gains,
but was partly offset by increases of $42.8 million in net
interest income and $20.9 million in non-interest income.
Diluted income per share was $2.07 in 2009 compared to $2.36 in
2008. Several significant items of non-interest income and
non-interest expense affected results for 2009 and 2008. During
2009, FDIC insurance expense rose to $27.4 million compared
to $2.1 million in 2008. Results for 2008 included a
$22.2 million gain on the redemption of Visa, Inc. (Visa)
stock, a loss of $33.3 million relating to purchases of
auction rate securities, and a $6.9 million gain on a bank
branch sale. Reductions in a Visa indemnification obligation,
discussed further in the Non-Interest Expense section of this
discussion, were recorded in both years. Excluding these items,
diluted income per share would have been $2.27 in 2009 and $2.33
in 2008, or a decline of $.06. The return on average assets was
.96% in 2009 compared to 1.15% in 2008, and the return on
average equity was 9.76% compared to 11.81%. At
December 31, 2009, the ratio of tangible equity to assets
improved to 9.71% compared to 8.25% at year end 2008.
During 2009, net interest income increased $42.8 million,
or 7.2%, compared to 2008. This growth was mainly the result of
lower rates paid on deposits and borrowings coupled with a
higher average balance in investment securities, but partly
offset by lower yields on loans and investment securities and
declining loan balances. The provision for loan losses totaled
$160.7 million in 2009, an increase of $51.8 million
over the prior year and indicative of the general decline in the
U.S. economy. The Company incurred higher net loan
charge-offs in all loan categories, with the largest increases
in construction, consumer, consumer credit card, and business
loans.
Non-interest income in 2009 increased $20.9 million, or
5.6%, over amounts reported in the previous year, mainly due to
growth in bank card and student lending fees, which rose
$8.3 million and $20.8 million, respectively. Student
lending (included in loan fees and sales) included higher gains
on loan sales and the reversal of certain impairment charges
which had been recorded in 2008. Non-interest expense increased
$6.7 million, or 1.1%, over 2008. This growth in 2009
included increases of $25.3 million in FDIC insurance
expense and $12.2 million in salaries and employee benefits
expense, in addition to a $7.1 million decline in
reductions to the Visa indemnification obligation. These
increases in expense were largely offset by the 2008 loss of
$33.3 million on the purchase of auction rate securities
(ARS), discussed further in the Non-Interest Expense section.
Income tax expense declined 13.3% in 2009 and resulted in an
effective tax rate of 30.4%, which was slightly lower than the
effective tax rate of 31.1% in the previous year. The decrease
in income tax expense in 2009 compared to 2008 was mainly due to
changes in the mix of taxable and non-taxable income on lower
pre-tax income.
During 2008, net income was $188.7 million, a decrease of
$18.0 million, or 8.7%, compared to $206.7 million in
2007. The decline in net income was mainly the result of an
increase in the provision for loan losses of $66.2 million
coupled with a 7.2% increase in non-interest expense, but partly
offset by increases in net interest income, investment
securities gains and non-interest income. Net interest income
increased $54.7 million, or 10.2%, in 2008 compared to
2007, mainly as a result of growth in loans and
19
Table of Contents
investment securities, coupled with a large reduction in rates
paid on interest bearing liabilities. These effects were partly
offset by lower loan yields and higher borrowings. In 2008, net
investment securities gains totaled $30.3 million compared
to $8.2 million in 2007. Gains in 2008 included a
$22.2 million gain on the redemption of Visa stock and a
gain of $7.9 million on the sale of certain ARS, further
described in the Investment Securities Gains (Losses) section of
this discussion.
Non-interest income in 2008 rose $4.1 million, or 1.1%,
over amounts reported in the previous year and included a
$9.4 million impairment charge on certain loans held for
sale. Non-interest expense increased $41.2 million, or
7.2%, over 2007, mainly due to the $33.3 million ARS loss
mentioned previously and a $9.6 million reduction in the
Visa indemnification obligation. The provision for loan losses
totaled $108.9 million in 2008, an increase of
$66.2 million over 2007, and reflected higher net loan
charge-offs, mainly in consumer and consumer credit card loans.
Income tax expense declined 9.2% in 2008 and resulted in an
effective tax rate of 31.1%, which was slightly lower than the
effective tax rate of 31.2% in the previous year. The decrease
in income tax expense in 2008 compared to 2007 was mainly due to
lower pre-tax earnings.
The Company continually evaluates the profitability of its
network of bank branches throughout its markets. As a result of
this evaluation process, the Company may periodically sell the
assets and liabilities of certain branches, or may sell the
premises of specific banking facilities. In February 2009, the
Company sold its branch in Lakin, Kansas. In this transaction,
the Company sold the bank facility and certain deposits totaling
approximately $4.7 million and recorded a gain of $644
thousand. During the second quarter of 2008, the Company sold
its banking branch, including the facility, in Independence,
Kansas. In this transaction, approximately $23.3 million in
loans, $85.0 million in deposits, and various other assets
and liabilities were sold. A gain of $6.9 million was
recorded.
The Company distributed a 5% stock dividend for the sixteenth
consecutive year on December 15, 2009. All per share and
average share data in this report has been restated to reflect
the 2009 stock dividend.
Critical
Accounting Policies
The Company’s consolidated financial statements are
prepared based on the application of certain accounting
policies, the most significant of which are described in
Note 1 to the consolidated financial statements. Certain of
these policies require numerous estimates and strategic or
economic assumptions that may prove inaccurate or be subject to
variations which may significantly affect the Company’s
reported results and financial position for the current period
or future periods. The use of estimates, assumptions, and
judgments are necessary when financial assets and liabilities
are required to be recorded at, or adjusted to reflect, fair
value. Current economic conditions may require the use of
additional estimates, and some estimates may be subject to a
greater degree of uncertainty due to the current instability of
the economy. The Company has identified several policies as
being critical because they require management to make
particularly difficult, subjective
and/or
complex judgments about matters that are inherently uncertain
and because of the likelihood that materially different amounts
would be reported under different conditions or using different
assumptions. These policies relate to the allowance for loan
losses, the valuation of certain investment securities, and
accounting for income taxes.
Allowance
for Loan Losses
The Company performs periodic and systematic detailed reviews of
its loan portfolio to assess overall collectability. The level
of the allowance for loan losses reflects the Company’s
estimate of the losses inherent in the loan portfolio at any
point in time. While these estimates are based on substantive
methods for determining allowance requirements, actual outcomes
may differ significantly from estimated results, especially when
determining allowances for business, lease, construction and
business real estate loans. These loans are normally larger and
more complex, and their collection rates are harder to predict.
Personal loans, including personal mortgage, credit card and
consumer loans, are individually smaller and perform in a more
homogenous manner, making loss estimates more predictable.
Further discussion of the methodologies used in establishing the
allowance is provided in the Allowance for Loan Losses section
of this discussion.
20
Table of Contents
Valuation
of Investment Securities
The Company carries its investment securities at fair value, and
employs valuation techniques which utilize observable inputs
when those inputs are available. These observable inputs reflect
assumptions market participants would use in pricing the
security, developed based on market data obtained from sources
independent of the Company. When such information is not
available, the Company employs valuation techniques which
utilize unobservable inputs, or those which reflect the
Company’s own assumptions about market participants, based
on the best information available in the circumstances. These
valuation methods typically involve cash flow and other
financial modeling techniques. Changes in underlying factors,
assumptions, estimates, or other inputs to the valuation
techniques could have a material impact on the Company’s
future financial condition and results of operations. Assets and
liabilities carried at fair value inherently result in more
financial statement volatility. Under the fair value measurement
hierarchy, fair value measurements are classified as
Level 1 (quoted prices), Level 2 (based on observable
inputs) or Level 3 (based on unobservable,
internally-derived inputs), as discussed in more detail in
Note 16 on Fair Value Measurements. Most of the available
for sale investment portfolio is priced utilizing
industry-standard models that consider various assumptions which
are observable in the marketplace, or can be derived from
observable data. Such securities totaled approximately
$5.7 billion, or 89.9% of the available for sale portfolio
at December 31, 2009, and were classified as Level 2
measurements. The Company also holds $167.8 million in
auction rate securities. These were classified as Level 3
measurements, as no market currently exists for these
securities, and fair values were derived from internally
generated cash flow valuation models which used unobservable
inputs which were significant to the overall measurement.
Changes in the fair value of available for sale securities,
excluding credit losses relating to
other-than-temporary
impairment, are reported in other comprehensive income. The
Company periodically evaluates the available for sale portfolio
for
other-than-temporary
impairment. Evaluation for
other-than-temporary
impairment is based on the Company’s intent to sell the
security and whether it is likely that it will be required to
sell the security before the anticipated recovery of its
amortized cost basis. If either of these conditions is met, the
entire loss (the amount by which the amortized cost exceeds the
fair value) must be recognized in current earnings. If neither
condition is met, but the Company does not expect to recover the
amortized cost basis, the Company must determine whether a
credit loss has occurred. This credit loss is the amount by
which the amortized cost basis exceeds the present value of cash
flows expected to be collected from the security. The credit
loss, if any, must be recognized in current earnings, while the
remainder of the loss, related to all other factors, is
recognized in other comprehensive income.
The estimation of whether a credit loss exists and the period
over which the security is expected to recover requires
significant judgment. The Company must consider available
information about the collectability of the security, including
information about past events, current conditions, and
reasonable forecasts, which includes payment structure,
prepayment speeds, expected defaults, and collateral values.
Changes in these factors could result in additional impairment,
recorded in current earnings, in future periods.
At December 31, 2009, non-agency guaranteed mortgage-backed
securities with a par value of $171.6 million were
identified as other-than-temporarily impaired. The
credit-related impairment loss on these securities amounted to
$2.5 million, which was recorded in the consolidated income
statement in investment securities gains (losses), net. The
noncredit-related loss on these securities, which was recorded
in other comprehensive income, was $30.3 million on a
pre-tax basis.
The Company, through its direct holdings and its Small Business
Investment subsidiaries, has numerous private equity
investments, categorized as non-marketable securities in the
accompanying consolidated balance sheets. These investments are
reported at fair value, and totaled $49.5 million at
December 31, 2009. Changes in fair value are reflected in
current earnings, and reported in investment securities gains
(losses), net in the consolidated income statements. Because
there is no observable market data for these securities, their
fair values are internally developed using available information
and management’s judgment, and are classified as
Level 3 measurements. Although management believes its
estimates of fair value reasonably reflect the fair value of
these securities, key assumptions regarding the projected
financial performance of
21
Table of Contents
these companies, the evaluation of the investee company’s
management team, and other economic and market factors may
affect the amounts that will ultimately be realized from these
investments.
Accounting
for Income Taxes
Accrued income taxes represent the net amount of current income
taxes which are expected to be paid attributable to operations
as of the balance sheet date. Deferred income taxes represent
the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns.
Current and deferred income taxes are reported as either a
component of other assets or other liabilities in the
consolidated balance sheets, depending on whether the balances
are assets or liabilities. Judgment is required in applying
generally accepted accounting principles in accounting for
income taxes. The Company regularly monitors taxing authorities
for changes in laws and regulations and their interpretations by
the judicial systems. The aforementioned changes, and changes
that may result from the resolution of income tax examinations
by federal and state taxing authorities, may impact the estimate
of accrued income taxes and could materially impact the
Company’s financial position and results of operations.
22
Table of Contents
Net
Interest Income
Net interest income, the largest source of revenue, results from
the Company’s lending, investing, borrowing, and deposit
gathering activities. It is affected by both changes in the
level of interest rates and changes in the amounts and mix of
interest earning assets and interest bearing liabilities. The
following table summarizes the changes in net interest income on
a fully taxable equivalent basis, by major category of interest
earning assets and interest bearing liabilities, identifying
changes related to volumes and rates. Changes not solely due to
volume or rate changes are allocated to rate.
| 2009 | 2008 | |||||||||||||||||||||||
| Change due to | Change due to | |||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
| (In thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest income, fully taxable equivalent basis
|
||||||||||||||||||||||||
|
Loans
|
$ | (31,745 | ) | $ | (66,327 | ) | $ | (98,072 | ) | $ | 57,851 | $ | (137,334 | ) | $ | (79,483 | ) | |||||||
|
Loans held for sale
|
2,161 | (8,910 | ) | (6,749 | ) | 1,741 | (8,713 | ) | (6,972 | ) | ||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
U.S. government and federal agency obligations
|
5,037 | (1,503 | ) | 3,534 | (9,129 | ) | 63 | (9,066 | ) | |||||||||||||||
|
State and municipal obligations
|
9,669 | (3,557 | ) | 6,112 | 5,698 | (1,344 | ) | 4,354 | ||||||||||||||||
|
Mortgage and asset-backed securities
|
63,862 | (22,144 | ) | 41,718 | 17,036 | 6,090 | 23,126 | |||||||||||||||||
|
Other securities
|
4,524 | (1,155 | ) | 3,369 | 1,129 | (2,010 | ) | (881 | ) | |||||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell
|
(7,361 | ) | (704 | ) | (8,065 | ) | (4,848 | ) | (12,746 | ) | (17,594 | ) | ||||||||||||
|
Interest earning deposits with banks
|
1,183 | (574 | ) | 609 | 198 | — | 198 | |||||||||||||||||
|
Total interest income
|
47,330 | (104,874 | ) | (57,544 | ) | 69,676 | (155,994 | ) | (86,318 | ) | ||||||||||||||
|
Interest expense
|
||||||||||||||||||||||||
|
Interest bearing deposits:
|
||||||||||||||||||||||||
|
Savings
|
113 | (657 | ) | (544 | ) | 42 | (923 | ) | (881 | ) | ||||||||||||||
|
Interest checking and money market
|
6,211 | (35,369 | ) | (29,158 | ) | 7,117 | (61,197 | ) | (54,080 | ) | ||||||||||||||
|
Time open and C.D.’s of less than $100,000
|
(3,466 | ) | (21,874 | ) | (25,340 | ) | (9,775 | ) | (23,860 | ) | (33,635 | ) | ||||||||||||
|
Time open and C.D.’s of $100,000 and over
|
8,424 | (28,718 | ) | (20,294 | ) | 7,566 | (25,640 | ) | (18,074 | ) | ||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
(8,439 | ) | (12,947 | ) | (21,386 | ) | (16,534 | ) | (41,845 | ) | (58,379 | ) | ||||||||||||
|
Other borrowings
|
(4,611 | ) | (1,767 | ) | (6,378 | ) | 38,018 | (13,888 | ) | 24,130 | ||||||||||||||
|
Total interest expense
|
(1,768 | ) | (101,332 | ) | (103,100 | ) | 26,434 | (167,353 | ) | (140,919 | ) | |||||||||||||
|
Net interest income, fully taxable equivalent basis
|
$ | 49,098 | $ | (3,542 | ) | $ | 45,556 | $ | 43,242 | $ | 11,359 | $ | 54,601 | |||||||||||
Net interest income totaled $635.5 million in 2009,
representing an increase of $42.8 million, or 7.2%,
compared to $592.7 million in 2008. On a tax equivalent
basis, net interest income totaled $654.2 million and
increased $45.6 million, or 7.5%, over the previous year.
This increase was mainly the result of lower rates paid on
deposits and borrowings coupled with higher average investment
securities balances during the year, but partly offset by lower
average loan balances and yields. The net yield on earning
assets (tax equivalent) was 3.93% in 2009 compared with 3.96% in
the previous year.
During 2009, interest income on loans (tax equivalent) declined
$98.1 million from 2008 due to lower rates earned on most
lending products coupled with lower loan balances, especially in
business, business real estate and consumer loans. The average
rate earned on the loan portfolio decreased 75 basis points
to 5.27%
23
Table of Contents
compared to 6.02% in the previous year. Average loan balances
decreased $306.0 million, or 2.8%, reflecting lower line of
credit usage, lower demand and pay-downs. Additionally, the
Company has ceased most marine and recreational vehicle lending
in the consumer loan portfolio. The student loan portfolio,
which was acquired late in the fourth quarter of 2008,
contributed $9.2 million to interest income with average
loan balances of $344.2 million during 2009. Tax equivalent
interest earned on investment securities increased by
$54.7 million, or 29.8%, due to higher average balances of
securities, partially offset by a decrease in rates earned on
these investments. Average balances of mortgage and asset-backed
securities increased 51.4% to $3.7 billion, and state and
municipal obligations increased 25.6%. Additionally, average
balances of U.S. government and federal agency securities
increased 67.8% during the year to $307.1 million,
primarily a result of purchases of U.S. Treasury
inflation-protected securities during the last six months of
2009. Interest earned on federal funds sold and resale agreement
assets declined $8.1 million, mainly due to a
$381.5 million decrease in average balances coupled with
much lower overnight rates. Average rates (tax equivalent)
earned on interest earning assets in 2009 decreased to 4.85%
compared to 5.63% in the previous year, or a decline of
78 basis points.
Interest expense on deposits decreased $75.3 million in
2009 compared to 2008. The decline resulted from much lower
rates paid on all deposit products, but was partly offset by the
effects of higher average balances of money market accounts and
certificates of deposit of $100,000 and over. Average rates paid
on deposit balances declined 76 basis points from 1.68% in
2008 to .92% in 2009. Interest expense on borrowings declined
$27.8 million, or 44.1%, as a result of lower rates paid
and lower average balances of federal funds purchased and
repurchase agreement borrowings. The average rate paid on
interest bearing liabilities decreased to 1.04% compared to
1.83% in 2008.
During 2008, interest income on loans (tax equivalent) declined
$79.5 million from 2007 due to lower rates earned on
virtually all lending products but offset by higher loan
balances, especially in business, consumer and consumer credit
card loans. The lower rates earned on the loan portfolio were
related to the actions taken by the Federal Reserve Bank during
2008 to reduce interest rate levels, which caused the
Company’s portfolio to re-price quickly. Tax equivalent
interest earned on investment securities increased by
$17.5 million, or 10.5%, due to higher average balances of
mortgage-backed and municipal securities, coupled with higher
rates earned on these investments. Interest earned on federal
funds sold and resale agreement assets declined
$17.6 million, mainly due to lower average balances coupled
with lower overnight rates. Average rates (tax equivalent)
earned on interest earning assets in 2008 decreased to 5.63%
compared to 6.61% in the previous year, or a decline of
98 basis points.
Interest expense on deposits in 2008 decreased
$106.7 million compared to 2007, mainly the result of much
lower rates paid on all deposit products but partly offset by
the effects of higher average balances of money market accounts
and certificates of deposit of $100,000 and over. Average rates
paid on deposit balances declined 100 basis points from
2.68% in 2007 to 1.68% in 2008. Interest expense on borrowings
declined $34.2 million, or 35.2%, mainly as a result of
lower rates paid and lower average balances of federal funds
purchased and repurchase agreement borrowings. Also, while
advances from the Federal Home Loan Bank (FHLB) and the Federal
Reserve’s Term Auction Facility increased on average by
$788.3 million, rates on these borrowings dropped
significantly in 2008. The average rate paid on interest bearing
liabilities decreased to 1.83% compared to 3.01% in 2007.
Provision
for Loan Losses
The provision for loan losses totaled $160.7 million in
2009, up from $108.9 million in the previous year, or an
increase of $51.8 million. In 2007 the provision totaled
$42.7 million. The growth in the provision in 2009 was the
result of deteriorating economic conditions affecting the
Company’s loan portfolio, higher watch list loan totals,
and increasing loan loss experience. As a result, the Company
increased its allowance for loan losses by $21.9 million in
2009. The provision for loan losses is recorded to bring the
allowance for loan losses to a level deemed adequate by
management based on the factors mentioned in the following
“Allowance for Loan Losses” section of this discussion.
24
Table of Contents
Non-Interest
Income
|
|
||||||||||||||||||||
| % Change | ||||||||||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | ’09-’08 | ’08-’07 | |||||||||||||||
|
|
||||||||||||||||||||
|
Deposit account charges and other fees
|
$ | 106,362 | $ | 110,361 | $ | 117,350 | (3.6 | )% | (6.0 | )% | ||||||||||
|
Bank card transaction fees
|
122,124 | 113,862 | 103,613 | 7.3 | 9.9 | |||||||||||||||
|
Trust fees
|
76,831 | 80,294 | 78,840 | (4.3 | ) | 1.8 | ||||||||||||||
|
Bond trading income
|
22,432 | 15,665 | 9,338 | 43.2 | 67.8 | |||||||||||||||
|
Consumer brokerage services
|
10,831 | 12,156 | 11,754 | (10.9 | ) | 3.4 | ||||||||||||||
|
Loan fees and sales
|
21,273 | (2,413 | ) | 8,835 | N.M. | N.M. | ||||||||||||||
|
Other
|
36,732 | 45,787 | 41,851 | (19.8 | ) | 9.4 | ||||||||||||||
|
Total non-interest income
|
$ | 396,585 | $ | 375,712 | $ | 371,581 | 5.6 | % | 1.1 | % | ||||||||||
|
Non-interest income as a % of total revenue*
|
38.4 | % | 38.8 | % | 40.8 | % | ||||||||||||||
|
Total revenue per full-time equivalent employee
|
$ | 201.4 | $ | 185.6 | $ | 179.0 | ||||||||||||||
| * | Total revenue is calculated as net interest income plus non-interest income. |
Non-interest income totaled $396.6 million, an increase of
$20.9 million, or 5.6%, compared to $375.7 million in
2008. Deposit account fees declined $4.0 million, or 3.6%,
as a result of lower overdraft fee revenue, which fell
$6.8 million, or 9.5%. Overdraft fees comprised 60.9% of
total deposit account fee income in 2009. Partly offsetting this
decline was an increase in cash management fees, which grew
$3.2 million, or 10.6%, over the prior year. Bank card fee
income rose $8.3 million, or 7.3% overall, due to continued
growth in transaction fees earned on corporate card, debit card
and merchant transactions, which increased 24.1%, 4.6% and 3.4%,
respectively, but was negatively impacted by lower retail sales
affecting credit card fees. Trust fees decreased
$3.5 million, or 4.3%, mainly in institutional and
corporate fees and reflected the impact that lower markets have
had on trust asset values during 2009 and the effects of low
interest rates on money market assets held in trust accounts.
The market value of total customer trust assets (on which fees
are charged) totaled $22.1 billion at year end 2009, and
grew 14.0% over year end 2008. Bond trading income rose
$6.8 million due to higher sales of fixed income securities
to correspondent banks and corporate customers, while consumer
brokerage services revenue declined $1.3 million due to
lower fees earned on sales of annuity and mutual fund products.
Loan fees and sales increased by $23.7 million, as gains on
student loan sales increased $20.8 million. The 2009 gains
included the reversal of impairment reserves of
$8.6 million on certain held for sale student loans,
through sales of the related loans and recoveries in the fair
value of most of the remaining outstanding loans. The impairment
had originally been established in 2008 due to liquidity
concerns, which at year end 2009 were largely alleviated. In
addition, mortgage banking revenue and loan commitment fees both
increased over 2008. The decrease in other non-interest income
of $9.1 million from 2008 was mainly due to a gain of
$6.9 million recorded in the second quarter of 2008 on the
sale of a banking branch in Independence, Kansas, mentioned
previously. Other declines were reported in cash sweep
commissions, equipment rental income and fees on interest rate
swap sales. Partly offsetting these declines was an impairment
charge of $1.1 million recorded in 2008 on an office
building held for sale, which formerly housed the Company’s
check processing operations.
During 2008, non-interest income increased $4.1 million, or
1.1%, over 2007 to $375.7 million. Results for 2008
included an impairment charge of $9.4 million, recorded in
loan fees and sales, on certain student loans held for sale. The
Company has agreements to sell its portfolio of originated
student loans to various student loan servicing agencies. Due to
uncertainties surrounding some of these agencies’ abilities
to fulfill these contracts in the future, the Company recorded
the impairment in order to adjust a portion of the portfolio,
totaling $206.1 million, to fair value. Most of the charge
was reversed in 2009, as mentioned above. During 2008, bank card
fee income grew by $10.2 million, or 9.9%, over 2007 due to
solid growth in debit card and corporate credit card fee income,
which grew by 9.4% and 28.6%, respectively. However, deposit
account fees declined by $7.0 million, or 6.0%, mainly due
to a decrease of $10.4 million in deposit account overdraft
fees. This decline was partly offset by growth in corporate cash
management fee income, which increased $4.5 million, or
17.2%. Trust fee income grew by $1.5 million, or 1.8%, and
was especially affected in the fourth quarter by lower market
values of the trust assets on which fees are based. Market
values of total trust
25
Table of Contents
assets at year end 2008 were 14.6% lower than at year end 2007.
Consumer brokerage services revenue grew by $402 thousand, or
3.4%, on higher annuity commissions. Bond trading income
increased $6.3 million, or 67.8%, due to increased sales
volumes from its correspondent bank and commercial customers.
Other non-interest income rose $3.9 million over the prior
year, largely due to the $6.9 million gain on the
Independence branch sale. Additional increases occurred in cash
sweep commission income and fees on interest rate swap sales.
These increases were partly offset by the impairment charge on
the office building mentioned above, in addition to declines in
official check sales and equipment rental income.
Investment
Securities Gains (Losses), Net
Net gains and losses on investment securities during 2009, 2008
and 2007 are shown in the table below. Included in these amounts
are gains and losses arising from sales of bonds from the
Company’s available for sale portfolio, including
credit-related losses on debt securities identified as
other-than-temporarily impaired. Also included are gains and
losses on sales of publicly traded common stock held by the
holding company, Commerce Bancshares, Inc. (the Parent). Gains
and losses relating to non-marketable private equity
investments, which are primarily held by the Parent’s
majority-owned venture capital subsidiaries, are also shown
below. These include fair value adjustments, in addition to
gains and losses realized upon disposition. The portion of the
activity attributable to minority interests is reported as
non-controlling interest in the consolidated income statement
and resulted in income of $1.1 million in 2009 and expense
of $299 thousand and $389 thousand in 2008 and 2007,
respectively.
Net securities losses of $7.2 million were recorded in
2009. Most of the loss resulted from a $5.0 million net
decline in fair value of various private equity securities. In
addition, credit-related
other-than-temporary
impairment (OTTI) losses of $2.5 million were recorded on
certain non-agency mortgage-backed securities with a par value
of $171.6 million. The non credit-related loss on these
securities, which was recorded in other comprehensive income,
was $30.3 million.
Net securities gains of $30.3 million were recorded in
2008, compared to net gains of $8.2 million in 2007. Most
of the net gain in 2008 occurred because of Visa’s
redemption of certain Class B stock held by its former
member banks. The redemption occurred in conjunction with an
initial public offering by Visa in which 500 thousand shares of
Class B stock held by the Company were redeemed, resulting
in a $22.2 million gain. Also, in December 2008,
$341.4 million in auction rate securities were sold in
exchange for federally guaranteed student loans, resulting in a
gain of $7.9 million.
|
|
||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Available for sale
:
|
||||||||||||
|
Preferred equity securities
|
$ | — | $ | (3,504 | ) | $ | (663 | ) | ||||
|
Common stock
|
— | (294 | ) | 2,521 | ||||||||
|
Auction rate securities
|
— | 7,861 | — | |||||||||
|
Other bonds:
|
||||||||||||
|
Realized gains
|
322 | 1,140 | 1,069 | |||||||||
|
OTTI losses
|
(2,473 | ) | — | — | ||||||||
|
Non-marketable:
|
||||||||||||
|
Private equity investments
|
(5,044 | ) | 2,895 | 5,307 | ||||||||
|
Visa Class B stock
|
— | 22,196 | — | |||||||||
|
Total investment securities gains (losses), net
|
$ | (7,195 | ) | $ | 30,294 | $ | 8,234 | |||||
26
Table of Contents
Non-Interest
Expense
|
|
||||||||||||||||||||
| % Change | ||||||||||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | ’09-’08 | ’08-’07 | |||||||||||||||
|
|
||||||||||||||||||||
|
Salaries
|
$ | 290,289 | $ | 286,161 | $ | 265,378 | 1.4 | % | 7.8 | % | ||||||||||
|
Employee benefits
|
55,490 | 47,451 | 43,390 | 16.9 | 9.4 | |||||||||||||||
|
Net occupancy
|
45,925 | 46,317 | 45,789 | (.8 | ) | 1.2 | ||||||||||||||
|
Equipment
|
25,472 | 24,569 | 24,121 | 3.7 | 1.9 | |||||||||||||||
|
Supplies and communication
|
32,156 | 35,335 | 34,162 | (9.0 | ) | 3.4 | ||||||||||||||
|
Data processing and software
|
61,789 | 56,387 | 50,342 | 9.6 | 12.0 | |||||||||||||||
|
Marketing
|
18,231 | 19,994 | 18,199 | (8.8 | ) | 9.9 | ||||||||||||||
|
Deposit insurance
|
27,373 | 2,051 | 1,412 | N.M. | 45.3 | |||||||||||||||
|
Loss on purchase of auction rate securities
|
— | 33,266 | — | N.M. | N.M. | |||||||||||||||
|
Indemnification obligation
|
(2,496 | ) | (9,619 | ) | 20,951 | N.M. | N.M. | |||||||||||||
|
Other
|
67,834 | 73,468 | 70,415 | (7.7 | ) | 4.3 | ||||||||||||||
|
Total non-interest expense
|
$ | 622,063 | $ | 615,380 | $ | 574,159 | 1.1 | % | 7.2 | % | ||||||||||
|
Efficiency ratio
|
59.9 | % | 63.1 | % | 62.7 | % | ||||||||||||||
|
Salaries and benefits as a % of total non-interest expense
|
55.6 | % | 54.2 | % | 53.8 | % | ||||||||||||||
|
Number of full-time equivalent employees
|
5,125 | 5,217 | 5,083 | |||||||||||||||||
Non-interest expense was $622.1 million in 2009, an
increase of $6.7 million, or 1.1%, over the previous year.
A major expense to the Company in 2009 was FDIC deposit
insurance, which rose dramatically over amounts recorded in
previous years. The Company expects these costs to remain high
as the banking industry replenishes the FDIC insurance fund,
which has been depleted by the recent high levels of bank
failures across the country. The Company incurred total annual
expense of $27.4 million during 2009 as a result of normal
deposit premiums and special assessments, compared to
$2.1 million in 2008. Also, the FDIC required insured
institutions to prepay their quarterly risk-based assessments
for the fourth quarter of 2009 and subsequent years 2010 through
2012. Accordingly, a cash payment of $68.7 million was paid
by the Company on December 30, 2009. The payment has been
recorded as an asset and will be reduced each quarter as the
Company’s regular quarterly assessments come due and are
expensed.
During 2009, salaries and benefits expense increased by
$12.2 million, or 3.6%, over 2008 due to merit increases
and higher pension and medical costs. Occupancy expense
decreased slightly, while equipment expense increased $903
thousand, or 3.7%, mainly due to higher data processing
equipment depreciation expense. Supplies and communication
expense decreased $3.2 million, or 9.0%, as a result of
lower supplies and courier expense. Data processing and software
costs grew by $5.4 million, or 9.6%. Core data processing
expense increased $3.5 million due to several new software
and servicing systems, in addition to higher bank card
processing costs, which increased in relation to higher bank
card revenues. Marketing expense decreased $1.8 million, or
8.8%. Other expense decreased $5.6 million, or 7.7%, partly
due to declines in travel and entertainment expense and
impairment charges on foreclosed property. Other decreases
occurred in leased asset depreciation, professional fees and
recruiting expense, which were partly offset by a decline in
loan origination cost deferrals.
In 2008, non-interest expense was $615.4 million, an
increase of 7.2% over the previous year. Salaries and benefits
expense grew by $24.8 million, or 8.0%, due to merit
increases, higher incentive payments, and increased medical
insurance costs. In addition, increased salary costs resulted
from higher staffing in areas such as commercial bank card,
private banking, and commercial banking, which were part of
certain growth initiatives established by the Company in 2007.
Occupancy, supplies and communication, and equipment costs grew
by 1.2%, 3.4%, and 1.9%, respectively, and were well controlled.
Occupancy costs increased mainly as a result of higher building
services and repairs expense. Equipment expense grew mainly due
to higher repairs and maintenance expense, partly offset by a
decline in equipment depreciation expense. Supplies and
27
Table of Contents
communication costs were higher due to increased costs for
supplies and courier expense. Data processing and software
expense increased $6.0 million, or 12.0%, mainly due to
higher bank card processing costs. Exclusive of bank card costs,
core data processing expense increased $2.1 million, or
6.7%, over the prior year due to investments in new software and
servicing systems. Marketing expense also rose by
$1.8 million, or 9.9%, over the prior year mainly related
to deposit account product marketing and other campaigns
supporting Company initiatives. Other non-interest expense
increased $3.1 million, or 4.3%, in 2008 partly due to a
$2.5 million impairment charge on foreclosed land which was
sold later that year. Other increases occurred in travel and
entertainment, FHLB letter of credit fees, and credit card
rewards expense. Partly offsetting these increases were declines
in professional fees and leased asset depreciation.
Non-interest expense in 2008 also included a $33.3 million
non-cash loss related to the purchase of auction rate securities
from customers. The securities were purchased at par value from
the customers, and this loss represents the amount by which par
value exceeded estimated fair value on the purchase date. Most
of these securities were subsequently sold in the fourth quarter
of 2008, and the gain relating to that transaction was recorded
in investments securities gains (losses), as noted above.
Also included in non-interest expense were adjustments to the
Company’s estimate of its share of certain litigation costs
arising from its member bank relationship with Visa. An
obligation was initially recorded in 2007 which represented the
Company’s portion of litigation costs relating to various
suits against Visa. The obligation has been periodically
adjusted to reflect escrow funding by Visa, suit settlements,
and changes in estimates of remaining litigation costs. As a
result of these adjustments, reductions to the obligation were
recorded in 2009 and 2008 of $2.5 million and
$9.6 million, respectively.
Income
Taxes
Income tax expense was $73.8 million in 2009, compared to
$85.1 million in 2008 and $93.7 million in 2007.
Income tax expense in 2009 decreased 13.3% from 2008, compared
to an 11.8% decrease in pre-tax income. The effective tax rate
was 30.4%, 31.1% and 31.2% in 2009, 2008 and 2007, respectively.
The Company’s effective tax rates in those years were lower
than the federal statutory rate of 35% mainly due to tax-exempt
interest on state and local municipal obligations.
Financial
Condition
Loan
Portfolio Analysis
Classifications of consolidated loans by major category at
December 31 for each of the past five years are shown in the
table below. This portfolio consists of loans which the Company
intends to hold to their maturity, and includes a portfolio of
student loans which was acquired in 2008. The Company’s
portfolio of originated student loans was classified as held for
sale in 2006, and is included in the table below only for 2005.
Loans held for sale are discussed in the following section. A
schedule of average balances invested in each loan category
below appears on page 60.
|
|
||||||||||||||||||||
| Balance at December 31 | ||||||||||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Business
|
$ | 2,877,936 | $ | 3,404,371 | $ | 3,257,047 | $ | 2,860,692 | $ | 2,527,654 | ||||||||||
|
Real estate – construction and land
|
665,110 | 837,369 | 668,701 | 658,148 | 424,561 | |||||||||||||||
|
Real estate – business
|
2,104,030 | 2,137,822 | 2,239,846 | 2,148,195 | 1,919,045 | |||||||||||||||
|
Real estate – personal
|
1,537,687 | 1,638,553 | 1,540,289 | 1,478,669 | 1,352,339 | |||||||||||||||
|
Consumer
|
1,333,763 | 1,615,455 | 1,648,072 | 1,435,038 | 1,287,348 | |||||||||||||||
|
Home equity
|
489,517 | 504,069 | 460,200 | 441,851 | 448,507 | |||||||||||||||
|
Student
|
331,698 | 358,049 | — | — | 330,238 | |||||||||||||||
|
Consumer credit card
|
799,503 | 779,709 | 780,227 | 648,326 | 592,465 | |||||||||||||||
|
Overdrafts
|
6,080 | 7,849 | 10,986 | 10,601 | 10,854 | |||||||||||||||
|
Total loans
|
$ | 10,145,324 | $ | 11,283,246 | $ | 10,605,368 | $ | 9,681,520 | $ | 8,893,011 | ||||||||||
28
Table of Contents
In December 2008, the Company elected to reclassify certain
segments of its real estate, business, and consumer portfolios.
The reclassifications were made to better align the loan
reporting with its related collateral and purpose. Amounts
reclassified to real estate construction and land pertained
mainly to commercial or residential land and lots which were
held by borrowers for future development. Amounts reclassified
to personal real estate related mainly to one to four family
rental property secured by residential mortgages. The table
below shows the effect of the reclassifications on the various
lending categories as of the transfer date. Because the
information was not readily available and it was impracticable
to do so, periods prior to 2008 were not restated.
|
|
||||
|
Effect of
|
||||
| (In thousands) | reclassification | |||
|
|
||||
|
Business
|
$ | (55,991 | ) | |
|
Real estate – construction and land
|
158,268 | |||
|
Real estate – business
|
(214,071 | ) | ||
|
Real estate – personal
|
142,093 | |||
|
Consumer
|
(30,299 | ) | ||
|
Net reclassification
|
$ | — | ||
The contractual maturities of loan categories at
December 31, 2009, and a breakdown of those loans between
fixed rate and floating rate loans are as follows:
|
|
||||||||||||||||||||
| Principal Payments Due | ||||||||||||||||||||
|
In
|
After One
|
After
|
||||||||||||||||||
|
One Year
|
Year Through
|
Five
|
||||||||||||||||||
| (In thousands) | or Less | Five Years | Years | Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
Business
|
$ | 1,566,491 | $ | 1,141,653 | $ | 169,792 | $ | 2,877,936 | ||||||||||||
|
Real estate – construction and land
|
477,162 | 185,124 | 2,824 | 665,110 | ||||||||||||||||
|
Real estate – business
|
653,649 | 1,232,146 | 218,235 | 2,104,030 | ||||||||||||||||
|
Real estate – personal
|
188,587 | 384,937 | 964,163 | 1,537,687 | ||||||||||||||||
|
Total business and real estate loans
|
$ | 2,885,889 | $ | 2,943,860 | $ | 1,355,014 | 7,184,763 | |||||||||||||
|
Consumer
(1)
|
1,333,763 | |||||||||||||||||||
|
Home
equity
(2)
|
489,517 | |||||||||||||||||||
|
Student
(3)
|
331,698 | |||||||||||||||||||
|
Consumer credit
card
(4)
|
799,503 | |||||||||||||||||||
|
Overdrafts
|
6,080 | |||||||||||||||||||
|
Total loans
|
$ | 10,145,324 | ||||||||||||||||||
|
Loans with fixed rates
|
$ | 614,446 | $ | 1,622,946 | $ | 465,016 | $ | 2,702,408 | ||||||||||||
|
Loans with floating rates
|
2,271,443 | 1,320,914 | 889,998 | 4,482,355 | ||||||||||||||||
|
Total business and real estate loans
|
$ | 2,885,889 | $ | 2,943,860 | $ | 1,355,014 | $ | 7,184,763 | ||||||||||||
| (1) | Consumer loans with floating rates totaled $113.6 million. | |
| (2) | Home equity loans with floating rates totaled $483.9 million. | |
| (3) | All student loans have floating rates. | |
| (4) | Consumer credit card loans with floating rates totaled $732.3 million. |
Total loans at December 31, 2009 were $10.1 billion, a
decrease of $1.1 billion, or 10.1%, from balances at
December 31, 2008. The decline in loans during 2009 came
principally from business, construction, personal real estate
and consumer loans. Business loans declined $526.4 million,
or 15.5%, reflecting lower line of credit usage, lower demand
and pay-downs by business loan customers. Lease balances, which
are included in the business category, decreased
$26.8 million, or 8.7%, compared with the previous year end
balance, as demand for equipment financing weakened. Business
real estate loans were lower by $33.8 million, or 1.6%, and
construction loans decreased $172.3 million, or 20.6%. The
decline in construction loans reflected continued uncertain
economic conditions in the real estate markets and lower overall
demand. Personal real estate loans and consumer loans declined
$100.9 million and $281.7 million, respectively, as
loan pay-downs exceeded new loan originations. Consumer loans
also declined, as in mid 2008 the Company ceased most marine and
recreational vehicle lending from that portfolio. Home equity
loans decreased $14.6 million due to
29
Table of Contents
fewer new account activations, and student loans declined
$26.4 million due to principal pay-downs. Consumer credit
card loans increased by $19.8 million, or 2.5%.
Period end loans increased $677.9 million, or 6.4%, in 2008
compared to 2007, resulting from increases in business, business
real estate and student loans. In December 2008, the Company
acquired $358.5 million of federally guaranteed student
loans from a student loan agency in exchange for certain auction
rate securities.
The Company currently generates approximately 31% of its loan
portfolio in the St. Louis market, 29% in the Kansas City
market, and 40% in various other regional markets. The portfolio
is diversified from a business and retail standpoint, with 56%
in loans to businesses and 44% in loans to consumers. A balanced
approach to loan portfolio management and an historical aversion
toward credit concentrations, from an industry, geographic and
product perspective, have contributed to low levels of problem
loans and loan losses.
Business
Total business loans amounted to $2.9 billion at
December 31, 2009 and include loans used mainly to fund
customer accounts receivable, inventories, and capital
expenditures. This portfolio also includes direct financing and
sales type leases totaling $281.4 million, which are used
by commercial customers to finance capital purchases ranging
from computer equipment to office and transportation equipment.
These leases comprise 2.8% of the Company’s 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 management’s strategy
and emphasis upon relationship banking, most borrowing customers
also maintain deposit accounts and utilize other banking
services. Net loan charge-offs in this category totaled
$12.8 million in 2009 and $4.4 million in 2008.
Non-accrual business loans were $12.9 million (.4% of
business loans) at December 31, 2009 compared to
$4.0 million at December 31, 2008. Included in these
totals were non-accrual lease-related loans of $3.3 million
and $1.0 million at December 31, 2009 and 2008,
respectively. Growth opportunities in business loans will
largely depend on economic and market conditions affecting
businesses and their ability to grow and invest in new capital,
and the Company’s own solicitation efforts in attracting
new, high quality loans. Asset quality is, in part, a function
of management’s consistent application of underwriting
standards and credit terms through stages in economic cycles.
Therefore, portfolio growth in 2010 will be dependent upon
1) the strength of the economy, 2) the actions of the
Federal Reserve with regard to targets for economic growth,
interest rates, and inflationary tendencies, 3) customer
demand, and 4) the competitive environment.
Real
Estate-Construction and Land
The portfolio of loans in this category amounted to
$665.1 million at December 31, 2009 and comprised 6.6%
of the Company’s total loan portfolio. These loans are
predominantly made to businesses in the local markets of the
Company’s banking subsidiary. Commercial construction loans
are made during the construction phase for small and
medium-sized office and medical buildings, manufacturing and
warehouse facilities, apartment complexes, shopping centers,
hotels and motels, and other commercial properties. Exposure to
larger speculative commercial properties remains low. Commercial
land and land development loans relate to land owned or
developed for use in conjunction with business properties. The
largest percentage of residential construction and land
development loans are for projects located in the Kansas City
and St. Louis metropolitan areas. Credit risk in this
sector has risen over the last two years, especially in
residential construction and land development lending, as a
result of the slowdown in the housing industry and worsening
economic conditions. Net loan charge-offs increased to
$34.1 million in 2009, compared to net charge-offs of
$6.2 million in 2008. The increase in net charge-offs in
2009 was mainly comprised of
30
Table of Contents
$28.1 million in charge-offs on nine specific loans.
Construction and land development loans on non-accrual status
rose to $62.5 million at year end 2009, compared to
$48.9 million at year end 2008. The non-accrual balance
included a $14.8 million residential construction loan
within the Bank’s market, which was placed on non-accrual
status in December 2008. The remainder of the non-accrual
balance at year end 2009 was mainly composed of loans to 15
borrowers, with balances ranging from $500 thousand to
$8.7 million. The Company’s watch list, which includes
special mention and substandard categories, included
$149.3 million of residential land and construction loans
which are being closely monitored.
Real
Estate-Business
Total business real estate loans were $2.1 billion at
December 31, 2009 and comprised 20.7% of the Company’s
total loan portfolio. This category includes mortgage loans for
small and medium-sized office and medical buildings,
manufacturing and warehouse facilities, shopping centers, hotels
and motels, and other commercial properties. Emphasis is placed
on owner-occupied and income producing commercial real estate
properties, which present lower risk levels. The borrowers
and/or
the
properties are generally located in local and regional markets.
Additional information about loans by category is presented on
page 38. At December 31, 2009, non-accrual balances
amounted to $21.8 million, or 1.0%, of the loans in this
category, up from $13.1 million at year end 2008. The
Company experienced net charge-offs of $5.2 million in
2009, compared to net charge-offs of $2.2 million in 2008.
Real
Estate-Personal
At December 31, 2009, there were $1.5 billion in
outstanding personal real estate loans, which comprised 15.2% of
the Company’s total loan portfolio. The mortgage loans in
this category are mainly for owner-occupied residential
properties. The Company originates both adjustable rate and
fixed rate mortgage loans. The Company retains adjustable rate
mortgage loans, and may from time to time retain certain fixed
rate loans (typically
15-year
fixed rate loans) as directed by its Asset/Liability Management
Committee. Other fixed rate loans in the portfolio have resulted
from previous bank acquisitions. The Company does not purchase
loans from outside parties or brokers, and has never maintained
or promoted subprime or reduced document products. At
December 31, 2009, 54% of the portfolio was comprised of
adjustable rate loans while 46% was comprised of fixed rate
loans. Levels of mortgage loan origination activity increased
slightly in 2009 compared to 2008, with originations of
$199 million in 2009 compared with $181 million in
2008. Growth in mortgage loan originations continued to be
constrained in 2009 as a result of the weakened economy, slower
housing starts, and lower resales within the Company’s
markets. The Company has experienced lower loan losses in this
category than many others in the industry, and believes this is
partly because it does not offer subprime lending products or
purchase loans from brokers. Net loan charge-offs for 2009
amounted to $2.8 million, compared to $1.7 million in
the previous year. The non-accrual balances of loans in this
category increased to $9.4 million at December 31,
2009, compared to $6.8 million at year end 2008.
Personal
Banking
Total personal banking loans, which include consumer, student
and revolving home equity loans, totaled $2.2 billion at
December 31, 2009 and comprised 21.2% of the Company’s
total loan portfolio. Consumer loans consist of auto, marine,
tractor/trailer, recreational vehicle (RV) and fixed rate home
equity loans, and totaled $1.3 billion at year end 2009.
Approximately 68% of consumer loans outstanding were originated
indirectly from auto and other dealers, while the remaining 32%
were direct loans made to consumers. Approximately 28% of the
consumer portfolio consists of automobile loans, 50% in marine
and RV loans and 10% in fixed rate home equity lending. As
mentioned above, total consumer loans declined
$281.7 million in 2009 as a result of a decrease of
$156.0 million in marine and RV loans, due to the
Company’s decision in 2008 to cease most marine and RV
lending. In addition, auto lending declined $97.0 million,
or 20.8%. Net charge-offs on consumer loans were
$32.2 million in 2009 compared to $21.4 million in
2008. Net charge-offs increased to 2.2% of average consumer
loans in 2009 compared to 1.3% in 2008. The increase in net
charge-offs in 2009 compared to 2008 was mainly due to higher
marine and RV charge-offs. Net charge-offs on marine and RV
loans were $8.3 million higher in 2009 compared to 2008,
and were 3.0% of average marine and RV loans in 2009 compared to
1.7% in 2008.
31
Table of Contents
Revolving home equity loans, of which 99% are adjustable rate
loans, totaled $489.5 million at year end 2009. An
additional $658.8 million was available in unused lines of
credit, which can be drawn at the discretion of the borrower.
Home equity loans are secured mainly by second mortgages (and
less frequently, first mortgages) on residential property of the
borrower. The underwriting terms for the home equity line
product permit borrowing availability, in the aggregate,
generally up to 80% or 90% of the appraised value of the
collateral property at the time of origination. While in prior
years a small percentage of borrowers were permitted borrowing
up to 100% of appraised value, this practice was discontinued in
2009.
As mentioned above, in December 2008 the Company acquired
federally guaranteed student loans from a student loan agency.
The loans were acquired in exchange for certain auction rate
securities issued by that agency and purchased earlier in the
year by the Bank from its customers. The loans, which had an
average estimated life of approximately seven years at purchase
date, were recorded at fair value, which resulted in a discount
from their face value of approximately 2.5%. At
December 31, 2009, these student loan balances totaled
$331.7 million.
Consumer
Credit Card
Total consumer credit card loans amounted to $799.5 million
at December 31, 2009 and comprised 7.9% of the
Company’s total loan portfolio. The credit card portfolio
is concentrated within regional markets served by the Company.
The Company offers a variety of credit card products, including
affinity cards, rewards cards, and standard and premium credit
cards, and emphasizes its credit card relationship product,
Special Connections. Approximately 65% of the households in
Missouri that own a Commerce credit card product also maintain a
deposit relationship with the subsidiary bank. Approximately 92%
of the outstanding credit card loans have a floating interest
rate. Net charge-offs amounted to $49.3 million in 2009,
which was a $17.8 million increase over 2008. The annual
ratio of net credit card loan charge-offs to total average
credit card loans totaled 6.8% in 2009 compared to 4.1% in 2008.
These ratios, however, remain below national loss averages.
Loans
Held for Sale
Total loans held for sale at December 31, 2009 were
$345.0 million, a decrease of $16.3 million, or 4.5%,
from $361.3 million at year end 2008. Loans classified as
held for sale consist of student loans and residential mortgage
loans.
Most of the portfolio is comprised of originated loans to
students attending colleges and universities. These loans are
normally sold to the secondary market when the student graduates
and the loan enters into repayment status. Nearly all of these
loans are based on variable rates. The Company maintains
agreements to sell these student loans to various student loan
servicing agencies, including the Missouri Higher Education Loan
Authority and the Student Loan Marketing Association. In mid
2008, the Company also entered into an agreement with the
Department of Education (DOE) which covers all new loans
originated beginning July 1, 2008. Under this agreement,
loans originated for the school year
2008-2009
were sold in 2009. Total student loans sold to the DOE and other
agencies were approximately $439 million in 2009 and
$164 million in 2008.
Due to uncertainties during 2008 surrounding some of the student
loan agencies’ future ability to fulfill these contracts,
the Company adjusted loans totaling $206.1 million to fair
value and recorded impairment charges of $9.4 million at
year end 2008. Of these losses, $8.6 million were reversed
during 2009, as various sales of the related loans were made in
accordance with contractual terms and performance concerns
diminished. Due to higher sales of student loans in 2009,
student loan balances declined by $24.0 million, or 6.7%,
to $334.5 million at year end 2009, compared to
$358.6 million at year end 2008.
The remainder of the held for sale portfolio consists of fixed
rate mortgage loans, which are sold in the secondary market,
generally within three months of origination. These loans
totaled $10.5 million and $2.7 million at
December 31, 2009 and 2008, respectively.
32
Table of Contents
Allowance
for Loan Losses
The Company has an established process to determine the amount
of the allowance for loan losses, which assesses the risks and
losses inherent in its portfolio. This process provides an
allowance consisting of a specific allowance component based on
certain individually evaluated loans and a general component
based on estimates of reserves needed for pools of loans with
similar risk characteristics.
Loans subject to individual evaluation are defined by the
Company as impaired, and generally consist of business,
construction, commercial real estate and personal real estate
loans on non-accrual status. In addition, loans that have been
modified and meet the criteria for troubled debt restructuring
are also included in impaired loans. Impaired loans are
evaluated individually for the impairment of repayment potential
and collateral adequacy, and in conjunction with current
economic conditions and loss experience, allowances are
estimated. Loans not individually evaluated are aggregated and
reserves are recorded using a consistent methodology that
considers historical loan loss experience by loan type,
delinquencies, current economic factors, loan risk ratings and
industry concentrations.
The Company’s 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
Company’s 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
Company’s senior management and Board of Directors. Such
reviews also assist management in establishing the level of the
allowance. The Company’s subsidiary bank continues to be
subject to examination by the Office of the Comptroller of the
Currency (OCC) and examinations are conducted throughout the
year, targeting various segments of the loan portfolio for
review. In addition to the examination of the subsidiary bank by
the OCC, the parent holding company and its non-bank
subsidiaries are examined by the Federal Reserve Bank.
At December 31, 2009, the allowance for loan losses was
$194.5 million compared to a balance at year end 2008 of
$172.6 million. The $21.9 million, or 12.7%, increase
in the allowance for loan losses during 2009 was primarily a
result of increasing levels of watch list loans and
deteriorating general economic conditions. Total loans
delinquent 90 days or more increased $2.7 million, or
6.7% at December 31, 2009 compared to year end 2008.
Delinquencies of 90 days or more on consumer credit card
loans increased $3.1 million, or 22.2%, compared to 2008.
Loans on non-accrual status increased $33.7 million to
$106.6 million in 2009 from $72.9 million in 2008.
This growth included increases of $13.6 million in
non-accrual construction and land loans, $8.6 million in
non-accrual business real estate loans, and $8.9 million in
business loans. Other loans identified as potential future
problem loans increased $8.9 million. This group of loans
saw a $58.0 million increase in business real estate loans
during the year, offset by declines in business and construction
and loans. These trends were reflective of the economic downturn
experienced in 2009. The Company’s analysis of the
allowance considered these trends, which resulted in an increase
in the allowance balance during 2009 and 2008. The percentage of
allowance to loans increased to 1.92% at December 31, 2009
compared to 1.53% at year end 2008 as a result of the increase
in the allowance balance, coupled with a decrease in period end
loan balances of 10.1%.
Net loan charge-offs totaled $138.8 million in 2009, and
increased $69.0 million, compared to net charge-offs of
$69.9 million in 2008. Net charge-offs related to business
loans were $12.8 million in 2009 compared to
$4.4 million in 2008. Construction and land loans incurred
net charge-offs of $34.1 million in 2009 compared to
$6.2 million in 2008. Net charge-offs related to consumer
loans increased by $10.8 million to $32.2 million at
December 31, 2009, representing 23.2% of total net
charge-offs during 2009. This increase was due primarily to a
$8.3 million increase in net charge-offs related to marine
and recreational vehicle loans. Additionally, net charge-offs
related to consumer credit cards increased $17.8 million to
$49.3 million in 2009 compared to $31.5 million in
2008. Approximately 35.5% of total net loan charge-offs during
2009 were related to consumer credit card loans compared to
45.1% during 2008. Net consumer credit card charge-offs
increased to 6.8% of average consumer credit card loans in 2009
compared to 4.1% in 2008.
33
Table of Contents
The ratio of net charge-offs to total average loans outstanding
in 2009 was 1.31% compared to .64% in 2008 and .42% in 2007. The
provision for loan losses in 2009 was $160.7 million,
compared to a provision of $108.9 million in 2008 and
$42.7 million in 2007.
The Company considers the allowance for loan losses of
$194.5 million adequate to cover losses inherent in the
loan portfolio at December 31, 2009.
The schedules which follow summarize the relationship between
loan balances and activity in the allowance for loan losses:
|
|
||||||||||||||||||||
| Years Ended December 31 | ||||||||||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net loans outstanding at end of
year
(A)
|
$ | 10,145,324 | $ | 11,283,246 | $ | 10,605,368 | $ | 9,681,520 | $ | 8,893,011 | ||||||||||
|
Average loans
outstanding
(A)
|
$ | 10,629,867 | $ | 10,935,858 | $ | 10,189,316 | $ | 9,105,432 | $ | 8,549,573 | ||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
Balance at beginning of year
|
$ | 172,619 | $ | 133,586 | $ | 131,730 | $ | 128,447 | $ | 132,394 | ||||||||||
|
Additions to allowance through charges to expense
|
160,697 | 108,900 | 42,732 | 25,649 | 28,785 | |||||||||||||||
|
Allowances of acquired companies
|
— | — | 1,857 | 3,688 | — | |||||||||||||||
|
Loans charged off:
|
||||||||||||||||||||
|
Business
|
15,762 | 7,820 | 5,822 | 1,343 | 1,083 | |||||||||||||||
|
Real estate – construction and land
|
34,812 | 6,215 | 2,049 | 62 | — | |||||||||||||||
|
Real estate – business
|
5,957 | 2,293 | 2,396 | 854 | 827 | |||||||||||||||
|
Real estate – personal
|
3,150 | 1,765 | 181 | 119 | 87 | |||||||||||||||
|
Consumer
|
35,973 | 26,229 | 14,842 | 11,364 | 13,441 | |||||||||||||||
|
Home equity
|
1,197 | 447 | 451 | 158 | 34 | |||||||||||||||
|
Student
|
6 | — | — | — | — | |||||||||||||||
|
Consumer credit card
|
54,060 | 35,825 | 28,218 | 22,104 | 28,263 | |||||||||||||||
|
Overdrafts
|
3,493 | 4,499 | 4,909 | 4,940 | 3,485 | |||||||||||||||
|
Total loans charged off
|
154,410 | 85,093 | 58,868 | 40,944 | 47,220 | |||||||||||||||
|
Recovery of loans previously charged off:
|
||||||||||||||||||||
|
Business
|
2,925 | 3,406 | 1,429 | 2,166 | 4,099 | |||||||||||||||
|
Real estate – construction and land
|
720 | — | 37 | — | — | |||||||||||||||
|
Real estate – business
|
709 | 117 | 1,321 | 890 | 330 | |||||||||||||||
|
Real estate – personal
|
363 | 51 | 42 | 27 | 57 | |||||||||||||||
|
Consumer
|
3,772 | 4,782 | 5,304 | 5,263 | 4,675 | |||||||||||||||
|
Home equity
|
7 | 18 | 5 | 23 | — | |||||||||||||||
|
Consumer credit card
|
4,785 | 4,309 | 4,520 | 4,250 | 3,851 | |||||||||||||||
|
Overdrafts
|
2,293 | 2,543 | 3,477 | 2,271 | 1,476 | |||||||||||||||
|
Total recoveries
|
15,574 | 15,226 | 16,135 | 14,890 | 14,488 | |||||||||||||||
|
Net loans charged off
|
138,836 | 69,867 | 42,733 | 26,054 | 32,732 | |||||||||||||||
|
Balance at end of year
|
$ | 194,480 | $ | 172,619 | $ | 133,586 | $ | 131,730 | $ | 128,447 | ||||||||||
|
Ratio of allowance to loans at end of year
|
1.92 | % | 1.53 | % | 1.26 | % | 1.36 | % | 1.44 | % | ||||||||||
|
Ratio of provision to average loans outstanding
|
1.51 | % | 1.00 | % | .42 | % | .28 | % | .34 | % | ||||||||||
| (A) | Net of unearned income, before deducting allowance for loan losses, excluding loans held for sale. |
34
Table of Contents
|
|
||||||||||||||||||||
| Years Ended December 31 | ||||||||||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Ratio of net charge-offs to average loans outstanding, by loan
category:
|
||||||||||||||||||||
|
Business
|
.41 | % | .13 | % | .14 | % | NA | NA | ||||||||||||
|
Real estate – construction and land
|
4.61 | .89 | .30 | .01 | — | |||||||||||||||
|
Real estate – business
|
.24 | .10 | .05 | NA | .03 | |||||||||||||||
|
Real estate – personal
|
.18 | .11 | .01 | .01 | — | |||||||||||||||
|
Consumer
|
2.20 | 1.28 | .61 | .45 | .71 | |||||||||||||||
|
Home equity
|
.24 | .09 | .10 | .03 | .01 | |||||||||||||||
|
Consumer credit card
|
6.77 | 4.06 | 3.56 | 3.00 | 4.40 | |||||||||||||||
|
Overdrafts
|
12.27 | 16.40 | 10.36 | 18.18 | 14.36 | |||||||||||||||
|
Ratio of total net charge-offs to total average loans outstanding
|
1.31 | % | .64 | % | .42 | % | .29 | % | .38 | % | ||||||||||
NA: Net recoveries were experienced in these years.
The following schedule provides a breakdown of the allowance for
loan losses by loan category and the percentage of each loan
category to total loans outstanding at year end:
|
|
||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Loan Loss
|
% of Loans
|
Loan Loss
|
% of Loans
|
Loan Loss
|
% of Loans
|
Loan Loss
|
% of Loans
|
Loan Loss
|
% of Loans
|
|||||||||||||||||||||||||||||||
|
Allowance
|
to Total
|
Allowance
|
to Total
|
Allowance
|
to Total
|
Allowance
|
to Total
|
Allowance
|
to Total
|
|||||||||||||||||||||||||||||||
| Allocation | Loans | Allocation | Loans | Allocation | Loans | Allocation | Loans | Allocation | Loans | |||||||||||||||||||||||||||||||
|
Business
|
$ | 42,949 | 28.4 | % | $ | 37,912 | 30.2 | % | $ | 29,392 | 30.7 | % | $ | 28,529 | 29.5 | % | $ | 26,211 | 28.4 | % | ||||||||||||||||||||
|
RE – construction and land
|
30,776 | 6.6 | 23,526 | 7.4 | 8,507 | 6.3 | 4,605 | 6.8 | 3,375 | 4.8 | ||||||||||||||||||||||||||||||
|
RE – business
|
30,640 | 20.7 | 25,326 | 19.0 | 14,842 | 21.1 | 19,343 | 22.2 | 19,432 | 21.6 | ||||||||||||||||||||||||||||||
|
RE – personal
|
5,231 | 15.2 | 4,680 | 14.5 | 2,389 | 14.5 | 2,243 | 15.3 | 4,815 | 15.3 | ||||||||||||||||||||||||||||||
|
Consumer
|
29,994 | 13.1 | 28,638 | 14.3 | 24,611 | 15.6 | 18,655 | 14.8 | 18,951 | 14.5 | ||||||||||||||||||||||||||||||
|
Home equity
|
1,590 | 4.8 | 1,332 | 4.4 | 5,839 | 4.3 | 5,035 | 4.6 | 5,916 | 5.0 | ||||||||||||||||||||||||||||||
|
Student
|
229 | 3.3 | — | 3.2 | — | — | — | — | 497 | 3.7 | ||||||||||||||||||||||||||||||
|
Consumer credit card
|
51,801 | 7.9 | 49,492 | 6.9 | 44,307 | 7.4 | 39,965 | 6.7 | 35,513 | 6.6 | ||||||||||||||||||||||||||||||
|
Overdrafts
|
1,270 | — | 1,713 | .1 | 2,351 | .1 | 3,592 | .1 | 2,739 | .1 | ||||||||||||||||||||||||||||||
|
Unallocated
|
— | — | — | — | 1,348 | — | 9,763 | — | 10,998 | — | ||||||||||||||||||||||||||||||
|
Total
|
$ | 194,480 | 100.0 | % | $ | 172,619 | 100.0 | % | $ | 133,586 | 100.0 | % | $ | 131,730 | 100.0 | % | $ | 128,447 | 100.0 | % | ||||||||||||||||||||
Risk
Elements of Loan Portfolio
Management reviews the loan portfolio continuously for evidence
of problem loans. During the ordinary course of business,
management becomes aware of borrowers that may not be able to
meet the contractual requirements of loan agreements. Such loans
are placed under close supervision with consideration given to
placing the loan on non-accrual status, the need for an
additional allowance for loan loss, and (if appropriate) partial
or full loan charge-off. Loans are placed on non-accrual status
when management does not expect to collect payments consistent
with acceptable and agreed upon terms of repayment. Loans that
are 90 days past due as to principal
and/or
interest payments are generally placed on non-accrual, unless
they are both well-secured and in the process of collection, or
they are consumer loans that are exempt under regulatory rules
from being classified as non-accrual. Consumer installment loans
and related accrued interest are normally charged down to the
fair value of related collateral (or are charged off in full if
no collateral) once the loans are more than 120 days
delinquent. Credit card loans and the related accrued interest
are charged off when the receivable is more than 180 days
past due. After a loan is placed on non-accrual status, any
interest previously accrued but not yet collected is reversed
against current income. Interest is included in income only as
received and only after all previous loan charge-offs have been
recovered, so long as management is satisfied there is no
impairment of collateral values. The loan is returned to accrual
status only when the borrower has brought all past due principal
and interest payments current and, in the opinion of
35
Table of Contents
management, the borrower has demonstrated the ability to make
future payments of principal and interest as scheduled.
The following schedule shows non-performing assets and loans
past due 90 days and still accruing interest.
|
|
||||||||||||||||||||
| December 31 | ||||||||||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-performing assets:
|
||||||||||||||||||||
|
Non-accrual loans:
|
||||||||||||||||||||
|
Business
|
$ | 12,874 | $ | 4,007 | $ | 4,700 | $ | 5,808 | $ | 5,916 | ||||||||||
|
Real estate – construction and land
|
62,509 | 48,871 | 7,769 | 120 | — | |||||||||||||||
|
Real estate – business
|
21,756 | 13,137 | 5,628 | 9,845 | 3,149 | |||||||||||||||
|
Real estate – personal
|
9,384 | 6,794 | 1,095 | 384 | 261 | |||||||||||||||
|
Consumer
|
90 | 87 | 547 | 551 | 519 | |||||||||||||||
|
Total non-accrual loans
|
106,613 | 72,896 | 19,739 | 16,708 | 9,845 | |||||||||||||||
|
Real estate acquired in foreclosure
|
10,057 | 6,181 | 13,678 | 1,515 | 1,868 | |||||||||||||||
|
Total non-performing assets
|
$ | 116,670 | $ | 79,077 | $ | 33,417 | $ | 18,223 | $ | 11,713 | ||||||||||
|
Non-performing assets as a percentage of total loans
|
1.15 | % | .70 | % | .32 | % | .19 | % | .13 | % | ||||||||||
|
Non-performing assets as a percentage of total assets
|
.64 | % | .45 | % | .21 | % | .12 | % | .08 | % | ||||||||||
|
Past due 90 days and still accruing interest:
|
||||||||||||||||||||
|
Business
|
$ | 3,672 | $ | 1,459 | $ | 1,427 | $ | 2,814 | $ | 1,026 | ||||||||||
|
Real estate – construction and land
|
1,184 | 466 | 768 | 593 | — | |||||||||||||||
|
Real estate – business
|
402 | 1,472 | 281 | 1,336 | 1,075 | |||||||||||||||
|
Real estate – personal
|
3,102 | 4,717 | 5,131 | 3,994 | 2,998 | |||||||||||||||
|
Consumer
|
2,045 | 3,478 | 1,914 | 1,255 | 1,069 | |||||||||||||||
|
Home equity
|
878 | 440 | 700 | 659 | 429 | |||||||||||||||
|
Student
|
14,346 | 14,018 | 1 | 1 | 74 | |||||||||||||||
|
Consumer credit card
|
17,003 | 13,914 | 10,664 | 9,724 | 7,417 | |||||||||||||||
|
Total past due 90 days and still accruing interest
|
$ | 42,632 | $ | 39,964 | $ | 20,886 | $ | 20,376 | $ | 14,088 | ||||||||||
The table below shows the effect on interest income in 2009 of
loans on non-accrual status at year end.
| (In thousands) | ||||
|
Gross amount of interest that would have been recorded at
original rate
|
$ | 8,332 | ||
|
Interest that was reflected in income
|
2,136 | |||
|
Interest income not recognized
|
$ | 6,196 | ||
Total non-accrual loans at year end 2009 were
$106.6 million, an increase of $33.7 million over the
balance at year end 2008. Most of the increase occurred in
non-accrual construction and land loans, which included a
$19.9 million residential construction loan placed on
non-accrual status in December. In addition, business and
business real estate non-accrual loans increased
$8.9 million and $8.6 million, respectively.
Foreclosed real estate increased to a total of
$10.1 million at year end 2009. Total non-performing assets
remain low compared to the overall banking industry in 2009,
with the non-performing loans to total loans ratio at 1.05% at
December 31, 2009. Loans past due 90 days and still
accruing interest increased $2.7 million at year end 2009
compared to 2008, mainly due to higher credit card and business
loan delinquencies, partly offset by lower real estate and
consumer loan delinquencies. Loans past due 90 days
includes $13.8 million in federally guaranteed student
loans that the Company intends to hold to maturity.
Commercial loans (business, business real estate, and
construction) and personal real estate loans whose terms have
been modified in a troubled debt restructuring are generally
placed on non-accrual status until a six-month payment history
is sustained. Non-accrual loan balances at December 31,
2009 included $735 thousand of such loans.
36
Table of Contents
The Company seeks to assist customers that are experiencing
financial difficulty through renegotiating credit card loans
under various debt management and assistance programs. At
December 31, 2009, the Company had renegotiated consumer
credit card loans of $16.0 million, of which
$8.4 million were current or less than 30 days past
due under the modified terms. These renegotiated loans are
excluded from non-performing loans, in accordance with the
Company’s classification policy on the overall consumer
credit card portfolio.
In addition to non-accrual loans, renegotiated loans, and loans
past due 90 days and still accruing interest, the Company
also has identified loans for which management has concerns
about the ability of the borrowers to meet existing repayment
terms, which are shown in the table below. These loans are
primarily classified as substandard for regulatory purposes
under the Company’s internal rating system. The loans are
generally secured by either real estate or other borrower
assets, reducing the potential for loss should they become
non-performing. Although these loans are generally identified as
potential problem loans, they may never become non-performing.
|
|
||||||||
|
December 31
|
December 31
|
|||||||
| (In thousands) | 2009 | 2008 | ||||||
|
|
||||||||
|
Potential problem loans:
|
||||||||
|
Business
|
$ | 93,256 | $ | 126,409 | ||||
|
Real estate – construction and land
|
115,251 | 135,324 | ||||||
|
Real estate – business
|
98,951 | 40,919 | ||||||
|
Real estate – personal
|
12,013 | 8,336 | ||||||
|
Consumer
|
409 | 41 | ||||||
|
Total potential problem loans
|
$ | 319,880 | $ | 311,029 | ||||
Loans
with Special Risk Characteristics
Within the loan portfolio, certain types of loans are considered
at higher risk of loss due to their terms, location, or special
conditions. Certain personal real estate products have
contractual features that could increase credit exposure in a
market of declining real estate prices, when interest rates are
steadily increasing, or when a geographic area experiences an
economic downturn. Loans might be considered at higher risk when
1) loan terms require a minimum monthly payment that covers
only interest, or
2) loan-to-collateral
value (LTV) ratios are above 80%, with no private mortgage
insurance. Information presented below is based on LTV ratios
which were generally calculated with valuations at loan
origination date.
Real
Estate – Construction and Land Loans
The Company’s portfolio of construction loans, as shown in
the table below, amounted to 6.6% of total loans outstanding at
December 31, 2009.
|
% of
|
% of
|
|||||||||||||||||||||||
|
December 31
|
% of
|
Total
|
December 31
|
% of
|
Total
|
|||||||||||||||||||
| (In thousands) | 2009 | Total | Loans | 2008 | Total | Loans | ||||||||||||||||||
|
Residential land and land development
|
$ | 181,257 | 27.2 | % | 1.8 | % | $ | 246,335 | 29.4 | % | 2.2 | % | ||||||||||||
|
Residential construction
|
110,165 | 16.6 | 1.1 | 141,405 | 16.9 | 1.3 | ||||||||||||||||||
|
Commercial land and land development
|
144,880 | 21.8 | 1.4 | 139,726 | 16.7 | 1.2 | ||||||||||||||||||
|
Commercial construction
|
228,808 | 34.4 | 2.3 | 309,903 | 37.0 | 2.7 | ||||||||||||||||||
|
Total real estate – construction and land loans
|
$ | 665,110 | 100.0 | % | 6.6 | % | $ | 837,369 | 100.0 | % | 7.4 | % | ||||||||||||
37
Table of Contents
Real
Estate – Business Loans
Total business real estate loans were $2.1 billion at
December 31, 2009 and comprised 20.7% of the Company’s
total loan portfolio. These loans include properties such as
manufacturing and warehouse buildings, small office and medical
buildings, churches, hotels and motels, shopping centers, and
other commercial properties. Approximately 52% of these loans
were for owner-occupied real estate properties, which present
lower risk profiles.
|
December 31
|
% of
|
% of
|
||||||||||
| (In thousands) | 2009 | Total | Total Loans | |||||||||
|
Owner-occupied
|
$ | 1,101,870 | 52.4 | % | 10.9 | % | ||||||
|
Industrial
|
142,745 | 6.8 | 1.4 | |||||||||
|
Office
|
214,408 | 10.2 | 2.1 | |||||||||
|
Retail
|
210,619 | 10.0 | 2.1 | |||||||||
|
Multi-family
|
112,664 | 5.3 | 1.1 | |||||||||
|
Farm
|
131,245 | 6.2 | 1.3 | |||||||||
|
Hotels
|
115,056 | 5.5 | 1.1 | |||||||||
|
Other
|
75,423 | 3.6 | .7 | |||||||||
|
Total real estate – business loans
|
$ | 2,104,030 | 100.0 | % | 20.7 | % | ||||||
Real
Estate – Personal Loans
The Company’s $1.5 billion personal real estate
portfolio is composed of loans collateralized with residential
real estate. Included in this portfolio are personal real estate
loans made to commercial customers, which totaled
$270.5 million at December 31, 2009. This group of
loans has an original weighted average term of approximately
5 years, with 58% of the balance in fixed rate loans and
42% in floating rate loans. The remainder of the personal real
estate portfolio, totaling $1.3 billion at
December 31, 2009, is comprised of loans made to the retail
customer base. It includes adjustable rate mortgage loans and
certain fixed rate loans, retained by the Company as directed by
its Asset/Liability Management Committee.
Within the larger mortgage loan group, only 2% were made with
interest only payments (see table below). These loans are
typically made to high net-worth borrowers and generally have
low LTV ratios or have additional collateral pledged to secure
the loan and, therefore, they are not perceived to represent
above normal credit risk. At December 31, 2009, these loans
had a weighted average LTV and FICO score of 55.4% and 757
respectively, and there were no delinquencies noted in this
group. The majority of these loans (95.7%) consist of loans
written within the Company’s five state branch network
territories of Missouri, Kansas, Illinois, Oklahoma, and
Colorado. Loans originated with interest only payments were not
made to “qualify” the borrower for a lower payment
amount.
The following table presents information about the retail based
personal real estate loan portfolio for 2009 and 2008.
|
|
||||||||||||||||
| 2009 | 2008 | |||||||||||||||
|
Principal
|
Principal
|
|||||||||||||||
|
Outstanding at
|
% of Loan
|
Outstanding at
|
% of Loan
|
|||||||||||||
| (Dollars in thousands) | December 31 | Portfolio | December 31 | Portfolio | ||||||||||||
|
|
||||||||||||||||
|
Loans with interest only payments
|
$ | 25,201 | 2.0 | % | $ | 35,649 | 2.6 | % | ||||||||
|
Loans with no insurance and LTV:
|
||||||||||||||||
|
Between 80% and 90%
|
99,395 | 7.8 | 74,094 | 5.4 | ||||||||||||
|
Between 90% and 95%
|
31,331 | 2.5 | 25,495 | 1.9 | ||||||||||||
|
Over 95%
|
52,033 | 4.1 | 35,653 | 2.6 | ||||||||||||
|
Over 80% LTV with no insurance
|
182,759 | 14.4 | 135,242 | 9.9 | ||||||||||||
|
Total loan portfolio from which above loans were identified
|
1,267,156 | 1,360,204 | ||||||||||||||
38
Table of Contents
Revolving
Home Equity Loans
The Company also has revolving home equity loans that are
generally collateralized by residential real estate. Most of
these loans (95.9%) are written with terms requiring interest
only monthly payments. These loans are offered in three main
product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. The
following tables break out the year end outstanding balances by
product for 2009 and 2008.
|
|
||||||||||||||||||||||||||||||||
|
Principal
|
Unused Portion
|
|||||||||||||||||||||||||||||||
|
Outstanding at
|
New Lines
|
of Available Lines
|
Balances
|
|||||||||||||||||||||||||||||
|
December 31
|
Originated During
|
at December 31
|
Over 30
|
|||||||||||||||||||||||||||||
| (Dollars in thousands) | 2009 | * | 2009 | * | 2009 | * | Days Past Due | * | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans with interest only payments
|
$ | 469,460 | 95.9 | % | $ | 30,832 | 6.3 | % | $ | 647,669 | 132.3 | % | $ | 2,102 | .4 | % | ||||||||||||||||
|
Loans with LTV:
|
||||||||||||||||||||||||||||||||
|
Between 80% and 90%
|
63,369 | 12.9 | 3,181 | .7 | 44,261 | 9.0 | 547 | .1 | ||||||||||||||||||||||||
|
Over 90%
|
23,369 | 4.8 | 104 | — | 16,751 | 3.5 | 504 | .1 | ||||||||||||||||||||||||
|
Over 80% LTV
|
86,738 | 17.7 | 3,285 | .7 | 61,012 | 12.5 | 1,051 | .2 | ||||||||||||||||||||||||
|
Total loan portfolio from which above loans were identified
|
489,517 | 32,485 | 658,845 | |||||||||||||||||||||||||||||
| * | Percentage of total principal outstanding of $489.5 million at December 31, 2009. |
|
|
||||||||||||||||||||||||||||||||
|
Principal
|
Unused Portion
|
|||||||||||||||||||||||||||||||
|
Outstanding at
|
New Lines
|
of Available Lines
|
Balances
|
|||||||||||||||||||||||||||||
|
December 31
|
Originated During
|
at December 31
|
Over 30
|
|||||||||||||||||||||||||||||
| (Dollars in thousands) | 2008 | * | 2008 | * | 2008 | * | Days Past Due | * | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans with interest only payments
|
$ | 476,354 | 94.5 | % | $ | 172,868 | 34.3 | % | $ | 675,819 | 134.1 | % | $ | 1,217 | .2 | % | ||||||||||||||||
|
Loans with LTV:
|
||||||||||||||||||||||||||||||||
|
Between 80% and 90%
|
66,009 | 13.1 | 19,578 | 3.9 | 49,781 | 9.9 | 428 | .1 | ||||||||||||||||||||||||
|
Over 90%
|
28,292 | 5.6 | 3,815 | .7 | 20,025 | 3.9 | 206 | — | ||||||||||||||||||||||||
|
Over 80% LTV
|
94,301 | 18.7 | 23,393 | 4.6 | 69,806 | 13.8 | 634 | .1 | ||||||||||||||||||||||||
|
Total loan portfolio from which above loans were identified
|
504,069 | 174,903 | 690,751 | |||||||||||||||||||||||||||||
| * | Percentage of total principal outstanding of $504.1 million at December 31, 2008. |
39
Table of Contents
Fixed
Rate Home Equity Loans
In addition to the residential real estate mortgage loans and
the revolving floating rate line product discussed above, the
Company offers a third choice to those consumers looking for a
fixed rate loan and a fixed maturity date. This fixed rate home
equity loan, typically for home repair or remodeling, is an
alternative for individuals who want to finance a specific
project or purchase, and decide to lock in a specific monthly
payment over a defined period. This portfolio of loans totaled
$132.6 million and $151.4 million at December 31,
2009 and 2008, respectively. At times, these loans are written
with interest only monthly payments and a balloon payoff at
maturity; however, less than 4% of the outstanding balance has
interest only payments. During 2009, the Company continued
limiting the offering of products with LTV ratios over 90%,
which resulted in a $3.5 million decrease in new loans with
LTV ratios over 90% in 2009 compared to 2008. The delinquency
history on this product has been low, as balances over
30 days past due totaled only $1.7 million and
$1.4 million, respectively, or 1.3% and .9%, respectively,
of the portfolio, at year end 2009 and 2008.
|
|
||||||||||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||||||||||
|
Principal
|
Principal
|
|||||||||||||||||||||||||||||||
|
Outstanding at
|
New Loans
|
Outstanding at
|
New Loans
|
|||||||||||||||||||||||||||||
| (Dollars in thousands) | December 31 | * | Originated | * | December 31 | * | Originated | * | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans with interest only payments
|
$ | 4,731 | 3.6 | % | $ | 2,355 | 1.8 | % | $ | 5,725 | 3.8 | % | $ | 5,136 | 3.4 | % | ||||||||||||||||
|
Loans with LTV:
|
||||||||||||||||||||||||||||||||
|
Between 80% and 90%
|
19,526 | 14.7 | 7,682 | 5.8 | 18,996 | 12.5 | 10,960 | 7.2 | ||||||||||||||||||||||||
|
Over 90%
|
25,398 | 19.1 | 924 | .7 | 34,772 | 23.0 | 4,431 | 3.0 | ||||||||||||||||||||||||
|
Over 80% LTV
|
44,924 | 33.8 | 8,606 | 6.5 | 53,768 | 35.5 | 15,391 | 10.2 | ||||||||||||||||||||||||
|
Total loan portfolio from which above loans were identified
|
132,747 | 151,361 | ||||||||||||||||||||||||||||||
| * | Percentage of total principal outstanding of $132.7 million and $151.4 million at December 31, 2009 and 2008, respectively. |
Management does not believe these loans collateralized by real
estate (personal real estate, revolving home equity, and fixed
rate home equity) represent any unusual concentrations of risk,
as evidenced by net charge-offs in 2009 of $2.8 million,
$1.2 million and $1.1 million, respectively. The
amount of any increased potential loss on high LTV agreements
relates mainly to amounts advanced that are in excess of the 80%
collateral calculation, not the entire approved line. The
Company currently offers no subprime loan products, which is
defined as those offerings made to customers with a FICO score
below 650, and has purchased no brokered loans.
Other
Consumer Loans
Within the consumer loan portfolio of several product lines, the
Company experienced rapid growth in marine and RV loans
outstanding from 2005 through 2007. The majority of these loans
were outside the Company’s basic five state branch network.
The loss ratios experienced in this portion of the portfolio
recently were higher than for other consumer loan products, as
reflected in the delinquency figures in the table below. Due to
the continued weakening credit and economic conditions, this
loan product offering was curtailed in mid 2008, as less than
$10 million in new loans were written over the last three
months of 2008, and only $3.8 million new marine and RV
loans written the entire year of 2009. The table below provides
the total outstanding principal and other data for this group of
direct and indirect lending products at December 31, 2009
and 2008.
40
Table of Contents
|
|
||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
|
Principal
|
Balances
|
Principal
|
Balances
|
|||||||||||||||||||||
|
Outstanding at
|
New Loans
|
Over 30
|
Outstanding at
|
New Loans
|
Over 30
|
|||||||||||||||||||
| (Dollars in thousands) | December 31 | Originated | Days Past Due | December 31 | Originated | Days Past Due | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Passenger vehicles
|
$ | 371,009 | $ | 130,839 | $ | 5,281 | $ | 469,100 | $ | 256,274 | $ | 8,876 | ||||||||||||
|
Marine
|
182,866 | 1,537 | 5,617 | 230,715 | 43,458 | 8,174 | ||||||||||||||||||
|
RV
|
466,757 | 2,214 | 10,793 | 566,429 | 150,792 | 10,265 | ||||||||||||||||||
|
Other
|
42,726 | 25,345 | 740 | 59,322 | 41,860 | 1,326 | ||||||||||||||||||
|
Total
|
$ | 1,063,358 | $ | 159,935 | $ | 22,431 | $ | 1,325,566 | $ | 492,384 | $ | 28,641 | ||||||||||||
Additionally, the Company offers low introductory rates on
selected consumer credit card products. Out of a portfolio at
December 31, 2009 of $799.5 million in consumer credit
card loans outstanding, approximately $152.0 million, or
19.0%, carried a low introductory rate. These loans are
scheduled to convert to the ongoing higher contractual rate on a
weighted average of approximately 7 months. To mitigate
some of the risk involved with this credit card product, the
Company performs credit checks and detailed analysis of the
customer borrowing profile before approving the loan application.
Investment
Securities Analysis
Investment securities are comprised of securities which are
available for sale, non-marketable, and held for trading. During
2009, total investment securities increased $2.5 billion,
or 65.9%, to $6.4 billion (excluding unrealized
gains/losses) compared to $3.8 billion at the previous year
end. During 2009, securities of $4.1 billion were
purchased, which included $1.1 billion in agency
mortgage-backed securities, $1.6 billion in other
asset-backed securities, $538.5 million in
U.S. Treasury inflation-protected securities (TIPS), and
$339.7 million in state and municipal obligations. Total
maturities and paydowns were $1.3 billion during 2009.
Sales proceeds were $207.9 million, of which
$121.8 million related to TIPS sales. During 2010,
maturities of approximately $1.5 billion are expected to
occur. The average tax equivalent yield earned on total
investment securities was 4.54% in 2009 and 5.09% in 2008.
At December 31, 2009, the fair value of available for sale
securities was $6.3 billion, including a net unrealized
gain in fair value of $103.6 million, compared to a net
loss of $58.7 million at December 31, 2008. The
overall unrealized gain in fair value at December 31, 2009
included gains of $56.8 million in agency mortgage-backed
securities, $22.1 million in state and municipal
obligations, and $28.6 million in marketable equity
securities held by the Parent, partly offset by an unrealized
loss of $45.7 million in non-agency mortgage-backed
securities.
41
Table of Contents
Available for sale investment securities at year end for the
past two years are shown below:
| December 31 | ||||||||
| (In thousands) | 2009 | 2008 | ||||||
|
Amortized Cost
|
||||||||
|
U.S. government and federal agency obligations
|
$ | 436,607 | $ | 10,478 | ||||
|
Government-sponsored enterprise obligations
|
162,191 | 135,825 | ||||||
|
State and municipal obligations
|
917,267 | 715,421 | ||||||
|
Agency mortgage-backed securities
|
2,205,177 | 1,685,821 | ||||||
|
Non-agency mortgage-backed securities
|
654,711 | 742,090 | ||||||
|
Other asset-backed securities
|
1,685,691 | 275,641 | ||||||
|
Other debt securities
|
164,402 | 116,527 | ||||||
|
Equity securities
|
11,285 | 7,680 | ||||||
|
Total available for sale investment securities
|
$ | 6,237,331 | $ | 3,689,483 | ||||
|
Fair Value
|
||||||||
|
U.S. government and federal agency obligations
|
$ | 447,038 | $ | 11,594 | ||||
|
Government-sponsored enterprise obligations
|
165,814 | 141,957 | ||||||
|
State and municipal obligations
|
939,338 | 719,752 | ||||||
|
Agency mortgage-backed securities
|
2,262,003 | 1,711,404 | ||||||
|
Non-agency mortgage-backed securities
|
609,016 | 620,479 | ||||||
|
Other asset-backed securities
|
1,701,569 | 253,756 | ||||||
|
Other debt securities
|
176,331 | 121,861 | ||||||
|
Equity securities
|
39,866 | 49,950 | ||||||
|
Total available for sale investment securities
|
$ | 6,340,975 | $ | 3,630,753 | ||||
The largest component of the available for sale portfolio
consists of agency mortgage-backed securities, which are
collateralized bonds issued by government-sponsored agencies,
including FNMA, GNMA, FHLMC, FHLB, and Federal Farm Credit
Banks. Non-agency mortgage-backed securities totaled
$654.7 million, on an amortized cost basis, at
December 31, 2009, and included Alt-A type mortgage-backed
securities of $221.5 million and prime/jumbo loan type
securities of $433.1 million. Nearly all of these
securities had credit ratings of AAA (or the equivalent) from at
least two rating agencies at their purchase date. The portfolio
does not have exposure to subprime originated mortgage-backed or
collateralized debt obligation instruments.
At December 31, 2009, U.S. government obligations
included $435.0 million in TIPS, and state and municipal
obligations included $167.8 million in auction rate
securities. Other debt securities include corporate bonds, notes
and commercial paper. Available for sale equity securities are
mainly comprised of publicly traded stock held by the Parent.
A summary of maturities by category of investment securities and
the weighted average yield for each range of maturities as of
December 31, 2009, is presented in Note 4 on
Investment Securities in the consolidated financial statements.
The table below provides additional information for each
category of debt securities.
|
|
||||||||||||
| December 31, 2009 | ||||||||||||
|
|
||||||||||||
|
Percent
|
Weighted
|
Estimated
|
||||||||||
|
of Total
|
Average
|
Average
|
||||||||||
| Debt Securities | Yield | Maturity* | ||||||||||
|
Available for sale debt securities:
|
||||||||||||
|
U.S. government and federal agency obligations
|
7.1 | % | 1.07 | % | 4.4 | years | ||||||
|
Government-sponsored enterprise obligations
|
2.6 | 2.62 | 1.6 | |||||||||
|
State and municipal obligations
|
14.9 | 3.23 | 9.4 | |||||||||
|
Agency mortgage-backed securities
|
35.9 | 4.17 | 2.7 | |||||||||
|
Non-agency mortgage-backed securities
|
9.7 | 6.21 | 3.0 | |||||||||
|
Other asset-backed securities
|
27.0 | 2.51 | 1.2 | |||||||||
|
Other debt securities
|
2.8 | 4.69 | 2.9 | |||||||||
| * | Based on call provisions and estimated prepayment speeds. |
42
Table of Contents
Non-marketable securities, which totaled $122.1 million at
December 31, 2009, included $30.3 million in Federal
Reserve Bank stock and $42.3 million in Federal Home Loan
Bank (Des Moines) stock held by the bank subsidiary in
accordance with debt and regulatory requirements. These are
restricted securities which, lacking a market, are carried at
cost. Other non-marketable securities also include private
equity securities which are carried at estimated fair value.
The Company engages in private equity activities through direct
private equity investments and through three private
equity/venture capital subsidiaries. The subsidiaries hold
investments in various portfolio concerns, which are carried at
fair value and totaled $44.8 million at December 31,
2009. The Company expects to fund an additional
$31.9 million to these subsidiaries for investment purposes
over the next several years. In addition to investments held by
its private equity/venture capital subsidiaries, the Parent
directly holds investments in several private equity concerns,
which totaled $3.9 million at year end 2009. Most of the
private equity investments are not readily marketable. While the
nature of these investments carries a higher degree of risk than
the normal lending portfolio, this risk is mitigated by the
overall size of the investments and oversight provided by
management, which believes the potential for long-term gains in
these investments outweighs the potential risks.
Non-marketable securities at year end for the past two years are
shown below:
| December 31 | ||||||||
| (In thousands) | 2009 | 2008 | ||||||
|
Debt securities
|
$ | 19,908 | $ | 22,297 | ||||
|
Equity securities
|
102,170 | 117,603 | ||||||
|
Total non-marketable investment securities
|
$ | 122,078 | $ | 139,900 | ||||
Deposits
and Borrowings
Deposits are the primary funding source for the Bank, and are
acquired from a broad base of local markets, including both
individual and corporate customers. Total deposits were
$14.2 billion at December 31, 2009, compared to
$12.9 billion last year, reflecting an increase of
$1.3 billion, or 10.2%. Average deposits grew by
$1.6 billion, or 12.8%, in 2009 compared to 2008 with most
of this growth centered in non-interest bearing demand deposits,
which grew $250.0 million, or 37.3%, in 2009 compared to
2008. Certificates of deposit with balances under $100,000 fell
on average by $93.2 million, or 4.3%, while certificates of
deposit over $100,000 grew $229.0 million, or 14.1%.
The following table shows year end deposits by type as a
percentage of total deposits.
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Non-interest bearing demand
|
12.6 | % | 10.7 | % | ||||
|
Savings, interest checking and money market
|
64.8 | 59.0 | ||||||
|
Time open and C.D.’s of less than $100,000
|
12.7 | 16.0 | ||||||
|
Time open and C.D.’s of $100,000 and over
|
9.9 | 14.3 | ||||||
|
Total deposits
|
100.0 | % | 100.0 | % | ||||
Core deposits, which include demand, interest checking, savings,
and money market deposits, supported 59% of average earning
assets in 2009 and 55% in 2008. Average balances by major
deposit category for the last six years appear at the end of
this discussion. A maturity schedule of time deposits
outstanding at December 31, 2009 is included in Note 7
on Deposits in the consolidated financial statements.
The Company’s primary sources of overnight borrowings are
federal funds purchased and securities sold under agreements to
repurchase (repurchase agreements). Balances in these accounts
can fluctuate significantly on a
day-to-day
basis, and generally have one day maturities. The Company has
also entered into structured repurchase agreements totaling
$500.0 million which mature in mid 2010. Total balances
outstanding at year end 2009 were $1.1 billion, a
$76.7 million increase from $1.0 billion outstanding
at
43
Table of Contents
year end 2008. On an average basis, these borrowings declined
$405.0 million, or 29.5% during 2009, with declines of
$251.1 million in federal funds purchased and
$153.8 million in repurchase agreements. The average rate
paid on total federal funds purchased and repurchase agreements
was .38% during 2009 and 1.83% during 2008.
Additional short-term borrowings may be periodically acquired
under the Federal Reserve’s temporary Term Auction Facility
(TAF) program, which was instituted in December 2007. The TAF is
a credit facility under which banking institutions may bid for
term borrowings in bi-weekly auctions. The TAF credit is
collateralized similarly to discount window borrowings,
generally with investment securities and loans. The amount
borrowed under this program totaled $700.0 million at
December 31, 2008. Borrowing activity under the program
declined during 2009, and there were no outstanding borrowings
at December 31, 2009.
Most of the Company’s long-term debt is comprised of fixed
rate advances from the Federal Home Loan Bank (FHLB). These
borrowings declined from $1.0 billion at December 31,
2008 to $724.4 million outstanding at December 31,
2009. Approximately 59% of the outstanding balance is due within
the next year. The average rate paid on FHLB advances was 3.68%
during 2009 and 3.81% during 2008.
Liquidity
and Capital Resources
Liquidity
Management
Liquidity is managed within the Company in order to satisfy cash
flow requirements of deposit and borrowing customers while at
the same time meeting its own cash flow needs. The Company
maintains its liquidity position through a variety of sources
including:
| • | A portfolio of liquid assets including marketable investment securities and overnight investments, | |
| • | A large customer deposit base and limited exposure to large, volatile certificates of deposit, | |
| • | Lower long-term borrowings that might place demands on Company cash flow, | |
| • | Relatively low loan to deposit ratio promoting strong liquidity, | |
| • | Excellent debt ratings from both Standard & Poor’s and Moody’s national rating services, and | |
| • | Available borrowing capacity from outside sources. |
During 2008, liquidity risk became a concern affecting the
general banking industry, as some of the major banking
institutions across the country experienced an unprecedented
erosion in capital. This erosion was fueled by declines in asset
values, losses in market and investor confidence, and higher
defaults, resulting in higher costing and less available credit.
The Company, as discussed below, took numerous steps to address
liquidity risk and over the past few years has developed a
variety of liquidity sources which it believes will provide the
necessary funds to grow its business into the future. During
2009, overall liquidity improved significantly throughout the
banking industry and in the Company by a combination of growth
in deposits and a decline in loans outstanding. The
Company’s average loans to deposits ratio, one measure of
liquidity, decreased from 92.1% in 2008 to 79.8% in 2009.
The Company did not apply for funds through the Federal
Treasury’s Capital Purchase Program. This program is part
of the federal government’s 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 Company’s earnings, capital and liquidity
are strong and sufficient to grow its business.
44
Table of Contents
The Company’s most liquid assets include available for sale
marketable investment securities, federal funds sold, balances
at the Federal Reserve Bank (FRB), and securities purchased
under agreements to resell (resale agreements). At
December 31, 2009 and 2008, such assets were as follows:
| (In thousands) | 2009 | 2008 | ||||||
|
Available for sale investment securities
|
$ | 6,340,975 | $ | 3,630,753 | ||||
|
Federal funds sold
|
22,590 | 59,475 | ||||||
|
Resale agreements
|
— | 110,000 | ||||||
|
Balances at the Federal Reserve Bank
|
24,118 | 638,158 | ||||||
|
Total
|
$ | 6,387,683 | $ | 4,438,386 | ||||
Federal funds sold and resale agreements normally have overnight
maturities and are used to satisfy the daily cash needs of the
Company. Effective October 1, 2008, required and excess
cash balances maintained at the FRB began earning interest.
These balances are also used for general daily liquidity
purposes. The interest rate on these balances during 2009 was
25 basis points. The Company’s available for sale
investment portfolio has maturities of approximately
$1.5 billion which are scheduled to occur during 2010 and
offers substantial resources to meet either new loan demand or
reductions in the Company’s deposit funding base. The
Company pledges portions of its investment securities portfolio
to secure public fund deposits, repurchase agreements, trust
funds, letters of credit issued by the FHLB, and borrowing
capacity at the FRB. At December 31, 2009, total investment
securities pledged for these purposes were as follows:
| (In thousands) | 2009 | |||
|
Investment securities pledged for the purpose of securing:
|
||||
|
Federal Reserve Bank borrowings
|
$ | 1,180,924 | ||
|
FHLB borrowings and letters of credit
|
395,925 | |||
|
Repurchase agreements
|
1,541,936 | |||
|
Other deposits
|
1,013,422 | |||
|
Total pledged, at fair value
|
$ | 4,132,207 | ||
|
Total unpledged and available for pledging, at fair value
|
$ | 1,765,214 | ||
Liquidity is also available from the Company’s large base
of core customer deposits, defined as demand, interest checking,
savings, and money market deposit accounts. At December 31,
2009, such deposits totaled $11.0 billion and represented
77.4% of the Company’s total deposits. These core deposits
are normally less volatile, often with customer relationships
tied to other products offered by the Company promoting long
lasting relationships and stable funding sources. During 2009,
total core deposits increased $2.0 billion, mainly in
non-interest bearing demand and money market accounts. This
increase was comprised of growth in consumer deposits of
$1.6 million and corporate and non-personal deposits of
$390.4 million. Some of the growth in corporate deposits
was the result of both extremely low interest rates and FDIC
insurance programs, which effectively guaranteed all such
deposits. While the Company considers core consumer deposits
less volatile, corporate deposits could decline if interest
rates increase significantly or if corporate customers move
funds from the Company. In order to address funding needs,
should these corporate deposits decline, the Company maintains
adequate levels of earning assets maturing in 2010. Time open
and certificates of deposit of $100,000 or greater totaled
$1.4 billion at December 31, 2009. These deposits are
normally considered more volatile and higher costing, and
comprised 9.9% of total deposits at December 31, 2009.
| (In thousands) | 2009 | 2008 | ||||||
|
Core deposit base:
|
||||||||
|
Non-interest bearing demand
|
$ | 1,793,816 | $ | 1,375,000 | ||||
|
Interest checking
|
735,870 | 700,714 | ||||||
|
Savings and money market
|
8,467,046 | 6,909,592 | ||||||
|
Total
|
$ | 10,996,732 | $ | 8,985,306 | ||||
45
Table of Contents
Other important components of liquidity are the level of
borrowings from third party sources and the availability of
future credit. The Company’s outside borrowings are mainly
comprised of federal funds purchased, repurchase agreements, and
advances from the FRB and the FHLB, as follows:
| (In thousands) | 2009 | 2008 | ||||||
|
Borrowings:
|
||||||||
|
Federal funds purchased
|
$ | 62,130 | $ | 24,900 | ||||
|
Repurchase agreements
|
1,041,061 | 1,001,637 | ||||||
|
FHLB advances
|
724,386 | 1,025,721 | ||||||
|
Subordinated debentures
|
4,000 | 14,310 | ||||||
|
Term auction facility
|
— | 700,000 | ||||||
|
Other long-term debt
|
7,676 | 7,750 | ||||||
|
Total
|
$ | 1,839,253 | $ | 2,774,318 | ||||
Federal funds purchased and repurchase agreements are generally
borrowed overnight and amounted to $1.1 billion at
December 31, 2009. Federal funds purchased are unsecured
overnight borrowings obtained mainly from upstream correspondent
banks with which the Company maintains approved lines of credit.
Repurchase agreements are secured by a portion of the
Company’s investment portfolio and are comprised of both
non-insured customer funds, totaling $541.1 million at
December 31, 2009, and structured repurchase agreements of
$500.0 million purchased from an upstream financial
institution. Customer repurchase agreements are offered to
customers wishing to earn interest in highly liquid balances and
are used by the Company as a funding source considered to be
stable, but short-term in nature. Beginning in mid 2008, the
Company began to periodically borrow additional short-term funds
from the FRB through its Term Auction Facility (TAF). The TAF
offered attractive funding with low rates and made possible the
reduction in federal funds purchased during 2008. The Company
curtailed these borrowings during 2009 as rising deposit
balances provided other sources of liquidity, and at
December 31, 2009 the Company had no TAF borrowings
outstanding. The Company also borrows on a secured basis through
advances from the FHLB, which totaled $724.4 million at
December 31, 2009. Most of these advances have fixed
interest rates and mature in 2010 through 2011. The
Company’s other borrowings are comprised of debentures
funded by trust preferred securities and debt related to the
Company’s private equity business. The overall long-term
debt position of the Company is small relative to the
Company’s overall liability position.
The Company pledges certain assets, including loans and
investment securities, to both the Federal Reserve Bank and the
FHLB as security to establish lines of credit and borrow from
these entities. Based on the amount and type of collateral
pledged, the FHLB establishes a collateral value from which the
Company may draw advances against the collateral. Also, this
collateral is used to enable the FHLB to issue letters of credit
in favor of public fund depositors of the Company. The Federal
Reserve Bank also establishes a collateral value of assets
pledged and permits borrowings from either the discount window
or the Term Auction Facility. The following table reflects the
collateral value of assets pledged, borrowings, and letters of
credit outstanding, in addition to the estimated future funding
capacity available to the Company at December 31, 2009:
| December 31, 2009 | ||||||||
|
|
||||||||
| (In thousands) | FHLB | Federal Reserve | ||||||
|
Total collateral value pledged
|
$ | 2,150,085 | $ | 1,980,798 | ||||
|
Advances outstanding
|
(724,386 | ) | — | |||||
|
Letters of credit issued
|
(533,309 | ) | — | |||||
|
Available for future advances
|
$ | 892,390 | $ | 1,980,798 | ||||
46
Table of Contents
The Company had an average loans to deposits ratio of 79.8% at
December 31, 2009, which is considered in the banking
industry to be a conservative measure of good liquidity. Also,
the Company receives outside ratings from both
Standard & Poor’s and Moody’s on both the
consolidated company and its subsidiary bank, Commerce Bank,
N.A. These ratings are as follows:
| Standard & Poor’s | Moody’s | |||
|
Commerce Bancshares, Inc.
|
||||
|
Counterparty rating
|
A-1 | |||
|
Commercial paper rating
|
A-1 | P-1 | ||
|
Commerce Bank, N. A.
|
||||
|
Issuer rating
|
A+ | Aa2 | ||
|
Bank deposits
|
A+ | Aa2 | ||
|
Bank financial strength rating
|
B+ | |||
The Company considers these ratings to be indications of a sound
capital base and good liquidity, and believes that these ratings
would help ensure the ready marketability of its commercial
paper, should the need arise. No commercial paper has been
outstanding over the past ten years. The Company has little
subordinated debt or hybrid instruments which would affect
future borrowings capacity. Because of its lack of significant
long-term debt, the Company believes that, through its Capital
Markets Group or in other public debt markets, it could generate
additional liquidity from sources such as jumbo certificates of
deposit, privately-placed corporate notes or other forms of
debt. Future financing could also include the issuance of common
or preferred stock.
The cash flows from the operating, investing and financing
activities of the Company resulted in a net decrease in cash and
cash equivalents of $835.5 million in 2009, as reported in
the consolidated statements of cash flows on page 67 of
this report. Operating activities, consisting mainly of net
income adjusted for certain non-cash items, provided cash flow
of $295.3 million and has historically been a stable source
of funds. Investing activities used total cash of
$1.6 billion in 2009, and consist mainly of purchases and
maturities of available for sale investment securities and
changes in the level of the Company’s loan portfolio. The
investment securities portfolio grew during 2009, using cash of
$2.5 billion, while the loan portfolio decreased, providing
cash of $999.1 million. Investing activities are somewhat
unique to financial institutions in that, while large sums of
cash flow are normally used to fund growth in investment
securities, loans, or other bank assets, they are normally
dependent on the financing activities described below.
Financing activities provided total cash of $441.5 million,
resulting from a $1.3 billion increase in deposits, partly
offset by net debt repayments of $1.1 billion. The stock
sale program (described below) provided cash of
$98.2 million, while cash dividend payments totaled
$74.7 million. Future short-term liquidity needs for daily
operations are not expected to vary significantly and the
Company maintains adequate liquidity to meet these cash flows.
The Company’s sound equity base, along with its low debt
level, common and preferred stock availability, and excellent
debt ratings, provide several alternatives for future financing.
Future acquisitions may utilize partial funding through one or
more of these options.
Cash flows resulting from the Company’s transactions in its
common stock were as follows:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Stock sale program
|
$ | 98.2 | $ | — | $ | — | ||||||
|
Exercise of stock-based awards and sales to affiliate
non-employee directors
|
5.5 | 16.0 | 13.7 | |||||||||
|
Purchases of treasury stock
|
(.5 | ) | (9.5 | ) | (128.6 | ) | ||||||
|
Cash dividends paid
|
(74.7 | ) | (72.1 | ) | (68.9 | ) | ||||||
|
Cash provided (used)
|
$ | 28.5 | $ | (65.6 | ) | $ | (183.8 | ) | ||||
47
Table of Contents
The Parent faces unique liquidity constraints due to legal
limitations on its ability to borrow funds from its bank
subsidiary. The Parent obtains funding to meet its obligations
from two main sources: dividends received from bank and non-bank
subsidiaries (within regulatory limitations) and from management
fees charged to subsidiaries as reimbursement for services
provided by the Parent, as presented below:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Dividends received from subsidiaries
|
$ | 45.1 | $ | 76.2 | $ | 179.5 | ||||||
|
Management fees
|
46.6 | 44.0 | 39.1 | |||||||||
|
Total
|
$ | 91.7 | $ | 120.2 | $ | 218.6 | ||||||
These sources of funds are used mainly to pay cash dividends on
outstanding common stock, pay general operating expenses, and
purchase treasury stock when appropriate. At December 31,
2009, the Parent’s available for sale investment securities
totaled $115.2 million at fair value, consisting mainly of
publicly traded common stock and non-agency backed
collateralized mortgage obligations. To support its various
funding commitments, the Parent maintains a $20.0 million
line of credit with its subsidiary bank. The Parent had no
borrowings outstanding under the line at December 31, 2009.
Company senior management is responsible for measuring and
monitoring the liquidity profile of the organization with
oversight by the Company’s Asset/Liability Committee. This
is done through a series of controls, including a written
Contingency Funding Policy and risk monitoring procedures,
including daily, weekly and monthly reporting. In addition, the
Company prepares forecasts which project changes in the balance
sheet affecting liquidity, and which allow the Company to better
plan for forecasted changes.
Capital
Management
The Company maintains strong regulatory capital ratios,
including those of its banking subsidiary, in excess of the
“well-capitalized” guidelines under federal banking
regulations. The Company’s capital ratios at the end of the
last three years are as follows:
|
Well-Capitalized
|
||||||||||||||||
|
Regulatory
|
||||||||||||||||
| 2009 | 2008 | 2007 | Guidelines | |||||||||||||
|
Risk-based capital ratios:
|
||||||||||||||||
|
Tier I capital
|
13.04 | % | 10.92 | % | 10.31 | % | 6.00 | % | ||||||||
|
Total capital
|
14.39 | 12.31 | 11.49 | 10.00 | ||||||||||||
|
Leverage ratio
|
9.58 | 9.06 | 8.76 | 5.00 | ||||||||||||
|
Tangible equity to assets
|
9.71 | 8.25 | 8.61 | |||||||||||||
|
Dividend payout ratio
|
44.15 | 38.54 | 33.76 | |||||||||||||
The components of the Company’s regulatory risked-based
capital and risk-weighted assets at the end of the last three
years are as follows:
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Regulatory risk-based capital:
|
||||||||||||
|
Tier I capital
|
$ | 1,708,901 | $ | 1,510,959 | $ | 1,375,035 | ||||||
|
Tier II capital
|
177,077 | 191,957 | 157,154 | |||||||||
|
Total capital
|
1,885,978 | 1,702,916 | 1,532,189 | |||||||||
|
Total risk-weighted assets
|
13,105,948 | 13,834,161 | 13,330,968 | |||||||||
In February 2008, the Board of Directors authorized the Company
to purchase additional shares of common stock under its
repurchase program, which brought the total purchase
authorization to 3,000,000 shares. During 2009,
approximately 16,000 shares were acquired under the current
Board authorization at an average price of $33.50 per share.
48
Table of Contents
The Company’s common stock dividend policy reflects its
earnings outlook, desired payout ratios, the need to maintain
adequate capital levels and alternative investment options. Per
share cash dividends paid by the Company increased .8% in 2009
compared with 2008. The Company paid its sixteenth consecutive
annual stock dividend in December 2009.
Common
Equity Offering
On February 27, 2009, the Company entered into an equity
distribution agreement with a broker dealer, acting as the
Company’s sales agent, relating to the offering of the
Company’s common stock having aggregate gross sales
proceeds of up to $200 million. This offering was described
in a prospectus supplement, including the associated base
prospectus, which the Company filed with the SEC on
February 27, 2009.
Sales of these shares were made by means of brokers’
transactions on or through the Nasdaq Global Select Market,
trading facilities of national securities associations or
alternative trading systems, block transactions and such other
transactions as agreed upon by the Company and the sales agent,
at market prices prevailing at the time of the sale or at prices
related to the prevailing market prices. The Company and the
sales agent determined jointly, as often as daily, how many
shares to sell under this offering. On July 31, 2009, the
Company terminated the offering.
Total shares sold under the offering amounted to 2,894,773.
Total gross proceeds for the entire offering were
$100.0 million, with an average sale price of $34.55 per
share, and total commissions paid to the sales agent for the
sale of these shares were $1.5 million. After payment of
commissions and SEC, legal and accounting fees relating to the
offering, net proceeds for the entire offering totaled
$98.2 million, with average net sale proceeds of $33.91 per
share.
Commitments,
Contractual Obligations, and Off-Balance Sheet
Arrangements
Various commitments and contingent liabilities arise in the
normal course of business, which are not required to be recorded
on the balance sheet. The most significant of these are loan
commitments, totaling $7.0 billion (including approximately
$3.3 billion in unused approved credit card lines), and the
contractual amount of standby letters of credit, totaling
$404.1 million at December 31, 2009. Since many
commitments expire unused or only partially used, these totals
do not necessarily reflect future cash requirements. Management
does not anticipate any material losses arising from commitments
and contingent liabilities and believes there are no material
commitments to extend credit that represent risks of an unusual
nature.
A table summarizing contractual cash obligations of the Company
at December 31, 2009 and the expected timing of these
payments follows:
| Payments Due by Period | ||||||||||||||||||||
|
After One Year
|
After Three
|
After
|
||||||||||||||||||
|
In One Year
|
Through Three
|
Years Through
|
Five
|
|||||||||||||||||
| (In thousands) | or Less | Years | Five Years | Years | Total | |||||||||||||||
|
Long-term debt obligations, including structured repurchase
agreements*
|
$ | 927,597 | $ | 125,386 | $ | 52,703 | $ | 130,376 | $ | 1,236,062 | ||||||||||
|
Operating lease obligations
|
5,805 | 8,226 | 6,211 | 21,227 | 41,469 | |||||||||||||||
|
Purchase obligations
|
36,640 | 58,189 | 17,210 | 4,149 | 116,188 | |||||||||||||||
|
Time open and C.D.’s*
|
2,604,292 | 534,819 | 74,122 | 486 | 3,213,719 | |||||||||||||||
|
Total
|
$ | 3,574,334 | $ | 726,620 | $ | 150,246 | $ | 156,238 | $ | 4,607,438 | ||||||||||
| * | Includes principal payments only. |
As of December 31, 2009, the Company has unrecognized tax
benefits that, if recognized, would impact the effective tax
rate in future periods. Due to the uncertainty of the amounts to
be ultimately paid as well as the timing of such payments, all
uncertain tax liabilities that have not been paid have been
excluded from the table above. Further detail on the impact of
income taxes is located in Note 9 of the consolidated
financial statements.
49
Table of Contents
The Company funds a defined benefit pension plan for a majority
of its employees. Under the funding policy for the plan,
contributions are made as necessary to provide for current
service and for any unfunded accrued actuarial liabilities over
a reasonable period. During recent years, the Company has not
been required to make cash contributions to the plan and does
not expect to do so in 2010.
The Company has investments in several low-income housing
partnerships within the area it serves. At December 31,
2009, these investments totaled $4.7 million and were
recorded as other assets in the Company’s consolidated
balance sheet. These partnerships supply funds for the
construction and operation of apartment complexes that provide
affordable housing to that segment of the population with lower
family income. If these developments successfully attract a
specified percentage of residents falling in that lower income
range, state
and/or
federal income tax credits are made available to the partners.
The tax credits are normally recognized over ten years, and they
play an important part in the anticipated yield from these
investments. In order to continue receiving the tax credits each
year over the life of the partnership, the low-income residency
targets must be maintained. Under the terms of the partnership
agreements, the Company has a commitment to fund a specified
amount that will be due in installments over the life of the
agreements, which ranges from 10 to 15 years. These
unfunded commitments are recorded as liabilities on the
Company’s consolidated balance sheet, and aggregated
$3.7 million at December 31, 2009.
The Company regularly purchases various state tax credits
arising from third-party property redevelopment. While most of
the tax credits are resold to third parties, some are
periodically retained for use by the Company. During 2009,
purchases and sales of tax credits amounted to
$51.4 million and $42.5 million, respectively. At
December 31, 2009, the Company had outstanding purchase
commitments totaling $114.7 million.
The Parent has investments in several private equity concerns
which are classified as non-marketable securities in the
Company’s consolidated balance sheet. Under the terms of
the agreements with three of these concerns, the Parent has
unfunded commitments outstanding of $1.4 million at
December 31, 2009. The Parent also expects to fund
$31.9 million to venture capital subsidiaries over the next
several years.
Interest
Rate Sensitivity
The Company’s Asset/Liability Management Committee (ALCO)
measures and manages the Company’s interest rate risk on a
monthly basis to identify trends and establish strategies to
maintain stability in earnings throughout various rate
environments. Analytical modeling techniques provide management
insight into the Company’s exposure to changing rates.
These techniques include net interest income simulations and
market value 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 Company’s main interest rate measurement tool, income
simulations, projects net interest income under various rate
change scenarios in order to quantify the magnitude and timing
of potential rate-related changes. Income simulations are able
to capture option risks within the balance sheet where expected
cash flows may be altered under various rate environments.
Modeled rate movements include “shocks, ramps and
twists”. Shocks are intended to capture interest rate risk
under extreme conditions by immediately shifting rates up and
down, while ramps measure the impact of gradual changes and
twists measure yield curve risk. The size of the balance sheet
is assumed to remain constant so that results are not influenced
by growth predictions. The 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 Company’s net
interest income, given a static balance sheet.
| December 31, 2009 | September 30, 2009 | December 31, 2008 | ||||||||||||||||||||||
|
Increase
|
% of Net Interest
|
Increase
|
% of Net Interest
|
Increase
|
% of Net Interest
|
|||||||||||||||||||
| (Dollars in millions) | (Decrease) | Income | (Decrease) | Income | (Decrease) | Income | ||||||||||||||||||
|
300 basis points rising
|
$ | 21.6 | 3.22 | % | $ | 26.3 | 3.97 | % | $ | 37.3 | 6.38 | % | ||||||||||||
|
200 basis points rising
|
17.3 | 2.57 | 21.4 | 3.23 | 30.6 | 5.23 | ||||||||||||||||||
|
100 basis points rising
|
10.6 | 1.58 | 12.1 | 1.83 | 18.1 | 3.10 | ||||||||||||||||||
50
Table of Contents
The Company also employs a sophisticated simulation technique
known as a stochastic income simulation. This technique allows
management to see a range of results from hundreds of income
simulations. The stochastic simulation creates a vector of
potential rate paths around the market’s best guess
(forward rates) concerning the future path of interest rates and
allows rates to randomly follow paths throughout the vector.
This allows for the modeling of non-biased rate forecasts around
the market consensus. Results give management insight into a
likely range of rate-related risk as well as worst and best-case
rate scenarios.
The Company also uses market value analyses to help identify
longer-term risks that may reside on the balance sheet. This is
considered a secondary risk measurement tool by management. The
Company measures the market value of equity as the net present
value of all asset and liability cash flows discounted along the
current 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 Company’s modeling of interest rate risk as of
December 31, 2009 shows that under various rising rate
scenarios, net interest income would show growth. The Company
has not modeled falling rate scenarios due the extremely low
interest rate environment. At December 31, 2009, the
Company calculated that a gradual increase in rates of
100 basis points would increase net interest income by
$10.6 million, or 1.6%, compared with an increase of
$18.1 million projected at December 31, 2008. A
200 basis point gradual rise in rates calculated at
December 31, 2009 would increase net interest income by
$17.3 million, or 2.6%, down from an increase of
$30.6 million last year. Also, a gradual increase of
300 basis points would increase net interest income by
$21.6 million, or 3.2%, compared to a growth of
$37.3 million at December 31, 2008.
Using rising rate models, the potential increase in net interest
income is lower at December 31, 2009 when compared to the
prior year due to several factors. These factors include a
decline of $255.8 million in average loan balances in 2009
compared to the previous year, which are mainly variable rate
assets, and average growth of $1.7 billion in available for
sale securities, most of which have fixed rates. In addition to
the change in earning assets, average interest bearing deposits
grew during 2009 by $1.3 billion, mainly in money market
deposit accounts, which have lower rates and can re-price
upwards more slowly.
Thus, under rising rate scenarios, the Company benefits from the
repricing of its loan portfolio, the majority of which is
variable rate. However, higher levels of fixed rate securities
will partly offset the effect of the loan portfolio on interest
income. Additionally, deposit balances have a smaller impact on
net interest income when rates are rising, due to lower overall
rates and fewer accounts that carry variable rates moving in
sequence with market rates.
Through review and oversight by the ALCO, the Company attempts
to engage in strategies that neutralize interest rate risk as
much as possible. The Company’s balance sheet remains
well-diversified with moderate interest rate risk and is
well-positioned for future growth. The use of derivative
products is limited and the deposit base is strong and stable.
The loan to deposit ratio is still at relatively low levels,
which should present the Company with opportunities to fund
future loan growth at reasonable costs. The Company believes
that its approach to interest rate risk has appropriately
considered its susceptibility to both rising and falling rates
and has adopted strategies which minimize impacts of interest
rate risk.
Derivative
Financial Instruments
The Company maintains an overall interest rate risk management
strategy that permits the use of derivative instruments to
modify exposure to interest rate risk. The Company’s
interest rate risk management strategy includes the ability to
modify the re-pricing characteristics of certain assets and
liabilities so that changes in interest rates do not adversely
affect the net interest margin and cash flows. Interest rate
swaps are used on a limited basis as part of this strategy. As
of December 31, 2009, the Company had entered into three
interest rate swaps with a notional amount of $16.9 million
which are designated as fair value hedges of certain fixed rate
loans. The Company also sells swap contracts to customers who
wish to modify their interest rate sensitivity. The Company
offsets the interest rate risk of these swaps by purchasing
51
Table of Contents
matching contracts with offsetting pay/receive rates from other
financial institutions. The notional amount of these types of
swaps at December 31, 2009 was $486.6 million.
The Company enters into foreign exchange derivative instruments
as an accommodation to customers and offsets the related foreign
exchange risk by entering into offsetting third-party forward
contracts with approved, reputable counterparties. In addition,
the Company takes proprietary positions in such contracts based
on market expectations. Hedge accounting has not been applied to
these foreign exchange activities. This trading activity is
managed within a policy of specific controls and limits. Most of
the foreign exchange contracts outstanding at December 31,
2009 mature within 90 days, and the longest period to
maturity is 12 months.
Additionally, interest rate lock commitments issued on
residential mortgage loans held for resale are considered
derivative instruments. The interest rate exposure on these
commitments is economically hedged primarily with forward sale
contracts in the secondary market.
In all of these contracts, the Company is exposed to credit risk
in the event of nonperformance by counterparties, who may be
bank customers or other financial institutions. The Company
controls the credit risk of its financial contracts through
credit approvals, limits and monitoring procedures. Because the
Company generally enters into transactions only with high
quality counterparties, there have been no losses associated
with counterparty nonperformance on derivative financial
instruments.
The following table summarizes the notional amounts and
estimated fair values of the Company’s derivative
instruments at December 31, 2009 and 2008. Notional amount,
along with the other terms of the derivative, is used to
determine the amounts to be exchanged between the
counterparties. Because the notional amount does not represent
amounts exchanged by the parties, it is not a measure of loss
exposure related to the use of derivatives nor of exposure to
liquidity risk. Positive fair values are recorded in other
assets and negative fair values are recorded in other
liabilities in the consolidated balance sheets.
| 2009 | 2008 | |||||||||||||||||||||||
|
Positive
|
Negative
|
Positive
|
Negative
|
|||||||||||||||||||||
|
Notional
|
Fair
|
Fair
|
Notional
|
Fair
|
Fair
|
|||||||||||||||||||
| (In thousands) | Amount | Value | Value | Amount | Value | Value | ||||||||||||||||||
|
Interest rate swaps
|
$ | 503,530 | $ | 16,962 | $ | (17,816 | ) | $ | 492,111 | $ | 25,274 | $ | (26,568 | ) | ||||||||||
|
Interest rate caps
|
16,236 | 239 | (239 | ) | — | — | — | |||||||||||||||||
|
Credit risk participation agreements
|
53,246 | 140 | (239 | ) | 47,750 | 117 | (178 | ) | ||||||||||||||||
|
Foreign exchange contracts:
|
||||||||||||||||||||||||
|
Forward contracts
|
17,475 | 415 | (295 | ) | 6,226 | 207 | (217 | ) | ||||||||||||||||
|
Option contracts
|
— | — | — | 3,300 | 18 | (18 | ) | |||||||||||||||||
|
Mortgage loan commitments
|
9,767 | 44 | (16 | ) | 23,784 | 198 | (6 | ) | ||||||||||||||||
|
Mortgage loan forward sale contracts
|
19,986 | 184 | (5 | ) | 26,996 | 21 | (88 | ) | ||||||||||||||||
|
Total at December 31
|
$ | 620,240 | $ | 17,984 | $ | (18,610 | ) | $ | 600,167 | $ | 25,835 | $ | (27,075 | ) | ||||||||||
Operating
Segments
The Company segregates financial information for use in
assessing its performance and allocating resources among three
operating segments. The results are determined based on the
Company’s management accounting process, which assigns
balance sheet and income statement items to each responsible
segment. These segments are defined by customer base and product
type. The management process measures the performance of the
operating segments based on the management structure of the
Company and is not necessarily comparable with similar
information for any other financial institution. Each segment is
managed by executives who, in conjunction with the Chief
Executive Officer, make strategic business decisions regarding
that segment. The three reportable operating segments are
Consumer, Commercial and Wealth (formerly titled Money
Management). Additional information is presented in Note 13
on Segments in the consolidated financial statements.
52
Table of Contents
The Company uses a funds transfer pricing method to value funds
used (e.g., loans, fixed assets, cash, etc.) and funds provided
(deposits, borrowings, and equity) by the business segments and
their components. This process assigns a specific value to each
new source or use of funds with a maturity, based on current
LIBOR interest rates, thus determining an interest spread at the
time of the transaction. Non-maturity assets and liabilities are
assigned to LIBOR based funding pools. This method helps to
provide an accurate means of valuing fund sources and uses in a
varying interest rate environment. The Company also assigns loan
charge-offs and recoveries (labeled in the table below as
“provision for loan losses”) directly to each
operating segment instead of allocating an estimated loan loss
provision. The operating segments also include a number of
allocations of income and expense from various support and
overhead centers within the Company.
The table below is a summary of segment pre-tax income results
for the past three years.
|
Segment
|
Other/
|
Consolidated
|
||||||||||||||||||||||
| (Dollars in thousands) | Consumer | Commercial | Wealth | Totals | Elimination | Totals | ||||||||||||||||||
|
Year ended December 31, 2009:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 348,362 | $ | 258,886 | $ | 42,074 | $ | 649,322 | $ | (13,820 | ) | $ | 635,502 | |||||||||||
|
Provision for loan losses
|
(84,019 | ) | (54,230 | ) | (520 | ) | (138,769 | ) | (21,928 | ) | (160,697 | ) | ||||||||||||
|
Non-interest income
|
162,374 | 115,697 | 114,838 | 392,909 | 3,676 | 396,585 | ||||||||||||||||||
|
Investment securities losses, net
|
— | — | — | — | (7,195 | ) | (7,195 | ) | ||||||||||||||||
|
Non-interest expense
|
(301,622 | ) | (192,722 | ) | (106,604 | ) | (600,948 | ) | (21,115 | ) | (622,063 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 125,095 | $ | 127,631 | $ | 49,788 | $ | 302,514 | $ | (60,382 | ) | $ | 242,132 | |||||||||||
|
Year ended December 31, 2008:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 323,568 | $ | 203,950 | $ | 37,188 | $ | 564,706 | $ | 28,033 | $ | 592,739 | ||||||||||||
|
Provision for loan losses
|
(56,639 | ) | (13,526 | ) | (265 | ) | (70,430 | ) | (38,470 | ) | (108,900 | ) | ||||||||||||
|
Non-interest income
|
146,051 | 107,586 | 114,482 | 368,119 | 7,593 | 375,712 | ||||||||||||||||||
|
Investment securities gains, net
|
— | — | — | — | 30,294 | 30,294 | ||||||||||||||||||
|
Non-interest expense
|
(285,466 | ) | (180,930 | ) | (131,982 | ) | (598,378 | ) | (17,002 | ) | (615,380 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 127,514 | $ | 117,080 | $ | 19,423 | $ | 264,017 | $ | 10,448 | $ | 274,465 | ||||||||||||
|
2009 vs. 2008
|
||||||||||||||||||||||||
|
Increase (decrease) in income before income taxes:
|
||||||||||||||||||||||||
|
Amount
|
$ | (2,419 | ) | $ | 10,551 | $ | 30,365 | $ | 38,497 | $ | (70,830 | ) | $ | (32,333 | ) | |||||||||
|
Percent
|
(1.9 | )% | 9.0 | % | 156.3 | % | 14.6 | % | N.M. | (11.8 | )% | |||||||||||||
|
Year ended December 31, 2007:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 318,970 | $ | 184,263 | $ | 34,484 | $ | 537,717 | $ | 355 | $ | 538,072 | ||||||||||||
|
Provision for loan losses
|
(34,737 | ) | (8,376 | ) | (154 | ) | (43,267 | ) | 535 | (42,732 | ) | |||||||||||||
|
Non-interest income
|
167,352 | 124,377 | 106,026 | 397,755 | (26,174 | ) | 371,581 | |||||||||||||||||
|
Investment securities gains, net
|
— | — | — | — | 8,234 | 8,234 | ||||||||||||||||||
|
Non-interest expense
|
(275,161 | ) | (180,389 | ) | (90,280 | ) | (545,830 | ) | (28,329 | ) | (574,159 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 176,424 | $ | 119,875 | $ | 50,076 | $ | 346,375 | $ | (45,379 | ) | $ | 300,996 | |||||||||||
|
2008 vs. 2007
|
||||||||||||||||||||||||
|
Increase (decrease) in income before income taxes:
|
||||||||||||||||||||||||
|
Amount
|
$ | (48,910 | ) | $ | (2,795 | ) | $ | (30,653 | ) | $ | (82,358 | ) | $ | 55,827 | $ | (26,531 | ) | |||||||
|
Percent
|
(27.7 | )% | (2.3 | )% | (61.2 | )% | (23.8 | )% | N.M. | (8.8 | )% | |||||||||||||
Consumer
The Consumer segment includes consumer deposits, consumer
finance, consumer debit and credit card bank cards, and student
lending. Pre-tax income for 2009 was $125.1 million, a
decrease of $2.4 million, or 1.9%, from 2008. The decline
in profitability was mainly due to an increase of
$27.4 million in net loan charge-offs and an increase of
$16.2 million in non-interest expense, which were partly
offset by higher net interest income of $24.8 million and
$16.3 million in non-interest income. The increase in net
interest income resulted
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Table of Contents
mainly from a $53.0 million decrease in deposit interest
expense, mainly in premium money market accounts and short-term
certificates of deposit. This effect was partly offset by a
decline of $7.8 million in net allocated funding credits
assigned to the Consumer segment’s loan and deposit
portfolios and a $20.4 million decrease in loan interest
income. The increase in net loan charge-offs occurred mainly in
consumer credit card and marine and RV loans. An increase of
$16.3 million, or 11.2%, in non-interest income resulted
mainly from higher gains on sales of student loans, including
the reversal of an impairment reserve discussed above in the
Non-Interest Income section of this discussion. This increase in
income was partly offset by a decline in overdraft charges.
Non-interest expense grew $16.2 million, or 5.7%, over the
prior year due to higher FDIC insurance expense and data
processing costs, partly offset by lower bank card servicing
expense. Total average loans increased slightly in 2009 over the
prior year due to the student loan portfolio acquired late in
2008, partly offset by declines in other types of consumer
loans. Average deposits increased 2.8% over the prior period,
resulting mainly from growth in interest checking and premium
money market deposit accounts, partly offset by a decline in
certificates of deposit.
Pre-tax profitability for 2008 was $127.5 million, a
decrease of $48.9 million, or 27.7%, from 2007. The
decrease was due to increases of $10.3 million in
non-interest expense and $21.9 million in net loan
charge-offs. In addition, non-interest income declined
$21.3 million, while net interest income increased
$4.6 million. The increase in net interest income resulted
mainly from an $83.9 million decline in deposit interest
expense, partly offset by a $64.5 million decrease in net
allocated funding credits assigned to the Consumer segment and a
$14.8 million decrease in loan interest income. The
decrease in non-interest income resulted largely from lower
overdraft and return item fees, an impairment charge taken on
certain held for sale student loans, and lower gains on student
loan sales. These declines were partly offset by an increase in
bank card fee income (primarily debit card fees). Non-interest
expense increased $10.3 million over the previous year
mainly due to higher bank card processing costs, telephone
support fees and teller services processing costs. Net loan
charge-offs increased $21.9 million, or 63.1%, in the
Consumer segment, with most of the increase due to higher
consumer credit card and marine and RV loan charge-offs. Total
average assets directly related to the segment rose 6.5% over
2007, mainly due to growth in consumer loans and consumer credit
card loans. Average deposits decreased slightly from the prior
year, mainly due to lower balances in long-term certificates of
deposit, partly offset by growth in premium money market deposit
accounts.
Commercial
The Commercial segment provides corporate lending (including the
Small Business Banking product line within the branch network),
leasing, international services, and business, government
deposit, and related commercial cash management services, as
well as merchant and commercial bank card products. In 2009,
pre-tax profitability for the Commercial segment increased
$10.6 million, or 9.0%, compared to the prior year. The
growth was mainly due to a $54.9 million, or 26.9%,
increase in net interest income and an $8.1 million
increase in non-interest income. Partly offsetting the increases
in income were higher net loan charge-offs of $40.7 million
and non-interest expense of $11.8 million. The increase in
net interest income was mainly due to lower net allocated
funding costs of $129.6 million and a decrease of
$6.7 million in deposit interest expense, which were partly
offset by a decline in loan interest income of
$81.3 million. The growth in net loan charge-offs included
a $27.9 million increase in construction and land loan net
charge-offs and smaller increases in other commercial loan
categories. Non-interest income increased $8.1 million, or
7.5%, over the prior year and included higher commercial cash
management fees and bank card fees (mainly corporate card),
partly offset by lower cash sweep commissions. Non-interest
expense increased $11.8 million, or 6.5%, over the previous
year, mainly due to higher FDIC insurance expense and an
increase in salaries and benefits expense. Total average assets
directly related to the segment declined 4.7% from 2008. Average
segment loans decreased 4.9% compared to 2008 as a result of
declines in business and business real estate loans, while
average deposits increased 38.0% due to growth in non-interest
bearing demand and money market deposit accounts.
Pre-tax income for 2008 decreased $2.8 million, or 2.3%,
compared to the prior year. Most of the decrease was due to a
decline of $16.8 million in non-interest income and an
increase of $5.2 million in net loan charge-offs. Net
interest income increased $19.7 million, or 10.7%, which
resulted from lower net allocated funding costs of
$81.1 million and lower deposit interest expense of
$7.0 million, partly offset by a $68.3 million
54
Table of Contents
decline in loan interest income. Non-interest income decreased
by 13.5% from the previous year largely due to lower bank card
fees, partly offset by higher commercial cash management fees.
Non-interest expense increased slightly over the prior year and
included higher salaries expense and impairment charges on
foreclosed land, partly offset by lower commercial card
servicing costs. Net loan charge-offs were $13.5 million in
2008 compared to $8.4 million in 2007. The increase was
mainly due to higher construction and land loan net charge-offs.
Total average assets directly related to the segment rose 7.0%
over 2007, largely due to growth in business and business real
estate loans. Average deposits increased 7.2% due to growth in
non-interest bearing demand, money market and interest checking
deposit accounts.
Wealth
The Wealth segment provides traditional trust and estate
planning, advisory and discretionary investment management
services, brokerage services, and includes Private Banking
accounts. At December 31, 2009 the Trust group managed
investments with a market value of $12.8 billion and
administered an additional $9.3 billion in non-managed
assets. It also provides investment management services to The
Commerce Funds, a series of mutual funds with $1.4 billion
in total assets at December 31, 2009. The Capital Markets
Group sells primarily fixed-income securities to individuals,
corporations, correspondent banks, public institutions, and
municipalities, and also provides investment safekeeping and
bond accounting services. Pre-tax profitability for the Wealth
segment was $49.8 million in 2009 compared to
$19.4 million in 2008, an increase of $30.4 million.
The profitability increase was the result of a
$25.4 million decline in non-interest expense, which was
due to a $33.3 million loss on the purchase of auction rate
securities in 2008, which is discussed above in the Non-Interest
Expense section of this discussion. Partly offsetting this
decline in expense were increases in FDIC insurance costs,
allocated processing costs, and salaries and benefits expense.
Net interest income increased $4.9 million, or 13.1%,
largely due to a $13.9 million decline in interest expense
on short-term jumbo certificates of deposit, and a
$7.6 million decline in overnight borrowings expense. These
effects were partly offset by a $13.2 million decrease in
assigned net funding credits. Non-interest income increased
slightly over the prior year due to higher bond trading income
in the Capital Markets Group, partly offset by lower trust fee
income and cash sweep commissions. Average assets decreased
$7.7 million during 2009 mainly due to a decline in the
trading securities portfolio. Average deposits increased
$400.3 million, or 25.3%, during 2009, due to growth in
premium money market accounts and certificates of deposit over
$100,000.
In 2008, pre-tax income for the Wealth segment was
$19.4 million compared to $50.1 million in 2007, a
$30.7 million decline mainly due to the auction rate
securities loss mentioned above. Excluding this loss, segment
profitability in 2008 would have been $52.7 million, a 5.2%
increase over 2007. Net interest income increased
$2.7 million, or 7.8%, over the prior year, due to lower
interest expense on short-term borrowings and deposits, partly
offset by lower interest income on overnight investments.
Non-interest income increased $8.5 million, or 8.0%, mainly
due to higher private client and corporate trust fees and bond
trading income. Non-interest expense, excluding the auction rate
securities loss, rose $8.4 million over 2007, mainly in
salary expense. Average assets decreased $305.2 million
during 2008 because of lower overnight investments of liquid
funds. Average deposits increased $306.5 million during
2008, due to growth in short-term certificates of deposit over
$100,000.
The segment activity, as shown above, includes both direct and
allocated items. Amounts in the “Other/Elimination”
column include activity not related to the segments, such as
certain administrative functions, the investment securities
portfolio, and the effect of certain expense allocations to the
segments. Also included in this category is the excess of the
Company’s provision for loan losses over net loan
charge-offs, which are generally assigned directly to the
segments. In 2009, the pre-tax loss in this category was
$60.4 million, compared to profitability of
$10.4 million in 2008. The decline in profitability was
partly due to items relating to the Bank’s relationship
with Visa which were not assigned to a segment. As mentioned
earlier, Visa-related stock redemption gains of
$22.2 million and indemnification obligation reversals of
$9.6 million were recorded in 2008, compared to obligation
reversals of $2.5 million in 2009. In addition, unallocated
net interest income in this category, relating to earnings on
the Company’s investment portfolio and interest expense on
overnight borrowings not allocated to the segments, decreased
$41.9 million
55
Table of Contents
in 2009. These declines in profitability were partly offset by a
$16.5 million decrease in the unallocated loan loss
provision.
Impact
of Recently Issued Accounting Standards
Fair Value Measurements
The Company adopted new
accounting guidance for determining fair value, issued by the
Financial Accounting Standards Board (FASB), on January 1,
2008. Under this guidance, fair value is defined as a
market-based measurement and should be determined based on
assumptions that a market participant would use when pricing an
asset or liability. Additionally, it establishes a fair value
hierarchy that provides the highest priority to measurements
using quoted prices in active markets and the lowest priority to
measurements based on unobservable data. No new fair value
measurements are required. The guidance for initial recognition
of fair value for certain derivative contracts held by the
Company was modified. Former accounting guidance precluded
immediate recognition in earnings of an unrealized gain or loss,
measured as the difference between the transaction price and
fair value of these instruments at initial recognition. This
guidance was nullified and in accordance with the new
recognition requirements, the Company increased equity by $903
thousand on January 1, 2008.
In April 2009, the FASB issued additional guidance on reliance
on transaction prices or quoted prices when estimating fair
value when market volume and activity have significantly
decreased. The guidance reaffirms the definition of fair value
as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants. It provides a two-step process to determine
whether there has been a significant decrease in the volume and
level of activity for an asset or liability when compared with
normal market activity for the asset or liability, and whether a
transaction is not orderly. If it is determined that there has
been a significant decrease in the volume and level of activity
for the asset or liability in relation to normal market activity
for the asset or liability, transactions or quoted prices may
not be determinative of fair value. Accordingly, further
analysis of the transactions or quoted prices is needed, and a
significant adjustment to the transactions or quoted prices may
be necessary to estimate fair value. The Company adopted the
guidance in March 2009, and its application did not result in a
change in valuation techniques and related inputs.
Business Combinations
In December 2007, the FASB
issued guidance which, while retaining the fundamental
requirements of the acquisition method of accounting for
business combinations, broadened the scope and improved the
application of this method. Under the new guidance, the acquirer
in a business combination must recognize the assets acquired,
the liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values
as of that date. The recognition at the acquisition date of an
allowance for loan losses on acquired loans was eliminated, as
credit-related factors are now incorporated directly into the
fair value of the loans. Costs incurred to effect the
acquisition are to be recognized separately from the
acquisition. Assets and liabilities arising from contractual
contingencies must be measured at fair value as of the
acquisition date. Contingent consideration must also be measured
at fair value as of the acquisition date. The guidance also
changes the accounting for negative goodwill arising from a
bargain purchase, requiring recognition in earnings instead of
allocation to assets acquired. For business combinations
achieved in stages (step acquisitions), the assets and
liabilities must be recognized at the full amounts of their fair
values, while under former guidance the entity was acquired in a
series of purchases, with costs and fair values being identified
and measured at each step. The new accounting requirements apply
to business combinations occurring after January 1, 2009.
Non-controlling Interests
Also in December 2007,
the FASB issued guidance which clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the
consolidated financial statements. A single method of accounting
exists for changes in a parent’s ownership interest if the
parent retains its controlling interest, deeming these to be
equity transactions. Such changes include the parent’s
purchases and sales of ownership interests in its subsidiary and
the subsidiary’s acquisition and issuance of its ownership
interests. The parent must recognize a gain or loss in net
income when a subsidiary is deconsolidated. The guidance changed
the way the consolidated income statement is presented,
requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the
non-controlling interest, and requires disclosure of these
56
Table of Contents
amounts on the face of the consolidated statement of income. The
guidance was effective on January 1, 2009, and its adoption
did not have a significant effect on the Company’s
consolidated financial statements.
Income per Share
In June 2008, the FASB issued
guidance which defined unvested stock awards which contain
nonforfeitable rights to dividends as securities which
participate in undistributed earnings. Such participating
securities must be included in the computation of income per
share under the two-class method. The two-class method is an
earnings allocation formula that determines income per share for
common stock and for participating securities according to
dividends declared and participation rights in undistributed
earnings. The Company was required to apply the two-class method
to its computation of income per share effective January 1,
2009, and its application did not have a significant effect on
the computation of income per share attributable to common
shareholders.
Benefit Plans
In December 2008, the FASB expanded
its disclosure requirements about pension and other
postretirement benefit plan assets. These disclosures, for each
major asset category, include fair value measurements, valuation
techniques, risk concentrations, and rate of return assumptions.
Information about asset investment policies and strategies, such
as investment goals and risk management practices, must also be
provided. The new disclosures are required on an annual basis,
effective with the December 31, 2009 financial statements.
Other-Than-Temporary
Impairments
In April 2009, the FASB issued new
accounting guidance for the measurement and recognition of
other-than-temporary
impairment for debt securities. The guidance addresses how to
evaluate whether an impairment of a debt security is other than
temporary, determination of the amount of impairment to be
recognized in earnings and other comprehensive income, and
subsequent accounting for these securities. It requires a new
presentation on the statement of earnings which shows the total
impairment, offset for that amount considered noncredit-related
and recognized in other comprehensive income. Various additional
disclosures are required for investments in an unrealized loss
position, in addition to information about the methodologies and
inputs used in calculating the portion of impairment recognized
in earnings. The Company adopted the new guidance in March 2009,
and has presented the required disclosures in Note 4 on
Investment Securities in the accompanying consolidated financial
statements.
Subsequent Events
The FASB issued guidance in May
2009 for accounting and disclosures of events that occur after
the balance sheet date but before financial statements are
issued or are available to be issued. The guidance sets the
period after the balance sheet date during which management
should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
and the circumstances under which they should be recognized. The
guidance was effective with the June 30, 2009 financial
statements, and its application did not have a significant
effect on the Company’s financial statements.
Accounting for Transfers of Financial Assets
The
FASB issued additional guidance in June 2009 with the objective
of providing greater transparency about transfers of financial
assets and a transferor’s continuing involvement. The new
guidance limits the circumstances in which a financial asset
should be derecognized when the transferor has not transferred
the entire original financial asset, or when the transferor has
continuing involvement with the transferred asset. It
establishes conditions for reporting a transfer of a portion of
a financial asset as a sale. Also, it eliminates the exception
for qualifying special purpose entities from consolidation
guidance, and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not
surrendered control over the transferred assets. The new
accounting requirements must be applied to transactions
occurring on or after January 1, 2010. The Company does not
expect their adoption to have a significant effect on its
financial statements.
Variable Interest Entities
In June 2009, the FASB
issued new accounting guidance related to variable interest
entities. This guidance replaces a quantitative-based risks and
rewards calculation for determining which entity, if any, has a
controlling financial interest in a variable interest entity
with an approach focused on identifying which entity has the
power to direct the activities of a variable interest entity
that most significantly impact its economic performance and the
obligation to absorb its losses or the right to receive its
benefits. This guidance requires reconsideration of whether an
entity is a variable interest entity when any changes in facts
or circumstances occur such that the holders of the equity
investment at risk, as a group, lose
57
Table of Contents
the power to direct the activities of the entity that most
significantly impact the entity’s economic performance. It
also requires ongoing assessments of whether a variable interest
holder is the primary beneficiary of a variable interest entity.
The guidance was effective on January 1, 2010, and its
adoption did not have a significant effect on the Company’s
financial statements.
Effects
of Inflation
The impact of inflation on financial institutions differs
significantly from that exerted on industrial entities.
Financial institutions are not heavily involved in large capital
expenditures used in the production, acquisition or sale of
products. Virtually all assets and liabilities of financial
institutions are monetary in nature and represent obligations to
pay or receive fixed and determinable amounts not affected by
future changes in prices. Changes in interest rates have a
significant effect on the earnings of financial institutions.
Higher interest rates generally follow the rising demand of
borrowers and the corresponding increased funding requirements
of financial institutions. Although interest rates are viewed as
the price of borrowing funds, the behavior of interest rates
differs significantly from the behavior of the prices of goods
and services. Prices of goods and services may be directly
related to that of other goods and services while the price of
borrowing relates more closely to the inflation rate in the
prices of those goods and services. As a result, when the rate
of inflation slows, interest rates tend to decline while
absolute prices for goods and services remain at higher levels.
Interest rates are also subject to restrictions imposed through
monetary policy, usury laws and other artificial constraints.
During the second half of 2008, the national economy experienced
a significant deterioration which has continued throughout 2009.
As a result, interest rates fell significantly and have remained
at low levels, while prices of consumer goods and services have
been relatively constant. New legislation was enacted to
mitigate the effects of the recession and revive the economy,
and additional legislation is probable. It is difficult to
predict the inflationary impact of the recession and the
accompanying legislative measures taken to combat it.
Corporate
Governance
The Company has adopted a number of corporate governance
measures. These include corporate governance guidelines, a code
of ethics that applies to its senior financial officers and the
charters for its audit committee, its committee on compensation
and human resources, and its committee on governance/directors.
This information is available on the Company’s web site
www.commercebank.com under Investor Relations.
Forward-Looking
Statements
This report may contain “forward-looking statements”
that are subject to risks and uncertainties and include
information about possible or assumed future results of
operations. Many possible events or factors could affect the
future financial results and performance of the Company. This
could cause results or performance to differ materially from
those expressed in the forward-looking statements. Words such as
“expects”, “anticipates”,
“believes”, “estimates”, variations of such
words and other similar expressions are intended to identify
such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks,
uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially
from what is expressed or forecasted in, or implied by, such
forward-looking statements. Readers should not rely solely on
the forward-looking statements and should consider all
uncertainties and risks discussed throughout this report.
Forward-looking statements speak only as of the date they are
made. The Company does not undertake to update forward-looking
statements to reflect circumstances or events that occur after
the date the forward-looking statements are made or to reflect
the occurrence of unanticipated events. Such possible events or
factors include: changes in economic conditions in the
Company’s market area; changes in policies by regulatory
agencies, governmental legislation and regulation; fluctuations
in interest rates; changes in liquidity requirements; demand for
loans in the Company’s market area; changes in accounting
and tax principles; estimates made on income taxes; and
competition with other entities that offer financial services.
58
Table of Contents
|
Year Ended December 31, 2009
|
For the Quarter Ended | |||||||||||||||
| (In thousands, except per share data) | 12/31/09 | 9/30/09 | 6/30/09 | 3/31/09 | ||||||||||||
|
Interest income
|
$ | 194,999 | $ | 201,647 | $ | 198,992 | $ | 193,874 | ||||||||
|
Interest expense
|
(30,496 | ) | (38,108 | ) | (41,547 | ) | (43,859 | ) | ||||||||
|
Net interest income
|
164,503 | 163,539 | 157,445 | 150,015 | ||||||||||||
|
Non-interest income
|
103,457 | 102,135 | 98,562 | 92,431 | ||||||||||||
|
Investment securities losses, net
|
(1,325 | ) | (945 | ) | (2,753 | ) | (2,172 | ) | ||||||||
|
Salaries and employee benefits
|
(85,480 | ) | (87,267 | ) | (86,279 | ) | (86,753 | ) | ||||||||
|
Other expense
|
(69,197 | ) | (67,222 | ) | (73,732 | ) | (66,133 | ) | ||||||||
|
Provision for loan losses
|
(41,002 | ) | (35,361 | ) | (41,166 | ) | (43,168 | ) | ||||||||
|
Income before income taxes
|
70,956 | 74,879 | 52,077 | 44,220 | ||||||||||||
|
Income taxes
|
(21,493 | ) | (23,415 | ) | (15,257 | ) | (13,592 | ) | ||||||||
|
Non-controlling interest
|
159 | 185 | 148 | 208 | ||||||||||||
|
Net income
|
$ | 49,622 | $ | 51,649 | $ | 36,968 | $ | 30,836 | ||||||||
|
Net income per common share – basic*
|
$ | .60 | $ | .63 | $ | .46 | $ | .38 | ||||||||
|
Net income per common share – diluted*
|
$ | .60 | $ | .63 | $ | .46 | $ | .38 | ||||||||
|
Weighted average shares – basic*
|
82,684 | 82,169 | 80,251 | 79,487 | ||||||||||||
|
Weighted average shares – diluted*
|
83,040 | 82,491 | 80,524 | 79,807 | ||||||||||||
|
Year Ended December 31, 2008
|
For the Quarter Ended | |||||||||||||||
| (In thousands, except per share data) | 12/31/08 | 9/30/08 | 6/30/08 | 3/31/08 | ||||||||||||
|
Interest income
|
$ | 209,628 | $ | 209,464 | $ | 208,204 | $ | 222,553 | ||||||||
|
Interest expense
|
(53,339 | ) | (57,900 | ) | (63,425 | ) | (82,446 | ) | ||||||||
|
Net interest income
|
156,289 | 151,564 | 144,779 | 140,107 | ||||||||||||
|
Non-interest income
|
85,226 | 95,593 | 102,733 | 92,160 | ||||||||||||
|
Investment securities gains, net
|
4,814 | 1,149 | 1,008 | 23,323 | ||||||||||||
|
Salaries and employee benefits
|
(83,589 | ) | (83,766 | ) | (83,247 | ) | (83,010 | ) | ||||||||
|
Other expense
|
(60,099 | ) | (100,680 | ) | (63,818 | ) | (57,171 | ) | ||||||||
|
Provision for loan losses
|
(41,333 | ) | (29,567 | ) | (18,000 | ) | (20,000 | ) | ||||||||
|
Income before income taxes
|
61,308 | 34,293 | 83,455 | 95,409 | ||||||||||||
|
Income taxes
|
(17,757 | ) | (9,534 | ) | (27,118 | ) | (30,668 | ) | ||||||||
|
Non-controlling interest
|
285 | (86 | ) | (358 | ) | (574 | ) | |||||||||
|
Net income
|
$ | 43,836 | $ | 24,673 | $ | 55,979 | $ | 64,167 | ||||||||
|
Net income per common share – basic*
|
$ | .55 | $ | .31 | $ | .70 | $ | .81 | ||||||||
|
Net income per common share – diluted*
|
$ | .55 | $ | .31 | $ | .70 | $ | .80 | ||||||||
|
Weighted average shares – basic*
|
79,400 | 79,228 | 79,119 | 79,027 | ||||||||||||
|
Weighted average shares – diluted*
|
79,986 | 79,868 | 79,754 | 79,702 | ||||||||||||
|
Year Ended December 31, 2007
|
For the Quarter Ended | |||||||||||||||
| (In thousands, except per share data) | 12/31/07 | 9/30/07 | 6/30/07 | 3/31/07 | ||||||||||||
|
Interest income
|
$ | 236,752 | $ | 238,274 | $ | 232,808 | $ | 228,267 | ||||||||
|
Interest expense
|
(99,285 | ) | (103,012 | ) | (98,944 | ) | (96,788 | ) | ||||||||
|
Net interest income
|
137,467 | 135,262 | 133,864 | 131,479 | ||||||||||||
|
Non-interest income
|
98,101 | 95,137 | 94,059 | 84,284 | ||||||||||||
|
Investment securities gains (losses), net
|
3,270 | 1,562 | (493 | ) | 3,895 | |||||||||||
|
Salaries and employee benefits
|
(78,433 | ) | (77,312 | ) | (76,123 | ) | (76,900 | ) | ||||||||
|
Other expense
|
(84,204 | ) | (61,608 | ) | (60,251 | ) | (59,328 | ) | ||||||||
|
Provision for loan losses
|
(14,062 | ) | (11,455 | ) | (9,054 | ) | (8,161 | ) | ||||||||
|
Income before income taxes
|
62,139 | 81,586 | 82,002 | 75,269 | ||||||||||||
|
Income taxes
|
(18,187 | ) | (25,515 | ) | (26,453 | ) | (23,582 | ) | ||||||||
|
Non-controlling interest
|
(260 | ) | (173 | ) | 25 | (191 | ) | |||||||||
|
Net income
|
$ | 43,692 | $ | 55,898 | $ | 55,574 | $ | 51,496 | ||||||||
|
Net income per common share – basic*
|
$ | .55 | $ | .70 | $ | .69 | $ | .64 | ||||||||
|
Net income per common share – diluted*
|
$ | .55 | $ | .70 | $ | .68 | $ | .63 | ||||||||
|
Weighted average shares – basic*
|
79,029 | 79,291 | 80,207 | 80,606 | ||||||||||||
|
Weighted average shares – diluted*
|
79,803 | 80,064 | 81,027 | 81,515 | ||||||||||||
* Restated for the 5% stock
dividend distributed in 2009.
59
Table of Contents
| Years Ended December 31 | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
|
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)
|
$ | 3,119,778 | $ | 116,686 | 3.74 | % | $ | 3,478,927 | $ | 170,620 | 4.90 | % | $ | 3,110,386 | $ | 209,523 | 6.74 | % | ||||||||||||||||||
|
Real estate – construction and land
|
739,896 | 26,746 | 3.61 | 701,519 | 34,445 | 4.91 | 671,986 | 49,436 | 7.36 | |||||||||||||||||||||||||||
|
Real estate – business
|
2,143,675 | 108,107 | 5.04 | 2,281,664 | 136,955 | 6.00 | 2,204,041 | 154,819 | 7.02 | |||||||||||||||||||||||||||
|
Real estate – personal
|
1,585,273 | 87,085 | 5.49 | 1,522,172 | 88,322 | 5.80 | 1,521,066 | 90,537 | 5.95 | |||||||||||||||||||||||||||
|
Consumer
|
1,464,170 | 101,761 | 6.95 | 1,674,497 | 119,837 | 7.16 | 1,558,302 | 115,184 | 7.39 | |||||||||||||||||||||||||||
|
Home equity
|
495,629 | 21,456 | 4.33 | 474,635 | 23,960 | 5.05 | 443,748 | 33,526 | 7.56 | |||||||||||||||||||||||||||
|
Student
(C)
|
344,243 | 9,440 | 2.74 | 13,708 | 287 | 2.10 | — | — | — | |||||||||||||||||||||||||||
|
Consumer credit card
|
727,422 | 89,045 | 12.24 | 776,810 | 83,972 | 10.81 | 665,964 | 84,856 | 12.74 | |||||||||||||||||||||||||||
|
Overdrafts
|
9,781 | — | — | 11,926 | — | — | 13,823 | — | — | |||||||||||||||||||||||||||
|
Total loans
|
10,629,867 | 560,326 | 5.27 | 10,935,858 | 658,398 | 6.02 | 10,189,316 | 737,881 | 7.24 | |||||||||||||||||||||||||||
|
Loans held for sale
|
397,583 | 8,219 | 2.07 | 347,441 | 14,968 | 4.31 | 321,916 | 21,940 | 6.82 | |||||||||||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||||||||||||||
|
U.S. government & federal agency
|
307,142 | 10,973 | 3.57 | 183,083 | 7,439 | 4.06 | 410,170 | 16,505 | 4.02 | |||||||||||||||||||||||||||
|
State & municipal
obligations
(B)
|
873,607 | 43,882 | 5.02 | 695,542 | 37,770 | 5.43 | 594,154 | 33,416 | 5.62 | |||||||||||||||||||||||||||
|
Mortgage and asset-backed securities
|
3,739,967 | 167,087 | 4.47 | 2,469,467 | 125,369 | 5.08 | 2,120,521 | 102,243 | 4.82 | |||||||||||||||||||||||||||
|
Other marketable
securities
(B)
|
179,847 | 9,793 | 5.45 | 98,650 | 4,243 | 4.30 | 129,622 | 7,355 | 5.67 | |||||||||||||||||||||||||||
|
Trading
securities
(B)
|
16,927 | 506 | 2.99 | 28,840 | 1,355 | 4.70 | 22,321 | 1,144 | 5.13 | |||||||||||||||||||||||||||
|
Non-marketable
securities
(B)
|
136,911 | 6,398 | 4.67 | 133,996 | 7,730 | 5.77 | 92,251 | 5,710 | 6.19 | |||||||||||||||||||||||||||
|
Total investment securities
|
5,254,401 | 238,639 | 4.54 | 3,609,578 | 183,906 | 5.09 | 3,369,039 | 166,373 | 4.94 | |||||||||||||||||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell
|
43,811 | 222 | .51 | 425,273 | 8,287 | 1.95 | 527,304 | 25,881 | 4.91 | |||||||||||||||||||||||||||
|
Interest earning deposits with banks
|
325,744 | 807 | .25 | 46,670 | 198 | .42 | — | — | — | |||||||||||||||||||||||||||
|
Total interest earning assets
|
16,651,406 | 808,213 | 4.85 | 15,364,820 | 865,757 | 5.63 | 14,407,575 | 952,075 | 6.61 | |||||||||||||||||||||||||||
|
Less allowance for loan losses
|
(181,417 | ) | (145,176 | ) | (132,234 | ) | ||||||||||||||||||||||||||||||
|
Unrealized gain (loss) on investment securities
|
24,105 | 27,068 | 25,333 | |||||||||||||||||||||||||||||||||
|
Cash and due from banks
|
364,579 | 451,105 | 463,970 | |||||||||||||||||||||||||||||||||
|
Land, buildings and equipment – net
|
411,366 | 412,852 | 400,161 | |||||||||||||||||||||||||||||||||
|
Other assets
|
349,164 | 343,664 | 315,522 | |||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 17,619,203 | $ | 16,454,333 | $ | 15,480,327 | ||||||||||||||||||||||||||||||
|
LIABILITIES AND EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Interest bearing deposits:
|
||||||||||||||||||||||||||||||||||||
|
Savings
|
$ | 438,748 | 642 | .15 | $ | 400,948 | 1,186 | .30 | $ | 392,942 | 2,067 | .53 | ||||||||||||||||||||||||
|
Interest checking and money market
|
8,547,801 | 30,789 | .36 | 7,400,125 | 59,947 | .81 | 6,996,943 | 114,027 | 1.63 | |||||||||||||||||||||||||||
|
Time open & C.D.’s of less than $100,000
|
2,055,952 | 51,982 | 2.53 | 2,149,119 | 77,322 | 3.60 | 2,359,386 | 110,957 | 4.70 | |||||||||||||||||||||||||||
|
Time open & C.D.’s of $100,000 and over
|
1,858,543 | 35,371 | 1.90 | 1,629,500 | 55,665 | 3.42 | 1,480,856 | 73,739 | 4.98 | |||||||||||||||||||||||||||
|
Total interest bearing deposits
|
12,901,044 | 118,784 | .92 | 11,579,692 | 194,120 | 1.68 | 11,230,127 | 300,790 | 2.68 | |||||||||||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
968,643 | 3,699 | .38 | 1,373,625 | 25,085 | 1.83 | 1,696,613 | 83,464 | 4.92 | |||||||||||||||||||||||||||
|
Other
borrowings
(D)
|
920,467 | 31,527 | 3.43 | 1,092,746 | 37,905 | 3.47 | 292,446 | 13,775 | 4.71 | |||||||||||||||||||||||||||
|
Total borrowings
|
1,889,110 | 35,226 | 1.86 | 2,466,371 | 62,990 | 2.55 | 1,989,059 | 97,239 | 4.89 | |||||||||||||||||||||||||||
|
Total interest bearing liabilities
|
14,790,154 | 154,010 | 1.04 | % | 14,046,063 | 257,110 | 1.83 | % | 13,219,186 | 398,029 | 3.01 | % | ||||||||||||||||||||||||
|
Non-interest bearing demand deposits
|
920,118 | 670,118 | 647,888 | |||||||||||||||||||||||||||||||||
|
Other liabilities
|
176,676 | 140,333 | 134,278 | |||||||||||||||||||||||||||||||||
|
Equity
|
1,732,255 | 1,597,819 | 1,478,975 | |||||||||||||||||||||||||||||||||
|
Total liabilities and equity
|
$ | 17,619,203 | $ | 16,454,333 | $ | 15,480,327 | ||||||||||||||||||||||||||||||
|
Net interest margin (T/E)
|
$ | 654,203 | $ | 608,647 | $ | 554,046 | ||||||||||||||||||||||||||||||
|
Net yield on interest earning assets
|
3.93 | % | 3.96 | % | 3.85 | % | ||||||||||||||||||||||||||||||
|
Percentage increase (decrease) in net interest margin
(T/E) compared to the prior year
|
7.48 | % | 9.85 | % | 5.64 | % | ||||||||||||||||||||||||||||||
| (A) | Loans on non-accrual status are included in the computation of average balances. Included in interest income above are loan fees and late charges, net of amortization of deferred loan origination fees and costs, which are immaterial. Credit card income from merchant discounts and net interchange fees are not included in loan income. | |
| (B) | Interest income and yields are presented on a fully-taxable equivalent basis using the Federal statutory income tax rate. Loan interest income includes tax free loan income (categorized as business loan income) which includes tax equivalent adjustments of $3,922,000 in 2009, $3,553,000 in 2008, $2,895,000 in 2007, $1,826,000 in 2006, $1,035,000 in 2005, and $726,000 in 2004. Investment securities interest income include tax equivalent adjustments of $14,779,000 in 2009, | |
| $12,355,000 in 2008, $13,079,000 in 2007, $9,476,000 in 2006, $3,626,000 in 2005, and $1,682,000 in 2004. These adjustments relate to state and municipal obligations, other marketable securities, trading securities, and non-marketable securities. |
60
Table of Contents
| Years Ended December 31 | ||||||||||||||||||||||||||||||||||||||
| 2006 | 2005 | 2004 |
Average
|
|||||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Balance
|
|||||||||||||||||||||||||||||||||||
|
Interest
|
Rates
|
Interest
|
Rates
|
Interest
|
Rates
|
Five Year
|
||||||||||||||||||||||||||||||||
|
Average
|
Income/
|
Earned/
|
Average
|
Income/
|
Earned/
|
Average
|
Income/
|
Earned/
|
Compound
|
|||||||||||||||||||||||||||||
| Balance | Expense | Paid | Balance | Expense | Paid | Balance | Expense | Paid | Growth Rate | |||||||||||||||||||||||||||||
| $ | 2,688,722 | $ | 177,543 | 6.60 | % | $ | 2,336,681 | $ | 125,354 | 5.36 | % | $ | 2,119,823 | $ | 88,106 | 4.16 | % | 8.04 | % | |||||||||||||||||||
| 540,574 | 40,477 | 7.49 | 480,864 | 28,422 | 5.91 | 427,976 | 18,068 | 4.22 | 11.57 | |||||||||||||||||||||||||||||
| 2,053,455 | 140,659 | 6.85 | 1,794,269 | 106,167 | 5.92 | 1,823,302 | 90,601 | 4.97 | 3.29 | |||||||||||||||||||||||||||||
| 1,415,321 | 79,816 | 5.64 | 1,339,900 | 71,222 | 5.32 | 1,322,354 | 68,629 | 5.19 | 3.69 | |||||||||||||||||||||||||||||
| 1,352,047 | 95,074 | 7.03 | 1,242,163 | 80,431 | 6.48 | 1,188,018 | 75,633 | 6.37 | 4.27 | |||||||||||||||||||||||||||||
| 445,376 | 33,849 | 7.60 | 429,911 | 26,463 | 6.16 | 381,111 | 17,481 | 4.59 | 5.40 | |||||||||||||||||||||||||||||
| – | — | — | 357,319 | 17,050 | 4.77 | 326,120 | 9,790 | 3.00 | NM | |||||||||||||||||||||||||||||
| 595,252 | 77,737 | 13.06 | 554,471 | 66,552 | 12.00 | 515,585 | 57,112 | 11.08 | 7.13 | |||||||||||||||||||||||||||||
| 14,685 | — | — | 13,995 | — | — | 13,319 | — | — | (5.99 | ) | ||||||||||||||||||||||||||||
| 9,105,432 | 645,155 | 7.09 | 8,549,573 | 521,661 | 6.10 | 8,117,608 | 425,420 | 5.24 | 5.54 | |||||||||||||||||||||||||||||
| 315,950 | 21,788 | 6.90 | 11,909 | 657 | 5.52 | 12,505 | 644 | 5.15 | NM | |||||||||||||||||||||||||||||
| 640,239 | 22,817 | 3.56 | 1,066,304 | 39,968 | 3.75 | 1,721,301 | 67,988 | 3.95 | (29.16 | ) | ||||||||||||||||||||||||||||
| 414,282 | 22,499 | 5.43 | 137,007 | 6,591 | 4.81 | 70,846 | 3,516 | 4.96 | 65.27 | |||||||||||||||||||||||||||||
| 2,201,685 | 96,270 | 4.37 | 2,812,757 | 114,978 | 4.09 | 2,846,093 | 105,827 | 3.72 | 5.61 | |||||||||||||||||||||||||||||
| 200,013 | 10,695 | 5.35 | 216,984 | 8,808 | 4.06 | 163,843 | 3,539 | 2.16 | 1.88 | |||||||||||||||||||||||||||||
| 17,444 | 884 | 5.07 | 10,624 | 478 | 4.50 | 14,250 | 557 | 3.91 | 3.50 | |||||||||||||||||||||||||||||
| 85,211 | 7,863 | 9.23 | 78,709 | 4,984 | 6.33 | 75,542 | 3,695 | 4.89 | 12.63 | |||||||||||||||||||||||||||||
| 3,558,874 | 161,028 | 4.52 | 4,322,385 | 175,807 | 4.07 | 4,891,875 | 185,122 | 3.78 | 1.44 | |||||||||||||||||||||||||||||
| 299,554 | 15,637 | 5.22 | 116,553 | 4,102 | 3.52 | 84,113 | 1,312 | 1.56 | (12.23 | ) | ||||||||||||||||||||||||||||
| – | — | — | — | — | — | — | — | — | NM | |||||||||||||||||||||||||||||
| 13,279,810 | 843,608 | 6.35 | 13,000,420 | 702,227 | 5.40 | 13,106,101 | 612,498 | 4.67 | 4.90 | |||||||||||||||||||||||||||||
| (129,224 | ) | (129,272 | ) | (132,554 | ) | 6.48 | ||||||||||||||||||||||||||||||||
| (9,443 | ) | 22,607 | 90,692 | NM | ||||||||||||||||||||||||||||||||||
| 470,826 | 508,389 | 553,074 | (8.00 | ) | ||||||||||||||||||||||||||||||||||
| 376,375 | 369,471 | 340,188 | 3.87 | |||||||||||||||||||||||||||||||||||
| 250,260 | 201,829 | 191,655 | 12.75 | |||||||||||||||||||||||||||||||||||
| $ | 14,238,604 | $ | 13,973,444 | $ | 14,149,156 | 4.48 | ||||||||||||||||||||||||||||||||
| $ | 393,870 | 2,204 | .56 | $ | 403,158 | 1,259 | .31 | $ | 401,935 | 1,250 | .31 | 1.77 | ||||||||||||||||||||||||||
| 6,717,280 | 94,238 | 1.40 | 6,745,714 | 52,112 | .77 | 6,171,456 | 26,707 | .43 | 6.73 | |||||||||||||||||||||||||||||
| 2,077,257 | 85,424 | 4.11 | 1,736,804 | 50,597 | 2.91 | 1,678,659 | 38,924 | 2.32 | 4.14 | |||||||||||||||||||||||||||||
| 1,288,845 | 58,381 | 4.53 | 983,703 | 30,779 | 3.13 | 788,800 | 14,912 | 1.89 | 18.70 | |||||||||||||||||||||||||||||
| 10,477,252 | 240,247 | 2.29 | 9,869,379 | 134,747 | 1.37 | 9,040,850 | 81,793 | .90 | 7.37 | |||||||||||||||||||||||||||||
| 1,455,544 | 70,154 | 4.82 | 1,609,868 | 48,776 | 3.03 | 1,827,428 | 22,560 | 1.23 | (11.92 | ) | ||||||||||||||||||||||||||||
| 182,940 | 8,744 | 4.78 | 366,072 | 12,464 | 3.40 | 419,215 | 8,519 | 2.03 | 17.03 | |||||||||||||||||||||||||||||
| 1,638,484 | 78,898 | 4.82 | 1,975,940 | 61,240 | 3.10 | 2,246,643 | 31,079 | 1.38 | (3.41 | ) | ||||||||||||||||||||||||||||
| 12,115,736 | 319,145 | 2.63 | % | 11,845,319 | 195,987 | 1.65 | % | 11,287,493 | 112,872 | 1.00 | % | 5.55 | ||||||||||||||||||||||||||
| 642,545 | 655,729 | 1,288,434 | (6.51 | ) | ||||||||||||||||||||||||||||||||||
| 99,396 | 90,752 | 119,498 | 8.13 | |||||||||||||||||||||||||||||||||||
| 1,380,927 | 1,381,644 | 1,453,731 | 3.57 | |||||||||||||||||||||||||||||||||||
| $ | 14,238,604 | $ | 13,973,444 | $ | 14,149,156 | 4.48 | % | |||||||||||||||||||||||||||||||
| $ | 524,463 | $ | 506,240 | $ | 499,626 | |||||||||||||||||||||||||||||||||
| 3.95 | % | 3.89 | % | 3.81 | % | |||||||||||||||||||||||||||||||||
| 3.60 | % | 1.32 | % | (1.14 | )% | |||||||||||||||||||||||||||||||||
| (C) | The Company’s portfolio of originated student loans was classified as held for sale in the first quarter of 2006 and, accordingly, is included in the held for sale balances for 2006 through 2009. In December 2008, the Company purchased $358,451,000 of student loans which it intends to hold to maturity. | |
| (D) | Interest expense of $38,000, $123,000 and $113,000 which was capitalized on construction projects in 2006, 2005 and 2004, respectively, is not deducted from the interest expense shown above. |
61
Table of Contents
QUARTERLY
AVERAGE BALANCE SHEETS – AVERAGE RATES AND
YIELDS
| Year Ended December 31, 2009 | ||||||||||||||||||||||||||||||||
| Fourth Quarter | Third Quarter | Second Quarter | First Quarter | |||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||||||||
|
Rates
|
Rates
|
Rates
|
Rates
|
|||||||||||||||||||||||||||||
|
Average
|
Earned/
|
Average
|
Earned/
|
Average
|
Earned/
|
Average
|
Earned/
|
|||||||||||||||||||||||||
| (Dollars in millions) | Balance | Paid | Balance | Paid | Balance | Paid | Balance | Paid | ||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||
|
Business
(A)
|
$ | 2,866 | 3.77 | % | $ | 3,019 | 3.77 | % | $ | 3,260 | 3.81 | % | $ | 3,341 | 3.61 | % | ||||||||||||||||
|
Real estate – construction and land
|
695 | 3.93 | 699 | 3.74 | 751 | 3.50 | 816 | 3.34 | ||||||||||||||||||||||||
|
Real estate – business
|
2,113 | 4.98 | 2,147 | 5.04 | 2,174 | 5.05 | 2,141 | 5.10 | ||||||||||||||||||||||||
|
Real estate – personal
|
1,547 | 5.32 | 1,578 | 5.38 | 1,596 | 5.55 | 1,621 | 5.72 | ||||||||||||||||||||||||
|
Consumer
|
1,358 | 7.03 | 1,424 | 6.99 | 1,498 | 6.87 | 1,579 | 6.92 | ||||||||||||||||||||||||
|
Home equity
|
488 | 4.33 | 492 | 4.35 | 498 | 4.33 | 505 | 4.31 | ||||||||||||||||||||||||
|
Student
|
335 | 2.28 | 341 | 2.37 | 347 | 2.61 | 354 | 3.69 | ||||||||||||||||||||||||
|
Consumer credit card
|
749 | 11.80 | 729 | 12.60 | 698 | 12.70 | 734 | 11.90 | ||||||||||||||||||||||||
|
Overdrafts
|
11 | — | 11 | — | 9 | — | 8 | — | ||||||||||||||||||||||||
|
Total loans
|
10,162 | 5.27 | 10,440 | 5.31 | 10,831 | 5.27 | 11,099 | 5.24 | ||||||||||||||||||||||||
|
Loans held for sale
|
322 | 1.70 | 294 | 1.95 | 514 | 1.53 | 463 | 3.00 | ||||||||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||||||||||
|
U.S. government & federal agency
|
518 | 3.02 | 413 | 4.47 | 159 | 3.03 | 134 | 3.61 | ||||||||||||||||||||||||
|
State & municipal
obligations
(A)
|
931 | 4.80 | 908 | 4.97 | 906 | 5.22 | 747 | 5.13 | ||||||||||||||||||||||||
|
Mortgage and asset-backed securities
|
4,478 | 3.86 | 3,985 | 4.47 | 3,649 | 4.66 | 2,827 | 5.20 | ||||||||||||||||||||||||
|
Other marketable
securities
(A)
|
188 | 5.45 | 195 | 5.20 | 193 | 5.40 | 142 | 5.84 | ||||||||||||||||||||||||
|
Trading
securities
(A)
|
14 | 2.66 | 18 | 3.08 | 19 | 3.12 | 17 | 3.01 | ||||||||||||||||||||||||
|
Non-marketable
securities
(A)
|
134 | 6.02 | 134 | 4.98 | 139 | 3.65 | 141 | 4.09 | ||||||||||||||||||||||||
|
Total investment securities
|
6,263 | 4.02 | 5,653 | 4.58 | 5,065 | 4.70 | 4,008 | 5.11 | ||||||||||||||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell
|
10 | .85 | 31 | .66 | 26 | .56 | 110 | .42 | ||||||||||||||||||||||||
|
Interest earning deposits with banks
|
290 | .25 | 204 | .23 | 213 | .10 | 601 | .30 | ||||||||||||||||||||||||
|
Total interest earning assets
|
17,047 | 4.66 | 16,622 | 4.93 | 16,649 | 4.91 | 16,281 | 4.93 | ||||||||||||||||||||||||
|
Less allowance for loan losses
|
(188 | ) | (186 | ) | (178 | ) | (173 | ) | ||||||||||||||||||||||||
|
Unrealized gain (loss) on investment securities
|
115 | 41 | (13 | ) | (49 | ) | ||||||||||||||||||||||||||
|
Cash and due from banks
|
366 | 357 | 357 | 378 | ||||||||||||||||||||||||||||
|
Land, buildings and equipment – net
|
408 | 411 | 412 | 415 | ||||||||||||||||||||||||||||
|
Other assets
|
345 | 363 | 348 | 340 | ||||||||||||||||||||||||||||
|
Total assets
|
$ | 18,093 | $ | 17,608 | $ | 17,575 | $ | 17,192 | ||||||||||||||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||||||
|
Interest bearing deposits:
|
||||||||||||||||||||||||||||||||
|
Savings
|
$ | 442 | .14 | $ | 443 | .15 | $ | 452 | .15 | $ | 418 | .15 | ||||||||||||||||||||
|
Interest checking and money market
|
9,181 | .33 | 8,653 | .35 | 8,460 | .37 | 7,881 | .41 | ||||||||||||||||||||||||
|
Time open & C.D.’s under $100,000
|
1,895 | 1.93 | 2,108 | 2.54 | 2,130 | 2.74 | 2,092 | 2.86 | ||||||||||||||||||||||||
|
Time open & C.D.’s $100,000 & over
|
1,559 | 1.46 | 1,785 | 1.87 | 2,004 | 1.98 | 2,093 | 2.19 | ||||||||||||||||||||||||
|
Total interest bearing deposits
|
13,077 | .69 | 12,989 | .90 | 13,046 | 1.00 | 12,484 | 1.11 | ||||||||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
980 | .33 | 938 | .35 | 963 | .35 | 995 | .50 | ||||||||||||||||||||||||
|
Other borrowings
|
773 | 3.62 | 833 | 3.66 | 873 | 3.79 | 1,208 | 2.86 | ||||||||||||||||||||||||
|
Total borrowings
|
1,753 | 1.78 | 1,771 | 1.90 | 1,836 | 1.99 | 2,203 | 1.80 | ||||||||||||||||||||||||
|
Total interest bearing liabilities
|
14,830 | .82 | % | 14,760 | 1.02 | % | 14,882 | 1.12 | % | 14,687 | 1.21 | % | ||||||||||||||||||||
|
Non-interest bearing demand deposits
|
1,167 | 878 | 861 | 771 | ||||||||||||||||||||||||||||
|
Other liabilities
|
217 | 186 | 168 | 135 | ||||||||||||||||||||||||||||
|
Equity
|
1,879 | 1,784 | 1,664 | 1,599 | ||||||||||||||||||||||||||||
|
Total liabilities and equity
|
$ | 18,093 | $ | 17,608 | $ | 17,575 | $ | 17,192 | ||||||||||||||||||||||||
|
Net interest margin (T/E)
|
$ | 170 | $ | 168 | $ | 162 | $ | 154 | ||||||||||||||||||||||||
|
Net yield on interest earning assets
|
3.95 | % | 4.02 | % | 3.91 | % | 3.83 | % | ||||||||||||||||||||||||
(A) Includes tax equivalent
calculations.
62
Table of Contents
| Year Ended December 31, 2008 | ||||||||||||||||||||||||||||||||
| Fourth Quarter | Third Quarter | Second Quarter | First Quarter | |||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||||||||
|
Rates
|
Rates
|
Rates
|
Rates
|
|||||||||||||||||||||||||||||
|
Average
|
Earned/
|
Average
|
Earned/
|
Average
|
Earned/
|
Average
|
Earned/
|
|||||||||||||||||||||||||
| (Dollars in millions) | Balance | Paid | Balance | Paid | Balance | Paid | Balance | Paid | ||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||
|
Business
(A)
|
$ | 3,389 | 4.52 | % | $ | 3,474 | 4.70 | % | $ | 3,550 | 4.80 | % | $ | 3,504 | 5.60 | % | ||||||||||||||||
|
Real estate – construction and land
|
724 | 4.21 | 698 | 4.78 | 700 | 4.85 | 684 | 5.85 | ||||||||||||||||||||||||
|
Real estate – business
|
2,285 | 5.76 | 2,325 | 5.80 | 2,282 | 5.98 | 2,234 | 6.49 | ||||||||||||||||||||||||
|
Real estate – personal
|
1,543 | 5.67 | 1,509 | 5.75 | 1,510 | 5.84 | 1,526 | 5.95 | ||||||||||||||||||||||||
|
Consumer
|
1,670 | 7.08 | 1,717 | 7.07 | 1,675 | 7.13 | 1,636 | 7.35 | ||||||||||||||||||||||||
|
Home equity
|
494 | 4.58 | 479 | 4.72 | 466 | 4.93 | 459 | 6.03 | ||||||||||||||||||||||||
|
Student
|
55 | 2.09 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Consumer credit card
|
770 | 11.21 | 790 | 10.76 | 786 | 10.15 | 761 | 11.14 | ||||||||||||||||||||||||
|
Overdrafts
|
11 | — | 12 | — | 11 | — | 14 | — | ||||||||||||||||||||||||
|
Total loans
|
10,941 | 5.77 | 11,004 | 5.88 | 10,980 | 5.93 | 10,818 | 6.51 | ||||||||||||||||||||||||
|
Loans held for sale
|
393 | 3.70 | 352 | 4.26 | 331 | 4.40 | 313 | 5.04 | ||||||||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||||||||||
|
U.S. government & federal agency
|
113 | 3.88 | 117 | 4.08 | 199 | 4.08 | 304 | 4.11 | ||||||||||||||||||||||||
|
State & municipal
obligations
(A)
|
1,007 | 5.25 | 700 | 5.40 | 566 | 5.59 | 506 | 5.67 | ||||||||||||||||||||||||
|
Mortgage and asset-backed securities
|
2,528 | 5.25 | 2,454 | 5.04 | 2,522 | 4.99 | 2,373 | 5.03 | ||||||||||||||||||||||||
|
Other marketable
securities
(A)
|
73 | 7.07 | 82 | 3.23 | 127 | 2.81 | 114 | 4.95 | ||||||||||||||||||||||||
|
Trading
securities
(A)
|
20 | 4.13 | 23 | 3.71 | 22 | 3.59 | 50 | 5.89 | ||||||||||||||||||||||||
|
Non-marketable
securities
(A)
|
150 | 5.75 | 145 | 5.83 | 130 | 5.72 | 111 | 5.77 | ||||||||||||||||||||||||
|
Total investment securities
|
3,891 | 5.25 | 3,521 | 5.06 | 3,566 | 4.97 | 3,458 | 5.08 | ||||||||||||||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell
|
369 | .54 | 420 | 2.01 | 421 | 2.16 | 491 | 2.78 | ||||||||||||||||||||||||
|
Interest earning deposits with banks
|
186 | .42 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total interest earning assets
|
15,780 | 5.40 | 15,297 | 5.55 | 15,298 | 5.57 | 15,080 | 6.03 | ||||||||||||||||||||||||
|
Less allowance for loan losses
|
(160 | ) | (144 | ) | (141 | ) | (135 | ) | ||||||||||||||||||||||||
|
Unrealized gain (loss) on investment securities
|
(11 | ) | 17 | 38 | 64 | |||||||||||||||||||||||||||
|
Cash and due from banks
|
424 | 464 | 455 | 460 | ||||||||||||||||||||||||||||
|
Land, buildings and equipment – net
|
416 | 412 | 412 | 412 | ||||||||||||||||||||||||||||
|
Other assets
|
345 | 341 | 342 | 347 | ||||||||||||||||||||||||||||
|
Total assets
|
$ | 16,794 | $ | 16,387 | $ | 16,404 | $ | 16,228 | ||||||||||||||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||||||
|
Interest bearing deposits:
|
||||||||||||||||||||||||||||||||
|
Savings
|
$ | 402 | .19 | $ | 410 | .31 | $ | 410 | .31 | $ | 381 | .38 | ||||||||||||||||||||
|
Interest checking and money market
|
7,509 | .59 | 7,499 | .77 | 7,413 | .76 | 7,178 | 1.13 | ||||||||||||||||||||||||
|
Time open & C.D.’s under $100,000
|
2,053 | 3.00 | 2,041 | 3.14 | 2,187 | 3.76 | 2,318 | 4.38 | ||||||||||||||||||||||||
|
Time open & C.D.’s $100,000 & over
|
1,787 | 2.88 | 1,555 | 2.95 | 1,585 | 3.52 | 1,590 | 4.38 | ||||||||||||||||||||||||
|
Total interest bearing deposits
|
11,751 | 1.35 | 11,505 | 1.47 | 11,595 | 1.69 | 11,467 | 2.22 | ||||||||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
1,082 | .75 | 1,368 | 1.58 | 1,420 | 1.67 | 1,628 | 2.90 | ||||||||||||||||||||||||
|
Other borrowings
|
1,534 | 2.99 | 1,103 | 3.61 | 998 | 3.56 | 730 | 4.14 | ||||||||||||||||||||||||
|
Total borrowings
|
2,616 | 2.06 | 2,471 | 2.48 | 2,418 | 2.45 | 2,358 | 3.29 | ||||||||||||||||||||||||
|
Total interest bearing liabilities
|
14,367 | 1.48 | % | 13,976 | 1.65 | % | 14,013 | 1.82 | % | 13,825 | 2.40 | % | ||||||||||||||||||||
|
Non-interest bearing demand deposits
|
691 | 668 | 660 | 661 | ||||||||||||||||||||||||||||
|
Other liabilities
|
124 | 123 | 134 | 180 | ||||||||||||||||||||||||||||
|
Equity
|
1,612 | 1,620 | 1,597 | 1,562 | ||||||||||||||||||||||||||||
|
Total liabilities and equity
|
$ | 16,794 | $ | 16,387 | $ | 16,404 | $ | 16,228 | ||||||||||||||||||||||||
|
Net interest margin (T/E)
|
$ | 161 | $ | 156 | $ | 148 | $ | 144 | ||||||||||||||||||||||||
|
Net yield on interest earning assets
|
4.06 | % | 4.04 | % | 3.90 | % | 3.83 | % | ||||||||||||||||||||||||
(A) Includes tax equivalent
calculations.
63
Table of Contents
The information required by this item is set forth on pages 50
through 52 of Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Commerce Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of
Commerce Bancshares, Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of income, changes in equity, and cash flows for each
of the years in the three-year period ended December 31,
2009. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Commerce Bancshares, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control – Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 26, 2010
expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Kansas City, Missouri
February 26, 2010
64
Table of Contents
Commerce
Bancshares, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
| December 31 | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
ASSETS
|
||||||||
|
Loans
|
$ | 10,145,324 | $ | 11,283,246 | ||||
|
Allowance for loan losses
|
(194,480 | ) | (172,619 | ) | ||||
|
Net loans
|
9,950,844 | 11,110,627 | ||||||
|
Loans held for sale
|
345,003 | 361,298 | ||||||
|
Investment securities:
|
||||||||
|
Available for sale ($537,079,000 and $525,993,000 pledged in
2009 and
|
||||||||
|
2008, respectively, to secure structured repurchase agreements)
|
6,340,975 | 3,630,753 | ||||||
|
Trading
|
10,335 | 9,463 | ||||||
|
Non-marketable
|
122,078 | 139,900 | ||||||
|
Total investment securities
|
6,473,388 | 3,780,116 | ||||||
|
Federal funds sold and securities purchased under agreements to
resell
|
22,590 | 169,475 | ||||||
|
Interest earning deposits with banks
|
24,118 | 638,158 | ||||||
|
Cash and due from banks
|
417,126 | 491,723 | ||||||
|
Land, buildings and equipment – net
|
402,633 | 411,168 | ||||||
|
Goodwill
|
125,585 | 125,585 | ||||||
|
Other intangible assets – net
|
14,333 | 17,191 | ||||||
|
Other assets
|
344,569 | 427,106 | ||||||
|
Total assets
|
$ | 18,120,189 | $ | 17,532,447 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest bearing demand
|
$ | 1,793,816 | $ | 1,375,000 | ||||
|
Savings, interest checking and money market
|
9,202,916 | 7,610,306 | ||||||
|
Time open and C.D.’s of less than $100,000
|
1,801,332 | 2,067,266 | ||||||
|
Time open and C.D.’s of $100,000 and over
|
1,412,387 | 1,842,161 | ||||||
|
Total deposits
|
14,210,451 | 12,894,733 | ||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
1,103,191 | 1,026,537 | ||||||
|
Other borrowings
|
736,062 | 1,747,781 | ||||||
|
Other liabilities
|
184,580 | 283,929 | ||||||
|
Total liabilities
|
16,234,284 | 15,952,980 | ||||||
|
Commerce Bancshares, Inc. stockholders’ equity:
|
||||||||
|
Preferred stock, $1 par value
Authorized and unissued 2,000,000 shares |
— | — | ||||||
|
Common stock, $5 par value
Authorized 100,000,000 shares; issued 83,127,401 and 75,901,097 shares in 2009 and 2008, respectively |
415,637 | 379,505 | ||||||
|
Capital surplus
|
854,490 | 621,458 | ||||||
|
Retained earnings
|
568,532 | 633,159 | ||||||
|
Treasury stock of 22,328 and 18,789 shares in 2009 and
2008, respectively, at cost
|
(838 | ) | (761 | ) | ||||
|
Accumulated other comprehensive income (loss)
|
46,407 | (56,729 | ) | |||||
|
Total Commerce Bancshares, Inc. stockholders’ equity
|
1,884,228 | 1,576,632 | ||||||
|
Non-controlling interest
|
1,677 | 2,835 | ||||||
|
Total equity
|
1,885,905 | 1,579,467 | ||||||
|
Total liabilities and equity
|
$ | 18,120,189 | $ | 17,532,447 | ||||
See accompanying notes to
consolidated financial statements.
65
Table of Contents
Commerce
Bancshares, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME
| For the Years Ended December 31 | ||||||||||||
| (In thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
|
INTEREST INCOME
|
||||||||||||
|
Interest and fees on loans
|
$ | 556,404 | $ | 654,845 | $ | 734,986 | ||||||
|
Interest on loans held for sale
|
8,219 | 14,968 | 21,940 | |||||||||
|
Interest on investment securities
|
223,860 | 171,551 | 153,294 | |||||||||
|
Interest on federal funds sold and securities purchased under
agreements to resell
|
222 | 8,287 | 25,881 | |||||||||
|
Interest on deposits with banks
|
807 | 198 | — | |||||||||
|
Total interest income
|
789,512 | 849,849 | 936,101 | |||||||||
|
INTEREST EXPENSE
|
||||||||||||
|
Interest on deposits:
|
||||||||||||
|
Savings, interest checking and money market
|
31,431 | 61,133 | 116,094 | |||||||||
|
Time open and C.D.’s of less than $100,000
|
51,982 | 77,322 | 110,957 | |||||||||
|
Time open and C.D.’s of $100,000 and over
|
35,371 | 55,665 | 73,739 | |||||||||
|
Interest on federal funds purchased and securities sold under
agreements to repurchase
|
3,699 | 25,085 | 83,464 | |||||||||
|
Interest on other borrowings
|
31,527 | 37,905 | 13,775 | |||||||||
|
Total interest expense
|
154,010 | 257,110 | 398,029 | |||||||||
|
Net interest income
|
635,502 | 592,739 | 538,072 | |||||||||
|
Provision for loan losses
|
160,697 | 108,900 | 42,732 | |||||||||
|
Net interest income after provision for loan losses
|
474,805 | 483,839 | 495,340 | |||||||||
|
NON-INTEREST INCOME
|
||||||||||||
|
Deposit account charges and other fees
|
106,362 | 110,361 | 117,350 | |||||||||
|
Bank card transaction fees
|
122,124 | 113,862 | 103,613 | |||||||||
|
Trust fees
|
76,831 | 80,294 | 78,840 | |||||||||
|
Bond trading income
|
22,432 | 15,665 | 9,338 | |||||||||
|
Consumer brokerage services
|
10,831 | 12,156 | 11,754 | |||||||||
|
Loan fees and sales
|
21,273 | (2,413 | ) | 8,835 | ||||||||
|
Other
|
36,732 | 45,787 | 41,851 | |||||||||
|
Total non-interest income
|
396,585 | 375,712 | 371,581 | |||||||||
|
INVESTMENT SECURITIES GAINS (LOSSES), NET
|
||||||||||||
|
Impairment losses on debt securities
|
(32,783 | ) | — | — | ||||||||
|
Less noncredit-related losses on securities not expected to be
sold
|
30,310 | — | — | |||||||||
|
Net impairment losses
|
(2,473 | ) | — | — | ||||||||
|
Realized gains (losses) on sales and fair value adjustments
|
(4,722 | ) | 30,294 | 8,234 | ||||||||
|
Investment securities gains (losses), net
|
(7,195 | ) | 30,294 | 8,234 | ||||||||
|
NON-INTEREST EXPENSE
|
||||||||||||
|
Salaries and employee benefits
|
345,779 | 333,612 | 308,768 | |||||||||
|
Net occupancy
|
45,925 | 46,317 | 45,789 | |||||||||
|
Equipment
|
25,472 | 24,569 | 24,121 | |||||||||
|
Supplies and communication
|
32,156 | 35,335 | 34,162 | |||||||||
|
Data processing and software
|
61,789 | 56,387 | 50,342 | |||||||||
|
Marketing
|
18,231 | 19,994 | 18,199 | |||||||||
|
Deposit insurance
|
27,373 | 2,051 | 1,412 | |||||||||
|
Loss on purchase of auction rate securities
|
— | 33,266 | — | |||||||||
|
Indemnification obligation
|
(2,496 | ) | (9,619 | ) | 20,951 | |||||||
|
Other
|
67,834 | 73,468 | 70,415 | |||||||||
|
Total non-interest expense
|
622,063 | 615,380 | 574,159 | |||||||||
|
Income before income taxes
|
242,132 | 274,465 | 300,996 | |||||||||
|
Less income taxes
|
73,757 | 85,077 | 93,737 | |||||||||
|
Net income before non-controlling interest
|
168,375 | 189,388 | 207,259 | |||||||||
|
Less non-controlling interest expense (income)
|
(700 | ) | 733 | 599 | ||||||||
|
NET INCOME
|
$ | 169,075 | $ | 188,655 | $ | 206,660 | ||||||
|
Net income per share – basic
|
$ | 2.07 | $ | 2.37 | $ | 2.58 | ||||||
|
Net income per share – diluted
|
$ | 2.07 | $ | 2.36 | $ | 2.56 | ||||||
See accompanying notes to
consolidated financial statements.
66
Table of Contents
Commerce
Bancshares, Inc. and Subsidiaries
| For the Years Ended December 31 | ||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
OPERATING ACTIVITIES
|
||||||||||||
|
Net income
|
$ | 169,075 | $ | 188,655 | $ | 206,660 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Provision for loan losses
|
160,697 | 108,900 | 42,732 | |||||||||
|
Provision for depreciation and amortization
|
51,514 | 50,696 | 52,469 | |||||||||
|
Amortization of investment security premiums, net
|
2,348 | 3,946 | 7,398 | |||||||||
|
Deferred income tax expense (benefit)
|
(7,310 | ) | 2,656 | (11,227 | ) | |||||||
|
Investment securities (gains) losses, net
|
7,195 | (30,294 | ) | (8,234 | ) | |||||||
|
Gain on sale of branch
|
(644 | ) | (6,938 | ) | — | |||||||
|
Impairment losses (reversals) on loans held for sale
|
(3,796 | ) | 9,398 | — | ||||||||
|
Net gains on sales of loans held for sale
|
(12,201 | ) | (3,168 | ) | (5,670 | ) | ||||||
|
Proceeds from sales of loans held for sale
|
577,726 | 235,305 | 420,295 | |||||||||
|
Originations of loans held for sale
|
(545,380 | ) | (366,873 | ) | (371,918 | ) | ||||||
|
Net (increase) decrease in trading securities
|
(14,014 | ) | 13,281 | (19,058 | ) | |||||||
|
Stock-based compensation
|
6,642 | 6,389 | 6,263 | |||||||||
|
Decrease in interest receivable
|
2,943 | 2,908 | 8,324 | |||||||||
|
Increase (decrease) in interest payable
|
(18,574 | ) | (28,351 | ) | 5,270 | |||||||
|
Increase (decrease) in income taxes payable
|
(3,067 | ) | (1,204 | ) | 7,743 | |||||||
|
Net tax benefit related to equity compensation plans
|
(557 | ) | (1,928 | ) | (2,283 | ) | ||||||
|
Loss on purchase of auction rate securities
|
— | 33,266 | — | |||||||||
|
Prepayment of FDIC insurance premiums
|
(63,739 | ) | — | — | ||||||||
|
Other changes, net
|
(13,570 | ) | 650 | (3,062 | ) | |||||||
|
Net cash provided by operating activities
|
295,288 | 217,294 | 335,702 | |||||||||
|
INVESTING ACTIVITIES
|
||||||||||||
|
Net cash and cash equivalents paid in acquisitions/dispositions
|
(3,494 | ) | (54,490 | ) | (14,046 | ) | ||||||
|
Cash paid in exchange of investment securities for student loans
|
— | (17,164 | ) | — | ||||||||
|
Proceeds from sales of available for sale securities
|
207,852 | 131,843 | 239,541 | |||||||||
|
Proceeds from maturities/pay downs of available for sale
securities
|
1,332,347 | 1,311,605 | 1,135,260 | |||||||||
|
Purchases of available for sale securities
|
(4,078,962 | ) | (2,396,109 | ) | (1,095,686 | ) | ||||||
|
Net (increase) decrease in loans
|
999,086 | (412,593 | ) | (793,214 | ) | |||||||
|
Purchases of land, buildings and equipment
|
(29,247 | ) | (42,563 | ) | (55,102 | ) | ||||||
|
Sales of land, buildings and equipment
|
151 | 495 | 4,888 | |||||||||
|
Net cash used in investing activities
|
(1,572,267 | ) | (1,478,976 | ) | (578,359 | ) | ||||||
|
FINANCING ACTIVITIES
|
||||||||||||
|
Net increase in non-interest bearing demand, savings, interest
checking and money market deposits
|
2,041,513 | 381,276 | 253,221 | |||||||||
|
Net increase (decrease) in time open and C.D.’s
|
(693,941 | ) | (36,612 | ) | 379,002 | |||||||
|
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase
|
76,654 | (212,375 | ) | (542,992 | ) | |||||||
|
Repayment of long-term borrowings
|
(311,719 | ) | (10,855 | ) | (33,095 | ) | ||||||
|
Additional long-term borrowings
|
100,000 | 375,000 | 542,000 | |||||||||
|
Net increase (decrease) in short-term borrowings
|
(800,000 | ) | 799,997 | — | ||||||||
|
Purchases of treasury stock
|
(528 | ) | (9,490 | ) | (128,578 | ) | ||||||
|
Issuance of stock under open market stock sale program, stock
purchase and equity compensation plans
|
103,641 | 15,978 | 13,661 | |||||||||
|
Net tax benefit related to equity compensation plans
|
557 | 1,928 | 2,283 | |||||||||
|
Cash dividends paid on common stock
|
(74,720 | ) | (72,055 | ) | (68,915 | ) | ||||||
|
Net cash provided by financing activities
|
441,457 | 1,232,792 | 416,587 | |||||||||
|
Increase (decrease) in cash and cash equivalents
|
(835,522 | ) | (28,890 | ) | 173,930 | |||||||
|
Cash and cash equivalents at beginning of year
|
1,299,356 | 1,328,246 | 1,154,316 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 463,834 | $ | 1,299,356 | $ | 1,328,246 | ||||||
See accompanying notes to
consolidated financial statements.
67
Table of Contents
Commerce
Bancshares, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
| Commerce Bancshares, Inc. Shareholders | ||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||
|
Other
|
Non-
|
|||||||||||||||||||||||||||
|
Common
|
Capital
|
Retained
|
Treasury
|
Comprehensive
|
Controlling
|
|||||||||||||||||||||||
| (In thousands, except per share data) | Stock | Surplus | Earnings | Stock | Income (Loss) | Interest | Total | |||||||||||||||||||||
|
Balance, December 31, 2006
|
$ | 352,330 | $ | 427,421 | $ | 683,176 | $ | (20,613 | ) | $ | (200 | ) | $ | 4,422 | $ | 1,446,536 | ||||||||||||
|
Net income
|
206,660 | 599 | 207,259 | |||||||||||||||||||||||||
|
Change in unrealized gain (loss) on available for sale
securities, net of tax
|
19,363 | 19,363 | ||||||||||||||||||||||||||
|
Change related to pension plan, net of tax
|
6,944 | 6,944 | ||||||||||||||||||||||||||
|
Total comprehensive income
|
233,566 | |||||||||||||||||||||||||||
|
Distributions to non-controlling interest
|
(2,551 | ) | (2,551 | ) | ||||||||||||||||||||||||
|
Purchase of treasury stock
|
(128,578 | ) | (128,578 | ) | ||||||||||||||||||||||||
|
Cash dividends paid ($.864 per share)
|
(68,915 | ) | (68,915 | ) | ||||||||||||||||||||||||
|
Net tax benefit related to equity compensation plans
|
2,283 | 2,283 | ||||||||||||||||||||||||||
|
Stock-based compensation
|
6,263 | 6,263 | ||||||||||||||||||||||||||
|
Issuance under stock purchase and equity compensation plans, net
|
144 | (12,339 | ) | 25,856 | 13,661 | |||||||||||||||||||||||
|
Common stock issued in South Tulsa Financial Corp. acquisition
|
(303 | ) | 27,917 | 27,614 | ||||||||||||||||||||||||
|
5% stock dividend, net
|
7,220 | 51,895 | (152,225 | ) | 92,941 | (169 | ) | |||||||||||||||||||||
|
Adoption of guidance on recognition of income tax positions
|
446 | 446 | ||||||||||||||||||||||||||
|
Balance, December 31, 2007
|
359,694 | 475,220 | 669,142 | (2,477 | ) | 26,107 | 2,470 | 1,530,156 | ||||||||||||||||||||
|
Net income
|
188,655 | 733 | 189,388 | |||||||||||||||||||||||||
|
Change in unrealized gain (loss) on available for sale
securities, net of tax
|
(66,445 | ) | (66,445 | ) | ||||||||||||||||||||||||
|
Change related to pension plan, net of tax
|
(16,391 | ) | (16,391 | ) | ||||||||||||||||||||||||
|
Total comprehensive income
|
106,552 | |||||||||||||||||||||||||||
|
Distributions to non-controlling interest
|
(368 | ) | (368 | ) | ||||||||||||||||||||||||
|
Purchase of treasury stock
|
(9,490 | ) | (9,490 | ) | ||||||||||||||||||||||||
|
Cash dividends paid ($.907 per share)
|
(72,055 | ) | (72,055 | ) | ||||||||||||||||||||||||
|
Net tax benefit related to equity compensation plans
|
1,928 | 1,928 | ||||||||||||||||||||||||||
|
Stock-based compensation
|
6,389 | 6,389 | ||||||||||||||||||||||||||
|
Issuance under stock purchase and equity compensation plans, net
|
1,778 | 2,994 | 11,206 | 15,978 | ||||||||||||||||||||||||
|
5% stock dividend, net
|
18,033 | 134,927 | (153,118 | ) | (158 | ) | ||||||||||||||||||||||
|
Adoption of fair value guidance allowing use of transaction
price at initial measurement
|
903 | 903 | ||||||||||||||||||||||||||
|
Adoption of guidance requiring recognition of liabilities for
benefits payable under split-dollar life insurance arrangements
|
(716 | ) | (716 | ) | ||||||||||||||||||||||||
|
Change in pension benefit obligation resulting from change in
measurement date
|
348 | 348 | ||||||||||||||||||||||||||
|
Balance, December 31, 2008
|
379,505 | 621,458 | 633,159 | (761 | ) | (56,729 | ) | 2,835 | 1,579,467 | |||||||||||||||||||
|
Net income
|
169,075 | (700 | ) | 168,375 | ||||||||||||||||||||||||
|
Change in unrealized gain (loss) related to available for sale
securities for which a portion of an
other-than-temporary
impairment has been recorded in earnings, net of tax
|
7,596 | 7,596 | ||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on all other available for sale
securities, net of tax
|
93,075 | 93,075 | ||||||||||||||||||||||||||
|
Change related to pension plan, net of tax
|
2,465 | 2,465 | ||||||||||||||||||||||||||
|
Total comprehensive income
|
271,511 | |||||||||||||||||||||||||||
|
Distributions to non-controlling interest
|
(458 | ) | (458 | ) | ||||||||||||||||||||||||
|
Purchase of treasury stock
|
(528 | ) | (528 | ) | ||||||||||||||||||||||||
|
Cash dividends paid ($.914 per share)
|
(74,720 | ) | (74,720 | ) | ||||||||||||||||||||||||
|
Net tax benefit related to equity compensation plans
|
557 | 557 | ||||||||||||||||||||||||||
|
Stock-based compensation
|
6,642 | 6,642 | ||||||||||||||||||||||||||
|
Issuance under stock purchase and equity compensation plans, net
|
1,910 | 3,127 | 451 | 5,488 | ||||||||||||||||||||||||
|
Issuance of stock under open market sale program
|
14,474 | 83,679 | 98,153 | |||||||||||||||||||||||||
|
5% stock dividend, net
|
19,748 | 139,027 | (158,982 | ) | (207 | ) | ||||||||||||||||||||||
|
Balance, December 31, 2009
|
$ | 415,637 | $ | 854,490 | $ | 568,532 | $ | (838 | ) | $ | 46,407 | $ | 1,677 | $ | 1,885,905 | |||||||||||||
See accompanying notes to
consolidated financial statements.
68
Table of Contents
Commerce
Bancshares, Inc. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Summary of Significant Accounting Policies |
Nature of
Operations
Commerce Bancshares, Inc. (the Company) conducts its principal
activities through its banking and
non-banking
subsidiaries from approximately 370 locations throughout
Missouri, Illinois, Kansas, Oklahoma and Colorado. Principal
activities include retail and commercial banking, investment
management, securities brokerage, mortgage banking, credit
related insurance, and private equity investment activities.
Basis of
Presentation
The Company follows accounting principles generally accepted in
the United States of America (GAAP) and reporting practices
applicable to the banking industry. The preparation of financial
statements under GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and notes. These estimates are based on information
available to management at the time the estimates are made.
While the consolidated financial statements reflect
management’s best estimates and judgment, actual results
could differ from those estimates. The consolidated financial
statements include the accounts of the Company and its
majority-owned subsidiaries (after elimination of all material
intercompany balances and transactions). Certain amounts for
prior years have been reclassified to conform to the current
year presentation. Such reclassifications had no effect on net
income or total assets. The Company evaluated subsequent events
for recognition or disclosure through February 26, 2010,
the date on which the financial statements were issued.
Cash and
Cash Equivalents
In the accompanying consolidated statements of cash flows, cash
and cash equivalents include “Cash and due from
banks”, “Federal funds sold and securities purchased
under agreements to resell”, and “Interest earning
deposits with banks” as segregated in the accompanying
consolidated balance sheets.
Loans and
Related Earnings
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at
their outstanding principal balances, net of undisbursed loan
proceeds, the allowance for loan losses, and any deferred fees
and costs on originated loans. Origination fee income received
on loans and amounts representing the estimated direct costs of
origination are deferred and amortized to interest income over
the life of the loan using the interest method. Prepayment
premium or yield maintenance agreements are generally required
on all term commercial loans with fixed rate intervals of three
years or more.
Interest on loans is accrued based upon the principal amount
outstanding. Interest income is recognized primarily on the
level yield method. Loan and commitment fees on commercial and
consumer loans, net of costs, are deferred and recognized in
income over the term of the loan or commitment as an adjustment
of yield. Annual fees charged on credit card loans are
capitalized to principal and amortized over 12 months to
loan fees and sales in the accompanying consolidated income
statements. Other credit card fees, such as cash advance fees
and late payment fees, are recognized in income as an adjustment
of yield when charged to the cardholder’s account.
Loans are evaluated regularly by management for impairment.
Loans are considered impaired when it becomes probable that the
Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Once a loan has
been identified as impaired, impairment is measured based on the
present value of the expected future cash flows at the
loan’s initial effective interest rate or the fair value of
the collateral for collateral-dependent loans. Included in
impaired loans are all non-accrual business, lease,
construction, business real estate, and personal real estate
loans. These types of loans are placed on
non-accrual
status when the collection of interest or principal is
90 days or more past due, unless the loan
69
Table of Contents
is adequately secured and in the process of collection. They are
also generally placed on non-accrual status if their terms have
been modified in a troubled debt restructuring. When a loan is
placed on non-accrual status, any interest previously accrued
but not collected is reversed against current income. Loans may
be returned to accrual status when all the principal and
interest amounts contractually due are brought current and
future payments are reasonably assured. Interest payments
received on non-accrual loans are generally applied to principal
unless the remaining principal balance has been determined to be
fully collectible.
Consumer, home equity and credit card loans are excluded from
the definition of an impaired loan, unless they have been
subject to a troubled debt restructuring. 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 are charged off against the
allowance for loan losses when the receivable is more than
180 days past due. The interest and fee income previously
capitalized but not collected on credit card charge-offs is
reversed against interest income.
A loan which has undergone a troubled debt restructuring is
considered to be impaired. A loan is accounted for as a troubled
debt restructuring if the Company, for economic or legal reasons
related to the borrowers’ financial difficulties, grants a
concession to the borrower that it would not otherwise consider.
A troubled debt restructuring typically involves a modification
of terms such as a reduction of the stated interest rate or face
amount of the loan, a reduction of accrued interest, or an
extension of the maturity date(s) at a stated interest rate
lower than the current market rate for a new loan with similar
risk. The Company measures the impairment loss of a troubled
debt restructuring based on the difference between the original
loan’s carrying amount and the present value of expected
future cash flows discounted at the original, contractual rate
of the loan.
Loans
Held for Sale
Loans held for sale include student loans and fixed rate
residential mortgage loans. These loans are typically classified
as held for sale upon origination based upon management’s
intent to sell all the production of these loans. They are
carried at the lower of aggregate cost or fair value. Fair value
is determined based on prevailing market prices for loans with
similar characteristics, sale contract prices, or, for those
portfolios for which management has concerns about contractual
performance, discounted cash flows analyses. Declines in fair
value below cost (and subsequent recoveries) are recognized in
loan fees and sales. Deferred fees and costs related to these
loans are not amortized but are recognized as part of the cost
basis of the loan at the time it is sold. Gains or losses on
sales are recognized upon delivery and included in loan fees and
sales.
Allowance/Provision
for Loan Losses
The allowance for loan losses is maintained at a level believed
to be appropriate by management to provide for probable loan
losses inherent in the portfolio as of the balance sheet date,
including known or anticipated problem loans as well as for
loans which are not currently known to require specific
allowances. Management’s judgment as to the amount of the
allowance is a result of the review of larger individual loans,
collateral values, the overall risk characteristics of the
portfolio, changes in the character or size of the portfolio,
the level of impaired and non-performing assets, historical
charge-off amounts, geographic location, prevailing economic
conditions and other relevant factors (including individual
valuations on impaired loans in accordance with the provisions
of Accounting Standards Codification (ASC)
310-10-35.)
Personal loans (consumer, home equity and credit card loans) are
segregated by loan type and by
sub-type,
and are evaluated on a group basis. Loans are charged off to the
extent they are deemed to be uncollectible, reducing the
allowance. Recoveries of loans previously charged off are added
to the allowance. The amount of the allowance for loan losses is
highly dependent on management’s estimates of variables
affecting valuation, appraisals of collateral, evaluations of
performance and status, and the amount and timing of future cash
flows expected to be received on impaired loans. Such estimates,
appraisals, evaluations, and cash flows may be subject to
frequent adjustments due to changing economic prospects of
borrowers or properties. These estimates are reviewed
periodically and adjustments, if necessary, are recorded in the
provision for loan losses in the periods in which they become
known. In addition, the Company’s estimate of the allowance
is subject to review by regulatory agencies that could require
adjustments to the allowance.
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Operating,
Direct Financing and Sales Type Leases
The net investment in direct financing and sales type leases is
included in loans on the Company’s consolidated balance
sheets, and consists of the present values of the sum of the
future minimum lease payments and estimated residual value of
the leased asset. Revenue consists of interest earned on the net
investment, and is recognized over the lease term as a constant
percentage return thereon. The net investment in operating
leases is included in other assets on the Company’s
consolidated balance sheets. It is carried at cost, less the
amount depreciated to date. Depreciation is recognized, on the
straight-line basis, over the lease term to the estimated
residual value. Operating lease revenue consists of the
contractual lease payments and is recognized over the lease term
in other non-interest income. Estimated residual values are
established at lease inception utilizing contract terms, past
customer experience, and general market data and are reviewed,
and adjusted if necessary, on an annual basis.
Investments
in Debt and Equity Securities
The Company has classified the majority of its investment
portfolio as available for sale. From time to time, the Company
sells securities and utilizes the proceeds to reduce borrowings,
fund loan growth, or modify its interest rate profile.
Securities classified as available for sale are carried at fair
value. Changes in fair value, excluding certain losses
associated with
other-than-temporary
impairment (OTTI), are reported in other comprehensive income
(loss), a component of stockholders’ equity. Securities are
periodically evaluated for OTTI in accordance with guidance
provided in ASC
320-10-35.
For securities with OTTI, the entire loss in fair value is
required to be recognized in current earnings if the Company
intends to sell the securities or believes it likely that it
will be required to sell the security before the anticipated
recovery. If neither condition is met, but the Company does not
expect to recover the amortized cost basis, the Company
determines whether a credit loss has occurred, which is then
recognized in current earnings. The
noncredit-related
portion of the overall loss is reported in other comprehensive
income (loss). Mortgage and
asset-backed
securities whose credit ratings are below AA at their purchase
date are evaluated for OTTI under ASC
325-40-35,
which requires evaluations for OTTI at purchase date and in
subsequent periods. Gains and losses realized upon sales of
securities are calculated using the specific identification
method and are included in Investment securities gains (losses),
net in the consolidated statements of income. Premiums and
discounts are amortized to interest income over the estimated
lives of the securities. Prepayment experience is continually
evaluated and a determination made regarding the appropriate
estimate of the future rate of prepayment. When a change in a
bond’s estimated remaining life is necessary, a
corresponding adjustment is made in the related amortization of
premium or discount accretion.
Non-marketable securities include certain private equity
investments, consisting of both debt and equity instruments.
These securities are carried at fair value in accordance with
ASC
946-10-15,
with changes in fair value reported in current earnings. In the
absence of readily ascertainable market values, fair value is
estimated using internally developed models. Changes in fair
value and gains and losses from sales are included in Investment
securities gains (losses), net. Other non-marketable securities
acquired for debt and regulatory purposes are accounted for at
cost.
Trading account securities, which are bought and held
principally for the purpose of resale in the near term, are
carried at fair value. Gains and losses, both realized and
unrealized, are recorded in non-interest income.
Purchases and sales of securities are recognized on a trade date
basis. A receivable or payable is recognized for pending
transaction settlements.
Securities
Purchased under Agreements to Resell and Securities Sold under
Agreements to Repurchase
The Company may enter into short-term purchases of securities
under agreements to resell, which represent short-term secured
loans and are reflected as assets in the accompanying
consolidated balance sheets. The Company also sells securities
under agreements to repurchase, which are accounted for as
collateralized financing transactions and are reflected as
liabilities in the accompanying consolidated balance sheets.
Repurchase agreements are offered to cash management customers
as an automated,
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collateralized investment product. Repurchase agreements may
also be used by the Bank to obtain favorable borrowing rates on
its purchased funds, and at December 31, 2009, included
$500.0 million of structured agreements. Securities are
transferred by book entry into custody accounts at the Federal
Reserve Bank. Additional collateral may be required or returned,
when appropriate, to maintain full collateralization of the
transactions. As of December 31, 2009, the Company had
pledged $1.5 billion of available for sale securities as
collateral for repurchase agreements.
Land,
Buildings and Equipment
Land is stated at cost, and buildings and equipment are stated
at cost, including capitalized interest when appropriate, less
accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods. The Company generally
assigns depreciable lives of 30 years for buildings,
10 years for building improvements, and 3 to 8 years
for equipment. Leasehold improvements are amortized over the
shorter of their estimated useful lives or remaining lease
terms. Maintenance and repairs are charged to non-interest
expense as incurred.
Foreclosed
Assets
Foreclosed assets consist of property that has been repossessed.
Collateral obtained through foreclosure is comprised of
commercial and residential real estate and other non-real estate
property, including auto and recreational and marine vehicles.
The assets are initially recorded at the lower of the related
loan balance or fair value of the collateral less estimated
selling costs, with any valuation adjustments charged to the
allowance for loan losses. Fair values are estimated primarily
based on appraisals when available or quoted market prices of
liquid assets. After their initial recognition, foreclosed
assets are valued at the lower of the amount recorded at
acquisition date or the current fair value less estimated costs
to sell. Any resulting valuation adjustments, in addition to
gains and losses realized on sales and net operating expenses,
are recorded in other non-interest expense.
Intangible
Assets
Goodwill and intangible assets that have indefinite useful lives
are not amortized, but are tested annually for impairment.
Intangible assets that have finite useful lives, such as core
deposit intangibles and mortgage servicing rights, are amortized
over their estimated useful lives. Core deposit intangibles are
amortized over periods of 8 to 14 years, representing their
estimated lives, using accelerated methods. Mortgage servicing
rights are amortized in proportion to and over the period of
estimated net servicing income, considering appropriate
prepayment assumptions.
When facts and circumstances indicate potential impairment of
amortizable intangible assets, the Company evaluates the
recoverability of the asset carrying value, using estimates of
undiscounted future cash flows over the remaining asset life.
Any impairment loss is measured by the excess of carrying value
over fair value. Goodwill impairment tests are performed on an
annual basis or when events or circumstances dictate. In these
tests, the fair value of each reporting unit, or segment, is
compared to the carrying amount of that reporting unit in order
to determine if impairment is indicated. If so, the implied fair
value of the reporting unit’s goodwill is compared to its
carrying amount and the impairment loss is measured by the
excess of the carrying value over fair value. There has been no
impairment resulting from goodwill impairment tests. However,
adverse changes in the economic environment, operations of the
reporting unit, or other factors could result in a decline in
the implied fair value.
Income
Taxes
Amounts provided for income tax expense are based on income
reported for financial statement purposes and do not necessarily
represent amounts currently payable under tax laws. Deferred
income taxes are provided for temporary differences between the
financial reporting bases and income tax bases of the
Company’s assets and liabilities, net operating losses, and
tax credit carryforwards. Deferred tax assets and
72
Table of Contents
liabilities are measured using the enacted tax rates that are
expected to apply to taxable income when such assets and
liabilities are anticipated to be settled or realized. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized as tax expense or benefit in the period that
includes the enactment date of the change. In determining the
amount of deferred tax assets to recognize in the financial
statements, the Company evaluates the likelihood of realizing
such benefits in future periods. A valuation allowance is
established if it is more likely than not that all or some
portion of the deferred tax asset will not be realized. The
Company recognizes interest and penalties related to income
taxes within income tax expense in the consolidated statements
of income.
The Company and its eligible subsidiaries file a consolidated
federal income tax return. State and local income tax returns
are filed on a combined, consolidated or separate return basis
based upon each jurisdiction’s laws and regulations.
Derivatives
The Company is exposed to market risk, including changes in
interest rates and currency exchange rates. To manage the
volatility relating to these exposures, the Company’s risk
management policies permit its use of derivative products. The
Company manages potential credit exposure through established
credit approvals, risk control limits and other monitoring
procedures. The Company uses derivatives on a limited basis
mainly to stabilize interest rate margins and hedge against
interest rate movements. The Company more often manages normal
asset and liability positions by altering the products it offers
and by selling portions of specific loan or investment
portfolios as necessary.
Derivative accounting guidance requires that all derivative
financial instruments be recorded on the balance sheet at fair
value, with the adjustment to fair value recorded in current
earnings. Derivatives that are part of a qualifying hedging
relationship under ASC
815-20-25
can be designated, based on the exposure being hedged, as fair
value or cash flow hedges. Under the fair value hedging model,
gains or losses attributable to the change in fair value of the
derivative, as well as gains and losses attributable to the
change in fair value of the hedged item, are recognized in
current earnings. Under the cash flow hedging model, the
effective portion of the gain or loss related to the derivative
is recognized as a component of other comprehensive income. The
ineffective portion is recognized in current earnings.
The Company formally documents all hedging relationships between
hedging instruments and the hedged item, as well as its risk
management objective. At December 31, 2009, the Company had
three interest rate swaps designated as fair value hedges. The
Company performs quarterly assessments, using the regression
method, to determine whether the hedging relationship has been
highly effective in offsetting changes in fair values.
Derivative contracts are also offered to customers to assist in
hedging their risks of adverse changes in interest rates and
foreign exchange rates. The Company serves as an intermediary
between its customers and the markets. Each contract between the
Company and its customers is offset by a contract between the
Company and various counterparties. These contracts do not
qualify for hedge accounting. They are carried at fair value,
with changes in fair value recorded in other non-interest
income. Since each customer contract is paired with an
offsetting contract, the impact to net income is minimized.
The Company enters into interest rate lock commitments on
mortgage loans, which are commitments to originate loans whereby
the interest rate on the loan is determined prior to funding.
The Company also has corresponding forward sales contracts
related to these interest rate lock commitments. Both the
mortgage loan commitments and the related sales contracts are
accounted for as derivatives and carried at fair value, with
changes in fair value recorded in loan fees and sales. Fair
values are based upon quoted prices and, in 2007 and prior
years, fair value measurements exclude the value of loan
servicing rights or other ancillary values. In accordance with
new accounting guidance effective in 2008, the value of loan
servicing rights was incorporated into subsequent fair value
measurements for mortgage loan commitments.
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Pension
Plan
The Company’s pension plan is described in Note 10,
Employee Benefit Plans. In 2008, the Company changed the
measurement date of its plan assets and benefit obligations from
September 30 to December 31, as required by ASC
715-30-35-62.
The measurement of the projected benefit obligation and pension
expense involve actuarial valuation methods and the use of
various actuarial and economic assumptions. The Company monitors
the assumptions and updates them periodically. Due to the
long-term nature of the pension plan obligation, actual results
may differ significantly from estimations. Such differences are
adjusted over time as the assumptions are replaced by facts and
values are recalculated.
Stock-Based
Compensation
The Company’s stock-based employee compensation plan is
described in Note 11, Stock-Based Compensation and
Directors Stock Purchase Plan. In accordance with the
requirements of ASC
718-10-30-3
and
35-2,
the Company measures the cost of stock-based compensation based
on the grant-date fair value of the award, recognizing the cost
over the requisite service period. The fair value of an award is
estimated using the Black-Scholes option-pricing model. The
expense recognized is based on an estimation of the number of
awards for which the requisite service is expected to be
rendered, and is included in salaries and employee benefits in
the accompanying consolidated statements of income.
Treasury
Stock
Purchases of the Company’s common stock are recorded at
cost. Upon re-issuance for acquisitions, exercises of
stock-based awards or other corporate purposes, treasury stock
is reduced based upon the average cost basis of shares held.
Income
per Share
Basic income per share is computed using the weighted average
number of common shares outstanding during each year. Diluted
income per share includes the effect of all dilutive potential
common shares (primarily stock options and stock appreciation
rights) outstanding during each year. On January 1, 2009,
the Company adopted new guidance (ASC
260-10-45-61A)
requiring the application of the two-class method of computing
income per share. The two-class method is an earnings allocation
formula that determines income per share for common stock and
for participating securities, according to dividends declared
and participation rights in undistributed earnings. Under the
new guidance, the Company’s restricted share awards are
considered to be a class of participating security. All income
per share data has been restated to reflect the application of
the two-class method for common shareholders. The effects of the
revisions were not significant. In addition, all per share data
has been restated to reflect the 5% stock dividend distributed
in December 2009.
| 2. | Acquisitions and Dispositions |
In February 2009, the Company sold its branch in Lakin, Kansas.
In this transaction, the Company sold the bank facility and
certain deposits totaling approximately $4.7 million and
recorded a gain of $644 thousand.
During the second quarter of 2008, the Company sold its banking
branch 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,
and the Company recorded a gain of $6.9 million.
Information about the Company’s most recent acquisitions,
which occurred in 2007, is listed below. The Company acquired
all of the outstanding stock of the purchased institutions in
exchange for cash or stock. Results of operations are included
in the Company’s consolidated financial results beginning
on the acquisition date.
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|
Acquisition
|
Number of
|
Assets
|
Intangible Assets
|
|||||||||||||||||
| (Dollars in millions) | Date | Locations | Purchased | Recognized | Consideration | |||||||||||||||
|
Commerce Bank
Denver, Colorado |
7/1/07 | 1 | $ | 103.9 | $ | 20.0 | $ | 29.5 - cash | ||||||||||||
|
South Tulsa Financial Corporation Tulsa, Oklahoma
|
4/1/07 | 2 | $ | 127.3 | $ | 15.3 | $ | 27.6 - stock | ||||||||||||
| 3. | Loans and Allowance for Loan Losses |
Major classifications within the Company’s loan portfolio
at December 31, 2009 and 2008 are as follows:
| (In thousands) | 2009 | 2008 | ||||||
|
Business
|
$ | 2,877,936 | $ | 3,404,371 | ||||
|
Real estate – construction and land
|
665,110 | 837,369 | ||||||
|
Real estate – business
|
2,104,030 | 2,137,822 | ||||||
|
Real estate – personal
|
1,537,687 | 1,638,553 | ||||||
|
Consumer
|
1,333,763 | 1,615,455 | ||||||
|
Home equity
|
489,517 | 504,069 | ||||||
|
Student
|
331,698 | 358,049 | ||||||
|
Consumer credit card
|
799,503 | 779,709 | ||||||
|
Overdrafts
|
6,080 | 7,849 | ||||||
|
Total loans
|
$ | 10,145,324 | $ | 11,283,246 | ||||
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. The
reclassification increased construction real estate loans by
$158.3 million and personal real estate loans by
$142.1 million, while business real estate loans decreased
$214.1 million, business loans decreased $56.0 million
and consumer loans decreased $30.3 million.
Loans to directors and executive officers of the Parent and its
significant subsidiaries, and to their associates, are
summarized as follows:
| (In thousands) | ||||
|
Balance at January 1, 2009
|
$ | 109,803 | ||
|
Additions
|
35,652 | |||
|
Amounts collected
|
(68,179 | ) | ||
|
Amounts written off
|
— | |||
|
Balance at December 31, 2009
|
$ | 77,276 | ||
Management believes all loans to directors and executive
officers have been made in the ordinary course of business with
normal credit terms, including interest rate and collateral
considerations, and do not represent more than a normal risk of
collection. There were no outstanding loans at December 31,
2009 to principal holders of the Company’s common stock.
The Company’s lending activity is generally centered in
Missouri, Illinois, Kansas and other nearby states including
Iowa, Oklahoma, Colorado, Ohio, and others. The Company
maintains a diversified portfolio with limited industry
concentrations of credit risk. Loans and loan commitments are
extended under the Company’s normal credit standards,
controls, and monitoring features. Most loan commitments are
short and intermediate term in nature. Loan maturities, with the
exception of residential mortgages, generally do not exceed five
years. Collateral is commonly required and would include such
assets as marketable securities and cash equivalent assets,
accounts receivable and inventory, equipment, other forms of
personal property, and real estate. At December 31, 2009,
unfunded loan commitments totaled $7.0 billion (which
included $3.3 billion in unused approved lines of credit
related to credit card loan agreements) which could be drawn by
customers subject to certain review and terms of agreement. At
December 31, 2009, loans of
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$3.0 billion were pledged at the FHLB as collateral for
borrowings and letters of credit obtained to secure public
deposits. Additional loans of $1.5 billion were pledged at
the Federal Reserve Bank as collateral for discount window
borrowings and borrowings under the Term Auction Facility.
The Company has a net investment in direct financing and sales
type leases of $281.4 million and $308.2 million at
December 31, 2009 and 2008, respectively, which is included
in business loans on the Company’s consolidated balance
sheets. This investment includes deferred income of
$32.3 million and $37.5 million at December 31,
2009 and 2008, respectively. The net investment in operating
leases amounted to $7.2 million and $10.2 million at
December 31, 2009 and 2008, respectively, and is included
in other assets on the Company’s consolidated balance
sheets.
A summary of the allowance for loan losses is as follows:
| Years Ended December 31 | ||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Balance, January 1
|
$ | 172,619 | $ | 133,586 | $ | 131,730 | ||||||
|
Additions:
|
||||||||||||
|
Provision for loan losses
|
160,697 | 108,900 | 42,732 | |||||||||
|
Allowance of acquired banks
|
— | — | 1,857 | |||||||||
|
Total additions
|
160,697 | 108,900 | 44,589 | |||||||||
|
Deductions:
|
||||||||||||
|
Loan losses
|
154,410 | 85,093 | 58,868 | |||||||||
|
Less recoveries
|
15,574 | 15,226 | 16,135 | |||||||||
|
Net loan losses
|
138,836 | 69,867 | 42,733 | |||||||||
|
Balance, December 31
|
$ | 194,480 | $ | 172,619 | $ | 133,586 | ||||||
The Company had ceased recognition of interest income on loans
with a carrying value of $106.6 million and
$72.9 million at December 31, 2009 and 2008,
respectively. The interest income not recognized on these
non-accrual loans was $6.2 million, $2.7 million and
$2.3 million during 2009, 2008 and 2007, respectively.
Loans 90 days delinquent and still accruing interest
amounted to $42.6 million and $40.0 million at
December 31, 2009 and 2008, respectively.
The following table presents information on impaired loans at
December 31:
| (In thousands) | 2009 | 2008 | ||||||
|
Impaired loans for which a related allowance has been provided
|
$ | 62,554 | $ | 36,865 | ||||
|
Impaired loans for which no related allowance has been provided
|
60,109 | 46,946 | ||||||
|
Total impaired loans
|
$ | 122,663 | $ | 83,811 | ||||
|
Allowance related to impaired loans
|
$ | 8,134 | $ | 6,361 | ||||
At December 31, 2009, impaired loans were comprised mainly
of loans on non-accrual status, totaling $106.6 million, in
addition to certain loans whose terms have been modified in a
troubled debt restructuring. These consisted of renegotiated
credit card loans under various debt management and assistance
programs, and totaled $16.0 million at December 31,
2009.
Average impaired loans were $125.6 million during 2009,
$34.3 million during 2008 and $23.8 million during
2007. The interest income recorded on these loans during their
impairment period was not significant. Impaired loan balances
increased $38.9 million during 2009, with the largest
increases in non-accrual construction and land real estate
loans, business loans, and business real estate loans.
In addition to the portfolio of loans which are intended to be
held to maturity, the Company originates loans which it intends
to sell in secondary markets. Loans classified as held for sale
primarily consist of loans
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originated to students while attending colleges and
universities. The Company maintains contracts with the Federal
Department of Education and various student loan agencies to
sell student loans at various times while the student is
attending school or shortly after graduation. Also included as
held for sale are certain fixed rate residential mortgage loans
which are sold in the secondary market, generally within three
months of origination. The following table presents information
about loans held for sale, including an impairment valuation
allowance resulting from declines in fair value below cost,
which is further discussed in Note 16 on Fair Value
Measurements. Previously recognized impairment losses amounting
to $8.6 million were reversed during 2009, as various
impaired loans were sold, and increases in fair value were
recorded on other unsold loans due to improving investor
liquidity.
| (In thousands) | 2009 | 2008 | ||||||
|
Balance outstanding at end of year:
|
||||||||
|
Student loans, at cost
|
$ | 335,358 | $ | 367,954 | ||||
|
Residential mortgage loans, at cost
|
10,473 | 2,742 | ||||||
|
Valuation allowance on student loans
|
(828 | ) | (9,398 | ) | ||||
|
Total loans held for sale, at lower of cost or fair value
|
$ | 345,003 | $ | 361,298 | ||||
|
Net gains on sales:
|
||||||||
|
Student loans
|
$ | 9,738 | $ | 2,139 | ||||
|
Residential mortgage loans
|
2,463 | 1,029 | ||||||
|
Total gains on sales of loans held for sale, net
|
$ | 12,201 | $ | 3,168 | ||||
| 4. | Investment Securities |
Investment securities, at fair value, consisted of the following
at December 31, 2009 and 2008.
| (In thousands) | 2009 | 2008 | ||||||||||
|
Available for sale:
|
||||||||||||
|
U.S. government and federal agency obligations
|
$ | 447,038 | $ | 11,594 | ||||||||
|
Government-sponsored enterprise obligations
|
165,814 | 141,957 | ||||||||||
|
State and municipal obligations
|
939,338 | 719,752 | ||||||||||
|
Agency mortgage-backed securities
|
2,262,003 | 1,711,404 | ||||||||||
|
Non-agency mortgage-backed securities
|
609,016 | 620,479 | ||||||||||
|
Other asset-backed securities
|
1,701,569 | 253,756 | ||||||||||
|
Other debt securities
|
176,331 | 121,861 | ||||||||||
|
Equity securities
|
39,866 | 49,950 | ||||||||||
|
Total available for sale
|
6,340,975 | 3,630,753 | ||||||||||
|
Trading
|
10,335 | 9,463 | ||||||||||
|
Non-marketable
|
122,078 | 139,900 | ||||||||||
|
Total investment securities
|
$ | 6,473,388 | $ | 3,780,116 | ||||||||
Most of the Company’s investment securities are classified
as available for sale, and this portfolio is discussed in more
detail below. Securities which are classified as non-marketable
include Federal Home Loan Bank (FHLB) stock and Federal Reserve
Bank (FRB) stock held for debt and regulatory purposes, which
totaled $72.6 million and $84.4 million at
December 31, 2009 and December 31, 2008, respectively.
Investment in FRB stock is based on the capital structure of the
investing bank, and investment in FHLB stock is mainly tied to
the level of borrowings from the FHLB. These holdings are
carried at cost. Non-marketable securities also include private
equity investments, which amounted to $49.5 million and
$55.4 million at December 31, 2009 and
December 31, 2008, respectively. In the absence of readily
ascertainable market values, these securities are carried at
estimated fair value.
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Table of Contents
A summary of the available for sale investment securities by
maturity groupings as of December 31, 2009 is shown below.
The weighted average yield for each range of maturities was
calculated using the yield on each security within that range
weighted by the amortized cost of each security at
December 31, 2009. Yields on tax exempt securities have not
been adjusted for tax exempt status. The investment portfolio
includes agency mortgage-backed securities, which are guaranteed
by government-sponsored agencies such as FHLMC, FNMA and GNMA,
and non-agency mortgage-backed securities which have no
guarantee, but are collateralized by residential mortgages. Also
included are certain other asset-backed securities, primarily
collateralized by credit cards, automobiles and commercial
loans. These securities differ from traditional debt securities
primarily in that they have uncertain maturity dates and are
priced based on estimated prepayment rates on the underlying
collateral. The Company does not have exposure to subprime
originated mortgage-backed or collateralized debt obligation
instruments.
|
Weighted
|
||||||||||||
|
Amortized
|
Average
|
|||||||||||
| (Dollars in thousands) | Cost | Fair Value | Yield | |||||||||
|
U.S. government and federal agency obligations:
|
||||||||||||
|
Within 1 year
|
$ | 2,957 | $ | 2,966 | .89 | % | ||||||
|
After 1 but within 5 years
|
176,821 | 177,253 | .15 | |||||||||
|
After 5 but within 10 years
|
256,829 | 266,819 | 1.70 | |||||||||
|
Total U.S. government and federal agency obligations
|
436,607 | 447,038 | 1.07 | |||||||||
|
Government-sponsored enterprise obligations:
|
||||||||||||
|
Within 1 year
|
21,866 | 22,263 | 3.50 | |||||||||
|
After 1 but within 5 years
|
140,325 | 143,551 | 2.49 | |||||||||
|
Total government-sponsored enterprise obligations
|
162,191 | 165,814 | 2.62 | |||||||||
|
State and municipal obligations:
|
||||||||||||
|
Within 1 year
|
115,275 | 116,865 | 3.61 | |||||||||
|
After 1 but within 5 years
|
397,748 | 411,609 | 3.38 | |||||||||
|
After 5 but within 10 years
|
136,815 | 139,797 | 3.46 | |||||||||
|
After 10 years
|
267,429 | 271,067 | 2.74 | |||||||||
|
Total state and municipal obligations
|
917,267 | 939,338 | 3.23 | |||||||||
|
Mortgage and asset-backed securities:
|
||||||||||||
|
Agency mortgage-backed securities
|
2,205,177 | 2,262,003 | 4.17 | |||||||||
|
Non-agency mortgage-backed securities
|
654,711 | 609,016 | 6.21 | |||||||||
|
Other asset-backed securities
|
1,685,691 | 1,701,569 | 2.51 | |||||||||
|
Total mortgage and asset-backed securities
|
4,545,579 | 4,572,588 | 3.84 | |||||||||
|
Other debt securities:
|
||||||||||||
|
After 1 but within 5 years
|
164,402 | 176,331 | ||||||||||
|
Total other debt securities
|
164,402 | 176,331 | ||||||||||
|
Equity securities
|
11,285 | 39,866 | ||||||||||
|
Total available for sale investment securities
|
$ | 6,237,331 | $ | 6,340,975 | ||||||||
Included in U.S. government securities are
$435.0 million, at fair value, of U.S. Treasury
inflation-protected securities (TIPS), which were purchased
during the second half of 2009. Interest paid on these
securities increases with inflation and decreases with
deflation, as measured by the Consumer Price Index. At maturity,
the principal paid is the greater of an inflation-adjusted
principal or the original principal. Included in state and
municipal obligations are $167.8 million, at fair value, of
auction rate securities (ARS),
78
Table of Contents
which were purchased from bank customers in the third quarter of
2008. These bonds are historically traded in a competitive
bidding process at weekly/monthly auctions. These auctions have
not functioned since early 2008, and this market has not
recovered. Interest is currently being paid at the maximum
failed auction rates. Equity securities are primarily comprised
of investments in common stock held by the Parent.
For securities classified as available for sale, the following
table shows the unrealized gains and losses (pre-tax) in
accumulated other comprehensive income, by security type.
Included in gross unrealized losses at December 31, 2009
are
other-than-temporary
impairment (OTTI) losses of $30.3 million relating to
certain non-agency mortgage-backed securities, which represent
the noncredit-related portion of the overall impairment amount.
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
||||||||||||||
| (In thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 436,607 | $ | 10,764 | $ | (333 | ) | $ | 447,038 | |||||||
|
Government-sponsored enterprise obligations
|
162,191 | 3,743 | (120 | ) | 165,814 | |||||||||||
|
State and municipal obligations
|
917,267 | 25,099 | (3,028 | ) | 939,338 | |||||||||||
|
Mortgage and asset-backed securities:
|
||||||||||||||||
|
Agency mortgage-backed securities
|
2,205,177 | 58,740 | (1,914 | ) | 2,262,003 | |||||||||||
|
Non-agency mortgage-backed securities
|
654,711 | 4,505 | (50,200 | ) | 609,016 | |||||||||||
|
Other asset-backed securities
|
1,685,691 | 17,143 | (1,265 | ) | 1,701,569 | |||||||||||
|
Total mortgage and asset-backed securities
|
4,545,579 | 80,388 | (53,379 | ) | 4,572,588 | |||||||||||
|
Other debt securities
|
164,402 | 11,929 | — | 176,331 | ||||||||||||
|
Equity securities
|
11,285 | 28,581 | — | 39,866 | ||||||||||||
|
Total
|
$ | 6,237,331 | $ | 160,504 | $ | (56,860 | ) | $ | 6,340,975 | |||||||
|
December 31, 2008
|
||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 10,478 | $ | 1,116 | $ | — | $ | 11,594 | ||||||||
|
Government-sponsored enterprise obligations
|
135,825 | 6,132 | — | 141,957 | ||||||||||||
|
State and municipal obligations
|
715,421 | 10,794 | (6,463 | ) | 719,752 | |||||||||||
|
Mortgage and asset-backed securities:
|
||||||||||||||||
|
Agency mortgage-backed securities
|
1,685,821 | 26,609 | (1,026 | ) | 1,711,404 | |||||||||||
|
Non-agency mortgage-backed securities
|
742,090 | 816 | (122,427 | ) | 620,479 | |||||||||||
|
Other asset-backed securities
|
275,641 | 113 | (21,998 | ) | 253,756 | |||||||||||
|
Total mortgage and asset-backed securities
|
2,703,552 | 27,538 | (145,451 | ) | 2,585,639 | |||||||||||
|
Other debt securities
|
116,527 | 5,404 | (70 | ) | 121,861 | |||||||||||
|
Equity securities
|
7,680 | 42,270 | — | 49,950 | ||||||||||||
|
Total
|
$ | 3,689,483 | $ | 93,254 | $ | (151,984 | ) | $ | 3,630,753 | |||||||
79
Table of Contents
The Company’s impairment policy requires a review of all
securities for which fair value is less than amortized cost.
Special emphasis and analysis is placed on securities whose
credit rating has fallen below
A3/A-,
whose
fair values have fallen more than 20% below purchase price for
an extended period of time, or have been identified based on
management’s judgment. These securities are placed on a
watch list, and for all such securities, detailed cash flow
models are prepared which use inputs specific to each security.
Inputs to these models include factors such as cash flow
received, contractual payments required, and various other
information related to the underlying collateral (including
current delinquencies), collateral loss severity rates
(including loan to values), expected delinquency rates, credit
support from other tranches, and prepayment speeds. Stress tests
are performed at varying levels of delinquency rates, prepayment
speeds and loss severities in order to gauge probable ranges of
credit loss. At December 31, 2009, the fair value of
securities on this watch list was $298.8 million.
Prior to March 2009, the Company had not incurred OTTI on any of
its debt securities. However, as of December 31, 2009, the
Company had recorded OTTI on twelve non-agency mortgage-backed
securities, having an aggregate par value of
$171.6 million. The credit portion of the impairment
totaled $2.5 million and was recorded in current earnings.
The noncredit-related portion of the impairment totaled
$30.3 million on a pre-tax basis, and has been recognized
in other comprehensive income. The Company does not intend to
sell these securities and believes it is not more likely than
not that it will be required to sell the securities before the
recovery of their amortized cost.
The credit portion of the loss on these securities was based on
the cash flows projected to be received over the estimated life
of the securities, discounted to present value, and compared to
the current amortized cost bases of the securities. Significant
inputs to the cash flow models used to calculate the credit
losses on these securities included the following:
| Significant Inputs | Range | |||
|
Prepayment CPR
|
6% - 25% | |||
|
Projected cumulative default
|
7% - 39% | |||
|
Credit support
|
3% - 14% | |||
|
Loss severity
|
32% - 57% | |||
The following table shows changes in the credit losses recorded
in current earnings, for which a portion of an OTTI was
recognized in other comprehensive income.
| (In thousands) | 2009 | |||
|
Balance, January 1
|
$ | — | ||
|
Credit losses on debt securities for which impairment was not
previously recognized
|
3,619 | |||
|
Credit losses reversed on securities sold
|
(1,146 | ) | ||
|
Balance, December 31
|
$ | 2,473 | ||
80
Table of Contents
Securities with unrealized losses recorded in accumulated other
comprehensive income are shown in the table below, along with
the length of the impairment period. The table includes
securities for which a portion of an OTTI has been recognized in
other comprehensive income.
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
| (In thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
|
At December 31, 2009
|
||||||||||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 168,172 | $ | 333 | $ | — | $ | — | $ | 168,172 | $ | 333 | ||||||||||||
|
Government-sponsored enterprise obligations
|
24,842 | 120 | — | — | 24,842 | 120 | ||||||||||||||||||
|
State and municipal obligations
|
16,471 | 121 | 104,215 | 2,907 | 120,686 | 3,028 | ||||||||||||||||||
|
Mortgage and asset-backed securities:
|
||||||||||||||||||||||||
|
Agency mortgage-backed securities
|
214,571 | 1,911 | 150 | 3 | 214,721 | 1,914 | ||||||||||||||||||
|
Non-agency mortgage-backed securities
|
209,961 | 18,512 | 215,158 | 31,688 | 425,119 | 50,200 | ||||||||||||||||||
|
Other asset-backed securities
|
290,183 | 218 | 34,456 | 1,047 | 324,639 | 1,265 | ||||||||||||||||||
|
Total mortgage and asset-backed securities
|
714,715 | 20,641 | 249,764 | 32,738 | 964,479 | 53,379 | ||||||||||||||||||
|
Total temporarily impaired securities
|
$ | 924,200 | $ | 21,215 | $ | 353,979 | $ | 35,645 | $ | 1,278,179 | $ | 56,860 | ||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
| (In thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
|
At December 31, 2008
|
||||||||||||||||||||||||
|
State and municipal obligations
|
$ | 175,770 | $ | 6,457 | $ | 369 | $ | 6 | $ | 176,139 | $ | 6,463 | ||||||||||||
|
Mortgage and asset-backed securities:
|
||||||||||||||||||||||||
|
Agency mortgage-backed securities
|
183,577 | 1,003 | 4,664 | 23 | 188,241 | 1,026 | ||||||||||||||||||
|
Non-agency mortgage-backed securities
|
412,002 | 95,153 | 176,013 | 27,274 | 588,015 | 122,427 | ||||||||||||||||||
|
Other asset-backed securities
|
216,187 | 16,696 | 22,514 | 5,302 | 238,701 | 21,998 | ||||||||||||||||||
|
Total mortgage and asset-backed securities
|
811,766 | 112,852 | 203,191 | 32,599 | 1,014,957 | 145,451 | ||||||||||||||||||
|
Other debt securities
|
2,691 | 70 | — | — | 2,691 | 70 | ||||||||||||||||||
|
Total temporarily impaired securities
|
$ | 990,227 | $ | 119,379 | $ | 203,560 | $ | 32,605 | $ | 1,193,787 | $ | 151,984 | ||||||||||||
Out of the total available for sale portfolio, consisting of
approximately 1,200 individual securities at December 31,
2009, 146 securities were temporarily impaired, of which 46
securities, or 4% of the portfolio value, have been in a loss
position for 12 months or longer.
The unrealized losses on the Company’s investments, as
shown in the preceding tables, are largely contained in the
portfolio of non-agency mortgage-backed securities. These
securities are not guaranteed by an outside agency and are
dependent on payments received from the underlying mortgage
collateral. While virtually all of these securities, at purchase
date, were comprised of senior tranches and were highly rated by
various rating agencies, the adverse housing market, liquidity
pressures and overall economic climate has resulted in low fair
values for these securities. Also, as mentioned above, the
Company maintains a watch list comprised mainly of these
securities, and has recorded OTTI losses on certain securities.
The Company continues to closely monitor the performance of
these securities. Additional OTTI losses may arise in future
periods, due to further deterioration in expected cash flows,
loss severities and delinquency levels of the securities’
underlying collateral, which would negatively affect the
Company’s financial results.
The Company does not intend to sell these investments and it is
not more likely than not that the Company will be required to
sell the investments before recovery of their amortized cost
bases, which may be maturity.
81
Table of Contents
The following table presents proceeds from sales of securities
and the components of investment securities gains and losses
which have been recognized in earnings.
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Proceeds from sales of available for sale securities
|
$ | 202,544 | $ | 109,543 | $ | 235,294 | ||||||
|
Proceeds from sales/redemption of non-marketable securities
|
5,308 | 22,300 | 4,247 | |||||||||
|
Total proceeds
|
$ | 207,852 | $ | 131,843 | $ | 239,541 | ||||||
|
Available for sale:
|
||||||||||||
|
Gains realized on sales
|
$ | 10,311 | $ | 9,946 | $ | 5,043 | ||||||
|
Losses realized on sales
|
(9,989 | ) | (4,743 | ) | (2,116 | ) | ||||||
|
Other-than-temporary
impairment recognized on debt securities
|
(2,473 | ) | — | — | ||||||||
|
Non-marketable:
|
||||||||||||
|
Gains realized on sales/redemption
|
1,087 | 22,300 | 51 | |||||||||
|
Losses realized on sales
|
(170 | ) | — | (19 | ) | |||||||
|
Fair value adjustments, net
|
(5,961 | ) | 2,791 | 5,275 | ||||||||
|
Investment securities gains (losses), net
|
$ | (7,195 | ) | $ | 30,294 | $ | 8,234 | |||||
Investment securities with a fair value of $4.1 billion and
$2.6 billion were pledged at December 31, 2009 and
2008, respectively, to secure public deposits, securities sold
under repurchase agreements, trust funds, and borrowings at the
Federal Reserve Bank. Securities pledged under agreements
pursuant to which the collateral may be sold or re-pledged by
the secured parties approximated $537.1 million, while the
remaining securities were pledged under agreements pursuant to
which the secured parties may not sell or re-pledge the
collateral. Except for obligations of various
government-sponsored enterprises such as FNMA, FHLB and FHLMC,
no investment in a single issuer exceeds 10% of
stockholders’ equity.
| 5. | Land, Buildings and Equipment |
Land, buildings and equipment consist of the following at
December 31, 2009 and 2008:
| (In thousands) | 2009 | 2008 | ||||||
|
Land
|
$ | 107,002 | $ | 100,879 | ||||
|
Buildings and improvements
|
504,916 | 493,042 | ||||||
|
Equipment
|
225,621 | 224,869 | ||||||
|
Total
|
837,539 | 818,790 | ||||||
|
Less accumulated depreciation and amortization
|
434,906 | 407,622 | ||||||
|
Net land, buildings and equipment
|
$ | 402,633 | $ | 411,168 | ||||
Depreciation expense of $37.0 million, $35.3 million
and $35.7 million for 2009, 2008 and 2007, respectively,
was included in occupancy expense and equipment expense in the
consolidated income statements. Repairs and maintenance expense
of $18.6 million, $20.1 million and $18.5 million
for 2009, 2008 and 2007, respectively, was included in occupancy
expense and equipment expense. No interest expense was
capitalized on construction projects in 2009, 2008 or 2007.
82
Table of Contents
| 6. | Goodwill and Other Intangible Assets |
Goodwill and other intangible assets are summarized in the
following table.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Valuation
|
Net
|
Carrying
|
Accumulated
|
Valuation
|
Net
|
|||||||||||||||||||||||||
| (In thousands) | Amount | Amortization | Allowance | Amount | Amount | Amortization | Allowance | Amount | ||||||||||||||||||||||||
|
Amortizable intangible assets:
|
||||||||||||||||||||||||||||||||
|
Core deposit premium
|
$ | 25,720 | $ | (12,966 | ) | $ | — | $ | 12,754 | $ | 25,720 | $ | (9,324 | ) | $ | — | $ | 16,396 | ||||||||||||||
|
Mortgage servicing rights
|
2,898 | (1,206 | ) | (113 | ) | 1,579 | 1,816 | (871 | ) | (150 | ) | 795 | ||||||||||||||||||||
|
Total amortizable intangible assets
|
28,618 | (14,172 | ) | (113 | ) | 14,333 | 27,536 | (10,195 | ) | (150 | ) | 17,191 | ||||||||||||||||||||
|
Goodwill
|
125,585 | — | — | 125,585 | 125,585 | — | — | 125,585 | ||||||||||||||||||||||||
|
Total intangible assets
|
$ | 154,203 | $ | (14,172 | ) | $ | (113 | ) | $ | 139,918 | $ | 153,121 | $ | (10,195 | ) | $ | (150 | ) | $ | 142,776 | ||||||||||||
As a result of ongoing assessments, no impairment of goodwill
was recorded in 2009, 2008 or 2007. Further, the regular annual
review on January 1, 2010 revealed no impairment as of that
date. Changes in the carrying amount of goodwill by operating
segment for the years ended December 31, 2008 and 2009 are
shown in the following table.
|
Consumer
|
Commercial
|
Wealth
|
Total
|
|||||||||||||
| (In thousands) | Segment | Segment | Segment | Goodwill | ||||||||||||
|
Balance at December 31, 2007
|
$ | 67,653 | $ | 56,171 | $ | 746 | $ | 124,570 | ||||||||
|
Purchase accounting adjustments to prior year acquisitions
|
259 | 1,034 | — | 1,293 | ||||||||||||
|
Other
|
(147 | ) | (131 | ) | — | (278 | ) | |||||||||
|
Balance at December 31, 2008 and 2009
|
$ | 67,765 | $ | 57,074 | $ | 746 | $ | 125,585 | ||||||||
Changes in the net carrying amount of other intangible assets
for the years ended December 31, 2008 and 2009 are shown in
the following table.
|
Core
|
Mortgage
|
|||||||
|
Deposit
|
Servicing
|
|||||||
| (In thousands) | Premium | Rights | ||||||
|
Balance at December 31, 2007
|
$ | 20,538 | $ | 875 | ||||
|
Originations
|
— | 255 | ||||||
|
Amortization
|
(4,142 | ) | (185 | ) | ||||
|
Impairment
|
— | (150 | ) | |||||
|
Balance at December 31, 2008
|
16,396 | 795 | ||||||
|
Originations
|
— | 1,082 | ||||||
|
Amortization
|
(3,642 | ) | (335 | ) | ||||
|
Impairment recovery
|
— | 37 | ||||||
|
Balance at December 31, 2009
|
$ | 12,754 | $ | 1,579 | ||||
Mortgage servicing rights (MSRs) are initially recorded at fair
value and subsequently amortized over the period of estimated
servicing income. They are periodically reviewed for impairment
and if impairment is indicated, recorded at fair value. At
December 31, 2009, a temporary impairment of $113 thousand
was recognized. Temporary impairment, including impairment
recovery, is effected through a change in a valuation allowance.
The fair value of the MSRs is based on the present value of
expected future cash flows, as further discussed in Note 16
on Fair Value Measurements.
83
Table of Contents
Aggregate amortization expense on intangible assets for the
years ended December 31, 2009, 2008 and 2007 was
$4.0 million, $4.3 million and $4.2 million,
respectively. The following table shows the estimated future
amortization expense based on existing asset balances and the
interest rate environment as of December 31, 2009. The
Company’s actual amortization expense in any given period
may be different from the estimated amounts depending upon the
acquisition of intangible assets, changes in mortgage interest
rates, prepayment rates and other market conditions.
| (In thousands) | ||||
|
2010
|
$ | 3,372 | ||
|
2011
|
2,839 | |||
|
2012
|
2,311 | |||
|
2013
|
1,787 | |||
|
2014
|
1,319 | |||
| 7. | Deposits |
At December 31, 2009, the scheduled maturities of total
time open and certificates of deposit were as follows:
| (In thousands) | ||||
|
Due in 2010
|
$ | 2,604,292 | ||
|
Due in 2011
|
482,146 | |||
|
Due in 2012
|
52,673 | |||
|
Due in 2013
|
27,357 | |||
|
Due in 2014
|
46,765 | |||
|
Thereafter
|
486 | |||
|
Total
|
$ | 3,213,719 | ||
The following table shows a detailed breakdown of the maturities
of time open and certificates of deposit, by size category, at
December 31, 2009.
|
Certificates of
|
Certificates of
|
|||||||||||||||||||
|
Deposit under
|
Other Time Deposits
|
Deposit over
|
Other Time Deposits
|
|||||||||||||||||
| (In thousands) | $100,000 | under $100,000 | $100,000 | over $100,000 | Total | |||||||||||||||
|
Due in 3 months or less
|
$ | 282,394 | $ | 58,045 | $ | 456,493 | $ | 19,929 | $ | 816,861 | ||||||||||
|
Due in over 3 through 6 months
|
265,639 | 67,889 | 263,803 | 20,084 | 617,415 | |||||||||||||||
|
Due in over 6 through 12 months
|
661,513 | 64,584 | 420,442 | 23,477 | 1,170,016 | |||||||||||||||
|
Due in over 12 months
|
308,841 | 92,427 | 195,693 | 12,466 | 609,427 | |||||||||||||||
|
Total
|
$ | 1,518,387 | $ | 282,945 | $ | 1,336,431 | $ | 75,956 | $ | 3,213,719 | ||||||||||
Regulations of the Federal Reserve System require cash balances
to be maintained at the Federal Reserve Bank, based on certain
deposit levels. The minimum reserve requirement for the Bank at
December 31, 2009 totaled $119.7 million.
84
Table of Contents
| 8. | Borrowings |
The following table sets forth selected information for
short-term borrowings (borrowings with an original maturity of
less than one year).
|
Maximum
|
||||||||||||||||||||
|
Year End
|
Average
|
Average
|
Outstanding
|
|||||||||||||||||
|
Weighted
|
Weighted
|
Balance
|
at any
|
Balance at
|
||||||||||||||||
| (Dollars in thousands) | Rate | Rate | Outstanding | Month End | December 31 | |||||||||||||||
|
2009
|
||||||||||||||||||||
|
Federal funds purchased and repurchase agreements
|
.1 | % | .1 | % | $ | 468,643 | $ | 674,121 | $ | 603,191 | ||||||||||
|
2008
|
||||||||||||||||||||
|
Federal funds purchased and repurchase agreements
|
.1 | 1.8 | 873,625 | 1,253,655 | 526,537 | |||||||||||||||
|
FHLB advances
|
2.7 | 2.7 | 29,508 | 100,000 | 100,000 | |||||||||||||||
|
Term auction facility borrowings
|
.4 | 1.4 | 155,738 | 700,000 | 700,000 | |||||||||||||||
|
2007
|
||||||||||||||||||||
|
Federal funds purchased and repurchase agreements
|
2.8 | 4.7 | 1,196,612 | 1,800,505 | 739,219 | |||||||||||||||
Short-term borrowings consist primarily of federal funds
purchased and securities sold under agreements to repurchase
(repurchase agreements), which generally mature within
90 days. Short-term repurchase agreements at
December 31, 2009 were comprised of non-insured customer
funds totaling $541.1 million, which were secured by a
portion of the Company’s investment portfolio.
During 2008 and early 2009, the Company periodically borrowed
under the Federal Reserve’s temporary Term Auction Facility
(TAF) program. The TAF is a credit facility in which local
Federal Reserve Banks auction term funds, generally with a 28 or
84-day
maturity, at a rate determined as the result of the auction and
fixed over the time to maturity. The TAF credit is
collateralized similarly to discount window borrowings,
generally with investment securities and loans. The Company has
not borrowed under the TAF program since the first quarter of
2009, during which these borrowings averaged $287.8 million.
Long-term borrowings of the Company consisted of the following
at December 31, 2009.
|
Year End
|
||||||||||||||
|
Maturity
|
Weighted
|
Year End
|
||||||||||||
| (Dollars in thousands) | Borrower | Date | Rate | Balance | ||||||||||
|
FHLB advances
|
Subsidiary bank | 2010 | 3.9 | % | $ | 427,597 | ||||||||
| 2011 | 1.2 | 92,250 | ||||||||||||
| 2012-16 | 4.3 | 104,539 | ||||||||||||
| 2017 | 3.5 | 100,000 | ||||||||||||
|
Structured repurchase agreements
|
Subsidiary bank | 2010 | .5 | 500,000 | ||||||||||
|
Structured note payable
|
Venture capital subsidiary | 2012 | .0 | 7,515 | ||||||||||
|
Subordinated debentures
|
Subsidiary holding company | 2030 | 10.9 | 4,000 | ||||||||||
|
Non-recourse lease financing notes
|
Bank leasing subsidiary | 2011 | 6.3 | 161 | ||||||||||
|
Total
|
$ | 1,236,062 | ||||||||||||
The Bank is a member of the Des Moines FHLB and has access to
term financing from the FHLB. These borrowings are secured under
a blanket collateral agreement including primarily residential
mortgages as well as all unencumbered assets and stock of the
borrowing bank. Total outstanding advances at December 31,
2009 were $724.4 million. Nearly all of the outstanding
advances have fixed interest rates and contain prepayment
penalties. The FHLB has issued letters of credit, totaling
$533.3 million at December 31, 2009, to secure the
Company’s obligations to depositors of public funds.
The structured repurchase agreements mature in 2010, with
$350.0 million based on a LIBOR-based floating interest
rate with an embedded floor, and the remaining
$150.0 million based on a fixed rate. The
85
Table of Contents
Company has contracted to enter into new repurchase agreements,
totaling $400.0 million, upon maturity. These borrowings
have a floating interest rate based upon a published constant
maturity swap (CMS) rate and will mature in 2013 through 2014.
In certain acquisition transactions, the Company assumed
subordinated debentures which were issued by the acquired bank
holding companies to wholly owned grantor trusts. The trusts
were formed to issue preferred securities representing undivided
beneficial interests in the assets of the trusts and to invest
the gross proceeds of such preferred securities in the
debentures. While the trusts are accounted for as unconsolidated
equity investments, the preferred securities issued by the
trusts qualify as Tier I Capital for regulatory purposes.
In December 2009, $10.3 million of subordinated debentures
were redeemed by the Company. The remaining debentures
outstanding at December 31, 2009 totaled $4.0 million,
which the Company intends to redeem in 2010 as permitted under
contractual provisions.
Other long-term debt includes $7.5 million borrowed from
third-party insurance companies by a venture capital subsidiary,
a Missouri Certified Capital Company, to support its investment
activities. Because the insurance companies receive tax credits,
the borrowings do not bear interest. This debt is secured by
assets of the subsidiary and guaranteed by the Parent, evidenced
by letters of credit from the Bank.
Cash payments for interest on deposits and borrowings during
2009, 2008 and 2007 on a consolidated basis amounted to
$172.6 million, $285.5 million and
$393.1 million, respectively.
| 9. | Income Taxes |
The components of income tax expense (benefit) from operations
for the years ended December 31, 2009, 2008 and 2007 were
as follows:
| (In thousands) | Current | Deferred | Total | |||||||||
|
Year ended December 31, 2009:
|
||||||||||||
|
U.S. federal
|
$ | 77,753 | $ | (6,719 | ) | $ | 71,034 | |||||
|
State and local
|
3,314 | (591 | ) | 2,723 | ||||||||
| $ | 81,067 | $ | (7,310 | ) | $ | 73,757 | ||||||
|
Year ended December 31, 2008:
|
||||||||||||
|
U.S. federal
|
$ | 81,536 | $ | 3,193 | $ | 84,729 | ||||||
|
State and local
|
885 | (537 | ) | 348 | ||||||||
| $ | 82,421 | $ | 2,656 | $ | 85,077 | |||||||
|
Year ended December 31, 2007:
|
||||||||||||
|
U.S. federal
|
$ | 102,666 | $ | (9,866 | ) | $ | 92,800 | |||||
|
State and local
|
2,298 | (1,361 | ) | 937 | ||||||||
| $ | 104,964 | $ | (11,227 | ) | $ | 93,737 | ||||||
The components of income tax expense (benefit) recorded directly
to stockholders’ equity for the years ended
December 31, 2009, 2008 and 2007 were as follows:
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Unrealized gain (loss) on securities available for sale
|
$ | 61,701 | $ | (40,724 | ) | $ | 11,902 | |||||
|
Compensation expense for tax purposes in excess of amounts
recognized for financial reporting purposes
|
(557 | ) | (1,941 | ) | (2,298 | ) | ||||||
|
Accumulated pension (benefit) loss
|
1,476 | (9,833 | ) | 4,256 | ||||||||
|
Other
|
— | 549 | — | |||||||||
|
Income tax expense (benefit) allocated to stockholders’
equity
|
$ | 62,620 | $ | (51,949 | ) | $ | 13,860 | |||||
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Table of Contents
Significant components of the Company’s deferred tax assets
and liabilities at December 31, 2009 and 2008 were as
follows:
| (In thousands) | 2009 | 2008 | ||||||
|
Deferred tax assets:
|
||||||||
|
Loans, principally due to allowance for loan losses
|
$ | 90,774 | $ | 82,840 | ||||
|
Unrealized loss on securities available for sale
|
— | 22,317 | ||||||
|
Equity-based compensation
|
13,987 | 12,622 | ||||||
|
Accrued expenses
|
7,102 | 9,681 | ||||||
|
Deferred compensation
|
5,264 | 4,951 | ||||||
|
Other
|
7,758 | 6,316 | ||||||
|
Total deferred tax assets
|
124,885 | 138,727 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Equipment lease financing
|
45,551 | 45,926 | ||||||
|
Unrealized gain on securities available for sale
|
39,384 | — | ||||||
|
Land, buildings and equipment
|
25,571 | 24,295 | ||||||
|
Accretion on investment securities
|
6,055 | 2,633 | ||||||
|
Intangibles
|
4,919 | 5,305 | ||||||
|
Prepaid expenses
|
3,137 | 3,449 | ||||||
|
Other
|
2,926 | 2,948 | ||||||
|
Total deferred tax liabilities
|
127,543 | 84,556 | ||||||
|
Net deferred tax asset (liability)
|
$ | (2,658 | ) | $ | 54,171 | |||
The Company acquired a federal net operating loss (NOL)
carryforward of approximately $4.3 million in connection
with a 2003 acquisition. The NOL carryforward will begin to
expire in 2020. At December 31, 2009, the tax benefit
related to the remaining NOL carryforward was $564 thousand.
Management believes it is more likely than not that the results
of future operations will generate sufficient taxable income to
realize the total deferred tax assets.
A reconciliation between the expected federal income tax expense
using the federal statutory tax rate of 35 percent and the
Company’s actual income tax expense for 2009, 2008 and 2007
is as follows:
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Computed “expected” tax expense
|
$ | 84,991 | $ | 95,806 | $ | 105,139 | ||||||
|
Increase (decrease) in income taxes resulting from:
|
||||||||||||
|
Tax-exempt interest, net of cost to carry
|
(11,813 | ) | (9,902 | ) | (9,238 | ) | ||||||
|
Tax deductible dividends on allocated shares held by the
Company’s ESOP
|
(1,087 | ) | (1,084 | ) | (1,079 | ) | ||||||
|
State and local income taxes, net of federal tax benefit
|
1,770 | 226 | 609 | |||||||||
|
Other
|
(104 | ) | 31 | (1,694 | ) | |||||||
|
Total income tax expense
|
$ | 73,757 | $ | 85,077 | $ | 93,737 | ||||||
Cash payments of income taxes, net of refunds, amounted to
$82.9 million, $84.4 million and $95.4 million on
a consolidated basis during 2009, 2008 and 2007, respectively.
The Parent had net receipts of $4.9 million,
$2.7 million and $6.2 million during 2009, 2008 and
2007, respectively, from tax benefits.
Effective January 1, 2007, the Company adopted an amendment
to ASC 740 “Income Taxes”, which requires a company to
evaluate whether a tax position taken by the company will
“more likely than not” be sustained upon examination
by the appropriate taxing authority. The amendment also provides
guidance on how a company should measure the amount of benefit
that the company is to recognize in its financial statements. As
a result of the implementation of this guidance, the Company
recorded a $446 thousand decrease to the liability for
unrecognized tax benefits which was accounted for as an increase
to the January 1, 2007 balance of retained earnings. As of
January 1, 2007, the total gross amount of unrecognized
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Table of Contents
tax benefits was $2.4 million and the total amount of
unrecognized tax benefits that would impact the effective tax
rate, if recognized, was $2.0 million.
It is the Company’s policy to recognize interest and
penalties related to income tax matters in income tax expense.
Interest and penalties recorded in income tax expense,
classified as a component of income tax expense, was income of
$156 thousand and $73 thousand in 2009 and 2008, respectively,
and expense of $122 thousand in 2007. Accrued interest and
penalties were $335 thousand and $491 thousand as of
December 31, 2009 and 2008, respectively.
As of December 31, 2009 and 2008, the gross amount of
unrecognized tax benefits was $2.7 million and
$3.3 million, respectively, and the total amount of
unrecognized tax benefits that would impact the effective tax
rate, if recognized, was $2.1 million and
$2.5 million, respectively. While it is expected that the
amount of unrecognized tax benefits will change in the next
twelve months, the Company does not expect this change to have a
material impact on the results of operations or the financial
position of the Company.
The Company and its subsidiaries are subject to
U.S. federal income tax as well as income tax of multiple
state and local jurisdictions. Tax years 2006 through 2009
remain open to examination for U.S. federal income tax and
tax years 2006 through 2009 remain open to examination by
significant state tax jurisdictions.
The activity in the accrued liability for unrecognized tax
benefits for the years ended December 31, 2009 and 2008 was
as follows:
| (In thousands) | 2009 | 2008 | ||||||
|
Unrecognized tax benefits at beginning of year
|
$ | 3,350 | $ | 3,258 | ||||
|
Gross increases – tax positions in prior period
|
9 | 19 | ||||||
|
Gross decreases – tax positions in prior period
|
(667 | ) | (403 | ) | ||||
|
Gross increases – current-period tax positions
|
349 | 779 | ||||||
|
Settlements
|
(14 | ) | — | |||||
|
Lapse of statute of limitations
|
(313 | ) | (303 | ) | ||||
|
Unrecognized tax benefits at end of year
|
$ | 2,714 | $ | 3,350 | ||||
| 10. | Employee Benefit Plans |
Employee benefits charged to operating expenses are summarized
in the table below. Substantially all of the Company’s
employees are covered by a defined contribution (401K) plan,
under which the Company makes matching contributions.
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Payroll taxes
|
$ | 20,587 | $ | 20,290 | $ | 19,386 | ||||||
|
Medical plans
|
20,164 | 17,340 | 13,583 | |||||||||
|
401K plan
|
9,771 | 9,537 | 8,839 | |||||||||
|
Pension plans
|
3,023 | (1,797 | ) | (763 | ) | |||||||
|
Other
|
1,945 | 2,081 | 2,345 | |||||||||
|
Total employee benefits
|
$ | 55,490 | $ | 47,451 | $ | 43,390 | ||||||
A large portion of the Company’s current employees are
covered by a noncontributory defined benefit pension plan,
however, participation in the pension plan is not available to
employees hired after June 30, 2003. All participants are
fully vested in their benefit payable upon normal retirement
date, which is based on years of participation and average
annualized earnings. Certain key executives also participate in
a supplemental executive retirement plan (the CERP) that the
Company funds only as retirement benefits are disbursed. The
CERP carries no segregated assets.
Effective January 1, 2005 substantially all benefits
accrued under the pension plan were frozen. Certain annual
salary credits to pension accounts were discontinued, however,
the accounts continue to accrue interest at a stated annual
rate. Enhancements were then made to the 401K plan, which have
increased
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Table of Contents
employer contributions to the 401K plan. Enhancements were also
made to the CERP, providing credits based on hypothetical
contributions in excess of those permitted under the 401K plan.
An employer must recognize the funded status of a defined
benefit postretirement plan as an asset or liability in its
balance sheet and must recognize changes in that funded status
in the year in which the changes occur through other
comprehensive income. Effective in 2008, plan assets and benefit
obligations must be measured as of fiscal year end. Accordingly,
during 2008 the Company changed its measurement date from
September 30 to December 31. The change resulted in an
increase of $561 thousand, on a pre-tax basis, to retained
earnings, which was recorded on December 31, 2008.
Under the Company’s funding policy for the defined benefit
pension plan, contributions are made to a trust as necessary to
provide for current service and for any unfunded accrued
actuarial liabilities over a reasonable period. To the extent
that these requirements are fully covered by assets in the
trust, a contribution might not be made in a particular year.
The Company made no contributions to the defined benefit pension
plan in 2009, and the minimum required contribution for 2010 is
expected to be zero. The Company does not expect to make any
further contributions other than the necessary funding
contributions to the CERP. Contributions to the CERP were $10
thousand, $12 thousand and $10 thousand during fiscal 2009, 2008
and 2007, respectively.
Benefit obligations of the CERP at the December 31, 2009
and 2008 valuation dates are shown in the table immediately
below. In all other tables presented, the pension plan and the
CERP are presented on a combined basis.
| (In thousands) | 2009 | 2008 | ||||||
|
Projected benefit obligation
|
$ | 2,557 | $ | 2,169 | ||||
|
Accumulated benefit obligation
|
$ | 2,557 | $ | 2,169 | ||||
The following items are components of the net pension cost for
the years ended December 31, 2009, 2008 and 2007.
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Service cost-benefits earned during the year
|
$ | 683 | $ | 1,025 | $ | 1,053 | ||||||
|
Interest cost on projected benefit obligation
|
5,473 | 5,236 | 5,033 | |||||||||
|
Expected return on plan assets
|
(6,123 | ) | (8,165 | ) | (7,568 | ) | ||||||
|
Amortization of unrecognized net loss
|
2,990 | 107 | 719 | |||||||||
|
Net periodic pension cost (income)
|
$ | 3,023 | $ | (1,797 | ) | $ | (763 | ) | ||||
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Table of Contents
The following table sets forth the pension plans’ funded
status, using valuation dates of December 31, 2009 and 2008.
| (In thousands) | 2009 | 2008 | ||||||
|
Change in projected benefit obligation
|
||||||||
|
Projected benefit obligation at prior valuation date
|
$ | 91,430 | $ | 86,266 | ||||
|
Service cost
|
683 | 1,222 | ||||||
|
Interest cost
|
5,473 | 6,519 | ||||||
|
Benefits paid
|
(4,639 | ) | (5,751 | ) | ||||
|
Actuarial (gain) loss
|
5,201 | 3,174 | ||||||
|
Projected benefit obligation at valuation date
|
98,148 | 91,430 | ||||||
|
Change in plan assets
|
||||||||
|
Fair value of plan assets at prior valuation date
|
85,852 | 104,754 | ||||||
|
Actual return (loss) on plan assets
|
12,275 | (13,163 | ) | |||||
|
Employer contributions
|
10 | 12 | ||||||
|
Benefits paid
|
(4,639 | ) | (5,751 | ) | ||||
|
Fair value of plan assets at valuation date
|
93,498 | 85,852 | ||||||
|
Funded status and net amount recognized at valuation date
|
$ | (4,650 | ) | $ | (5,578 | ) | ||
The accumulated benefit obligation, which represents the
liability of a plan using only benefits as of the measurement
date, was $98.1 million and $91.4 million for the
combined plans on December 31, 2009 and 2008, respectively.
Amounts not yet reflected in net periodic benefit cost and
included in accumulated other comprehensive income (loss) at
December 31, 2009 and 2008 are shown below, including
amounts recognized in other comprehensive income during the
periods. All amounts are shown on a pre-tax basis.
| (In thousands) | 2009 | 2008 | ||||||
|
Prior service credit (cost)
|
$ | — | $ | — | ||||
|
Accumulated loss
|
(28,828 | ) | (32,769 | ) | ||||
|
Accumulated other comprehensive loss
|
(28,828 | ) | (32,769 | ) | ||||
|
Cumulative employer contributions in excess of net periodic
benefit cost
|
24,178 | 27,191 | ||||||
|
Net amount recognized as an accrued benefit liability on the
December 31 balance sheet
|
$ | (4,650 | ) | $ | (5,578 | ) | ||
|
Net gain (loss) arising during period
|
$ | 951 | $ | (26,544 | ) | |||
|
Amortization of net loss
|
2,990 | 107 | ||||||
|
Total recognized in other comprehensive income (loss)
|
$ | 3,941 | $ | (26,437 | ) | |||
|
Total income (expense) recognized in net periodic pension
cost and other comprehensive income
|
$ | 918 | $ | (24,640 | ) | |||
The estimated net loss to be amortized from accumulated other
comprehensive income into net periodic pension cost in 2010 is
$2.3 million.
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Table of Contents
The following assumptions, on a weighted average basis, were
used in accounting for the plans.
| 2009 | 2008 | 2007 | ||||||||||
|
Determination of benefit obligation at year end:
|
||||||||||||
|
Discount rate
|
5.75 | % | 6.00 | % | 6.25 | % | ||||||
|
Assumed credit on cash balance accounts
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
Determination of net periodic benefit cost for year ended:
|
||||||||||||
|
Discount rate
|
6.00 | % | 6.25 | % | 5.75 | % | ||||||
|
Long-term rate of return on assets
|
7.25 | % | 8.00 | % | 8.00 | % | ||||||
|
Assumed credit on cash balance accounts
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
The following table shows the fair values of the Company’s
pension plan assets by asset category. Information about the
valuation techniques and inputs used to measure fair value are
provided in Note 16 on Fair Value Measurements.
|
Fair Value Measurements
|
||||||||||||||||
| at December 31, 2009 | ||||||||||||||||
|
Quoted
|
||||||||||||||||
|
Prices in
|
||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
| (In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Assets:
|
||||||||||||||||
|
Government-sponsored enterprise
obligations
(a)
|
$ | 13,042 | $ | — | $ | 13,042 | $ | — | ||||||||
|
State and municipal obligations
|
2,053 | — | 2,053 | — | ||||||||||||
|
Non-agency mortgage-backed securities
|
3,919 | — | 3,919 | — | ||||||||||||
|
Other asset-backed securities
|
1,349 | — | 1,349 | — | ||||||||||||
|
Corporate
bonds
(b)
|
23,104 | — | 23,104 | — | ||||||||||||
|
International bonds
|
500 | — | 500 | — | ||||||||||||
|
Equity
securities:
(c)
|
||||||||||||||||
|
U.S. large-cap
|
22,819 | 22,819 | — | — | ||||||||||||
|
U.S. mid-cap
|
10,595 | 10,595 | — | — | ||||||||||||
|
Emerging markets
|
781 | 781 | — | — | ||||||||||||
|
Goldman Sachs Financial Square
Government
(d)
|
15,336 | 15,336 | — | — | ||||||||||||
|
Total
|
$ | 93,498 | $ | 49,531 | $ | 43,967 | $ | — | ||||||||
| (a) | This category represents obligations issued by agencies such as the Federal Home Loan Bank, the Federal Home Loan Mortgage Corp, the Federal National Mortgage Association, and the Government National Mortgage Association. | |
| (b) | This category represents investment grade bonds of U.S. issuers from diverse industries. | |
| (c) | This category represents investments in individual common stocks and equity funds. The majority of these investments are in equity mutual funds, which have diversified investment holdings across the financial services, healthcare, energy, telecommunications, and industrial materials sectors. | |
| (d) | Amounts in this fund are short-term placements pending reinvestment. |
The investment policy of the pension plan is designed for growth
in value within limits designed to safeguard against significant
losses within the portfolio. The policy sets guidelines
regarding the types of investments held that may change from
time to time, currently including items such as holding bonds
rated investment grade or better, and prohibiting investment in
Company stock. The plan does not utilize derivatives. Management
believes there are no significant concentrations of risk within
the plan asset portfolio at December 31, 2009. Under the
policy, the long-term investment target mix for the plan through
2007 was 60% equity securities and 40% fixed income. To better
match expected benefit payments in the future, the investment
mix was modified during 2008 and at December 31, 2008, plan
assets were more heavily weighted in fixed income debt
securities and money market funds. The same investment mix was
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Table of Contents
generally maintained throughout 2009, and the current target is
35% equity and 65% fixed income securities. The Company
regularly reviews its policies on investment mix and may make
changes depending on economic conditions and perceived
investment risk.
The selection of a discount rate was based on a review of
various bond indices. These portfolios are comprised of high
quality fixed-income instruments whose cash flows approximate
the future estimated benefit payments under the plan. The
selection process also considers the results of actuarial
modeling tools and assumptions.
The assumed overall expected long-term rate of return on pension
plan assets used in calculating 2009 pension plan expense was
7.25%. Determination of the plan’s rate of return is based
upon historical returns for equities and fixed income indexes.
The average
10-year
annualized return for the Company’s pension plan is 3.6%.
During 2009, the plan’s rate of return was 13.8%, compared
to a loss of 9.7% in 2008. The rate used in plan calculations
may be adjusted by management for current trends in the economic
environment. With a portion of the plan’s investments in
equities, the actual return for any one plan year may fluctuate
with changes in the stock market. Due to market gains
experienced during 2009 and therefore higher asset values and
lower anticipated amortization of investment losses in 2010, the
Company expects to incur $1.9 million pension expense in
2010 compared to $3.0 million in 2009.
The following future benefit payments are expected to be paid:
| (In thousands) | ||||
|
2010
|
$ | 5,735 | ||
|
2011
|
5,954 | |||
|
2012
|
6,117 | |||
|
2013
|
6,314 | |||
|
2014
|
6,491 | |||
|
2015-2019
|
34,990 | |||
| 11. | Stock-Based Compensation and Directors Stock Purchase Plan* |
The Company’s stock-based compensation is provided under a
stockholder-approved plan which allows for issuance of various
types of awards, including stock options, stock appreciation
rights, restricted stock and restricted stock units, performance
awards and stock-based awards. At December 31, 2009,
3,097,406 shares remained available for issuance under the
plan. The stock-based compensation expense that was charged
against income was $6.6 million, $6.4 million and
$6.3 million for the years ended December 31, 2009,
2008 and 2007, respectively. The total income tax benefit
recognized in the income statement for share-based compensation
arrangements was $2.5 million, $2.4 million and
$2.3 million for the years ended December 31, 2009,
2008 and 2007, respectively.
During 2009, stock-based compensation was issued primarily in
the form of nonvested stock awards. Nonvested stock is awarded
to key employees, by action of the Board of Directors. These
awards generally vest after 5 to 7 years of continued
employment, but vesting terms may vary according to the
specifics of the individual grant agreement. There are
restrictions as to transferability, sale, pledging, or
assigning, among others, prior to the end of the vesting period.
Dividend and voting rights are conferred upon grant. A summary
of the status of the Company’s nonvested share awards as of
December 31, 2009 and changes during the year then ended is
presented below.
92
Table of Contents
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Grant Date
|
||||||||
| Shares | Fair Value | |||||||
|
Nonvested at January 1, 2009
|
239,313 | $ | 39.82 | |||||
|
Granted
|
180,812 | 34.11 | ||||||
|
Vested
|
(52,505 | ) | 38.08 | |||||
|
Forfeited
|
(6,221 | ) | 38.41 | |||||
|
Nonvested at December 31, 2009
|
361,399 | $ | 37.23 | |||||
The total fair value (at vest date) of shares vested during
2009, 2008 and 2007 was $1.7 million, $1.8 million and
$1.0 million, respectively.
In determining compensation cost, the Black-Scholes
option-pricing model is used to estimate the fair value of
options and stock appreciation rights (SARs) on date of grant.
The Black-Scholes model is a closed-end model that uses the
assumptions in the following table. Expected volatility is based
on historical volatility of the Company’s stock. The
Company uses historical exercise behavior and other factors to
estimate the expected term of the options and SARs, which
represents the period of time that the options and SARs granted
are expected to be outstanding. The risk-free rate for the
expected term is based on the U.S. Treasury zero coupon
spot rates in effect at the time of grant.
Below are the fair values of SARs granted, using the
Black-Scholes option-pricing model, including the model
assumptions for those grants. SARs were granted with exercise
prices equal to the market price of the Company’s stock at
the date of grant and have
10-year
contractual terms. SARs vest on a graded basis over 4 years
of continuous service. All SARs must be settled in stock under
provisions of the plan. Stock options, which were granted in
2005 and previous years, vested on a graded basis over
3 years of continuous service and have
10-year
contractual terms.
| 2009 | 2008 | 2007 | ||||||||||
|
Weighted per share average fair value at grant date
|
$ | 7.12 | $ | 7.88 | $ | 10.85 | ||||||
|
Assumptions:
|
||||||||||||
|
Dividend yield
|
2.7 | % | 2.3 | % | 1.9 | % | ||||||
|
Volatility
|
20.8 | % | 18.4 | % | 19.9 | % | ||||||
|
Risk-free interest rate
|
3.2 | % | 3.5 | % | 4.6 | % | ||||||
|
Expected term
|
7.3 years | 7.2 years | 7.4 years | |||||||||
A summary of option activity during 2009 is presented below.
|
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||
| (Dollars in thousands, except per share data) | Shares | Price | Term | Value | ||||||||||||
|
Outstanding at January 1, 2009
|
2,514,776 | $ | 30.53 | |||||||||||||
|
Granted
|
— | — | ||||||||||||||
|
Forfeited
|
— | — | ||||||||||||||
|
Expired
|
(11,493 | ) | 32.91 | |||||||||||||
|
Exercised
|
(215,496 | ) | 22.21 | |||||||||||||
|
Outstanding at December 31, 2009
|
2,287,787 | $ | 31.30 | 3.3 years | $ | 16,980 | ||||||||||
|
Exercisable at December 31, 2009
|
2,287,787 | $ | 31.30 | 3.3 years | $ | 16,980 | ||||||||||
|
Vested and expected to vest at December 31, 2009
|
2,287,787 | $ | 31.30 | 3.3 years | $ | 16,980 | ||||||||||
93
Table of Contents
A summary of SAR activity during 2009 is presented below.
|
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||
| (Dollars in thousands, except per share data) | Shares | Price | Term | Value | ||||||||||||
|
Outstanding at January 1, 2009
|
1,679,987 | $ | 41.74 | |||||||||||||
|
Granted
|
7,350 | 37.12 | ||||||||||||||
|
Forfeited
|
(9,016 | ) | 40.72 | |||||||||||||
|
Expired
|
(8,568 | ) | 41.87 | |||||||||||||
|
Exercised
|
— | — | ||||||||||||||
|
Outstanding at December 31, 2009
|
1,669,753 | $ | 41.71 | 7.2 years | $ | 27 | ||||||||||
|
Exercisable at December 31, 2009
|
1,651,782 | $ | 41.73 | 7.2 years | $ | 26 | ||||||||||
|
Vested and expected to vest at December 31, 2009
|
813,902 | $ | 42.16 | 6.8 years | $ | 13 | ||||||||||
Additional information about stock options and SARs exercises is
presented below.
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Intrinsic value of options and SARs exercised
|
$ | 3,249 | $ | 10,006 | $ | 9,808 | ||||||
|
Cash received from options and SARs exercised
|
$ | 4,729 | $ | 15,186 | $ | 12,919 | ||||||
|
Tax benefit realized from options and SARs exercised
|
$ | 636 | $ | 1,745 | $ | 2,098 | ||||||
As of December 31, 2009, there was $11.2 million of
unrecognized compensation cost (net of estimated forfeitures)
related to unvested options, SARs and stock awards. That cost is
expected to be recognized over a weighted average period of
2.8 years.
The Company has a directors stock purchase plan whereby outside
directors of the Company and its subsidiaries may elect to use
their directors’ fees to purchase Company stock at market
value each month end. Remaining shares available for issuance
under this plan were 80,431 at December 31, 2009. In 2009,
22,240 shares were purchased at an average price of $34.07
and in 2008, 19,663 shares were purchased at an average
price of $40.27.
| * | All share and per share amounts in this note have been restated for the 5% stock dividend distributed in 2009. |
| 12. | Comprehensive Income |
Comprehensive income is the total of net income and all other
non-owner changes in equity. Items recognized under accounting
standards as components of comprehensive income are displayed in
the consolidated statements of changes in equity, and additional
information is presented below about the Company’s
components of other comprehensive income.
The first component is the unrealized holding gains and losses
on available for sale securities. These gains and losses have
been separated into two groups in the table below, as required
by new accounting guidance on
other-than-temporary
impairment on debt securities, which the Company adopted in
March 2009. Under this guidance, credit-related losses on debt
securities with
other-than-temporary
impairment are recorded in current earnings, while the
noncredit-related portion of the overall loss in fair value is
recorded in other comprehensive income (loss). The Company
recorded
other-than-temporary
impairments on certain debt securities during 2009. Changes in
the noncredit-related loss in fair value of these securities,
after
other-than-temporary
impairment (OTTI) was initially recognized, are shown separately
in the table below. The remaining unrealized holding gains and
losses shown in the table apply to available for sale investment
securities for which OTTI has not been recorded (and include
holding gains and losses on certain securities prior to the
recognition of OTTI).
In the calculation of other comprehensive income, certain
reclassification adjustments are made to avoid double counting
gains and losses that are included as part of net income for a
period that also had been
94
Table of Contents
included as part of other comprehensive income in that period or
earlier periods. The reclassification amounts and the related
income tax expense or benefit for the three years ended December
31 are shown in the table below.
The second component of other comprehensive income is pension
gains and losses that arise during the period but are not
recognized as components of net periodic benefit cost, and
corresponding adjustments when these gains and losses are
subsequently amortized to net periodic benefit cost.
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Available for sale debt securities for which OTTI has been
recognized:
|
||||||||||||
|
Unrealized holding gains subsequent to initial OTTI recognition
|
$ | 12,251 | $ | — | $ | — | ||||||
|
Income tax expense
|
(4,655 | ) | — | — | ||||||||
|
Net unrealized gains
|
7,596 | — | — | |||||||||
|
Other available for sale investment securities:
|
||||||||||||
|
Unrealized holding gains (losses)
|
150,443 | (101,968 | ) | 34,192 | ||||||||
|
Income tax (expense) benefit on unrealized gains/losses
|
(57,152 | ) | 38,684 | (13,025 | ) | |||||||
|
Reclassification adjustment for (gains) losses realized and
included in net income
|
(322 | ) | (5,201 | ) | (2,927 | ) | ||||||
|
Reclassification adjustment for tax expense (benefit) on
realized gains/losses
|
106 | 2,040 | 1,123 | |||||||||
|
Net unrealized gains (losses)
|
93,075 | (66,445 | ) | 19,363 | ||||||||
|
Prepaid pension cost:
|
||||||||||||
|
Amortization of accumulated pension loss
|
2,990 | 107 | 719 | |||||||||
|
Net gain (loss) arising during period
|
951 | (26,544 | ) | 10,481 | ||||||||
|
Income tax (expense) benefit on change in pension loss
|
(1,476 | ) | 10,046 | (4,256 | ) | |||||||
|
Change in pension loss
|
2,465 | (16,391 | ) | 6,944 | ||||||||
|
Other comprehensive income (loss)
|
$ | 103,136 | $ | (82,836 | ) | $ | 26,307 | |||||
The end of period components of accumulated other comprehensive
income (loss) are shown in the table below. At December 31,
2009, accumulated other comprehensive income was
$46.4 million, net of tax. It was comprised of
$18.9 million in unrealized holding losses on available for
sale debt securities for which OTTI has been recorded,
$83.2 million in unrealized holding gains on other
available for sale securities, and $17.9 million in
accumulated pension loss.
|
Accumulated
|
||||||||||||
|
Unrealized
|
Other
|
|||||||||||
|
Gains (Losses)
|
Pension
|
Comprehensive
|
||||||||||
| (In thousands) | on Securities | Loss | Income (Loss) | |||||||||
|
Balance at December 31, 2007
|
$ | 30,033 | $ | (3,926 | ) | $ | 26,107 | |||||
|
Current period other comprehensive income
|
(66,445 | ) | (16,391 | ) | (82,836 | ) | ||||||
|
Balance at December 31, 2008
|
(36,412 | ) | (20,317 | ) | (56,729 | ) | ||||||
|
Current period other comprehensive loss
|
100,671 | 2,465 | 103,136 | |||||||||
|
Balance at December 31, 2009
|
$ | 64,259 | $ | (17,852 | ) | $ | 46,407 | |||||
95
Table of Contents
| 13. | Segments |
The Company segregates financial information for use in
assessing its performance and allocating resources among three
operating segments. The Consumer segment includes consumer
deposits, consumer finance, consumer debit and credit bank
cards, and student loans. The Commercial segment, which includes
Small Business accounts, provides corporate lending, leasing,
merchant and commercial bank card products, and international
services, as well as business, government deposit and cash
management services. The Wealth segment provides traditional
trust and estate tax planning services, brokerage services, and
advisory and discretionary investment management services, and
includes Private Banking accounts. The Wealth segment (formerly
titled Money Management) also includes the Capital Markets
Group, which sells fixed-income securities and provides
investment safekeeping and bond accounting services.
The Company’s business line reporting system derives
segment information from the internal profitability reporting
system used by management to monitor and manage the financial
performance of the Company. This information is based on
internal management accounting policies, which have been
developed to reflect the underlying economics of the businesses.
The policies address the methodologies applied in connection
with funds transfer pricing and assignment of overhead costs
among segments. Funds transfer pricing was used in the
determination of net interest income by assigning a standard
cost (credit) for funds used (provided) by assets and
liabilities based on their maturity, prepayment
and/or
repricing characteristics. Income and expense that directly
relate to segment operations are recorded in the segment when
incurred. Expenses that indirectly support the segments are
allocated based on the most appropriate method available.
The Company uses a funds transfer pricing method to value funds
used (e.g., loans, fixed assets, and cash) and funds provided
(e.g., deposits, borrowings, and equity) by the business
segments and their components. This process assigns a specific
value to each new source or use of funds with a maturity, based
on current 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
provides an accurate means of valuing fund sources and uses in a
varying interest rate environment.
As products or business units grow or diminish, or processing
channels are refined, or as periodic changes in organizational
structure are made, management may decide that associated
business activities should also be rearranged between reportable
segments. In the first quarter of 2009, selected business units
were realigned between reportable segments so that brokerage
services and Private Banking accounts were moved from the
Consumer to the Wealth segment, while portions of indirect
lending were moved from Commercial to the Consumer segment. The
figures presented below for 2008 and 2007 have been revised to
incorporate these changes in order to provide comparable data.
96
Table of Contents
The following tables present selected financial information by
segment and reconciliations of combined segment totals to
consolidated totals. There were no material intersegment
revenues between the three segments.
Segment
Income Statement Data
|
Segment
|
Other/
|
Consolidated
|
||||||||||||||||||||||
| (In thousands) | Consumer | Commercial | Wealth | Totals | Elimination | Totals | ||||||||||||||||||
|
Year ended December 31, 2009:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 348,362 | $ | 258,886 | $ | 42,074 | $ | 649,322 | $ | (13,820 | ) | $ | 635,502 | |||||||||||
|
Provision for loan losses
|
(84,019 | ) | (54,230 | ) | (520 | ) | (138,769 | ) | (21,928 | ) | (160,697 | ) | ||||||||||||
|
Non-interest income
|
162,374 | 115,697 | 114,838 | 392,909 | 3,676 | 396,585 | ||||||||||||||||||
|
Investment securities losses, net
|
— | — | — | — | (7,195 | ) | (7,195 | ) | ||||||||||||||||
|
Non-interest expense
|
(301,622 | ) | (192,722 | ) | (106,604 | ) | (600,948 | ) | (21,115 | ) | (622,063 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 125,095 | $ | 127,631 | $ | 49,788 | $ | 302,514 | $ | (60,382 | ) | $ | 242,132 | |||||||||||
|
Year ended December 31, 2008:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 323,568 | $ | 203,950 | $ | 37,188 | $ | 564,706 | $ | 28,033 | $ | 592,739 | ||||||||||||
|
Provision for loan losses
|
(56,639 | ) | (13,526 | ) | (265 | ) | (70,430 | ) | (38,470 | ) | (108,900 | ) | ||||||||||||
|
Non-interest income
|
146,051 | 107,586 | 114,482 | 368,119 | 7,593 | 375,712 | ||||||||||||||||||
|
Investment securities gains, net
|
— | — | — | — | 30,294 | 30,294 | ||||||||||||||||||
|
Non-interest expense
|
(285,466 | ) | (180,930 | ) | (131,982 | ) | (598,378 | ) | (17,002 | ) | (615,380 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 127,514 | $ | 117,080 | $ | 19,423 | $ | 264,017 | $ | 10,448 | $ | 274,465 | ||||||||||||
|
Year ended December 31, 2007:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 318,970 | $ | 184,263 | $ | 34,484 | $ | 537,717 | $ | 355 | $ | 538,072 | ||||||||||||
|
Provision for loan losses
|
(34,737 | ) | (8,376 | ) | (154 | ) | (43,267 | ) | 535 | (42,732 | ) | |||||||||||||
|
Non-interest income
|
167,352 | 124,377 | 106,026 | 397,755 | (26,174 | ) | 371,581 | |||||||||||||||||
|
Investment securities gains, net
|
— | — | — | — | 8,234 | 8,234 | ||||||||||||||||||
|
Non-interest expense
|
(275,161 | ) | (180,389 | ) | (90,280 | ) | (545,830 | ) | (28,329 | ) | (574,159 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 176,424 | $ | 119,875 | $ | 50,076 | $ | 346,375 | $ | (45,379 | ) | $ | 300,996 | |||||||||||
The segment activity, as shown above, includes both direct and
allocated items. Amounts in the “Other/Elimination”
column include activity not related to the segments, such as
that relating to administrative functions, the investment
securities portfolio, and the effect of certain expense
allocations to the segments. The provision for loan losses in
this category contains the difference between loan charge-offs
and recoveries assigned directly to the segments and the
recorded provision for loan loss expense. Included in this
category’s net interest income are earnings of the
investment portfolio, which are not allocated to a segment.
97
Table of Contents
Segment
Balance Sheet Data
|
Segment
|
Other/
|
Consolidated
|
||||||||||||||||||||||
| (In thousands) | Consumer | Commercial | Wealth | Totals | Elimination | Totals | ||||||||||||||||||
|
Average balances for 2009:
|
||||||||||||||||||||||||
|
Assets
|
$ | 3,891,311 | $ | 6,232,582 | $ | 722,053 | $ | 10,845,946 | $ | 6,773,257 | $ | 17,619,203 | ||||||||||||
|
Loans, including held for sale
|
3,772,374 | 6,099,415 | 683,763 | 10,555,552 | 471,898 | 11,027,450 | ||||||||||||||||||
|
Goodwill and other intangible assets
|
80,071 | 60,599 | 746 | 141,416 | — | 141,416 | ||||||||||||||||||
|
Deposits
|
8,287,307 | 3,518,042 | 1,980,511 | 13,785,860 | 35,302 | 13,821,162 | ||||||||||||||||||
|
Average balances for 2008:
|
||||||||||||||||||||||||
|
Assets
|
$ | 3,852,938 | $ | 6,539,526 | $ | 729,710 | $ | 11,122,174 | $ | 5,332,159 | $ | 16,454,333 | ||||||||||||
|
Loans, including held for sale
|
3,741,173 | 6,413,457 | 677,143 | 10,831,773 | 451,526 | 11,283,299 | ||||||||||||||||||
|
Goodwill and other intangible assets
|
82,800 | 61,314 | 746 | 144,860 | — | 144,860 | ||||||||||||||||||
|
Deposits
|
8,063,478 | 2,550,056 | 1,580,260 | 12,193,794 | 56,016 | 12,249,810 | ||||||||||||||||||
The above segment balances include only those items directly
associated with the segment. The “Other/Elimination”
column includes unallocated bank balances not associated with a
segment (such as investment securities and federal funds sold),
balances relating to certain other administrative and corporate
functions, and eliminations between segment and non-segment
balances. This column also includes the resulting effect of
allocating such items as float, deposit reserve and capital for
the purpose of computing the cost or credit for funds
used/provided.
The Company’s reportable segments are strategic lines of
business that offer different products and services. They are
managed separately because each line services a specific
customer need, requiring different performance measurement
analyses and marketing strategies. The performance measurement
of the segments is based on the management structure of the
Company and is not necessarily comparable with similar
information for any other financial institution. The information
is also not necessarily indicative of the segments’
financial condition and results of operations if they were
independent entities.
| 14. | Common Stock |
On December 15, 2009, the Company distributed a 5% stock
dividend on its $5 par common stock for the sixteenth
consecutive year. All per share data in this report has been
restated to reflect the stock dividend.
Basic income per share is computed by dividing income available
to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted income per share
gives effect to all dilutive potential common shares that were
outstanding during the year. Presented below is a summary of the
components used to calculate basic and diluted income per share,
which have been restated for all stock dividends. On
January 1, 2009, the Company adopted new accounting
guidance which requires application of the two-class method of
computing income per share. Under this guidance, unvested
share-based awards that contain nonforfeitable rights to
dividends are considered securities which participate in
undistributed earnings with common stock. The two-class method
requires the calculation of separate income per share amounts
for the unvested share-based awards and for common stock. Income
per share attributable to common stock is shown in the table
below. Prior period income per share data has been retroactively
adjusted to conform to the pronouncement. Unvested share-based
awards are further discussed in Note 11 on Stock-Based
Compensation.
98
Table of Contents
| (In thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
|
Basic income per common share:
|
||||||||||||
|
Net income attributable to Commerce Bancshares, Inc.
|
$ | 169,075 | $ | 188,655 | $ | 206,660 | ||||||
|
Less income allocated to unvested restricted stockholders
|
741 | 592 | 601 | |||||||||
|
Net income available to common stockholders
|
$ | 168,334 | $ | 188,063 | $ | 206,059 | ||||||
|
Distributed income
|
$ | 74,384 | $ | 71,829 | $ | 68,714 | ||||||
|
Undistributed income
|
$ | 93,950 | $ | 116,234 | $ | 137,345 | ||||||
|
Weighted average common shares outstanding
|
81,160 | 79,194 | 79,777 | |||||||||
|
Distributed income per share
|
$ | .91 | $ | .90 | $ | .86 | ||||||
|
Undistributed income per share
|
1.16 | 1.47 | 1.72 | |||||||||
|
Basic income per common share
|
$ | 2.07 | $ | 2.37 | $ | 2.58 | ||||||
|
Diluted income per common share:
|
||||||||||||
|
Net income attributable to Commerce Bancshares, Inc.
|
$ | 169,075 | $ | 188,655 | $ | 206,660 | ||||||
|
Less income allocated to unvested restricted stockholders
|
740 | 589 | 597 | |||||||||
|
Net income available to common stockholders
|
$ | 168,335 | $ | 188,066 | $ | 206,063 | ||||||
|
Distributed income
|
$ | 74,384 | $ | 71,829 | $ | 68,714 | ||||||
|
Undistributed income
|
$ | 93,951 | $ | 116,237 | $ | 137,349 | ||||||
|
Weighted average common shares outstanding
|
81,160 | 79,194 | 79,777 | |||||||||
|
Net effect of the assumed exercise of stock-based
awards – based on the treasury stock method using the
average market price for the respective periods
|
317 | 634 | 819 | |||||||||
|
Weighted average diluted common shares outstanding
|
81,477 | 79,828 | 80,596 | |||||||||
|
Distributed income per share
|
$ | .91 | $ | .90 | $ | .85 | ||||||
|
Undistributed income per share
|
1.16 | 1.46 | 1.71 | |||||||||
|
Diluted income per common share
|
$ | 2.07 | $ | 2.36 | $ | 2.56 | ||||||
On February 27, 2009, the Company initiated an
at-the-market
offering of its common stock, which was terminated on
July 31, 2009. Pursuant to this offering, the Company
issued a total of 2,894,773 shares for gross proceeds of
$100.0 million, which were used for general corporate
purposes.
The table below shows activity in the outstanding shares of the
Company’s common stock during 2009. Shares in the table
below are presented on an historical basis and have not been
restated for the 5% stock dividend in 2009.
| (In thousands) | ||||
|
Shares outstanding at January 1, 2009
|
75,791 | |||
|
Issuance of stock:
|
||||
|
Awards and sales under employee and director plans
|
394 | |||
|
Stock offering
|
2,895 | |||
|
5% stock dividend
|
3,949 | |||
|
Purchases of treasury stock
|
(16 | ) | ||
|
Other
|
(5 | ) | ||
|
Shares outstanding at December 31, 2009
|
83,008 | |||
The Company maintains a treasury stock buyback program
authorized by its Board of Directors. At December 31, 2009,
2,861,783 shares were available for purchase under the
current Board authorization.
99
Table of Contents
| 15. | Regulatory Capital Requirements |
The Company is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory and additional discretionary actions by
regulators that could have a direct material effect on the
Company’s financial statements. The regulations require the
Company to meet specific capital adequacy guidelines that
involve quantitative measures of the Company’s assets,
liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company’s
capital classification is also subject to qualitative judgments
by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios of Tier I capital to total
average assets (leverage ratio), and minimum ratios of
Tier I and Total capital to risk-weighted assets (as
defined). To meet minimum, adequately capitalized regulatory
requirements, an institution must maintain a Tier I capital
ratio of 4.00%, a Total capital ratio of 8.00% and a leverage
ratio of 4.00%. The minimum required ratios for well-capitalized
banks (under prompt corrective action provisions) are 6.00% for
Tier I capital, 10.00% for Total capital and 5.00% for the
leverage ratio.
The following tables show the capital amounts and ratios for the
Company (on a consolidated basis) and the Bank, together with
the minimum and well-capitalized capital requirements, at the
last two year ends.
|
Minimum
|
Well-Capitalized
|
|||||||||||||||||||||||
| Actual | Capital Requirement | Capital Requirement | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
|
December 31, 2009:
|
||||||||||||||||||||||||
|
Total Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 1,885,978 | 14.39 | % | $ | 1,048,476 | 8.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,658,312 | 12.83 | 1,034,224 | 8.00 | $ | 1,292,780 | 10.00 | % | ||||||||||||||||
|
Tier I Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 1,708,901 | 13.04 | % | $ | 524,238 | 4.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,496,295 | 11.57 | 517,112 | 4.00 | $ | 775,668 | 6.00 | % | ||||||||||||||||
|
Tier I Capital (to adjusted quarterly average
assets):
|
||||||||||||||||||||||||
|
(Leverage Ratio)
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 1,708,901 | 9.58 | % | $ | 713,619 | 4.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,496,295 | 8.43 | 710,119 | 4.00 | $ | 887,649 | 5.00 | % | ||||||||||||||||
|
Minimum
|
Well-Capitalized
|
|||||||||||||||||||||||
| Actual | Capital Requirement | Capital Requirement | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
|
December 31, 2008:
|
||||||||||||||||||||||||
|
Total Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 1,702,916 | 12.31 | % | $ | 1,106,733 | 8.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,540,064 | 11.21 | 1,099,425 | 8.00 | $ | 1,374,281 | 10.00 | % | ||||||||||||||||
|
Tier I Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 1,510,959 | 10.92 | % | $ | 553,366 | 4.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,368,254 | 9.96 | 549,712 | 4.00 | $ | 824,569 | 6.00 | % | ||||||||||||||||
|
Tier I Capital (to adjusted quarterly average
assets):
|
||||||||||||||||||||||||
|
(Leverage Ratio)
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 1,510,959 | 9.06 | % | $ | 666,841 | 4.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,368,254 | 8.24 | 664,022 | 4.00 | $ | 830,027 | 5.00 | % | ||||||||||||||||
At December 31, 2009, the Company met all capital
requirements to which it is subject, and the Bank’s capital
position exceeded the regulatory definition of well-capitalized.
100
Table of Contents
| 16. | Fair Value Measurements |
The Company uses fair value measurements to record fair value
adjustments to certain financial and nonfinancial assets and
liabilities and to determine fair value disclosures. Various
financial instruments such as available for sale and trading
securities, certain non-marketable securities relating to
private equity activities, and derivatives are recorded at fair
value on a recurring basis. Additionally, from time to time, the
Company may be required to record at fair value other assets and
liabilities on a nonrecurring basis, such as loans held for
sale, mortgage servicing rights and certain other investment
securities. These nonrecurring fair value adjustments typically
involve lower of cost or market accounting, or write-downs of
individual assets.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Depending
on the nature of the asset or liability, the Company uses
various valuation techniques and assumptions when estimating
fair value. For accounting disclosure purposes, a three-level
valuation hierarchy of fair value measurements has been
established. The valuation hierarchy is based upon the
transparency of inputs to the valuation of an asset or liability
as of the measurement date. The three levels are defined as
follows:
| • | Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. | |
| • | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds). | |
| • | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider. |
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded or disclosed at
fair value, the Company considers the principal or most
advantageous market in which it would transact and considers
assumptions that market participants would use when pricing the
asset or liability. When possible, the Company looks to active
and observable markets to price identical assets or liabilities.
When identical assets and liabilities are not traded in active
markets, the Company looks to market observable data for similar
assets and liabilities. Nevertheless, certain assets and
liabilities are not actively traded in observable markets and
the Company must use alternative valuation techniques to derive
an estimated fair value measurement. The Company adopted new
guidance in March 2009 for estimating fair values for securities
where the market volume and level of activity have significantly
decreased. The application of the new guidance did not result in
a change in valuation technique or related inputs.
Valuation
methods for instruments measured at fair value on a recurring
basis
Following is a description of the Company’s valuation
methodologies used for instruments measured at fair value on a
recurring basis:
Available
for sale investment securities
For available for sale securities, changes in fair value,
including that portion of
other-than-temporary
impairment unrelated to credit loss, are recorded in other
comprehensive income. As mentioned in Note 4 on Investment
Securities, the Company records the credit-related portion of
other-than-temporary
impairment in current earnings. This portfolio comprises the
majority of the assets which the Company records at fair value.
Most of the portfolio, which includes government-sponsored
enterprise, mortgage-backed and asset-backed securities, are
priced utilizing industry-standard models that consider various
assumptions, including time value, yield curves, volatility
factors, prepayment speeds, default rates, loss severity,
current market and contractual prices for the underlying
financial instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable
in the marketplace, can be derived from
101
Table of Contents
observable data, or are supported by observable levels at which
transactions are executed in the marketplace. These measurements
are classified as Level 2 in the fair value hierarchy.
Where quoted prices are available in an active market, the
measurements are classified as Level 1. Most of the
Level 1 measurements apply to common stock and U.S.
Treasury obligations.
Valuation methods and inputs, by major security type:
| • | U.S. government and federal agency obligations |
These securities are valued using live data from active market
makers and inter-dealer brokers.
| • | Government-sponsored enterprise obligations |
Government-sponsored enterprise obligations are evaluated using
cash flow valuation models. Inputs used are live market data,
cash settlements, Treasury market yields, and floating rate
indices such as LIBOR, CMT, and Prime.
| • | State and municipal obligations, excluding auction rate securities |
A yield curve is generated and applied to bond sectors, and
individual bond valuations are extrapolated. Inputs used to
generate the yield curve are bellwether issue levels,
established trading spreads between similar issuers or credits,
historical trading spreads over widely accepted market
benchmarks, new issue scales, and verified bid information. Bid
information is verified by corroborating the data against
external sources such as broker-dealers, trustees/paying agents,
issuers, or non-affiliated bondholders.
| • | Mortgage and asset-backed securities |
All mortgage-backed securities (agency and non-agency) and other
asset-backed securities are valued at the tranche level. For
each tranche valuation, the process generates predicted cash
flows for the tranche and determines a benchmark yield. The
final price is determined by inputting the predicted cash flows
into a model that will determine principal and interest payments
along with an average life. The yield from the model is used to
discount the predicted cash flows to generate an evaluated
price. Inputs for the model include a swap curve or a Treasury
benchmark curve, as well as a spread that is generated based on
average life, type, volatility, ratings, collateral and
collateral performance.
| • | Other debt securities |
Other debt securities are valued using active markets and
inter-dealer brokers as well as bullet spread scales and option
adjusted spreads. The spreads and models use yield curves, terms
and conditions of the bonds, and any special features (i.e.,
call or put options, redemption features, etc.).
| • | Equity securities |
Equity securities are priced using the market prices for each
security from the major stock exchanges or other electronic
quotation systems.
At December 31, 2009, the Company held certain auction rate
securities (ARS) in its available for sale portfolio, totaling
$167.8 million. Nearly all of these securities were
purchased from customers during the third quarter of 2008. The
auction process by which the ARS are normally priced has failed
since the first quarter of 2008, and the fair value of these
securities cannot be based on observable market prices due to
the illiquidity in the market. The fair values of the ARS are
currently estimated using a discounted cash flows analysis. The
analysis compares the present value of cash flows based on
mandatory rates paid under failing auctions with the present
value of estimated cash flows for similar securities, after
adjustment for liquidity premium and nonperformance risk. The
cash flows were projected over an estimated market recovery
period, or in some cases, a shorter period if refinancing by
specific issuers is expected. The discount rate was based on the
published Treasury rate for the period commensurate with the
estimated holding period. In developing the inputs, discussions
were held with traders, both internal and external to the
Company, who are familiar with the ARS markets. Because many of
the inputs significant to the measurement are not observable,
these measurements are classified as Level 3 measurements.
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Table of Contents
Trading
securities
The securities in the Company’s trading portfolio are
priced by averaging several broker quotes for identical
instruments, and are classified as Level 2 measurements.
Private
equity investments
These securities are held by the Company’s venture capital
subsidiaries and are included in non-marketable investment
securities in the consolidated balance sheets. Valuation of
these nonpublic investments requires significant management
judgment due to the absence of quoted market prices. Each
quarter, valuations are performed utilizing available market
data and other factors. Market data includes published trading
multiples for private equity investments of similar size. The
multiples are considered in conjunction with current operating
performance, future expectations, financing and sales
transactions, and other investment-specific issues. The Company
applies its valuation methodology consistently from period to
period, and believes that its methodology is similar to that
used by other market participants. These fair value measurements
are classified as Level 3.
Derivatives
The Company’s derivative instruments include interest rate
swaps, foreign exchange forward contracts, commitments and sales
contracts related to personal mortgage loan origination
activity, and certain credit risk guarantee agreements. When
appropriate, the impact of credit standing as well as any
potential credit enhancements, such as collateral, has been
considered in the fair value measurement.
| • | Valuations for interest rate swaps are derived from proprietary models whose significant inputs are readily observable market parameters, primarily yield curves. The results of the models are constantly validated through comparison to active trading in the marketplace. These fair value measurements are classified as Level 2. | |
| • | Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations from global market makers, and are classified as Level 2. | |
| • | The fair values of mortgage loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market. However, these prices are adjusted by a factor which considers the likelihood that a commitment will ultimately result in a closed loan. This estimate is based on the Company’s historical data and its judgment about future economic trends. Based on the unobservable nature of this adjustment, these measurements are classified as Level 3. | |
| • | The Company’s contracts related to credit risk guarantees, as discussed in Notes 18 and 19, are valued under an internally developed methodology which uses significant unobservable inputs and assumptions about the creditworthiness of the counterparty to the guaranteed interest rate swap contract. Consequently, these measurements are classified as Level 3. |
Assets
held in trust
Assets held in an outside trust for the Company’s deferred
compensation plan consist of investments in mutual funds. The
fair value measurements are based on quoted prices in active
markets and classified as Level 1. The Company has recorded
an asset representing the total investment amount. The Company
has also recorded a corresponding nonfinancial liability,
representing the Company’s liability to the plan
participants.
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Table of Contents
The table below presents the December 31, 2009 carrying
values of assets and liabilities measured at fair value on a
recurring basis.
|
Fair Value Measurements
|
||||||||||||||||
| at December 31, 2009 | ||||||||||||||||
|
Quoted
|
||||||||||||||||
|
Prices in
|
||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
| (In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Assets:
|
||||||||||||||||
|
Available for sale securities:
|
||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 447,038 | $ | 447,038 | $ | — | $ | — | ||||||||
|
Government-sponsored enterprise obligations
|
165,814 | — | 165,814 | — | ||||||||||||
|
State and municipal obligations
|
939,338 | — | 771,502 | 167,836 | ||||||||||||
|
Agency mortgage-backed securities
|
2,262,003 | — | 2,262,003 | — | ||||||||||||
|
Non-agency mortgage-backed securities
|
609,016 | — | 609,016 | — | ||||||||||||
|
Other asset-backed securities
|
1,701,569 | — | 1,701,569 | — | ||||||||||||
|
Other debt securities
|
176,331 | — | 176,331 | — | ||||||||||||
|
Equity securities
|
39,866 | 25,378 | 14,488 | — | ||||||||||||
|
Trading securities
|
10,335 | — | 10,335 | — | ||||||||||||
|
Private equity investments
|
44,827 | — | — | 44,827 | ||||||||||||
|
Derivatives
|
17,984 | — | 17,616 | 368 | ||||||||||||
|
Assets held in trust
|
3,419 | 3,419 | — | — | ||||||||||||
|
Total assets
|
6,417,540 | 475,835 | 5,728,674 | 213,031 | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives
|
18,610 | — | 18,350 | 260 | ||||||||||||
|
Total liabilities
|
$ | 18,610 | $ | — | $ | 18,350 | $ | 260 | ||||||||
The changes in Level 3 assets and liabilities measured at
fair value on a recurring basis are summarized as follows:
|
Fair Value Measurements Using
|
||||||||||||||||
|
Significant Unobservable Inputs
|
||||||||||||||||
| (Level 3) | ||||||||||||||||
|
State and
|
Private
|
|||||||||||||||
|
Municipal
|
Equity
|
|||||||||||||||
| (In thousands) | Obligations | Investments | Derivatives | Total | ||||||||||||
|
For the year ended December 31, 2009:
|
||||||||||||||||
|
Balance at January 1, 2009
|
$ | 167,996 | $ | 49,494 | $ | 64 | $ | 217,554 | ||||||||
|
Total gains or losses (realized/unrealized):
|
||||||||||||||||
|
Included in earnings
|
— | (4,791 | ) | 99 | (4,692 | ) | ||||||||||
|
Included in other comprehensive income
|
4,496 | — | — | 4,496 | ||||||||||||
|
Purchases, issuances, and settlements, net
|
(4,656 | ) | 124 | (55 | ) | (4,587 | ) | |||||||||
|
Balance at December 31, 2009
|
$ | 167,836 | $ | 44,827 | $ | 108 | $ | 212,771 | ||||||||
|
Total gains or losses for the annual period included in earnings
attributable to the change in unrealized gains or losses
relating to assets still held at December 31, 2009
|
$ | — | $ | (4,791 | ) | $ | 223 | $ | (4,568 | ) | ||||||
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Table of Contents
Gains and losses on the Level 3 assets and liabilities in
the table above are reported in the following income categories:
|
Other
|
Investment
|
|||||||||||||||
|
Loan Fees
|
Non-Interest
|
Securities Losses,
|
||||||||||||||
| (In thousands) | and Sales | Income | Net | Total | ||||||||||||
|
For the year ended December 31, 2009:
|
||||||||||||||||
|
Total gains or losses included in earnings
|
$ | 83 | $ | 16 | $ | (4,791 | ) | $ | (4,692 | ) | ||||||
|
Change in unrealized gains or losses relating to assets still
held at December 31, 2009
|
$ | 207 | $ | 16 | $ | (4,791 | ) | $ | (4,568 | ) | ||||||
Valuation
methods for instruments measured at fair value on a nonrecurring
basis
Following is a description of the Company’s valuation
methodologies used for other financial and nonfinancial
instruments measured at fair value on a nonrecurring basis.
Collateral
dependent impaired loans
While the overall loan portfolio is not carried at fair value,
adjustments are recorded on certain loans to reflect partial
write-downs that are based on the value of the underlying
collateral. In determining the value of real estate collateral,
the Company relies on external appraisals and assessment of
property values by its internal staff. In the case of non-real
estate collateral, reliance is placed on a variety of sources,
including external estimates of value and judgments based on the
experience and expertise of internal specialists. Because many
of these inputs are not observable, the measurements are
classified as Level 3. The carrying value of these impaired
loans was $57.8 million at December 31, 2009, and
charge-offs of $39.1 million related to these loans were
recorded during 2009.
Loans
held for sale
Loans held for sale are carried at the lower of cost or fair
value. The portfolio consists primarily of student loans, and to
a lesser extent, residential real estate loans. The
Company’s student loans are contracted for sale with the
Federal Department of Education (DOE) and various investors in
the secondary market. Beginning in 2008, the secondary market
for student loans was disrupted by liquidity concerns.
Consequently, several investors are currently unable to
consistently purchase loans under existing contractual terms.
Loans under contract to these investors, in addition to another
investor whose future liquidity was of concern, were identified
for evaluation in 2008. The identified loans were evaluated
using a fair value measurement method based on a discounted cash
flows analysis, which was classified as Level 3, resulting
in impairment losses of $9.4 million during 2008. Of these
losses, $8.6 million were reversed during 2009, as various
sales of the related loans were made in accordance with
contractual terms and performance concerns for one large
investor diminished. The remainder of the identified portfolio,
for which performance concern remains, was carried at
$22.3 million at December 31, 2009. The measurement of
fair value for the remaining student loans, most of which will
be sold to the DOE, is based on the specific prices mandated in
the underlying sale contracts, the estimated exit price, and is
classified as Level 2. Fair value measurements on mortgage
loans held for sale are based on quoted market prices for
similar loans in the secondary market and are classified as
Level 2.
Private
equity investments and restricted stock
These assets are included in non-marketable investment
securities in the consolidated balance sheets. They include
private equity investments held by the Parent company which are
carried at cost, reduced by
other-than-temporary
impairment. These investments are periodically evaluated for
impairment based on
105
Table of Contents
their estimated fair value. The valuation methodology is
described above under the recurring measurements for
“Private equity securities”. Also included is stock
issued by the Federal Reserve and Federal Home Loan Banks which
is held by the Bank as required for regulatory purposes. There
are generally restrictions on the sale and/or liquidation of
these investments, and their carrying value approximates fair
value. Fair value measurements for these securities are
classified as Level 3.
Mortgage
servicing rights
The Company initially measures its mortgage servicing rights at
fair value, and amortizes them over the period of estimated net
servicing income. They are periodically assessed for impairment
based on fair value at the reporting date. Mortgage servicing
rights do not trade in an active market with readily observable
prices. Accordingly, the fair value is estimated based on a
valuation model which calculates the present value of estimated
future net servicing income. The model incorporates assumptions
that market participants use in estimating future net servicing
income, including estimates of prepayment speeds, market
discount rates, cost to service, float earnings rates, and other
ancillary income, including late fees. The fair value
measurements are classified as Level 3.
Goodwill
and core deposit premium
Valuation of goodwill to determine impairment is performed on an
annual basis, or more frequently if there is an event or
circumstance that would indicate impairment may have occurred.
The process involves calculations to determine the fair value of
each reporting unit on a stand-alone basis. A combination of
formulas using current market multiples, based on recent sales
of financial institutions within the Company’s geographic
marketplace, is used to estimate the fair value of each
reporting unit. That fair value is compared to the carrying
amount of the reporting unit, including its recorded goodwill.
Impairment is considered to have occurred if the fair value of
the reporting unit is lower than the carrying amount of the
reporting unit. These measurements are classified as
Level 3.
Core deposit premiums are recognized at the time a portfolio of
deposits is acquired, using valuation techniques which calculate
the present value of the estimated net cost savings attributable
to the core deposit base, relative to alternative costs of funds
and tax benefits, if applicable, over the expected remaining
economic life of the depositors. Subsequent evaluations are made
when facts or circumstances indicate potential impairment may
have occurred. The Company uses estimates of discounted future
cash flows, comparisons with alternative sources for deposits,
consideration of income potential generated in other product
lines by current customers, geographic parameters, and other
demographics to estimate a current fair value of a specific
deposit base. If the calculated fair value is less than the
carrying value, impairment is considered to have occurred. This
measurement is classified as Level 3.
Foreclosed
assets
Foreclosed assets consist of loan collateral which has been
repossessed through foreclosure. This collateral is comprised of
commercial and residential real estate and other non-real estate
property, including auto, recreational and marine vehicles.
Foreclosed assets are recorded as held for sale initially at the
lower of the loan balance or fair value of the collateral less
estimated selling costs. Subsequent to foreclosure, valuations
are updated periodically, and the assets may be marked down
further, reflecting a new cost basis. Fair value measurements
may be based upon appraisals or third-party price opinions and,
accordingly, those measurements are classified as Level 2.
Other fair value measurements may be based on internally
developed pricing methods, and those measurements are classified
as Level 3.
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Table of Contents
For assets measured at fair value on a nonrecurring basis during
2009, and still held as of December 31, 2009, the following
table provides the adjustments to fair value recognized in 2009,
the level of valuation assumptions used to determine each
adjustment, and the carrying value of the related individual
assets or portfolios at December 31, 2009.
| Fair Value Measurements Using | ||||||||||||||||||||
|
Quoted Prices in
|
Significant
|
|||||||||||||||||||
|
Active Markets for
|
Significant Other
|
Unobservable
|
||||||||||||||||||
|
Identical Assets
|
Observable Inputs
|
Inputs
|
Total Gains
|
|||||||||||||||||
| (In thousands) | 12/31/09 | (Level 1) | (Level 2) | (Level 3) | (Losses) | |||||||||||||||
|
Loans
|
$ | 57,761 | $ | — | $ | — | $ | 57,761 | $ | (39,054 | ) | |||||||||
|
Private equity investments
|
1,880 | — | — | 1,880 | (1,170 | ) | ||||||||||||||
|
Mortgage servicing rights
|
1,579 | — | — | 1,579 | 37 | |||||||||||||||
|
Foreclosed assets
|
2,770 | — | 2,770 | — | (612 | ) | ||||||||||||||
| 17. | Fair Value of Financial Instruments |
The carrying amounts and estimated fair values of financial
instruments held by the Company, in addition to a discussion of
the methods used and assumptions made in computing those
estimates, are set forth below.
Loans
The fair values of loans are estimated by discounting the
expected future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. This method of
estimating fair value does not incorporate the exit-price
concept of fair value prescribed by ASC 820 “Fair Value
Measurements and Disclosures”.
Investment
Securities
A detailed description of the fair value measurement of the debt
and equity instruments in the available for sale and trading
sections of the investment security portfolio is provided in
Note 16 on Fair Value Measurements. A schedule of
investment securities by category and maturity is provided in
Note 4 on Investment Securities.
Federal Funds Sold and Securities Purchased under Agreements
to Resell, Interest Earning Deposits With Banks and Cash and Due
From Banks
The carrying amounts of federal funds sold and securities
purchased under agreements to resell, interest earning deposits
with banks, and cash and due from banks approximate fair value.
Federal funds sold and securities purchased under agreements to
resell generally mature in 90 days or less.
Accrued
Interest Receivable/Payable
The carrying amounts of accrued interest receivable and accrued
interest payable approximate their fair values because of the
relatively short time period between the accrual period and the
expected receipt or payment due date.
Derivative
Instruments
A detailed description of the fair value measurement of
derivative instruments is provided in the preceding note on Fair
Value Measurements. Fair values are generally estimated using
observable market prices or pricing models.
Deposits
The fair value of deposits with no stated maturity is equal to
the amount payable on demand. Such deposits include savings and
interest and non-interest bearing demand deposits. These fair
value estimates do not recognize any benefit the Company
receives as a result of being able to administer, or control,
the
107
Table of Contents
pricing of these accounts. The fair value of certificates of
deposit is based on the discounted value of cash flows, taking
early withdrawal optionality into account. Discount rates are
based on the Company’s approximate cost of obtaining
similar maturity funding in the market.
Borrowings
The fair value of short-term borrowings such as federal funds
purchased, securities sold under agreements to repurchase, and
borrowings under the TAF, which mature or reprice within
90 days, approximates their carrying value. The fair value
of long-term debt is estimated by discounting contractual
maturities using an estimate of the current market rate for
similar instruments.
The estimated fair values of the Company’s financial
instruments are as follows:
| 2009 | 2008 | |||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
| (In thousands) | Amount | Fair Value | Amount | Fair Value | ||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Loans, including held for sale
|
$ | 10,490,327 | $ | 10,513,232 | $ | 11,644,544 | $ | 12,052,924 | ||||||||
|
Available for sale investment securities
|
6,340,975 | 6,340,975 | 3,630,753 | 3,630,753 | ||||||||||||
|
Trading securities
|
10,335 | 10,335 | 9,463 | 9,463 | ||||||||||||
|
Non-marketable securities
|
122,078 | 122,078 | 139,900 | 139,900 | ||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell
|
22,590 | 22,590 | 169,475 | 169,475 | ||||||||||||
|
Accrued interest receivable
|
74,553 | 74,553 | 77,496 | 77,496 | ||||||||||||
|
Derivative instruments
|
17,984 | 17,984 | 25,835 | 25,835 | ||||||||||||
|
Cash and due from banks
|
417,126 | 417,126 | 491,723 | 491,723 | ||||||||||||
|
Interest earning deposits with banks
|
24,118 | 24,118 | 638,158 | 638,158 | ||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Non-interest bearing demand deposits
|
$ | 1,793,816 | $ | 1,793,816 | $ | 1,375,000 | $ | 1,375,000 | ||||||||
|
Savings, interest checking and money market deposits
|
9,202,916 | 9,202,916 | 7,610,306 | 7,610,306 | ||||||||||||
|
Time open and C.D.’s
|
3,213,719 | 3,243,627 | 3,909,427 | 3,971,227 | ||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
1,103,191 | 1,102,995 | 1,026,537 | 1,020,539 | ||||||||||||
|
Other borrowings
|
736,062 | 757,365 | 1,747,781 | 1,799,814 | ||||||||||||
|
Accrued interest payable
|
21,570 | 21,570 | 40,168 | 40,168 | ||||||||||||
|
Derivative instruments
|
18,610 | 18,610 | 27,075 | 27,075 | ||||||||||||
Off-Balance
Sheet Financial Instruments
The fair value of letters of credit and commitments to extend
credit is based on the fees currently charged to enter into
similar agreements. The aggregate of these fees is not material.
These instruments are also referenced in Note 19 on
Commitments, Contingencies and Guarantees.
Limitations
Fair value estimates are made at a specific point in time based
on relevant market information. They do not reflect any premium
or discount that could result from offering for sale at one time
the Company’s entire holdings of a particular financial
instrument. Because no market exists for many of the
Company’s financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
risk characteristics and economic conditions. These estimates
are subjective, involve uncertainties and cannot be determined
with precision. Changes in assumptions could significantly
affect the estimates.
108
Table of Contents
| 18. | Derivative Instruments |
The notional amounts of the Company’s derivative
instruments are shown in the table below. These contractual
amounts, along with other terms of the derivative, are used to
determine amounts to be exchanged between counterparties, and
are not a measure of loss exposure. The largest group of
notional amounts relate to interest rate swaps, which are
discussed in more detail below.
| December 31 | ||||||||
| (In thousands) | 2009 | 2008 | ||||||
|
Interest rate swaps
|
$ | 503,530 | $ | 492,111 | ||||
|
Interest rate caps
|
16,236 | — | ||||||
|
Credit risk participation agreements
|
53,246 | 47,750 | ||||||
|
Foreign exchange contracts:
|
||||||||
|
Forward contracts
|
17,475 | 6,226 | ||||||
|
Option contracts
|
— | 3,300 | ||||||
|
Mortgage loan commitments
|
9,767 | 23,784 | ||||||
|
Mortgage loan forward sale contracts
|
19,986 | 26,996 | ||||||
|
Total notional amount
|
$ | 620,240 | $ | 600,167 | ||||
The Company’s mortgage banking operation makes commitments
to extend fixed rate loans secured by 1-4 family residential
properties, which are considered to be derivative instruments.
These commitments are recognized on the balance sheet at fair
value from their inception through their expiration or funding,
and have an average term of 60 to 90 days. The
Company’s general practice is to sell such loans in the
secondary market. The Company obtains forward sale contracts
with investors in the secondary market in order to manage these
risk positions. Most of the contracts are matched to a specific
loan on a “best efforts” basis, in which the Company
is obligated to deliver the loan only if the loan closes. The
sale contracts are also accounted for as derivatives. Hedge
accounting has not been applied to these activities.
The Company’s foreign exchange activity involves the
purchase and sale of forward foreign exchange contracts, which
are commitments to purchase or deliver a specified amount of
foreign currency at a specific future date. This activity
enables customers involved in international business to hedge
their exposure to foreign currency exchange rate fluctuations.
The Company minimizes its related exposure arising from these
customer transactions with offsetting contracts for the same
currency and time frame. In addition, the Company uses foreign
exchange contracts, to a limited extent, for trading purposes,
including taking proprietary positions. Risk arises from changes
in the currency exchange rate and from the potential for
counterparty nonperformance. These risks are controlled by
adherence to a foreign exchange trading policy which contains
control limits on currency amounts, open positions, maturities
and losses, and procedures for approvals, record-keeping,
monitoring and reporting. Hedge accounting has not been applied
to these foreign exchange activities.
Credit risk participation agreements arise when the Company
contracts with other financial institutions, as a guarantor or
beneficiary, to share credit risk associated with certain
interest rate swaps. The Company’s risks and
responsibilities as guarantor are further discussed in
Note 19 on Commitments, Contingencies and Guarantees.
109
Table of Contents
The Company’s interest rate risk management strategy
includes the ability to modify the repricing characteristics of
certain assets and liabilities so that changes in interest rates
do not adversely affect the net interest margin and cash flows.
Interest rate swaps are used on a limited basis as part of this
strategy. At December 31, 2009, the Company had entered
into three interest rate swaps with a notional amount of
$16.9 million, which are designated as fair value hedges of
certain fixed rate loans. Gains and losses on these derivative
instruments, as well as the offsetting loss or gain on the
hedged loans attributable to the hedged risk, are recognized in
current earnings. These gains and losses are reported in
interest and fees on loans in the accompanying statements of
income. The table below shows gains and losses related to fair
value hedges.
|
For the Years
|
||||||||||||
| Ended December 31 | ||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Gain (loss) on interest rate swaps
|
$ | 573 | $ | (1,035 | ) | $ | (489 | ) | ||||
|
Gain (loss) on loans
|
(571 | ) | 1,029 | 482 | ||||||||
|
Amount of hedge ineffectiveness
|
$ | 2 | $ | (6 | ) | $ | (7 | ) | ||||
The Company’s other derivative instruments are accounted
for as free-standing derivatives, and changes in their fair
value are recorded in current earnings. These instruments
include interest rate swap contracts sold to customers who wish
to modify their interest rate sensitivity. These swaps are
offset by matching contracts purchased by the Company from other
financial institutions. Because of the matching terms of the
offsetting contracts, in addition to collateral provisions which
mitigate the impact of non-performance risk, changes in fair
value subsequent to initial recognition have a minimal effect on
earnings. The notional amount of these types of swaps at
December 31, 2009 was $486.6 million. The Company is
party to master netting arrangements with its institutional
counterparties; however, the effect of offsetting assets and
liabilities under these arrangements is not significant.
Collateral, usually in the form of marketable securities, is
posted by the counterparty with liability positions, in
accordance with contract thresholds.
The Company’s interest rate swap arrangements with other
financial institutions contain contingent features relating to
debt ratings or capitalization levels. Under these provisions,
if the Company’s debt rating falls below investment grade
or if the Company ceases to be “well-capitalized”
under risk-based capital guidelines, certain counterparties can
require immediate and ongoing collateralization on interest rate
swaps in net liability positions, or in certain circumstances,
can require instant settlement of the contracts. The aggregate
fair value of interest rate swap contracts with credit
risk-related contingent features that were in a liability
position on December 31, 2009 was $16.5 million, for
which the Company had posted collateral of $12.7 million.
If the credit risk-related contingent features relating to
collateral were triggered on December 31, 2009, the Company
would be required to post an additional $4.9 million of
collateral to certain counterparties. If other credit-related
settlement features were also triggered at December 31,
2009, a cash disbursement of $1.0 million, in addition to
collateral posted, would be required.
The banking customer counterparties are engaged in a variety of
businesses, including real estate, building materials,
communications, consumer products, and manufacturing. The
manufacturing group is the largest, with a combined notional
amount of 34.2% of the total customer swap portfolio. If this
group of manufacturing counterparties failed to perform, and if
the underlying collateral proved to be of no value, the Company
would incur a loss of $4.9 million, based on amounts at
December 31, 2009.
Effective January 1, 2008, the Company adopted new
accounting guidance which 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. Under the new guidance, the immediate recognition
of a gain or loss is appropriate under certain circumstances
and, in accordance with transition provisions, the Company
increased equity by $903 thousand on January 1, 2008 to
reflect interest rate swaps at fair value.
110
Table of Contents
The fair values of the Company’s derivative instruments are
shown in the table below. Information about the valuation
methods used to measure fair value is provided in Note 16
on Fair Value Measurements.
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
| December 31 | December 31 | |||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
|
Balance
|
Balance
|
|||||||||||||||||||||||
|
Sheet
|
Sheet
|
|||||||||||||||||||||||
| (In thousands) | Location | Fair Value | Location | Fair Value | ||||||||||||||||||||
|
Derivatives designated as hedging instruments:
|
||||||||||||||||||||||||
|
Interest rate swaps
|
Other assets | $ | 64 | $ | — | Other liabilities | $ | (918 | ) | $ | (1,413 | ) | ||||||||||||
|
Total derivatives designated as hedging instruments
|
$ | 64 | $ | — | $ | (918 | ) | $ | (1,413 | ) | ||||||||||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||||||||||||||||
|
Interest rate swaps
|
Other assets | $ | 16,898 | $ | 25,274 | Other liabilities | $ | (16,898 | ) | $ | (25,155 | ) | ||||||||||||
|
Interest rate caps
|
Other assets | 239 | — | Other liabilities | (239 | ) | — | |||||||||||||||||
|
Credit risk participation agreements
|
Other assets | 140 | 117 | Other liabilities | (239 | ) | (178 | ) | ||||||||||||||||
|
Foreign exchange contracts:
|
||||||||||||||||||||||||
|
Forward contracts
|
Other assets | 415 | 207 | Other liabilities | (295 | ) | (217 | ) | ||||||||||||||||
|
Option contracts
|
Other assets | — | 18 | Other liabilities | — | (18 | ) | |||||||||||||||||
|
Mortgage loan commitments
|
Other assets | 44 | 198 | Other liabilities | (16 | ) | (6 | ) | ||||||||||||||||
|
Mortgage loan forward sale contracts
|
Other assets | 184 | 21 | Other liabilities | (5 | ) | (88 | ) | ||||||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 17,920 | $ | 25,835 | $ | (17,692 | ) | $ | (25,662 | ) | ||||||||||||||
|
Total derivatives
|
$ | 17,984 | $ | 25,835 | $ | (18,610 | ) | $ | (27,075 | ) | ||||||||||||||
The effects of derivative instruments on the consolidated
statements of income are shown in the table below.
|
Location of Gain or
|
||||||||||||||
|
(Loss) Recognized in
|
Amount of Gain or (Loss)
|
|||||||||||||
| Income on Derivative | Recognized in Income on Derivative | |||||||||||||
| For the Years Ended December 31 | ||||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||||
|
Derivatives in fair value hedging relationships:
|
||||||||||||||
|
Interest rate swaps
|
Interest and fees on loans | $ | 573 | $ | (1,035 | ) | $ | (489 | ) | |||||
|
Total
|
$ | 573 | $ | (1,035 | ) | $ | (489 | ) | ||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||||||
|
Interest rate swaps
|
Other non-interest income | $ | 360 | $ | 1,519 | $ | 270 | |||||||
|
Interest rate caps
|
Other non-interest income | 11 | — | — | ||||||||||
|
Credit risk participation agreements
|
Other non-interest income |
16 | 19 | 14 | ||||||||||
|
Foreign exchange contracts:
|
||||||||||||||
|
Forward contracts
|
Other non-interest income | 130 | 35 | (53 | ) | |||||||||
|
Option contracts
|
Other non-interest income | — | — | — | ||||||||||
|
Mortgage loan commitments
|
Loan fees and sales | (164 | ) | 184 | 49 | |||||||||
|
Mortgage loan forward sale contracts
|
Loan fees and sales |
247 | (58 | ) | (54 | ) | ||||||||
|
Total
|
$ | 600 | $ | 1,699 | $ | 226 | ||||||||
111
Table of Contents
| 19. | Commitments, Contingencies and Guarantees |
The Company leases certain premises and equipment, all of which
were classified as operating leases. The rent expense under such
arrangements amounted to $6.3 million, $6.1 million
and $5.9 million in 2009, 2008 and 2007, respectively. A
summary of minimum lease commitments follows:
|
(In thousands)
|
Type of Property | |||||||||||
|
Real
|
||||||||||||
| Year Ended December 31 | Property | Equipment | Total | |||||||||
|
2010
|
$ | 5,199 | $ | 606 | $ | 5,805 | ||||||
|
2011
|
4,221 | 358 | 4,579 | |||||||||
|
2012
|
3,469 | 178 | 3,647 | |||||||||
|
2013
|
3,220 | 53 | 3,273 | |||||||||
|
2014
|
2,938 | — | 2,938 | |||||||||
|
After
|
21,227 | — | 21,227 | |||||||||
|
Total minimum lease payments
|
$ | 41,469 | ||||||||||
All leases expire prior to 2055. It is expected that in the
normal course of business, leases that expire will be renewed or
replaced by leases on other properties; thus, the future minimum
lease commitments are not expected to be less than the amounts
shown for 2010.
The Company engages in various transactions and commitments with
off-balance sheet risk in the normal course of business to meet
customer financing needs. The Company uses the same credit
policies in making the commitments and conditional obligations
described below as it does for on-balance sheet instruments. The
following table summarizes these commitments at December 31:
| (In thousands) | 2009 | 2008 | ||||||
|
Commitments to extend credit:
|
||||||||
|
Credit card
|
$ | 3,285,041 | $ | 3,613,374 | ||||
|
Other
|
3,753,526 | 4,251,532 | ||||||
|
Standby letters of credit, net of participations
|
404,144 | 417,969 | ||||||
|
Commercial letters of credit
|
21,329 | 24,245 | ||||||
Commitments to extend credit are legally binding agreements to
lend to a borrower providing there are no violations of any
conditions established in the contract. As many of the
commitments are expected to expire without being drawn upon, the
total commitment does not necessarily represent future cash
requirements. Refer to Note 3 on Loans and Allowance for
Loan Losses for further discussion.
Commercial letters of credit act as a means of ensuring payment
to a seller upon shipment of goods to a buyer. The majority of
commercial letters of credit issued are used to settle payments
in international trade. Typically, letters of credit require
presentation of documents which describe the commercial
transaction, evidence shipment, and transfer title.
The Company, as a provider of financial services, routinely
issues financial guarantees in the form of financial and
performance standby letters of credit. Standby letters of credit
are contingent commitments issued by the Company generally to
guarantee the payment or performance obligation of a customer to
a third party. While these represent a potential outlay by the
Company, a significant amount of the commitments may expire
without being drawn upon. The Company has recourse against the
customer for any amount it is required to pay to a third party
under a standby letter of credit. The letters of credit are
subject to the same credit policies, underwriting standards and
approval process as loans made by the Company. Most of the
standby letters of credit are secured and in the event of
nonperformance by the customer, the Company has rights to the
underlying collateral, which could include commercial real
estate, physical plant and property, inventory, receivables,
cash and marketable securities.
At December 31, 2009, the Company had recorded a liability
in the amount of $3.1 million, representing the carrying
value of the guarantee obligations associated with the standby
letters of credit. This amount will
112
Table of Contents
be amortized into income over the life of the commitment.
Commitments outstanding under these letters of credit, which
represent the maximum potential future payments guaranteed by
the Company, were $404.1 million at December 31, 2009.
The Company regularly purchases various state tax credits
arising from third-party property redevelopment. While most of
the tax credits are resold to third parties, some are
periodically retained for use by the Company. During 2009,
purchases and sales of tax credits amounted to
$51.4 million and $42.5 million, respectively. At
December 31, 2009, the Company had outstanding purchase
commitments totaling $114.7 million. The commitments are
expected to be funded in 2010 through 2013.
The Company periodically enters into risk participation
agreements (RPAs) as a guarantor to other financial
institutions, in order to mitigate those institutions’
credit risk associated with interest rate swaps with third
parties. The RPA stipulates that, in the event of default by the
third party on the interest rate swap, the Company will
reimburse a portion of the loss borne by the financial
institution. These interest rate swaps are normally
collateralized (generally with real property, inventories and
equipment) by the third party, which limits the credit risk
associated with the Company’s RPAs. The third parties
usually have other borrowing relationships with the Company. The
Company monitors overall borrower collateral, and at
December 31, 2009, believes sufficient collateral is
available to cover potential swap losses. The Company receives a
fee from the institution at the inception of the contract, which
is recorded as a liability representing the fair value of the
RPA. Any future changes in fair value, including those due to a
change in the third party’s creditworthiness, are recorded
in current earnings. The terms of the RPAs, which correspond to
the terms of the underlying swaps, range from 5 to
10 years. At December 31, 2009, the liability recorded
for guarantor RPAs was $239 thousand, and the notional amount of
the underlying swaps was $34.0 million.
The Company guarantees payments to holders of certain trust
preferred securities issued by a wholly owned grantor trust, as
discussed in Note 8 on Borrowings. These preferred
securities totaled $4.0 million at December 31, 2009,
carry an interest rate of 10.9%, and are due in 2030. The
Company intends to redeem the securities in 2010.
The Company has committed to borrow $400.0 million under
structured repurchase agreements in August 2010. These
borrowings have a floating interest rate based upon a CMS rate
and will mature in 2013 through 2014. They will largely replace
several other structured repurchase agreements which will mature
in August 2010. These types of borrowings are secured with
marketable securities.
At December 31, 2009, the Company had recorded a liability
of $8.8 million representing its obligation to share
certain estimated litigation costs of Visa. This obligation
resulted from revisions in October 2007 to Visa’s by-laws
affecting all member banks, as part of an overall reorganization
in which the member banks indemnified Visa on certain covered
litigation. The covered litigation related mainly to American
Express and Discover suits, which are now settled, and other
interchange litigation, which has not yet been settled. As part
of the reorganization, Visa held an initial public offering in
March 2008. An escrow account was established in conjunction
with the offering, and is being used to fund actual litigation
settlements as they occur. The escrow account was funded
initially with proceeds from the offering, and subsequently with
contributions by Visa. The Company’s indemnification
obligation is periodically adjusted to reflect changes in
estimates of litigation costs, and is reduced as funding occurs
in the escrow account. The Company currently anticipates that
its proportional share of eventual escrow funding will more than
offset its liability related to the Visa litigation.
In the normal course of business, the Company had certain
lawsuits pending at December 31, 2009. In the opinion of
management, after consultation with legal counsel, none of these
suits will have a significant effect on the financial condition
and results of operations of the Company.
| 20. | Related Parties |
The Company’s Chief Executive Officer and its Vice Chairman
are directors of Tower Properties Company (Tower) and, together
with members of their immediate families, beneficially own
approximately 73% of the outstanding stock of Tower. At
December 31, 2009, Tower owned 183,186 shares of
Company stock. Tower is primarily engaged in the business of
owning, developing, leasing and managing real property.
113
Table of Contents
Payments from the Company and its affiliates to Tower are
summarized below. The Company leases several surface parking
lots owned by Tower for employee use. Other payments, with the
exception of dividend payments, relate to property management
services, including construction oversight, on four
Company-owned office buildings and related parking garages in
downtown Kansas City.
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Rent on leased parking lots
|
$ | 353 | $ | 501 | $ | 423 | ||||||
|
Leasing agent fees
|
14 | 19 | 19 | |||||||||
|
Operation of parking garages
|
115 | 114 | 104 | |||||||||
|
Building management fees
|
1,704 | 1,525 | 1,638 | |||||||||
|
Property construction management fees
|
61 | 118 | 269 | |||||||||
|
Dividends paid on Company stock held by Tower
|
167 | 166 | 158 | |||||||||
|
Total
|
$ | 2,414 | $ | 2,443 | $ | 2,611 | ||||||
Tower has a $13.5 million line of credit with the Bank
which is subject to normal credit terms and has a variable
interest rate. No loans were outstanding during the past three
years under this line of credit. Letters of credit may be
collateralized under this line of credit, and fees received for
these letters of credit totaled $218 thousand in 2008 and $35
thousand in 2007. From time to time, the Bank extends additional
credit to Tower for construction and development projects. No
construction loans were outstanding during 2009, 2008 and 2007.
During 2009, Tower leased office space in the Kansas City bank
headquarters building, owned by the Company. Rent paid to the
Company, at $15.25 per square foot, totaled $45 thousand in 2009.
Directors of the Company and their beneficial interests have
deposit accounts with the Bank and may be provided with cash
management and other banking services, including loans, in the
ordinary course of business. Such loans were made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other unrelated persons, and did not involve
more than the normal risk of collectability.
In December 2008 and at various times during 2009, the Company
purchased, through market transactions, corporate bonds issued
by Enterprise
Rent-A-Car
Company, whose Chairman and CEO is a director of the Company.
The bonds, totaling $12.9 million at book value, were sold
in the public market during December 2009 for a gain of
$3.8 million.
114
Table of Contents
| 21. | Parent Company Condensed Financial Statements |
Following are the condensed financial statements of Commerce
Bancshares, Inc. (Parent only) for the periods indicated:
Condensed
Balance Sheets
| December 31 | ||||||||
| (In thousands) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Investment in consolidated subsidiaries:
|
||||||||
|
Banks
|
$ | 1,670,328 | $ | 1,427,170 | ||||
|
Non-banks
|
43,173 | 44,487 | ||||||
|
Cash
|
52 | 71 | ||||||
|
Securities purchased under agreements to resell
|
47,525 | 66,425 | ||||||
|
Investment securities:
|
||||||||
|
Available for sale
|
115,157 | 47,471 | ||||||
|
Non-marketable
|
3,911 | 5,247 | ||||||
|
Advances to subsidiaries, net of borrowings
|
13,797 | 4,717 | ||||||
|
Income tax benefits
|
1,201 | — | ||||||
|
Other assets
|
14,138 | 12,999 | ||||||
|
Total assets
|
$ | 1,909,282 | $ | 1,608,587 | ||||
|
Liabilities and stockholders’ equity
|
||||||||
|
Indemnification obligation
|
$ | 8,837 | $ | 11,332 | ||||
|
Pension obligation
|
4,650 | 5,578 | ||||||
|
Income taxes payable
|
— | 3,403 | ||||||
|
Other liabilities
|
11,567 | 11,642 | ||||||
|
Total liabilities
|
25,054 | 31,955 | ||||||
|
Stockholders’ equity
|
1,884,228 | 1,576,632 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 1,909,282 | $ | 1,608,587 | ||||
Condensed
Statements of Income
| For the Years Ended December 31 | ||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Income
|
||||||||||||
|
Dividends received from consolidated subsidiaries:
|
||||||||||||
|
Banks
|
$ | 45,001 | $ | 75,900 | $ | 172,187 | ||||||
|
Non-banks
|
129 | 270 | 7,280 | |||||||||
|
Earnings of consolidated subsidiaries, net of dividends
|
128,536 | 103,618 | 44,086 | |||||||||
|
Interest and dividends on investment securities
|
1,406 | 2,326 | 4,524 | |||||||||
|
Management fees charged subsidiaries
|
46,613 | 44,035 | 39,074 | |||||||||
|
Investment securities gains
|
1,804 | 20,857 | 2,110 | |||||||||
|
Other
|
2,538 | 642 | 1,913 | |||||||||
|
Total income
|
226,027 | 247,648 | 271,174 | |||||||||
|
Expense
|
||||||||||||
|
Salaries and employee benefits
|
39,528 | 36,586 | 30,509 | |||||||||
|
Professional fees
|
3,080 | 2,698 | 3,997 | |||||||||
|
Data processing fees paid to affiliates
|
11,337 | 11,677 | 11,097 | |||||||||
|
Indemnification obligation
|
(2,495 | ) | (9,619 | ) | 20,951 | |||||||
|
Other
|
10,941 | 11,280 | 11,182 | |||||||||
|
Total expense
|
62,391 | 52,622 | 77,736 | |||||||||
|
Income tax expense (benefit)
|
(5,439 | ) | 6,371 | (13,222 | ) | |||||||
|
Net income
|
$ | 169,075 | $ | 188,655 | $ | 206,660 | ||||||
115
Table of Contents
Condensed
Statements of Cash Flows
| For the Years Ended December 31 | ||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Operating Activities
|
||||||||||||
|
Net income
|
$ | 169,075 | $ | 188,655 | $ | 206,660 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Earnings of consolidated subsidiaries, net of dividends
|
(128,536 | ) | (103,618 | ) | (44,086 | ) | ||||||
|
Other adjustments, net
|
(1,093 | ) | (21,257 | ) | 11,619 | |||||||
|
Net cash provided by operating activities
|
39,446 | 63,780 | 174,193 | |||||||||
|
Investing Activities
|
||||||||||||
|
(Increase) decrease in securities purchased under agreements to
resell
|
18,900 | (66,425 | ) | — | ||||||||
|
(Increase) decrease in investment in subsidiaries, net
|
353 | 99 | (43,977 | ) | ||||||||
|
Proceeds from sales of investment securities
|
11,812 | 26,653 | 55,866 | |||||||||
|
Proceeds from maturities of investment securities
|
105,944 | 73,291 | 62,256 | |||||||||
|
Purchases of investment securities
|
(195,935 | ) | (13,232 | ) | (70,389 | ) | ||||||
|
(Increase) decrease in advances to subsidiaries, net
|
(9,080 | ) | (20,425 | ) | 5,268 | |||||||
|
Net purchases of equipment
|
(409 | ) | (127 | ) | (1,691 | ) | ||||||
|
Net cash provided by (used in) investing activities
|
(68,415 | ) | (166 | ) | 7,333 | |||||||
|
Financing Activities
|
||||||||||||
|
Purchases of treasury stock
|
(528 | ) | (9,490 | ) | (128,578 | ) | ||||||
|
Issuance under open market stock sale program, stock purchase
and equity compensation plans
|
103,641 | 15,978 | 13,661 | |||||||||
|
Net tax benefit related to equity compensation plans
|
557 | 1,928 | 2,283 | |||||||||
|
Cash dividends paid on common stock
|
(74,720 | ) | (72,055 | ) | (68,915 | ) | ||||||
|
Net cash provided by (used in) financing activities
|
28,950 | (63,639 | ) | (181,549 | ) | |||||||
|
Decrease in cash
|
(19 | ) | (25 | ) | (23 | ) | ||||||
|
Cash at beginning of year
|
71 | 96 | 119 | |||||||||
|
Cash at end of year
|
$ | 52 | $ | 71 | $ | 96 | ||||||
Dividends paid by the Parent to its shareholders were
substantially provided from Bank dividends. The Bank may
distribute dividends without prior regulatory approval that do
not exceed the sum of net income for the current year and
retained net income for the preceding two years, subject to
maintenance of minimum capital requirements. The Parent charges
fees to its subsidiaries for management services provided, which
are allocated to the subsidiaries based primarily on total
average assets. The Parent makes advances to non-banking
subsidiaries and its subsidiary bank holding company. Advances
are made to the Parent by its subsidiary bank holding company
for investment in temporary liquid securities. Interest on such
advances is based on market rates.
For the past several years, the Parent has maintained a
$20.0 million line of credit for general corporate purposes
with the Bank. The line of credit is secured by marketable
investment securities. The Parent did not borrow under this line
during 2009, while average borrowings were $245 thousand during
2008 and $4.5 million in 2007. Interest was paid at the
quoted Call Money rate during the periods outstanding in 2008
and 2007, which was 6.1% and 6.4%, respectively.
The Parent plans to fund an additional $33.3 million
relating to private equity investments over the next several
years. The investments are made directly by the Parent and
through non-bank subsidiaries.
At December 31, 2009, the fair value of available for sale
investment securities held by the Parent consisted of
investments of $33.3 million in marketable common stock and
$81.9 million in non-agency mortgage-backed securities.
These mortgage-backed securities were purchased at fair value
from the Bank
116
Table of Contents
in December 2009. The Parent’s unrealized net gain in fair
value on its investments was $28.4 million at
December 31, 2009. The corresponding net of tax unrealized
gain included in stockholders’ equity was
$17.6 million. Also included in stockholders’ equity
was an unrealized net of tax gain in fair value of investment
securities held by subsidiaries, which amounted to
$46.7 million at December 31, 2009.
In 2007, the Parent recorded a liability related to its share of
certain estimated Visa litigation costs under an indemnification
obligation to Visa, as discussed on page 113. This
liability was $8.8 million at December 31, 2009
compared to $11.3 million at December 31, 2008.
Adjustments to the liability have been recorded as covered suits
have been settled or additional funding has been made to
Visa’s litigation escrow account, which resulted in net
declines in the liability of $2.5 million in 2009 and
$9.6 million during 2008. Also during 2008, the Parent
recorded a gain of $22.2 million on the redemption of Visa
Class B stock, which occurred in conjunction with
Visa’s initial public offering in March 2008.
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
| Item 9a. | CONTROLS AND PROCEDURES |
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934. Based on this
evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by
this annual report.
Management’s
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in
Internal Control –
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in
Internal
Control – Integrated Framework,
our management
concluded that our internal control over financial reporting was
effective as of December 31, 2009.
The Company’s internal control over financial reporting as
of December 31, 2009 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in
their report which follows.
Changes
in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial
reporting occurred that has materially affected, or is
reasonably likely to materially affect, such controls during the
last quarter of the period covered by this report.
117
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Commerce Bancshares, Inc.:
We have audited Commerce Bancshares, Inc. and subsidiaries (the
Company) internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control – Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. A
company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Commerce Bancshares, Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on
COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of
December 31, 2009 and 2008, and the related consolidated
statements of income, changes in equity, and cash flows for each
of the years in the three-year period ended December 31,
2009, and our report dated February 26, 2010 expressed an
unqualified opinion on those consolidated financial statements.
Kansas City, Missouri
February 26, 2010
118
Table of Contents
| Item 9b. | OTHER INFORMATION |
None
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by Items 401, 405 and 407(c)(3),
(d)(4) and (d)(5) of
Regulation S-K
regarding executive officers is included in Part I under
the caption “Executive Officers of the Registrant” and
under the captions “Election of the 2013 Class of
Directors”, “Section 16(a) Beneficial Ownership
Reporting Compliance”, “Audit Committee”,
“Audit Committee Report”, and “Committee on
Governance/Directors” in the definitive proxy statement,
which is incorporated herein by reference.
The Company’s financial officer code of ethics for the
chief executive officer and senior financial officers of the
Company is available at www.commercebank.com. Amendments to, and
waivers of, the code of ethics are posted on this website.
| Item 11. | EXECUTIVE COMPENSATION |
The information required by Items 402 and 407(e)(4) and
(e)(5) of
Regulation S-K
regarding executive compensation is included under the captions
“Executive Compensation”, “Compensation and Human
Resources Committee Report”, and “Compensation and
Human Resources Committee Interlocks and Insider
Participation” in the definitive proxy statement, which is
incorporated herein by reference.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Items 201(d) and 403 of
Regulation S-K
is covered under the captions “Equity Compensation Plan
Information” and “Security Ownership of Certain
Beneficial Owners and Management” in the definitive proxy
statement, which is incorporated herein by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Items 404 and 407(a) of
Regulation S-K
is covered under the captions “Election of the 2013 Class
of Directors” and “Corporate Governance” in the
definitive proxy statement, which is incorporated herein by
reference.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required is included under the captions
“Pre-approval of Services by the External Auditor” and
“Fees Paid to KPMG LLP” in the definitive proxy
statement, which is incorporated herein by reference.
119
| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as a part of this
report:
| Page | ||||||||
| (1 | ) | Financial Statements: | ||||||
| Consolidated Balance Sheets | 65 | |||||||
| Consolidated Statements of Income | 66 | |||||||
| Consolidated Statements of Cash Flows | 67 | |||||||
| Consolidated Statements of Changes in Equity | 68 | |||||||
| Notes to Consolidated Financial Statements | 69 | |||||||
| Summary of Quarterly Statements of Income | 59 | |||||||
| (2 | ) | Financial Statement Schedules: | ||||||
| All schedules are omitted as such information is inapplicable or is included in the financial statements. | ||||||||
(b) The exhibits filed as part of this report and exhibits
incorporated herein by reference to other documents are listed
in the Index to Exhibits (pages
E-1
through
E-2).
120
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized this 26th day of February 2010.
Commerce Bancshares, Inc.
| By: |
/s/
James
L. Swarts
|
James L. Swarts
Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
the 26th day of February 2010.
| By: |
/s/
Charles
G. Kim
|
Charles G. Kim
Chief Financial Officer
| By: |
/s/
Jeffery
D. Aberdeen
|
Jeffery D. Aberdeen
Controller
(Chief Accounting Officer)
|
David W. Kemper
|
||
|
(Chief Executive Officer)
|
||
|
John R. Capps
|
||
|
W. Thomas Grant, II
|
||
|
James B. Hebenstreit
|
||
|
Jonathan M. Kemper
|
A majority of the Board of Directors* | |
|
Terry O. Meek
|
||
|
Benjamin F. Rassieur, III
|
||
|
Andrew C. Taylor
|
||
|
Kimberly G. Walker
|
||
|
Robert H. West
|
| * | David W. Kemper, Director and Chief Executive Officer, and the other Directors of Registrant listed, executed a power of attorney authorizing James L. Swarts, their attorney-in-fact, to sign this report on their behalf. |
| By: |
/s/
James
L. Swarts
|
James L. Swarts
Attorney-in-Fact
121
Table of Contents
INDEX TO
EXHIBITS
3 – Articles of Incorporation and By-Laws:
(a) Restated Articles of Incorporation, as amended, were
filed in quarterly report on Form
10-Q
dated
August 10, 1999, and the same are hereby incorporated by
reference.
(b) Restated By-Laws, as amended, were filed in current
report on
Form 8-K
dated October 29, 2007, and the same are hereby
incorporated by reference.
4 – Instruments defining the rights of security
holders, including indentures:
(a) Pursuant to paragraph (b)(4)(iii) of Item 601
Regulation S-K,
Registrant will furnish to the Commission upon request copies of
long-term debt instruments.
10 – Material Contracts (Each of the following is a
management contract or compensatory plan arrangement):
(a) Commerce Bancshares, Inc. Executive Incentive
Compensation Plan amended and restated as of January 1,
2009 was filed in quarterly report on
Form 10-Q
dated August 7, 2009, and the same is hereby incorporated
by reference.
(b) Commerce Bancshares, Inc. 1987 Non-Qualified Stock
Option Plan amended and restated as of July 24, 2009 was
filed in quarterly report on
Form 10-Q
dated August 7, 2009, and the same is hereby incorporated
by reference.
(c) Commerce Bancshares, Inc. Stock Purchase Plan for
Non-Employee Directors amended and restated as of
October 4, 1996 was filed in quarterly report on
Form 10-Q
dated November 8, 1996, and the same is hereby incorporated
by reference.
(d) Commerce Bancshares, Inc. 1996 Incentive Stock Option
Plan amended and restated as of April 2001 was filed in
quarterly report on
Form 10-Q
dated May 8, 2001, and the same is hereby incorporated by
reference.
(e) Commerce Executive Retirement Plan amended and restated
as of January 1, 2005 was filed in current report on
Form 8-K
dated January 4, 2005, and the same is hereby incorporated
by reference.
(f) Commerce Bancshares, Inc. Restricted Stock Plan amended
and restated as of July 24, 2009 was filed in quarterly
report on
Form 10-Q
dated August 7, 2009, and the same is hereby incorporated
by reference.
(g) Form of Severance Agreement between Commerce
Bancshares, Inc. and certain of its executive officers entered
into as of October 4, 1996 was filed in quarterly report on
Form 10-Q
dated November 8, 1996, and the same is hereby incorporated
by reference.
(h) Trust Agreement for the Commerce Bancshares, Inc.
Executive Incentive Compensation Plan amended and restated as of
January 1, 2001 was filed in quarterly report on
Form 10-Q
dated May 8, 2001, and the same is hereby incorporated by
reference.
(i) Commerce Bancshares, Inc. 2010 Compensatory Arrangement
with CEO and Named Executive Officers was filed in current
report on
Form 8-K
dated February 11, 2010, and the same is hereby
incorporated by reference.
(j) Commerce Bancshares, Inc. 2005 Equity Incentive Plan
amended and restated as of July 24, 2009 was filed in
quarterly report on
Form 10-Q
dated August 7, 2009, and the same is hereby incorporated
by reference.
(k) Commerce Bancshares, Inc. Notice of Grant of Stock
Options and Option Agreement was filed in quarterly report on
Form 10-Q
dated August 5, 2005, and the same is hereby incorporated
by reference.
E-1
Table of Contents
(l) Commerce Bancshares, Inc. Restricted Stock Award
Agreement, pursuant to the Restricted Stock Plan, was filed in
quarterly report on
Form 10-Q
dated August 5, 2005, and the same is hereby incorporated
by reference.
(m) Commerce Bancshares, Inc. Stock Appreciation Rights
Agreement and Commerce Bancshares, Inc. Restricted Stock Award
Agreement, pursuant to the 2005 Equity Incentive Plan, were
filed in current report on
Form 8-K
dated February 23, 2006, and the same are hereby
incorporated by reference.
21 – Subsidiaries of the Registrant
23 – Consent of Independent Registered Public
Accounting Firm
24 – Power of Attorney
31.1 – Certification of CEO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 – Certification of CFO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 – Certifications of CEO and CFO pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
E-2
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules