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
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year
Ended December 31, 2010 — 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
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of 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
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
o
No
þ
As of June 30, 2010, the aggregate market value of the
voting stock held by non-affiliates of the Registrant was
approximately $2,604,000,000.
As of February 11, 2011, there were 86,958,563 shares
of Registrant’s $5 Par Value Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for
its 2011 annual meeting of shareholders, which will be filed
within 120 days of December 31, 2010, 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, 2010, the
Company had consolidated assets of $18.5 billion, loans of
$9.5 billion, deposits of $15.1 billion, and equity of
$2.0 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, 2009 and 2010 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. For additional information on acquisition and branch
disposition activity, refer to page 75.
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Table of Contents
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 209 full-service branches, a widespread ATM
network of 408 machines, and the use of alternative delivery
channels such as extensive online banking and telephone banking
services. In 2010, this retail segment contributed 35% 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
2010, it contributed 50% 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, 2010, the Wealth segment managed investments
with a market value of $14.3 billion and administered an
additional $10.7 billion in non-managed assets. Additional
information relating to operating segments can be found on pages
53 and 99.
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 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
4
Table of Contents
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,
generally up to $250,000 per depositor, for each account
ownership category. Through December 31, 2012, all
non-interest bearing transaction accounts are fully guaranteed
by the FDIC for the entire amount of the account. 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 had been depleted by high
levels of bank failures across the country. The Bank’s FDIC
expense totaled $19.2 million in 2010 and
$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. In November 2010, under the
provisions of the Dodd-Frank Act (mentioned below), the FDIC
proposed changing its assessment base from total domestic
deposits to average total assets minus average tangible equity.
The proposal alters other adjustments in the current assessment
system for heavy use of unsecured liabilities, secured
liabilities and brokered deposits, and adds an adjustment for
holdings of unsecured bank debt. The proposal is expected to
increase assessments on banks with more than $10 billion in
assets, raising their share of overall FDIC assessments from the
present 70% to 80%. The assessment increase would be in place by
the second quarter of 2011. Also, for banks with more than
$10 billion in assets, the FDIC has proposed changing the
assessment rate. The proposal would abandon the current method
for determining premiums, which are based on bank supervisory
ratings, debt issuer ratings and financial ratios. Instead, the
proposed assessment would rely on a scorecard designed to
measure financial performance and ability to withstand stress,
in addition to measuring the FDIC’s exposure should the
bank fail. This proposal would be effective beginning in the
second quarter of 2011. The Company expects that the effect of
these proposals, if adopted, would be to reduce FDIC insurance
expense in 2011 in the range of $4 to $5 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
5
Table of Contents
be obtained from the OCC for dividends exceeding these amounts.
The payment of dividends by the Bank may also be affected by
factors such as the maintenance of adequate capital.
Capital
Adequacy
The Company is required to comply with the capital adequacy
standards established by the Federal Reserve. These capital
adequacy guidelines generally require bank holding companies to
maintain minimum total capital equal to 8% of total
risk-adjusted assets and off-balance sheet items (the
“Total Risk-Based Capital Ratio”), with at least
one-half of that amount consisting of Tier I, or core
capital, and the remaining 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, 2010, the Bank was
“well-capitalized” under regulatory capital adequacy
standards, as further discussed on page 102.
In December 2010, the Basel Committee on Banking Supervision
presented to the public the Basel III rules text, which
proposes new global regulatory standards on bank capital
adequacy and liquidity. The Basel Committee seeks to strengthen
global capital and liquidity rules with the goal of promoting a
more resilient banking sector. The framework sets out tougher
capital requirements, higher risk-weighted assets, the
introduction of a leverage ratio, and higher requirements for
minimum capital ratios. Basel III also establishes two
minimum standards for liquidity to promote short-term
resilience, as well as resilience over a longer period of time
through a stable maturity structure of assets and liabilities.
Banks are required to begin phasing in Basel III
requirements beginning in 2013. The Company continues to
evaluate the impact of this framework on its operations and
reporting.
Legislation
The financial industry operates under laws and regulations that
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
6
Table of Contents
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.
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 included 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 became effective in July 2010, which deal with interest
rate reinstatements on former overdue accounts, and gift card
expiration dates and inactivity fees.
In late 2009, the Federal Reserve issued new regulations,
effective July 1, 2010, which prohibited financial
institutions from assessing fees for paying ATM and one-time
debit card transactions that overdraw consumer accounts unless
the consumer affirmatively consents to the financial
institution’s overdraft practices. The Company has
implemented new procedures to solicit and capture required
customer consents and, effective July 1, 2010, prohibited
such ATM and one-time debit card transactions causing
overdrafts, unless an opt-in consent has been received. As not
all customers provided such consent, these new regulations
resulted in lower deposit fee income in the second half of 2010.
Overdraft fees decreased $7.8 million in the second half of
2010 compared to the first half. The Company estimates that the
effect of these regulations will reduce annualized pre-tax
revenue by $15 to $16 million. As a means to mitigate some
of the impact to revenue, the Company is also developing other
products and has begun offering some deposit accounts with
monthly fees.
In March 2010, legislation was passed which expanded Pell Grants
and Perkins Loan programs and required all colleges and
universities to convert to direct lending programs with the
U.S. government as of July 1, 2010. Previously,
colleges and universities had the choice of participating in
either direct lending with the U.S. government or a program
whereby loans were originated by banks, but guaranteed by the
U.S. government. The Company terminated its guaranteed
student loan origination business effective July 1, 2010.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) was signed into law. The
Dodd-Frank Act is sweeping legislation intended to overhaul
regulation of the financial services industry. Its goals are to
establish a new council of “systemic risk” regulators,
create a new consumer protection division within the Federal
Reserve, empower the Federal Reserve to supervise the largest,
most complex financial companies, allow the government to seize
and liquidate failing financial companies, and give regulators
new powers to oversee the derivatives market. The provisions of
the Dodd-Frank Act are so extensive and overreaching that full
implementation may require several years, and an assessment of
its full effect on the Company is not possible at this time.
Under the provisions of the Dodd-Frank Act, the Federal Reserve
proposed changes in December 2010 that would significantly limit
the amount of debit card interchange fees charged by banks. The
proposal outlines two alternatives for computing a
“reasonable and proportional” fee. Industry analysts
have estimated that revenues from debit card interchange may be
reduced by as much as 70% under either approach.
7
Table of Contents
The proposal also seeks to limit network exclusivity, requiring
issuers to ensure that a debit card transaction can be carried
on several unaffiliated networks. The new rules would apply to
bank issuers with more than $10 billion in assets and would
take effect in July 2011. The Federal Reserve’s proposal
did not include a specific adjustment for fraud prevention
costs, which it intends to separately consider at a future date.
The Company’s fees from debit card interchange subject to
the proposed rule were $57 million in 2010.
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 service 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 4,389 persons on
a full-time basis and 616 persons on a part-time basis at
December 31, 2010. 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
|
42-44, 80-85 | ||||||
| III. |
Loan Portfolio
|
|||||||
|
Types of Loans
|
29 | |||||||
|
Maturities and Sensitivities of Loans to Changes in Interest
Rates
|
30 | |||||||
|
Risk Elements
|
36-42 | |||||||
| IV. |
Summary of Loan Loss Experience
|
33-36 | ||||||
| V. |
Deposits
|
44-45, 87 | ||||||
| VI. |
Return on Equity and Assets
|
18 | ||||||
| VII. |
Short-Term Borrowings
|
88-89 | ||||||
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. The
weak U.S. economy 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 will likely result in lower revenues from these products. | |
| • | High unemployment levels, weak economic activity and other 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 also 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. If an instance occurs |
9
Table of Contents
| that renders these predictions no longer capable of accurate estimation, this may in turn impact the reliability of the process. |
| • | 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 2010 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
10
Table of Contents
prices not sufficient to recover the full amount of the
financial instrument exposure due to the Company. Any such
losses could materially and adversely affect results of
operations.
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 the
Company’s 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. Recently,
budget deficits and other financial problems in a number of
states and political subdivisions have been reported in the
media. While the Company maintains rigorous risk management
practices over bonds issued by municipalities, further credit
deterioration in these bonds could occur and result in losses.
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 61% 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
11
Table of Contents
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.
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. In recent years 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, and that review could result in
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 may be
impaired, the compromise could result in lost business and as a
result, the Company could 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 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, and years of industry experience, as
well as 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 | 83 | 36 | |||||||||
|
Kansas City, MO
|
||||||||||||
|
811 Main
|
237,000 | 100 | 100 | |||||||||
|
Kansas City, MO
|
||||||||||||
|
8000 Forsyth
|
178,000 | 95 | 92 | |||||||||
|
Clayton, MO
|
||||||||||||
|
1551 N. Waterfront
Pkwy Wichita, KS |
120,000 | 99 | 32 | |||||||||
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
203 branch locations in Missouri, Illinois, Kansas, Oklahoma and
Colorado which are owned or leased, and 158 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 116.
| Item 4. | REMOVED AND RESERVED |
Executive
Officers of the Registrant
The following are the executive officers of the Company as of
February 25, 2011, each of whom is designated annually.
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, 57
|
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, 50
|
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. | |
|
Daniel D. Callahan, 53
|
Executive Vice President of the Company since December 2010, Senior Vice President of the Company since April 2005 and Vice President of the Company prior thereto. Executive Vice President of Commerce Bank, N.A. since May 2003. Effective December 2010, he was appointed Chief Credit Officer of the Company. | |
|
Sara E. Foster, 50
|
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, 60
|
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), the brother of Jonathan M. Kemper, Vice Chairman of the Company, and father of John W. Kemper. | |
|
John W. Kemper, 32
|
Senior Vice President of the Company since December 2010 and Senior Vice President of Commerce Bank, N.A. since January 2009. His employment began in August 2007 as Strategic Planning Consultant and was elected Strategic Planning Director in January 2009. Prior to his employment with the Commerce Bank, N.A. he was employed as an engagement manager with McKinsey & Company, a global management consulting firm, from 2005 until August 2007, managing strategy and operations projects primarily focused in the financial service industry. He is the son of David W. Kemper, Chairman, President, and Chief Executive Officer of the Company and nephew of Jonathan M. Kemper, Vice Chairman of the Company. | |
|
Jonathan M. Kemper, 57
|
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), the brother of David W. Kemper, Chairman, President, and Chief Executive Officer of the Company, and uncle of John W. Kemper. | |
|
Charles G. Kim, 50
|
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, 60
|
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). | |
|
Michael J. Petrie, 54
|
Senior Vice President of the Company since April 1995. Prior thereto, he was Vice President of the Company. | |
|
Robert J. Rauscher, 53
|
Senior Vice President of the Company since October 1997. Senior Vice President of Commerce Bank, N.A. prior thereto. | |
|
V. Raymond Stranghoener, 59
|
Executive Vice President of the Company since July 2005 and Senior Vice President of the Company prior thereto. | |
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 2010).
|
Cash
|
||||||||||||||
| Quarter | High | Low | Dividends | |||||||||||
|
2010
|
First | $ | 39.87 | $ | 35.76 | $ | .224 | |||||||
| Second | 41.16 | 33.83 | .224 | |||||||||||
| Third | 38.42 | 33.43 | .224 | |||||||||||
| Fourth | 40.59 | 34.35 | .224 | |||||||||||
|
2009
|
First | $ | 40.28 | $ | 25.22 | $ | .218 | |||||||
| Second | 35.60 | 26.97 | .218 | |||||||||||
| Third | 36.26 | 28.06 | .218 | |||||||||||
| Fourth | 38.46 | 32.56 | .218 | |||||||||||
|
2008
|
First | $ | 39.39 | $ | 32.83 | $ | .216 | |||||||
| Second | 39.44 | 34.06 | .216 | |||||||||||
| Third | 45.77 | 31.53 | .216 | |||||||||||
| Fourth | 47.95 | 32.15 | .216 | |||||||||||
Commerce Bancshares, Inc. common shares are listed on the Nasdaq
Global Select Market (NASDAQ) under the symbol CBSH. The Company
had 4,284 shareholders of record as of December 31,
2010.
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, 2005 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 2010.
|
|
||||||||||||||||
|
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, 2010
|
506,154 | $ | 36.70 | 506,154 | 2,329,156 | |||||||||||
|
November 1 – 30, 2010
|
566,534 | $ | 37.43 | 566,534 | 1,762,622 | |||||||||||
|
December 1 – 31, 2010
|
4,044 | $ | 39.34 | 4,044 | 1,758,578 | |||||||||||
|
Total
|
1,076,732 | $ | 37.09 | 1,076,732 | 1,758,578 | |||||||||||
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,
1,758,578 shares remained available for purchase at
December 31, 2010.
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 $221.7 million, an increase of 31.1% compared to the previous year. The return on average assets was 1.22%. Diluted earnings per share increased 27.9% in 2010 compared to 2009. | |
| • | Growth in total revenue – Total revenue is comprised of net interest income and non-interest income. Total revenue in 2010 grew 1.9% over 2009, which resulted from growth of $10.4 million, or 1.6%, in net interest income coupled with growth of $8.9 million, or 2.2%, in non-interest income. Total revenue has risen 4.7%, compounded annually, over the last five years. | |
| • | Expense control – Non-interest expense grew by 1.5% this year. Salaries and employee benefits, the largest expense component, grew by .2%, due to higher incentive payments and 401K plan expense, which were partly offset by lower pension and medical costs. | |
| • | Asset quality – Net loan charge-offs in 2010 decreased $41.9 million from those recorded in 2009, and averaged 1.00% of loans compared to 1.31% in the previous year. Total non-performing assets, which include non-accrual loans and other real estate owned, amounted to $97.3 million, a decrease of $19.4 million from balances at the previous year end, and represented 1.03% of loans outstanding. | |
| • | Shareholder return – Total shareholder return, including the change in stock price and dividend reinvestment, was 10.3% over the past year and 6.4% 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) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
Return on total assets
|
1.22 | % | .96 | % | 1.15 | % | 1.33 | % | 1.54 | % | ||||||||||
|
Return on total equity
|
11.15 | 9.76 | 11.81 | 13.97 | 15.92 | |||||||||||||||
|
Equity to total assets
|
10.91 | 9.83 | 9.71 | 9.55 | 9.70 | |||||||||||||||
|
Loans to
deposits
(1)
|
70.02 | 79.79 | 92.11 | 88.49 | 84.73 | |||||||||||||||
|
Non-interest bearing deposits to total deposits
|
6.92 | 6.66 | 5.47 | 5.45 | 5.78 | |||||||||||||||
|
Net yield on interest earning assets (tax equivalent basis)
|
3.89 | 3.93 | 3.96 | 3.85 | 3.95 | |||||||||||||||
|
(Based on end of period data)
|
||||||||||||||||||||
|
Non-interest income to
revenue
(2)
|
38.54 | 38.41 | 38.80 | 40.85 | 40.72 | |||||||||||||||
|
Efficiency
ratio
(3)
|
59.71 | 59.88 | 63.08 | 62.65 | 60.20 | |||||||||||||||
|
Tier I risk-based capital ratio
|
14.38 | 13.04 | 10.92 | 10.31 | 11.25 | |||||||||||||||
|
Total risk-based capital ratio
|
15.75 | 14.39 | 12.31 | 11.49 | 12.56 | |||||||||||||||
|
Tier I leverage ratio
|
10.17 | 9.58 | 9.06 | 8.76 | 9.05 | |||||||||||||||
|
Tangible equity to assets
ratio
(4)
|
10.27 | 9.71 | 8.25 | 8.61 | 8.77 | |||||||||||||||
|
Cash dividend payout ratio
|
35.52 | 44.15 | 38.54 | 33.76 | 30.19 | |||||||||||||||
| (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) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net interest income
|
$ | 645,932 | $ | 635,502 | $ | 592,739 | $ | 538,072 | $ | 513,199 | ||||||||||
|
Provision for loan losses
|
100,000 | 160,697 | 108,900 | 42,732 | 25,649 | |||||||||||||||
|
Non-interest income
|
405,111 | 396,259 | 375,712 | 371,581 | 352,586 | |||||||||||||||
|
Investment securities gains (losses), net
|
(1,785 | ) | (7,195 | ) | 30,294 | 8,234 | 9,035 | |||||||||||||
|
Non-interest expense
|
631,134 | 621,737 | 615,380 | 574,159 | 522,391 | |||||||||||||||
|
Net income
|
221,710 | 169,075 | 188,655 | 206,660 | 219,842 | |||||||||||||||
|
Net income per common share-basic*
|
2.54 | 1.98 | 2.26 | 2.46 | 2.57 | |||||||||||||||
|
Net income per common share-diluted*
|
2.52 | 1.97 | 2.24 | 2.44 | 2.54 | |||||||||||||||
|
Cash dividends
|
78,231 | 74,720 | 72,055 | 68,915 | 65,758 | |||||||||||||||
|
Cash dividends per share*
|
.895 | .871 | .864 | .823 | .768 | |||||||||||||||
|
Market price per share*
|
39.73 | 36.88 | 39.86 | 38.75 | 39.83 | |||||||||||||||
|
Book value per share*
|
23.36 | 21.64 | 18.90 | 18.41 | 17.01 | |||||||||||||||
|
Common shares outstanding*
|
86,624 | 87,159 | 83,560 | 83,113 | 85,028 | |||||||||||||||
|
Total assets
|
18,502,339 | 18,120,189 | 17,532,447 | 16,204,831 | 15,230,349 | |||||||||||||||
|
Loans, including held for sale
|
9,474,733 | 10,490,327 | 11,644,544 | 10,841,264 | 9,960,118 | |||||||||||||||
|
Investment securities
|
7,409,534 | 6,473,388 | 3,780,116 | 3,297,015 | 3,496,323 | |||||||||||||||
|
Deposits
|
15,085,021 | 14,210,451 | 12,894,733 | 12,551,552 | 11,744,854 | |||||||||||||||
|
Long-term debt
|
512,273 | 1,236,062 | 1,447,781 | 1,083,636 | 553,934 | |||||||||||||||
|
Equity
|
2,023,464 | 1,885,905 | 1,579,467 | 1,530,156 | 1,446,536 | |||||||||||||||
|
Non-performing assets
|
97,320 | 116,670 | 79,077 | 33,417 | 18,223 | |||||||||||||||
| * | Restated for the 5% stock dividend distributed in December 2010. |
18
Table of Contents
Results
of Operations
|
|
||||||||||||||||||||||||||||
| $ Change | % Change | |||||||||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | ’10-’09 | ’09-’08 | ’10-’09 | ’09-’08 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net interest income
|
$ | 645,932 | $ | 635,502 | $ | 592,739 | $ | 10,430 | $ | 42,763 | 1.6 | % | 7.2 | % | ||||||||||||||
|
Provision for loan losses
|
(100,000 | ) | (160,697 | ) | (108,900 | ) | (60,697 | ) | 51,797 | (37.8 | ) | 47.6 | ||||||||||||||||
|
Non-interest income
|
405,111 | 396,259 | 375,712 | 8,852 | 20,547 | 2.2 | 5.5 | |||||||||||||||||||||
|
Investment securities gains (losses), net
|
(1,785 | ) | (7,195 | ) | 30,294 | 5,410 | (37,489 | ) | 75.2 | (123.8 | ) | |||||||||||||||||
|
Non-interest expense
|
(631,134 | ) | (621,737 | ) | (615,380 | ) | 9,397 | 6,357 | 1.5 | 1.0 | ||||||||||||||||||
|
Income taxes
|
(96,249 | ) | (73,757 | ) | (85,077 | ) | 22,492 | (11,320 | ) | 30.5 | (13.3 | ) | ||||||||||||||||
|
Non-controlling interest (expense) income
|
(165 | ) | 700 | (733 | ) | (865 | ) | 1,433 | (123.6 | ) | 195.5 | |||||||||||||||||
|
Net income
|
$ | 221,710 | $ | 169,075 | $ | 188,655 | $ | 52,635 | $ | (19,580 | ) | 31.1 | % | (10.4 | )% | |||||||||||||
Net income for 2010 was $221.7 million, an increase of
$52.6 million, or 31.1%, compared to $169.1 million in
2009. Diluted income per share was $2.52 in 2010 compared to
$1.97 in 2009. The increase in net income resulted from a
$60.7 million decrease in the provision for loan losses
coupled with growth of $10.4 million in net interest income
and $8.9 million in non-interest income. The growth in
income was partly offset by an increase of $9.4 million in
non-interest expense. Several significant items of non-interest
income and non-interest expense affected results for 2010.
During 2010, the Company paid off $125.0 million in Federal
Home Loan Bank (FHLB) borrowings with high interest coupons
prior to maturity and incurred a pre-payment penalty of
$11.8 million. The Company also sold its held to maturity
portfolio of student loans, totaling $311.0 million, for a
gain of $6.9 million. During 2010, Visa, Inc. (Visa)
indemnification obligation liabilities were reduced by
$4.4 million, decreasing expense. The combined effect of
these items was a reduction in pre-tax net income of $465
thousand. The return on average assets was 1.22% in 2010
compared to .96% in 2009, and the return on average equity was
11.15% compared to 9.76%. At December 31, 2010, the ratio
of tangible equity to assets improved to 10.27% compared to
9.71% at year end 2009.
During 2010, net interest income increased $10.4 million,
or 1.6%, compared to 2009. This growth was mainly the result of
lower rates paid on deposits and higher average balances in
investment securities, but partly offset by lower yields on
loans and investment securities and declining loan balances. The
provision for loan losses totaled $100.0 million in 2010, a
decrease of $60.7 million from the prior year. The Company
incurred lower loan losses in nearly all categories, notably
construction, consumer and business.
Non-interest income in 2010 increased $8.9 million, or
2.2%, over amounts reported in the previous year, mainly due to
growth in bank card and trust fees, which rose
$26.8 million and $4.1 million, respectively. Bank
card fees increased due to strong growth in corporate card
revenues, resulting from both new customer transactions and
increased volumes from existing customers as the Company
continued to expand this product on a national basis. Offsetting
this growth was a decline in deposit account fees of
$13.7 million, or 12.9%, due largely to the effect of new
regulations on overdraft fees, in addition to lower brokerage
and bond trading revenue. Non-interest expense increased
$9.4 million, or 1.5%, over 2009. The growth in expense
included a pre-payment penalty to the FHLB of
$11.8 million, partly offset by an $8.2 million
reduction in FDIC insurance expense. Reductions in a Visa
indemnification obligation, discussed further in Note 19 to
the consolidated financial statements, were recorded in both
2010 and 2009. Income tax expense amounted to $96.2 million
in 2010 and $73.8 million in 2009. The effective tax rate
was 30.3% in 2010 compared to 30.4% in the previous year.
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 $20.5 million in non-interest income.
Diluted income per share was $1.97 in 2009 compared to $2.24 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 stock, a loss
19
Table of Contents
of $33.3 million relating to purchases of auction rate
securities, and a $6.9 million gain on a bank branch sale.
Reductions in the Visa indemnification obligation were
$2.5 million in 2009 compared to $9.6 million in 2008.
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. Similarly to the trend in 2010,
growth in 2009 was largely due to 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 lower 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 economic decline. 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 $20.5 million, or
5.5%, over amounts reported in 2008, 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
$6.4 million, or 1.0%, over 2008. This expense growth
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,
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.
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 seventeenth
consecutive year on December 20, 2010. All per share and
average share data in this report has been restated to reflect
the 2010 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.
20
Table of Contents
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 methodology used in establishing the
allowance is provided in the Allowance for Loan Losses section
of this discussion and in Note 1.
Valuation
of Investment Securities
The Company carries its investment securities at fair value and
employs valuation techniques which utilize observable inputs
when those inputs are available. These observable inputs reflect
assumptions market participants would use in pricing the
security and are developed based on market data obtained from
sources independent of the Company. When such information is not
available, the Company employs valuation techniques which
utilize unobservable inputs, or those which reflect the
Company’s own assumptions about market participants, based
on the best information available in the circumstances. These
valuation methods typically involve cash flow and other
financial modeling techniques. Changes in underlying factors,
assumptions, estimates, or other inputs to the valuation
techniques could have a material impact on the Company’s
future financial condition and results of operations. Assets and
liabilities carried at fair value inherently result in more
financial statement volatility. Under the fair value measurement
hierarchy, fair value measurements are classified as
Level 1 (quoted prices), Level 2 (based on observable
inputs) or Level 3 (based on unobservable,
internally-derived inputs), as discussed in more detail in
Note 16 on Fair Value Measurements. Most of the available
for sale investment portfolio is priced utilizing
industry-standard models that consider various assumptions
observable in the marketplace, or can be derived from observable
data. Such securities totaled approximately $6.7 billion,
or 91.5% of the available for sale portfolio at
December 31, 2010, and were classified as Level 2
measurements. The Company also holds $150.1 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 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, 2010, non-agency guaranteed mortgage-backed
securities with a par value of $184.3 million were
identified as
other-than-temporarily
impaired. The credit-related impairment loss on
21
Table of Contents
these securities amounted to $7.5 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 $12.2 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 $58.2 million at
December 31, 2010. Changes in fair value are reflected in
current earnings and reported in investment securities gains
(losses), net in the consolidated income statements. Because
there is no observable market data for these securities, their
fair values are internally developed using available information
and management’s judgment and are classified as
Level 3 measurements. Although management believes its
estimates of fair value reasonably reflect the fair value of
these securities, key assumptions regarding the projected
financial performance of these companies, the evaluation of the
investee company’s management 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.
| 2010 | 2009 | |||||||||||||||||||||||
| 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
|
$ | (40,397 | ) | $ | (7,643 | ) | $ | (48,040 | ) | $ | (31,745 | ) | $ | (66,327 | ) | $ | (98,072 | ) | ||||||
|
Loans held for sale
|
(809 | ) | (1,319 | ) | (2,128 | ) | 2,161 | (8,910 | ) | (6,749 | ) | |||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
U.S. government and federal agency obligations
|
10,767 | (7,848 | ) | 2,919 | 6,568 | (178 | ) | 6,390 | ||||||||||||||||
|
Government-sponsored enterprise obligations
|
2,009 | (1,637 | ) | 372 | (1,531 | ) | (1,325 | ) | (2,856 | ) | ||||||||||||||
|
State and municipal obligations
|
4,676 | (3,089 | ) | 1,587 | 9,669 | (3,557 | ) | 6,112 | ||||||||||||||||
|
Mortgage and asset-backed securities
|
34,296 | (49,602 | ) | (15,306 | ) | 63,862 | (22,144 | ) | 41,718 | |||||||||||||||
|
Other securities
|
(726 | ) | 805 | 79 | 4,524 | (1,155 | ) | 3,369 | ||||||||||||||||
|
Short-term federal funds sold and securities purchased under
agreements to resell
|
(206 | ) | 32 | (174 | ) | (7,361 | ) | (704 | ) | (8,065 | ) | |||||||||||||
|
Long-term securities purchased under agreements to resell
|
2,549 | — | 2,549 | — | — | — | ||||||||||||||||||
|
Interest earning deposits with banks
|
(385 | ) | 5 | (380 | ) | 1,183 | (574 | ) | 609 | |||||||||||||||
|
Total interest income
|
11,774 | (70,296 | ) | (58,522 | ) | 47,330 | (104,874 | ) | (57,544 | ) | ||||||||||||||
|
Interest expense
|
||||||||||||||||||||||||
|
Interest bearing deposits:
|
||||||||||||||||||||||||
|
Savings
|
60 | (80 | ) | (20 | ) | 113 | (657 | ) | (544 | ) | ||||||||||||||
|
Interest checking and money market
|
5,562 | (7,675 | ) | (2,113 | ) | 6,211 | (35,369 | ) | (29,158 | ) | ||||||||||||||
|
Time open and C.D.’s of less than $100,000
|
(8,420 | ) | (20,691 | ) | (29,111 | ) | (3,466 | ) | (21,874 | ) | (25,340 | ) | ||||||||||||
|
Time open and C.D.’s of $100,000 and over
|
(7,117 | ) | (14,407 | ) | (21,524 | ) | 8,424 | (28,718 | ) | (20,294 | ) | |||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
295 | (1,410 | ) | (1,115 | ) | (8,439 | ) | (12,947 | ) | (21,386 | ) | |||||||||||||
|
Other borrowings
|
(15,064 | ) | (1,515 | ) | (16,579 | ) | (4,611 | ) | (1,767 | ) | (6,378 | ) | ||||||||||||
|
Total interest expense
|
(24,684 | ) | (45,778 | ) | (70,462 | ) | (1,768 | ) | (101,332 | ) | (103,100 | ) | ||||||||||||
|
Net interest income, fully taxable equivalent basis
|
$ | 36,458 | $ | (24,518 | ) | $ | 11,940 | $ | 49,098 | $ | (3,542 | ) | $ | 45,556 | ||||||||||
Net interest income totaled $645.9 million in 2010,
representing an increase of $10.4 million, or 1.6%,
compared to $635.5 million in 2009. On a tax equivalent
basis, net interest income totaled $666.1 million and
increased $11.9 million, or 1.8%, over the previous year.
This increase was mainly the result of lower average deposit and
borrowing balances and lower rates paid on these liabilities,
which were partly offset by lower average loan balances and
yields, coupled with lower rates earned on the investment
securities portfolio. The net yield on earning assets (tax
equivalent) was 3.89% in 2010 compared with 3.93% in the
previous year.
During 2010, interest income on loans (tax equivalent) declined
$48.0 million from 2009 due to lower average balances on
most loan categories, coupled with lower rates earned on
personal real estate and other personal banking loan products.
The average rate earned on the loan portfolio was 5.28% compared
to 5.27% in the previous year. Rates on consumer credit cards
were impacted by new regulations on interest and service
charges, while lower rates on personal real estate loans
reflected the overall lower rate environment in the industry
this year. Rates increased on business and construction loans,
reflecting some increase in risk based pricing obtained earlier
in the year. Total average loan balances decreased
$931.2 million, or 8.8%, reflecting declines of
$346.8 million in business and business real estate loans,
$182.6 million in construction loans, $109.2 million
in personal real estate and $214.1 million in consumer
loans. The decrease in business,
23
Table of Contents
business real estate and personal real estate loans was the
result of loan principal pay downs and lower line of credit
utilization, which exceeded new loan originations due to lower
loan demands. The decline in construction loans was mainly due
to the weak housing economy and the Company’s efforts to
reduce this portfolio. The decrease in average consumer loans
was reflective of lower customer demand for automobile
financing, coupled with the fact that the Company ceased most
marine and recreational vehicle lending in 2008, while pay downs
on the existing balances continued. In October 2010, the Company
sold its entire held to maturity student loan portfolio, which
totaled approximately $311.0 million, to another loan
servicer. Total average loans held for sale, which are mainly
federally guaranteed student loans, declined $39.1 million.
In the second half of 2010, the Company sold most of these
loans, and new regulations prohibit the Company from originating
new federally guaranteed student loans in the future. Tax
equivalent interest earned on investment securities decreased by
$10.3 million, or 4.3%, due to lower rates earned, partly
offset by higher average balances of securities. The average
rate earned on the investment securities portfolio declined from
4.54% in 2009 to 3.40% in 2010, resulting in a decline in
interest income of approximately $61.4 million due to lower
rates. Average balances of mortgage and other asset-backed
securities increased $1.1 billion, or 28.2%, while the
average rate earned decreased 130 basis points to 3.17%.
Average balances of U.S. government and federal agency
securities increased $269.9 million during the year, while
average rates earned decreased 179 basis points to 2.20%.
Average state and municipal obligations balances increased
$93.1 million, while average rates earned decreased
32 basis points to 4.70%. During the second half of 2010,
in order to diversify its investment portfolio, the Company
purchased long-term resell agreements. The average balance of
these long-term resell agreements in 2010 was
$150.2 million, and earned interest at an average rate of
1.70%. Most of the purchases were made in the later half of the
year, and the year end balance grew to $450.0 million.
Average rates (tax equivalent) earned on total interest earning
assets in 2010 decreased to 4.38% compared to 4.85% in the
previous year, or a decline of 47 basis points.
During 2010, interest expense on deposits decreased
$52.8 million, or 44.4%, compared to 2009. This was mainly
the result of lower rates on all deposit products coupled with a
$930.1 million decline in average certificate of deposit
balances, but partly offset by the effects of higher average
balances of money market and interest checking accounts, which
grew by $1.4 billion. Average rates paid on deposit
balances declined 43 basis points in 2010 to .49%. Interest
expense on borrowings declined $17.7 million, mainly the
result of lower rates paid on total debt and lower average
balances outstanding of FHLB borrowings. The average balance of
FHLB borrowings decreased $383.7 million, partly due to
scheduled maturities of advances and partly due to the early pay
off of $125.0 million in advances prior to maturity. The
average rate paid on total interest bearing liabilities
decreased to .56% compared to 1.04% in 2009.
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% 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. 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 resell 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
24
Table of Contents
purchased and repurchase agreement borrowings. The average rate
paid on interest bearing liabilities decreased to 1.04% compared
to 1.83% in 2008.
Provision
for Loan Losses
The provision for loan losses totaled $100.0 million in
2010, which represented a decrease of $60.7 million from
the 2009 provision of $160.7 million. Net loan charge-offs
for the year totaled $96.9 million compared with
$138.8 million in 2009, or a decrease of
$41.9 million. The decrease in net loan charge-offs from
the previous year was mainly the result of lower construction,
consumer and business losses, which declined $19.1 million,
$11.7 million, and $8.3 million, respectively. The
allowance for loan losses totaled $197.5 million at
December 31, 2010, an increase of $3.1 million over
the prior year, and represented 2.10% of outstanding loans. 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.
Non-Interest
Income
|
|
||||||||||||||||||||
| % Change | ||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | ’10-’09 | ’09-’08 | |||||||||||||||
|
|
||||||||||||||||||||
|
Bank card transaction fees
|
$ | 148,888 | $ | 122,124 | $ | 113,862 | 21.9 | % | 7.3 | % | ||||||||||
|
Deposit account charges and other fees
|
92,637 | 106,362 | 110,361 | (12.9 | ) | (3.6 | ) | |||||||||||||
|
Trust fees
|
80,963 | 76,831 | 80,294 | 5.4 | (4.3 | ) | ||||||||||||||
|
Bond trading income
|
21,098 | 22,432 | 15,665 | (5.9 | ) | 43.2 | ||||||||||||||
|
Consumer brokerage services
|
9,190 | 10,831 | 12,156 | (15.2 | ) | (10.9 | ) | |||||||||||||
|
Loan fees and sales
|
23,116 | 21,273 | (2,413 | ) | 8.7 | N.M. | ||||||||||||||
|
Other
|
29,219 | 36,406 | 45,787 | (19.7 | ) | (20.5 | ) | |||||||||||||
|
Total non-interest income
|
$ | 405,111 | $ | 396,259 | $ | 375,712 | 2.2 | % | 5.5 | % | ||||||||||
|
Non-interest income as a % of total revenue*
|
38.5 | % | 38.4 | % | 38.8 | % | ||||||||||||||
|
Total revenue per full-time equivalent employee
|
$ | 211.1 | $ | 201.3 | $ | 185.6 | ||||||||||||||
| * | Total revenue is calculated as net interest income plus non-interest income. |
Non-interest income totaled $405.1 million, an increase of
$8.9 million, or 2.2%, compared to $396.3 million in
2009. Bank card fees increased $26.8 million, or 21.9%, due
to growth of 50.2%, 13.2%, and 15.6% in corporate card, debit
card and merchant transactions, respectively. During 2010, debit
card fees totaled $57.0 million and comprised 38.3% of
total bank card fees, while corporate card fees totaled
$48.3 million and comprised 32.4% of total fees. Trust fee
income increased $4.1 million, or 5.4%, as a result of
growth in personal and institutional trust fees, partly offset
by lower corporate fees. While most of the growth in trust fees
came from private client business, fees from institutional trust
services also grew $1.5 million, or 10.2%, in 2010. Because
of the low interest rate environment this year, the Company
waived trust fees on certain short-term client assets in money
market investments. It is estimated that these waived fees
amounted to approximately $6 million. The market value of
total customer trust assets (on which fees are charged) totaled
$25.1 billion at year end 2010, and grew 13.5% over year
end 2009. Deposit account fees declined $13.7 million, or
12.9%, from the prior year as a result of a $13.6 million
decline in overdraft fee revenue. Overdraft fees comprised 55.2%
of total deposit account fee income in 2010, down from 60.9% in
2009. The lower overdraft fees resulted from the Company’s
implementation on July 1, 2010 of new overdraft regulations
on debit card transactions. Also, corporate cash management
fees, which comprised 35.7% of total deposit account fees in
2010, declined 1.9% this year on lower sales/activity. Bond
trading income declined $1.3 million, or 5.9%, due to lower
sales of fixed income securities to correspondent banks and
corporate customers, while consumer brokerage services revenue
declined $1.6 million, or 15.2%, mainly due to lower fees
earned on mutual fund sales. Loan fees and sales increased by
$1.8 million over 2009. This increase included a
$6.9 million gain recorded on the sale of the
Company’s held to maturity portfolio of student loans in
late 2010, partly offset by a $5.3 million decline in gains
on sales of loans held for sale and adjustments to related
impairment reserves. Other non-interest income decreased by
$7.2 million partly due to impairment charges of
$2.0 million on certain bank premises, coupled
25
Table of Contents
with other fixed asset retirements. Also included were declines
in cash sweep commissions and equipment rental income, partially
offset by higher fees on letters of credit and foreign exchange
transactions.
During 2009, non-interest income increased $20.5 million,
or 5.5%, over 2008 to $396.3 million. 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%.
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 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 had on trust asset values during 2009, as well as
the effects of low interest rates on money market assets held in
trust accounts. The market value of total customer trust assets
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 volume, 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 $9.4 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. 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 a Kansas City
office building.
Investment
Securities Gains (Losses), Net
Net gains and losses on investment securities during 2010, 2009
and 2008 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. Portions of the fair value adjustments attributable
to minority interests are reported as non-controlling interest
in the consolidated income statement and resulted in income of
$108 thousand and $1.1 million in 2010 and 2009,
respectively, and expense of $299 thousand in 2008.
Net securities losses of $1.8 million were recorded in
2010. Included in these losses are credit-related impairment
losses of $5.1 million on certain non-agency guaranteed
mortgage-backed securities which have been identified as
other-than-temporarily impaired. These securities had a par
value of $184.3 million at December 31, 2010. The
cumulative credit-related impairment loss on these securities,
recorded in earnings, amounted to $7.5 million, while the
cumulative noncredit-related loss on these securities, which has
been recorded in other comprehensive income (loss), was
$12.2 million. Offsetting these losses were net gains of
$3.5 million recorded on sales of investment securities
(mainly mortgage-backed and municipals) from the bank portfolio.
26
Table of Contents
Net securities losses of $7.2 million were recorded in
2009, compared to net gains of $30.3 million in 2008. Most
of the loss recorded in 2009 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
the non-agency mortgage-backed securities mentioned above. The
net gain in 2008 included a $22.2 million gain resulting
from the redemption of Visa Class B stock in conjunction
with an initial public offering by Visa. In addition, during
2008 certain auction rate securities were sold in exchange for
student loans, resulting in a gain of $7.9 million.
|
|
||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Available for sale
:
|
||||||||||||
|
Preferred equity securities
|
$ | — | $ | — | $ | (3,504 | ) | |||||
|
Common stock
|
— | — | (294 | ) | ||||||||
|
Auction rate securities
|
— | — | 7,861 | |||||||||
|
Other bonds:
|
||||||||||||
|
Realized gains
|
3,488 | 322 | 1,140 | |||||||||
|
OTTI losses
|
(5,069 | ) | (2,473 | ) | — | |||||||
|
Non-marketable:
|
||||||||||||
|
Private equity investments
|
(204 | ) | (5,044 | ) | 2,895 | |||||||
|
Visa Class B stock
|
— | — | 22,196 | |||||||||
|
Total investment securities gains (losses), net
|
$ | (1,785 | ) | $ | (7,195 | ) | $ | 30,294 | ||||
Non-Interest
Expense
|
|
||||||||||||||||||||
| % Change | ||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | ’10-’09 | ’09-’08 | |||||||||||||||
|
|
||||||||||||||||||||
|
Salaries
|
$ | 292,675 | $ | 290,289 | $ | 286,161 | .8 | % | 1.4 | % | ||||||||||
|
Employee benefits
|
53,875 | 55,490 | 47,451 | (2.9 | ) | 16.9 | ||||||||||||||
|
Net occupancy
|
46,987 | 45,925 | 46,317 | 2.3 | (.8 | ) | ||||||||||||||
|
Equipment
|
23,324 | 25,472 | 24,569 | (8.4 | ) | 3.7 | ||||||||||||||
|
Supplies and communication
|
27,113 | 32,156 | 35,335 | (15.7 | ) | (9.0 | ) | |||||||||||||
|
Data processing and software
|
67,935 | 61,789 | 56,387 | 9.9 | 9.6 | |||||||||||||||
|
Marketing
|
18,161 | 18,231 | 19,994 | (.4 | ) | (8.8 | ) | |||||||||||||
|
Deposit insurance
|
19,246 | 27,373 | 2,051 | (29.7 | ) | N.M. | ||||||||||||||
|
Debt extinguishment
|
11,784 | — | — | N.M. | N.M. | |||||||||||||||
|
Loss on purchase of auction rate securities
|
— | — | 33,266 | N.M. | N.M. | |||||||||||||||
|
Indemnification obligation
|
(4,405 | ) | (2,496 | ) | (9,619 | ) | N.M. | N.M. | ||||||||||||
|
Other
|
74,439 | 67,508 | 73,468 | 10.3 | (8.1 | ) | ||||||||||||||
|
Total non-interest expense
|
$ | 631,134 | $ | 621,737 | $ | 615,380 | 1.5 | % | 1.0 | % | ||||||||||
|
Efficiency ratio
|
59.7 | % | 59.9 | % | 63.1 | % | ||||||||||||||
|
Salaries and benefits as a % of total non-interest expense
|
54.9 | % | 55.6 | % | 54.2 | % | ||||||||||||||
|
Number of full-time equivalent employees
|
4,979 | 5,125 | 5,217 | |||||||||||||||||
Non-interest expense was $631.1 million in 2010, an
increase of $9.4 million, or 1.5%, over the previous year.
Non-interest expense included a debt pre-payment penalty of
$11.8 million in 2010, in addition to reductions in a Visa
indemnification obligation of $4.4 million and
$2.5 million in 2010 and 2009, respectively. Excluding
these items, non-interest expense would have amounted to
$623.8 million in 2010, a decrease of $478 thousand from
the prior year. Salaries and benefits grew by $771 thousand, or
.2%, mainly as a result of higher costs for incentives and 401K
plan contributions, but lower costs for base salaries, pension
and
27
Table of Contents
medical plans. Total salaries expense was up $2.4 million,
or .8%, and full-time equivalent employees totaled 4,979 and
5,125 at December 31, 2010 and 2009, respectively, a
decline of 2.8%. Occupancy costs increased $1.1 million, or
2.3%, primarily resulting from higher real estate taxes and
utilities expense. Equipment costs decreased $2.1 million
mainly due to lower depreciation on data processing equipment.
Supplies and communication expense declined $5.0 million,
or 15.7%, which reflected certain initiatives to reduce paper
supplies, customer checks and courier costs. Data processing and
software costs grew $6.1 million, primarily due to higher
bank card processing costs, which have increased in proportion
to the growth in bank card revenues. Deposit insurance decreased
$8.1 million mainly due to a special assessment levied by
the FDIC in 2009 which did not reoccur in 2010. Other
non-interest expense increased $6.9 million and included
foreclosed property expense of $6.3 million, which
increased due to higher write-downs to fair value and additional
holding costs, in conjunction with higher levels of such assets
held by the Company. Also included were higher costs for
professional services, partially offset by lower operating
losses.
In 2009, non-interest expense was $621.7 million, an
increase of $6.4 million, or 1.0%, over the previous year.
FDIC insurance expense, including normal deposit premiums and
special assessments, increased $25.3 million compared to
2008, as the FDIC began a program to replenish its insurance
fund. 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. Marketing expense decreased $1.8 million,
or 8.8%. Other non-interest expense decreased $6.0 million,
or 8.1%, 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. Total non-interest
expense in 2008 included a $33.3 million non-cash loss
related to the purchase of auction rate securities from
customers, which represented the amount by which the purchase
price (at par) exceeded estimated fair value on the purchase
date.
Income
Taxes
Income tax expense was $96.2 million in 2010, compared to
$73.8 million in 2009 and $85.1 million in 2008.
Income tax expense in 2010 increased 30.5% over 2009, compared
to a 31.4% increase in pre-tax income. The effective tax rate,
including the effect of non-controlling interest, was 30.3%,
30.4% and 31.1% in 2010, 2009 and 2008, 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.
28
Table of Contents
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 were
acquired or originated with the intent of holding to their
maturity. Loans held for sale are separately discussed in a
following section. A schedule of average balances invested in
each loan category below appears on page 60.
|
|
||||||||||||||||||||
| Balance at December 31 | ||||||||||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Business
|
$ | 2,957,043 | $ | 2,877,936 | $ | 3,404,371 | $ | 3,257,047 | $ | 2,860,692 | ||||||||||
|
Real estate – construction and land
|
460,853 | 665,110 | 837,369 | 668,701 | 658,148 | |||||||||||||||
|
Real estate – business
|
2,065,837 | 2,104,030 | 2,137,822 | 2,239,846 | 2,148,195 | |||||||||||||||
|
Personal banking:
|
||||||||||||||||||||
|
Real estate – personal
|
1,440,386 | 1,537,687 | 1,638,553 | 1,540,289 | 1,478,669 | |||||||||||||||
|
Consumer
|
1,164,327 | 1,333,763 | 1,615,455 | 1,648,072 | 1,435,038 | |||||||||||||||
|
Revolving home equity
|
477,518 | 489,517 | 504,069 | 460,200 | 441,851 | |||||||||||||||
|
Student
|
— | 331,698 | 358,049 | — | — | |||||||||||||||
|
Consumer credit card
|
831,035 | 799,503 | 779,709 | 780,227 | 648,326 | |||||||||||||||
|
Overdrafts
|
13,983 | 6,080 | 7,849 | 10,986 | 10,601 | |||||||||||||||
|
Total loans
|
$ | 9,410,982 | $ | 10,145,324 | $ | 11,283,246 | $ | 10,605,368 | $ | 9,681,520 | ||||||||||
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
|
$ | — | ||
29
Table of Contents
The contractual maturities of loan categories at
December 31, 2010, 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
|
$ | 1,578,361 | $ | 1,216,165 | $ | 162,517 | $ | 2,957,043 | ||||||||
|
Real estate – construction and land
|
304,116 | 154,252 | 2,485 | 460,853 | ||||||||||||
|
Real estate – business
|
550,012 | 1,303,888 | 211,937 | 2,065,837 | ||||||||||||
|
Real estate – personal
|
155,182 | 381,797 | 903,407 | 1,440,386 | ||||||||||||
|
Total business and real estate loans
|
$ | 2,587,671 | $ | 3,056,102 | $ | 1,280,346 | 6,924,119 | |||||||||
|
Consumer
(1)
|
1,164,327 | |||||||||||||||
|
Revolving home
equity
(2)
|
477,518 | |||||||||||||||
|
Consumer credit
card
(3)
|
831,035 | |||||||||||||||
|
Overdrafts
|
13,983 | |||||||||||||||
|
Total loans
|
$ | 9,410,982 | ||||||||||||||
|
Loans with fixed rates
|
$ | 540,563 | $ | 1,573,442 | $ | 451,261 | $ | 2,565,266 | ||||||||
|
Loans with floating rates
|
2,047,108 | 1,482,660 | 829,085 | 4,358,853 | ||||||||||||
|
Total business and real estate loans
|
$ | 2,587,671 | $ | 3,056,102 | $ | 1,280,346 | $ | 6,924,119 | ||||||||
| (1) | Consumer loans with floating rates totaled $113.8 million. | |
| (2) | Revolving home equity loans with floating rates totaled $472.7 million. | |
| (3) | Consumer credit card loans with floating rates totaled $465.9 million. |
Total loans at December 31, 2010 were $9.4 billion, a
decrease of $734.3 million, or 7.2%, from balances at
December 31, 2009. The decline in loans during 2010
occurred principally in construction, consumer and student
loans. Business loans increased $79.1 million, or 2.7%,
reflecting growth in commercial and tax free loans, while lease
balances, which are also included in the business category,
decreased $37.9 million, or 13.5%, compared with the
previous year end balance, as demand for equipment financing
weakened. Business real estate loans were lower by
$38.2 million, or 1.8%, and construction loans decreased
$204.3 million, or 30.7%. 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
$97.3 million and $169.4 million, respectively, as
loan pay downs exceeded new loan originations. Consumer loans
declined primarily because the Company ceased most marine and
recreational vehicle lending from that portfolio several years
ago. Revolving home equity loans decreased $12.0 million
due to fewer new account activations. Consumer credit card loans
increased by $31.5 million, or 3.9%. The student loan
portfolio, which was originally acquired in 2008, was sold in
October 2010 as discussed below.
Period end loans decreased $1.1 billion, or 10.8%, in 2009
compared to 2008, resulting from decreases in business,
construction, personal real estate and consumer loans.
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 58%
in loans to businesses and 42% 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.
Commercial
Loans
Business
Total business loans amounted to $3.0 billion at
December 31, 2010 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 $243.5 million, which are used
by commercial customers to finance capital purchases ranging
from computer equipment to office and transportation equipment.
These leases comprise 2.6% of the Company’s total loan
portfolio. Also included in this portfolio are corporate card
loans,
30
Table of Contents
which totaled $175.9 million at December 31, 2010.
These loans, which grew by 13.9% in 2010, are made in
conjunction with the Company’s corporate card business,
which assists the increasing number of businesses that are
shifting from paper checks to a credit card payment system in
order to automate payment processes. These loans are generally
short-term, with outstanding balances averaging between 7 to
13 days in duration, which helps to limit risk in these
loans.
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
$4.6 million in 2010 and $12.8 million in 2009.
Non-accrual business loans were $8.9 million (.3% of
business loans) at December 31, 2010 compared to
$12.9 million at December 31, 2009. Included in these
totals were non-accrual lease-related loans of $887 thousand and
$3.3 million at December 31, 2010 and 2009,
respectively. Growth opportunities in business loans will
largely depend on the speed and sustainability of economic
recovery. Such growth is dependent on market conditions which
enable businesses to grow and invest in new capital, in addition
to the Company’s own solicitation efforts in attracting
new, high quality loans.
Real
Estate-Construction and Land
The portfolio of loans in this category amounted to
$460.9 million at December 31, 2010 and comprised 4.9%
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, comprising 33.0% of the portfolio at December 31,
2010, 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.
Residential construction and land development loans at
December 31, 2010 totaled $193.5 million. 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 few years, especially in residential
land development lending, as a result of the slowdown in the
housing industry and worsening economic conditions. Over the
last two years, net charge-offs on construction and land loans
have remained at elevated levels. However, in 2010 net loan
charge-offs decreased 56.0% to $15.0 million, compared to
net charge-offs of $34.1 million in 2009. The net
charge-offs in 2010 were mainly comprised of $11.2 million
in charge-offs on loans to three specific borrowers, and the
largest portion of total 2010 charge-offs occurred in the first
quarter. Construction and land development loans on non-accrual
status declined to $52.8 million at year end 2010 compared
to $62.5 million at year end 2009, with approximately 40%
of the non-accrual balance at year end 2010 comprised of loans
to three individual borrowers. The Company’s watch list,
which includes special mention and substandard categories,
included $37.0 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, 2010 and comprised 22.0% 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 type is presented on
page 39. At December 31, 2010, non-accrual balances
amounted to $16.2 million, or .8%, of the loans in this
category, down from
31
Table of Contents
$21.8 million at year end 2009. The Company experienced net
charge-offs of $4.1 million in 2010, compared to net
charge-offs of $5.2 million in 2009.
Personal
Banking Loans
Real
Estate-Personal
At December 31, 2010, there were $1.4 billion in
outstanding personal real estate loans, which comprised 15.3% 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 and
20-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
these types of loans from outside parties or brokers, and has
never maintained or promoted subprime or reduced document
products. At December 31, 2010, 51% of the portfolio was
comprised of adjustable rate loans while 49% was comprised of
fixed rate loans. Levels of mortgage loan origination activity
decreased slightly in 2010 compared to 2009, with originations
of $197 million in 2010 compared with $199 million in
2009. Growth in mortgage loan originations continued to be
constrained in 2010 as a result of the weakened economy, slower
housing starts, demand for fixed rates, and lower re-sales
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 of its
conservative underwriting culture and the fact that it does not
offer subprime lending products or purchase loans from brokers.
Net loan charge-offs for 2010 amounted to $2.1 million,
compared to $2.8 million in the previous year. The
non-accrual balances of loans in this category decreased to
$7.3 million at December 31, 2010, compared to
$9.4 million at year end 2009.
Consumer
Consumer loans consist of auto, marine, tractor/trailer,
recreational vehicle (RV), fixed rate home equity, and other
consumer installment loans. These loans totaled
$1.2 billion at year end 2010. Approximately 66% of
consumer loans outstanding were originated indirectly from auto
and other dealers, while the remaining 34% were direct loans
made to consumers. Approximately 28% of the consumer portfolio
consists of automobile loans, 46% in marine and RV loans and 11%
in fixed rate home equity lending. As mentioned above, total
consumer loans declined $169.4 million in 2010 as a result
of a decrease of $135.8 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
$40.8 million, or 11.0%. Net charge-offs on consumer loans
were $20.5 million in 2010 compared to $32.2 million
in 2009. Net charge-offs decreased to 1.6% of average consumer
loans in 2010 compared to 2.2% in 2009. Consumer loan net
charge-offs included marine and RV loan net charge-offs of
$14.8 million, which were 2.5% of average marine and RV
loans in 2010, compared to 3.0% in 2009.
Revolving
Home Equity
Revolving home equity loans, of which 99% are adjustable rate
loans, totaled $477.5 million at year end 2010. An
additional $657.8 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.
Student
In December 2008, the Company acquired a portfolio of federally
guaranteed student loans from a student loan agency. The loans
were acquired in exchange for certain auction rate securities
issued by that agency, which were 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 the time of the
purchase, the Company intended to hold the loans until their
maturity. However, in October 2010, the agency, as allowed under
the
32
Table of Contents
original exchange contract, elected to repurchase the loans. The
carrying amount of the loans sold totaled approximately
$311.0 million, and the Company recorded a gain of
$6.9 million.
Consumer
Credit Card
Total consumer credit card loans amounted to $831.0 million
at December 31, 2010 and comprised 8.8% 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 63% of the households in
Missouri that own a Commerce credit card product also maintain a
deposit relationship with the subsidiary bank. At
December 31, 2010, approximately 56% of the outstanding
credit card loan balances had a floating interest rate, compared
to 92% in the prior year. This decline is due to the provisions
of the Card Act, which went into effect in 2009, under which
certain credit card balances that previously had variable rates
were changed to non-variable rates. Net charge-offs amounted to
$47.7 million in 2010, compared to $49.3 million in
2009. The annual ratio of net credit card loan charge-offs to
total average credit card loans totaled 6.3% in 2010 compared to
6.8% in 2009. These ratios, however, remain below national loss
averages.
Loans
Held for Sale
Total loans held for sale at December 31, 2010 were
$63.8 million, a decrease of $281.3 million, from
$345.0 million at year end 2009. 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 has historically
sold these loans under agreements with the Department of
Education and various student loan servicing agencies, including
the Missouri Higher Education Loan Authority, the Student Loan
Marketing Association and others. However, because of recent
legislation which required the Company to terminate its
guaranteed student loan origination business effectively
July 1, 2010, student loan balances declined to
$53.3 million at year end 2010, compared to
$334.5 million at year end 2009.
The student loans outstanding at year end 2010 have associated
purchase commitments from various student loan agencies.
However, certain agencies have been unable to make purchases
under contractual terms and uncertainties exist about their
future ability. These loans are carried at fair value and
totaled $12.1 million at December 31, 2010, including
an associated impairment allowance of $569 thousand.
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. The loans are sold
primarily to other financial institutions and federal agencies
under industry-standard contracts which require various
representations by the Company as to ownership, tax status,
document delivery, and compliance with selection criteria
underwriting standards, and may obligate the Company to
repurchase such loans if these representations cannot be
satisfied. The Company did not receive any repurchase requests
in 2010, and does not believe there are any significant risks or
uncertainties associated with its sales. Mortgage loans held for
sale totaled $10.4 million and $10.5 million at
December 31, 2010 and 2009, respectively.
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.
Loans subject to individual evaluation generally consist of
business, construction, commercial real estate and personal real
estate loans on non-accrual status. These impaired loans are
evaluated individually for the impairment of repayment potential
and collateral adequacy, and in conjunction with current
economic
33
Table of Contents
conditions and loss experience, allowances are estimated. Loans
which are not individually evaluated are segregated by loan type
and
sub-type,
and are collectively evaluated. These include certain troubled
debt restructurings, which are collectively evaluated because
they have similar risk characteristics. Loans not individually
evaluated are aggregated and reserves are recorded using a
consistent methodology that considers historical loan loss
experience by loan type, delinquencies, current economic
factors, loan risk ratings and industry concentrations.
The Company’s estimate of the allowance for loan losses and
the corresponding provision for loan losses 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, and
prevailing regional and national economic conditions. The
Company has internal credit administration and loan review
staffs that continuously review loan quality and report the
results of their reviews and examinations to the Company’s
senior management and Board of Directors. Such reviews also
assist management in establishing the level of the allowance.
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. Refer to Note 1 to
the consolidated financial statements for additional discussion
on the allowance and charge-off policies.
At December 31, 2010, the allowance for loan losses was
$197.5 million compared to a balance at year end 2009 of
$194.5 million. Total loans delinquent 90 days or more
and still accruing were $20.5 million at December 31,
2010, a decrease of $22.2 million compared to year end
2009. Approximately $13.8 million of this decrease was due
to the sale of the held to maturity student loan portfolio in
the fourth quarter of 2010. Non-accrual loans at
December 31, 2010 were $85.3 million, a decrease of
$21.3 million from the prior year, and were mainly
comprised of construction and business real estate loans
totaling $52.8 million and $16.2 million,
respectively. The Company’s analysis of the allowance
considered the impact of the economic downturn experienced in
2009 on the current portfolio, which resulted in a slight
increase in the allowance balance during the first quarter of
2010. The percentage of allowance to loans increased to 2.10% at
December 31, 2010 compared to 1.92% at year end 2009 as a
result of the slight increase in the allowance balance, coupled
with a decrease in period end loan balances of 7.2%.
Net loan charge-offs totaled $96.9 million in 2010,
representing a $41.9 million decrease compared to net
charge-offs of $138.8 million in 2009. Net charge-offs
related to business loans were $4.6 million in 2010
compared to $12.8 million in 2009. Construction and land
loans incurred net charge-offs of $15.0 million in 2010
compared to $34.1 million in 2009. Net charge-offs related
to consumer loans decreased $11.7 million to
$20.5 million at December 31, 2010, representing 21.1%
of total net charge-offs during 2010. Additionally, net
charge-offs related to consumer credit cards were
$47.7 million in 2010 compared to $49.3 million in
2009. Approximately 49.2% of total net loan charge-offs during
2010 were related to consumer credit card loans compared to
35.5% during 2009. Net consumer credit card charge-offs
decreased to 6.3% of average consumer credit card loans in 2010
compared to 6.8% in 2009.
The ratio of net charge-offs to total average loans outstanding
in 2010 was 1.00% compared to 1.31% in 2009 and .64% in 2008.
The provision for loan losses in 2010 was $100.0 million,
compared to a provision of $160.7 million in 2009 and
$108.9 million in 2008.
The Company considers the allowance for loan losses of
$197.5 million adequate to cover losses inherent in the
loan portfolio at December 31, 2010.
34
Table of Contents
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) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net loans outstanding at end of
year
(A)
|
$ | 9,410,982 | $ | 10,145,324 | $ | 11,283,246 | $ | 10,605,368 | $ | 9,681,520 | ||||||||||
|
Average loans
outstanding
(A)
|
$ | 9,698,670 | $ | 10,629,867 | $ | 10,935,858 | $ | 10,189,316 | $ | 9,105,432 | ||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
Balance at beginning of year
|
$ | 194,480 | $ | 172,619 | $ | 133,586 | $ | 131,730 | $ | 128,447 | ||||||||||
|
Additions to allowance through charges to expense
|
100,000 | 160,697 | 108,900 | 42,732 | 25,649 | |||||||||||||||
|
Allowances of acquired companies
|
— | — | — | 1,857 | 3,688 | |||||||||||||||
|
Loans charged off:
|
||||||||||||||||||||
|
Business
|
8,550 | 15,762 | 7,820 | 5,822 | 1,343 | |||||||||||||||
|
Real estate – construction and land
|
15,199 | 34,812 | 6,215 | 2,049 | 62 | |||||||||||||||
|
Real estate – business
|
4,780 | 5,957 | 2,293 | 2,396 | 854 | |||||||||||||||
|
Real estate – personal
|
2,484 | 3,150 | 1,765 | 181 | 119 | |||||||||||||||
|
Consumer
|
24,582 | 35,973 | 26,229 | 14,842 | 11,364 | |||||||||||||||
|
Revolving home equity
|
2,014 | 1,197 | 447 | 451 | 158 | |||||||||||||||
|
Student
|
5 | 6 | — | — | — | |||||||||||||||
|
Consumer credit card
|
54,287 | 54,060 | 35,825 | 28,218 | 22,104 | |||||||||||||||
|
Overdrafts
|
2,672 | 3,493 | 4,499 | 4,909 | 4,940 | |||||||||||||||
|
Total loans charged off
|
114,573 | 154,410 | 85,093 | 58,868 | 40,944 | |||||||||||||||
|
Recovery of loans previously charged off:
|
||||||||||||||||||||
|
Business
|
3,964 | 2,925 | 3,406 | 1,429 | 2,166 | |||||||||||||||
|
Real estate – construction and land
|
193 | 720 | — | 37 | — | |||||||||||||||
|
Real estate – business
|
722 | 709 | 117 | 1,321 | 890 | |||||||||||||||
|
Real estate – personal
|
428 | 363 | 51 | 42 | 27 | |||||||||||||||
|
Consumer
|
4,108 | 3,772 | 4,782 | 5,304 | 5,263 | |||||||||||||||
|
Revolving home equity
|
39 | 7 | 18 | 5 | 23 | |||||||||||||||
|
Consumer credit card
|
6,556 | 4,785 | 4,309 | 4,520 | 4,250 | |||||||||||||||
|
Overdrafts
|
1,621 | 2,293 | 2,543 | 3,477 | 2,271 | |||||||||||||||
|
Total recoveries
|
17,631 | 15,574 | 15,226 | 16,135 | 14,890 | |||||||||||||||
|
Net loans charged off
|
96,942 | 138,836 | 69,867 | 42,733 | 26,054 | |||||||||||||||
|
Balance at end of year
|
$ | 197,538 | $ | 194,480 | $ | 172,619 | $ | 133,586 | $ | 131,730 | ||||||||||
|
Ratio of allowance to loans at end of year
|
2.10 | % | 1.92 | % | 1.53 | % | 1.26 | % | 1.36 | % | ||||||||||
|
Ratio of provision to average loans outstanding
|
1.03 | % | 1.51 | % | 1.00 | % | .42 | % | .28 | % | ||||||||||
| (A) | Net of unearned income, before deducting allowance for loan losses, excluding loans held for sale. |
|
|
||||||||||||||||||||
| Years Ended December 31 | ||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
Ratio of net charge-offs to average loans outstanding, by loan
category:
|
||||||||||||||||||||
|
Business
|
.16 | % | .41 | % | .13 | % | .14 | % | NA | |||||||||||
|
Real estate – construction and land
|
2.69 | 4.61 | .89 | .30 | .01 | |||||||||||||||
|
Real estate – business
|
.20 | .24 | .10 | .05 | NA | |||||||||||||||
|
Real estate – personal
|
.14 | .18 | .11 | .01 | .01 | |||||||||||||||
|
Consumer
|
1.64 | 2.20 | 1.28 | .61 | .45 | |||||||||||||||
|
Revolving home equity
|
.41 | .24 | .09 | .10 | .03 | |||||||||||||||
|
Consumer credit card
|
6.28 | 6.77 | 4.06 | 3.56 | 3.00 | |||||||||||||||
|
Overdrafts
|
14.42 | 12.27 | 16.40 | 10.36 | 18.18 | |||||||||||||||
|
Ratio of total net charge-offs to total average loans outstanding
|
1.00 | % | 1.31 | % | .64 | % | .42 | % | .29 | % | ||||||||||
NA: Net recoveries were experienced in 2006.
35
Table of Contents
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) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
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
|
$ | 45,754 | 31.4 | % | $ | 42,949 | 28.4 | % | $ | 37,912 | 30.2 | % | $ | 29,392 | 30.7 | % | $ | 28,529 | 29.5 | % | ||||||||||||||||||||
|
RE – construction and land
|
20,864 | 4.9 | 30,776 | 6.6 | 23,526 | 7.4 | 8,507 | 6.3 | 4,605 | 6.8 | ||||||||||||||||||||||||||||||
|
RE – business
|
48,189 | 22.0 | 30,640 | 20.7 | 25,326 | 19.0 | 14,842 | 21.1 | 19,343 | 22.2 | ||||||||||||||||||||||||||||||
|
RE – personal
|
4,016 | 15.3 | 5,231 | 15.2 | 4,680 | 14.5 | 2,389 | 14.5 | 2,243 | 15.3 | ||||||||||||||||||||||||||||||
|
Consumer
|
19,404 | 12.4 | 29,994 | 13.1 | 28,638 | 14.3 | 24,611 | 15.6 | 18,655 | 14.8 | ||||||||||||||||||||||||||||||
|
Revolving home equity
|
2,316 | 5.1 | 1,590 | 4.8 | 1,332 | 4.4 | 5,839 | 4.3 | 5,035 | 4.6 | ||||||||||||||||||||||||||||||
|
Student
|
— | — | 229 | 3.3 | — | 3.2 | — | — | — | — | ||||||||||||||||||||||||||||||
|
Consumer credit card
|
55,903 | 8.8 | 51,801 | 7.9 | 49,492 | 6.9 | 44,307 | 7.4 | 39,965 | 6.7 | ||||||||||||||||||||||||||||||
|
Overdrafts
|
1,092 | .1 | 1,270 | — | 1,713 | .1 | 2,351 | .1 | 3,592 | .1 | ||||||||||||||||||||||||||||||
|
Unallocated
|
— | — | — | — | — | — | 1,348 | — | 9,763 | — | ||||||||||||||||||||||||||||||
|
Total
|
$ | 197,538 | 100.0 | % | $ | 194,480 | 100.0 | % | $ | 172,619 | 100.0 | % | $ | 133,586 | 100.0 | % | $ | 131,730 | 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 management,
the borrower has demonstrated the ability to make future
payments of principal and interest as scheduled.
36
Table of Contents
The following schedule shows non-performing assets and loans
past due 90 days and still accruing interest.
|
|
||||||||||||||||||||
| December 31 | ||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-performing assets:
|
||||||||||||||||||||
|
Non-accrual loans:
|
||||||||||||||||||||
|
Business
|
$ | 8,933 | $ | 12,874 | $ | 4,007 | $ | 4,700 | $ | 5,808 | ||||||||||
|
Real estate – construction and land
|
52,752 | 62,509 | 48,871 | 7,769 | 120 | |||||||||||||||
|
Real estate – business
|
16,242 | 21,756 | 13,137 | 5,628 | 9,845 | |||||||||||||||
|
Real estate – personal
|
7,348 | 9,384 | 6,794 | 1,095 | 384 | |||||||||||||||
|
Consumer
|
— | 90 | 87 | 547 | 551 | |||||||||||||||
|
Total non-accrual loans
|
85,275 | 106,613 | 72,896 | 19,739 | 16,708 | |||||||||||||||
|
Real estate acquired in foreclosure
|
12,045 | 10,057 | 6,181 | 13,678 | 1,515 | |||||||||||||||
|
Total non-performing assets
|
$ | 97,320 | $ | 116,670 | $ | 79,077 | $ | 33,417 | $ | 18,223 | ||||||||||
|
Non-performing assets as a percentage of total loans
|
1.03 | % | 1.15 | % | .70 | % | .32 | % | .19 | % | ||||||||||
|
Non-performing assets as a percentage of total assets
|
.53 | % | .64 | % | .45 | % | .21 | % | .12 | % | ||||||||||
|
Past due 90 days and still accruing interest:
|
||||||||||||||||||||
|
Business
|
$ | 854 | $ | 3,672 | $ | 1,459 | $ | 1,427 | $ | 2,814 | ||||||||||
|
Real estate – construction and land
|
217 | 1,184 | 466 | 768 | 593 | |||||||||||||||
|
Real estate – business
|
— | 402 | 1,472 | 281 | 1,336 | |||||||||||||||
|
Real estate – personal
|
3,554 | 3,102 | 4,717 | 5,131 | 3,994 | |||||||||||||||
|
Consumer
|
2,867 | 3,042 | 4,346 | 2,676 | 1,961 | |||||||||||||||
|
Revolving home equity
|
825 | 878 | 440 | 700 | 659 | |||||||||||||||
|
Student
|
— | 14,346 | 14,018 | 1 | 1 | |||||||||||||||
|
Consumer credit card
|
12,149 | 16,006 | 13,046 | 9,902 | 9,018 | |||||||||||||||
|
Total past due 90 days and still accruing interest
|
$ | 20,466 | $ | 42,632 | $ | 39,964 | $ | 20,886 | $ | 20,376 | ||||||||||
The table below shows the effect on interest income in 2010 of
loans on non-accrual status at year end.
| (In thousands) | ||||
|
Gross amount of interest that would have been recorded at
original rate
|
$ | 7,583 | ||
|
Interest that was reflected in income
|
1,174 | |||
|
Interest income not recognized
|
$ | 6,409 | ||
Total non-accrual loans at year end 2010 were
$85.3 million, a decrease of $21.3 million from the
balance at year end 2009. Most of the decrease occurred in
non-accrual construction and land loans, which declined
$9.8 million to $52.8 million. In addition, business
and business real estate non-accrual loans decreased
$3.9 million and $5.5 million, respectively.
Foreclosed real estate increased to a total of
$12.0 million at year end 2010, of which $4.5 million
related to four individual borrowers. Total non-performing
assets remain low compared to the overall banking industry in
2010, with the non-performing loans to total loans ratio at .91%
at December 31, 2010. Loans past due 90 days and still
accruing interest decreased $22.2 million at year end 2010
compared to 2009, mainly due to $13.8 million in federally
guaranteed student loans which, as noted previously, were sold
in October 2010.
In addition to the non-performing and past due loans mentioned
above, the Company also has identified loans for which
management has concerns about the ability of the borrowers to
meet existing repayment terms. They are classified as
substandard under the Company’s internal rating system. The
loans are generally secured by either real estate or other
borrower assets, reducing the potential for loss should they
become non-performing. Although these loans are generally
identified as potential problem loans, they may never become
non-performing. Such loans totaled $233.5 million at
December 31, 2010 compared with
37
Table of Contents
$319.9 million at December 31, 2009, resulting in a
decrease of $86.4 million, or 27.0%. The decrease was
largely due to a $63.7 million decline in construction and
land real estate loans.
|
December 31
|
December 31
|
|||||||
| (In thousands) | 2010 | 2009 | ||||||
|
Potential problem loans:
|
||||||||
|
Business
|
$ | 79,640 | $ | 93,256 | ||||
|
Real estate – construction and land
|
51,589 | 115,251 | ||||||
|
Real estate – business
|
94,063 | 98,951 | ||||||
|
Real estate – personal
|
7,910 | 12,013 | ||||||
|
Consumer
|
284 | 409 | ||||||
|
Total potential problem loans
|
$ | 233,486 | $ | 319,880 | ||||
At December 31, 2010, the Company had identified
approximately $94.6 million of loans whose terms have been
modified or restructured under a troubled debt restructuring.
These loans have been extended to borrowers who are experiencing
financial difficulty and who have been granted a concession, as
defined by accounting guidance. Of this balance,
$34.5 million have been placed on non-accrual status. Of
the remaining $60.1 million, approximately
$41.3 million were commercial loans (business, construction
and business real estate) classified as substandard, which were
renewed at interest rates that were not judged to be market
rates for new debt with similar risk. These loans are performing
under their modified terms and the Company believes it probable
that all amounts due under the modified terms of the agreements
will be collected. However, because of their substandard
classification, they are included as potential problem loans in
the table above. An additional $18.8 million in troubled
debt restructurings were composed of certain credit card loans
under various debt management and assistance programs.
Loans
with Special Risk Characteristics
Management relies primarily on an internal risk rating system,
in addition to delinquency status, to assess risk in the loan
portfolio, and these statistics are presented in Note 3 to
the consolidated financial statements. However, certain types of
loans are considered at high risk of loss due to their terms,
location, or special conditions. Construction and land loans and
business real estate loans are subject to higher risk as a
result of the current weak economic climate and issues in the
housing industry. 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. For these types of loans higher risk could
exist 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.
38
Table of Contents
Real
Estate – Construction and Land Loans
The Company’s portfolio of construction loans, as shown in
the table below, amounted to 4.9% of total loans outstanding at
December 31, 2010.
|
% of
|
% of
|
|||||||||||||||||||||||
|
December 31
|
% of
|
Total
|
December 31
|
% of
|
Total
|
|||||||||||||||||||
| (In thousands) | 2010 | Total | Loans | 2009 | Total | Loans | ||||||||||||||||||
|
Residential land and land development
|
$ | 112,963 | 24.5 | % | 1.2 | % | $ | 181,257 | 27.2 | % | 1.8 | % | ||||||||||||
|
Residential construction
|
80,516 | 17.5 | .9 | 110,165 | 16.6 | 1.1 | ||||||||||||||||||
|
Commercial land and land development
|
115,106 | 25.0 | 1.2 | 144,880 | 21.8 | 1.4 | ||||||||||||||||||
|
Commercial construction
|
152,268 | 33.0 | 1.6 | 228,808 | 34.4 | 2.3 | ||||||||||||||||||
|
Total real estate – construction and land loans
|
$ | 460,853 | 100.0 | % | 4.9 | % | $ | 665,110 | 100.0 | % | 6.6 | % | ||||||||||||
Real
Estate – Business Loans
Total business real estate loans were $2.1 billion at
December 31, 2010 and comprised 22.0% 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 48% of these loans
were for owner-occupied real estate properties, which present
lower risk profiles.
|
December 31
|
% of
|
Total
|
December 31
|
% of
|
Total
|
|||||||||||||||||||
| (In thousands) | 2010 | Total | Loans | 2009 | Total | Loans | ||||||||||||||||||
|
Owner-occupied
|
$ | 990,892 | 48.0 | % | 10.5 | % | $ | 1,101,870 | 52.4 | % | 10.9 | % | ||||||||||||
|
Office
|
254,882 | 12.4 | 2.7 | 214,408 | 10.2 | 2.1 | ||||||||||||||||||
|
Retail
|
226,418 | 11.0 | 2.4 | 210,619 | 10.0 | 2.1 | ||||||||||||||||||
|
Multi-family
|
143,051 | 6.9 | 1.5 | 112,664 | 5.3 | 1.1 | ||||||||||||||||||
|
Farm
|
120,388 | 5.8 | 1.3 | 131,245 | 6.2 | 1.3 | ||||||||||||||||||
|
Industrial
|
118,159 | 5.7 | 1.3 | 142,745 | 6.8 | 1.4 | ||||||||||||||||||
|
Hotels
|
108,127 | 5.2 | 1.2 | 115,056 | 5.5 | 1.1 | ||||||||||||||||||
|
Other
|
103,920 | 5.0 | 1.1 | 75,423 | 3.6 | .7 | ||||||||||||||||||
|
Total real estate – business loans
|
$ | 2,065,837 | 100.0 | % | 22.0 | % | $ | 2,104,030 | 100.0 | % | 20.7 | % | ||||||||||||
Real
Estate – Personal Loans
The Company’s $1.4 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
$229.4 million at December 31, 2010. This group of
loans has an original weighted average term of approximately
6 years, with 63% of the balance in fixed rate loans and
37% in floating rate loans. The remainder of the personal real
estate portfolio, totaling $1.2 billion at
December 31, 2010, 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 retail mortgage loan group, only 1.5% 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, 2010, these loans
had a weighted average LTV and FICO score of 71.1% and 742
respectively, and there were no delinquencies noted in this
group. The majority of these loans (95.9%) consist of loans
written within the Company’s five state branch network
territories of Missouri, Kansas,
39
Table of Contents
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 2010 and 2009.
| 2010 | 2009 | |||||||||||||||
|
Principal
|
Principal
|
|||||||||||||||
|
Outstanding at
|
% of Loan
|
Outstanding at
|
% of Loan
|
|||||||||||||
| (Dollars in thousands) | December 31 | Portfolio | December 31 | Portfolio | ||||||||||||
|
Loans with interest only payments
|
$ | 18,191 | 1.5 | % | $ | 25,201 | 2.0 | % | ||||||||
|
Loans with no insurance and LTV:
|
||||||||||||||||
|
Between 80% and 90%
|
86,191 | 7.1 | 99,395 | 7.8 | ||||||||||||
|
Between 90% and 95%
|
25,851 | 2.2 | 31,331 | 2.5 | ||||||||||||
|
Over 95%
|
42,738 | 3.5 | 52,033 | 4.1 | ||||||||||||
|
Over 80% LTV with no insurance
|
154,780 | 12.8 | 182,759 | 14.4 | ||||||||||||
|
Total loan portfolio from which above loans were identified
|
1,210,939 | 1,267,156 | ||||||||||||||
Revolving
Home Equity Loans
The Company also has revolving home equity loans that are
generally collateralized by residential real estate. Most of
these loans (95.2%) 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 2010 and 2009.
|
Principal
|
Unused Portion
|
|||||||||||||||||||||||||||||||
|
Outstanding at
|
New Lines
|
of Available Lines
|
Balances
|
|||||||||||||||||||||||||||||
|
December 31
|
Originated During
|
at December 31
|
Over 30 Days
|
|||||||||||||||||||||||||||||
| (Dollars in thousands) | 2010 | * | 2010 | * | 2010 | * | Past Due | * | ||||||||||||||||||||||||
|
Loans with interest only payments
|
$ | 454,693 | 95.2 | % | $ | 31,472 | 6.6 | % | $ | 647,928 | 135.7 | % | $ | 1,340 | .3 | % | ||||||||||||||||
|
Loans with LTV:
|
||||||||||||||||||||||||||||||||
|
Between 80% and 90%
|
57,553 | 12.0 | 7,019 | 1.5 | 39,949 | 8.4 | 364 | .1 | ||||||||||||||||||||||||
|
Over 90%
|
21,301 | 4.5 | 865 | .2 | 13,384 | 2.8 | 327 | — | ||||||||||||||||||||||||
|
Over 80% LTV
|
78,854 | 16.5 | 7,884 | 1.7 | 53,333 | 11.2 | 691 | .1 | ||||||||||||||||||||||||
|
Total loan portfolio from which above loans were identified
|
477,518 | 121,428 | 665,701 | |||||||||||||||||||||||||||||
| * | Percentage of total principal outstanding of $477.5 million at December 31, 2010. |
|
Principal
|
Unused Portion
|
|||||||||||||||||||||||||||||||
|
Outstanding at
|
New Lines
|
of Available Lines
|
Balances
|
|||||||||||||||||||||||||||||
|
December 31
|
Originated During
|
at December 31
|
Over 30 Days
|
|||||||||||||||||||||||||||||
| (Dollars in thousands) | 2009 | * | 2009 | * | 2009 | * | 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. |
40
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 desiring 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
$132.7 million at both December 31, 2010 and 2009. At
times, these loans are written with interest only monthly
payments and a balloon payoff at maturity; however, less than 7%
of the outstanding balance has interest only payments. The
delinquency history on this product has been low, as balances
over 30 days past due totaled only $1.7 million, or
1.3%, of the portfolio, at both year end 2010 and 2009.
| 2010 | 2009 | |||||||||||||||||||||||||||||||
|
Principal
|
Principal
|
|||||||||||||||||||||||||||||||
|
Outstanding at
|
New Loans
|
Outstanding at
|
New Loans
|
|||||||||||||||||||||||||||||
| (Dollars in thousands) | December 31 | * | Originated | * | December 31 | * | Originated | * | ||||||||||||||||||||||||
|
Loans with interest only payments
|
$ | 8,620 | 6.5 | % | $ | 9,954 | 7.5 | % | $ | 4,731 | 3.6 | % | $ | 2,355 | 1.8 | % | ||||||||||||||||
|
Loans with LTV:
|
||||||||||||||||||||||||||||||||
|
Between 80% and 90%
|
17,597 | 13.3 | 5,540 | 4.2 | 19,526 | 14.7 | 7,682 | 5.8 | ||||||||||||||||||||||||
|
Over 90%
|
21,653 | 16.3 | 4,677 | 3.5 | 25,398 | 19.1 | 924 | .7 | ||||||||||||||||||||||||
|
Over 80% LTV
|
39,250 | 29.6 | 10,217 | 7.7 | 44,924 | 33.8 | 8,606 | 6.5 | ||||||||||||||||||||||||
|
Total loan portfolio from which above loans were identified
|
132,706 | 132,747 | ||||||||||||||||||||||||||||||
| * | Percentage of total principal outstanding of $132.7 million at both December 31, 2010 and 2009. |
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 2010 of $2.1 million,
$2.0 million and $1.5 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 are
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 are several direct and
indirect product lines, comprised of automobile and marine and
RV. During 2010 $187.1 million of new loans, mostly
automobile loans, were originated, compared to
$159.9 million during 2009. The Company experienced rapid
growth in marine and RV loans in 2006 through 2008, and the
majority of these loans were outside the Company’s basic
five state branch network. However, due to continuing weak
credit and economic conditions, this loan product was curtailed
in mid 2008. The loss ratios experienced for marine and RV loans
have been higher than for other consumer loan products in recent
years, at 2.5% and 3.0% in 2010 and 2009, respectively, but
balances over 30 days past due have decreased
$4.6 million from 2009. The table below provides the total
outstanding principal and other data for this group of direct
and indirect lending products at December 31, 2010 and 2009.
41
Table of Contents
|
|
||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
|
Principal
|
Balances
|
Principal
|
Balances
|
|||||||||||||||||||||
|
Outstanding at
|
New Loans
|
Over 30 Days
|
Outstanding at
|
New Loans
|
Over 30 Days
|
|||||||||||||||||||
| (Dollars in thousands) | December 31 | Originated | Past Due | December 31 | Originated | Past Due | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Passenger vehicles
|
$ | 330,212 | $ | 162,212 | $ | 3,050 | $ | 371,009 | $ | 130,839 | $ | 5,281 | ||||||||||||
|
Marine
|
142,536 | 1,207 | 4,170 | 182,866 | 1,537 | 5,617 | ||||||||||||||||||
|
RV
|
376,115 | 60 | 7,661 | 466,757 | 2,214 | 10,793 | ||||||||||||||||||
|
Other
|
33,809 | 23,607 | 235 | 42,726 | 25,345 | 740 | ||||||||||||||||||
|
Total
|
$ | 882,672 | $ | 187,086 | $ | 15,116 | $ | 1,063,358 | $ | 159,935 | $ | 22,431 | ||||||||||||
Additionally, the Company offers low introductory rates on
selected consumer credit card products. Out of a portfolio at
December 31, 2010 of $831.0 million in consumer credit
card loans outstanding, approximately $179.9 million, or
21.6%, carried a low introductory rate. Within the next six
months, $86.2 million of these loans are scheduled to
convert to the ongoing higher contractual rate. To mitigate some
of the risk involved with this credit card product, the Company
performs credit checks and detailed analysis of the customer
borrowing profile before approving the loan application.
Management believes that the risks in the consumer loan
portfolio are reasonable and the anticipated loss ratios are
within acceptable parameters.
Investment
Securities Analysis
Investment securities are comprised of securities which are
available for sale, non-marketable, and held for trading. During
2010, total investment securities increased $910.3 million,
or 14.3%, to $7.3 billion (excluding unrealized
gains/losses) compared to $6.4 billion at the previous year
end. During 2010, securities of $3.2 billion were
purchased, which included $1.0 billion in agency
mortgage-backed securities, $1.6 billion in other
asset-backed securities, and $405.8 million in state and
municipal obligations. Total sales, maturities and pay downs
were $2.4 billion during 2010. During 2011, maturities of
approximately $1.6 billion are expected to occur. The
average tax equivalent yield earned on total investment
securities was 3.40% in 2010 and 4.54% in 2009.
At December 31, 2010, the fair value of available for sale
securities was $7.3 billion, including a net unrealized
gain in fair value of $129.5 million, compared to
$103.6 million at December 31, 2009. The overall
unrealized gain in fair value at December 31, 2010 included
gains of $54.1 million in agency mortgage-backed
securities, $20.7 million in U.S. government and
federal agency obligations, and $31.6 million in marketable
equity securities held by the Parent.
42
Table of Contents
Available for sale investment securities at year end for the
past two years are shown below:
| December 31 | ||||||||
| (In thousands) | 2010 | 2009 | ||||||
|
Amortized Cost
|
||||||||
|
U.S. government and federal agency obligations
|
$ | 434,878 | $ | 436,607 | ||||
|
Government-sponsored enterprise obligations
|
200,061 | 162,191 | ||||||
|
State and municipal obligations
|
1,117,020 | 917,267 | ||||||
|
Agency mortgage-backed securities
|
2,437,123 | 2,205,177 | ||||||
|
Non-agency mortgage-backed securities
|
459,363 | 654,711 | ||||||
|
Other asset-backed securities
|
2,342,866 | 1,685,691 | ||||||
|
Other debt securities
|
165,883 | 164,402 | ||||||
|
Equity securities
|
7,569 | 11,285 | ||||||
|
Total available for sale investment securities
|
$ | 7,164,763 | $ | 6,237,331 | ||||
|
Fair Value
|
||||||||
|
U.S. government and federal agency obligations
|
$ | 455,537 | $ | 447,038 | ||||
|
Government-sponsored enterprise obligations
|
201,895 | 165,814 | ||||||
|
State and municipal obligations
|
1,119,485 | 939,338 | ||||||
|
Agency mortgage-backed securities
|
2,491,199 | 2,262,003 | ||||||
|
Non-agency mortgage-backed securities
|
455,790 | 609,016 | ||||||
|
Other asset-backed securities
|
2,354,260 | 1,701,569 | ||||||
|
Other debt securities
|
176,964 | 176,331 | ||||||
|
Equity securities
|
39,173 | 39,866 | ||||||
|
Total available for sale investment securities
|
$ | 7,294,303 | $ | 6,340,975 | ||||
The largest component of the available for sale portfolio
consists of agency mortgage-backed securities, which are
collateralized bonds issued by agencies, including FNMA, GNMA,
FHLMC, FHLB, Federal Farm Credit Banks and FDIC. Non-agency
mortgage- backed securities totaled $459.4 million, on an
amortized cost basis, at December 31, 2010, and included
Alt-A type mortgage-backed securities of $174.7 million and
prime/jumbo loan type securities of $284.7 million. Certain
of the non-agency mortgage-backed securities are
other-than-temporarily impaired, and the processes for
determining impairment and the related losses are discussed in
Note 4 to the consolidated financial statements. The
portfolio does not have exposure to subprime originated
mortgage-backed or collateralized debt obligation instruments.
At December 31, 2010, U.S. government obligations
included $445.7 million in U.S. Treasury
inflation-protected securities, and state and municipal
obligations included $150.1 million in auction rate
securities, at fair value. 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 which totaled $35.9 million at
December 31, 2010.
The types of debt securities in the available for sale security
portfolio are presented in the table below. Additional detail by
maturity category is provided in Note 4 on Investment
Securities in the consolidated financial statements.
|
|
||||||||||||
| December 31, 2010 | ||||||||||||
|
|
||||||||||||
|
Percent
|
Weighted
|
Estimated
|
||||||||||
|
of Total
|
Average
|
Average
|
||||||||||
| Debt Securities | Yield | Maturity* | ||||||||||
|
Available for sale debt securities:
|
||||||||||||
|
U.S. government and federal agency obligations
|
6.3 | % | 1.11 | % | 3.4 | years | ||||||
|
Government-sponsored enterprise obligations
|
2.8 | 2.10 | 1.4 | |||||||||
|
State and municipal obligations
|
15.4 | 2.94 | 8.5 | |||||||||
|
Agency mortgage-backed securities
|
34.3 | 3.61 | 3.3 | |||||||||
|
Non-agency mortgage-backed securities
|
6.3 | 6.17 | 3.6 | |||||||||
|
Other asset-backed securities
|
32.5 | 1.49 | 1.9 | |||||||||
|
Other debt securities
|
2.4 | 4.36 | 1.9 | |||||||||
| * | Based on call provisions and estimated prepayment speeds. |
43
Table of Contents
Non-marketable securities, which totaled $103.5 million at
December 31, 2010, included $30.5 million in Federal
Reserve Bank stock and $14.7 million in Federal Home Loan
Bank (Des Moines) stock held by the bank subsidiary in
accordance with debt and regulatory requirements. These are
restricted securities which, lacking a market, are carried at
cost. Other non-marketable securities also include private
equity 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. These subsidiaries hold
investments in various portfolio concerns, which are carried at
fair value and totaled $53.9 million at December 31,
2010. The Company expects to fund an additional
$21.9 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 $3.7 million at year end 2010. 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, and management 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) | 2010 | 2009 | ||||||
|
Debt securities
|
$ | 24,327 | $ | 19,908 | ||||
|
Equity securities
|
79,194 | 102,170 | ||||||
|
Total non-marketable investment securities
|
$ | 103,521 | $ | 122,078 | ||||
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
$15.1 billion at December 31, 2010, compared to
$14.2 billion last year, reflecting an increase of
$874.6 million, or 6.2%. Average deposits grew by
$541.8 million, or 3.9%, in 2010 compared to 2009 with most
of this growth centered in money market deposits, which grew
$1.3 billion, or 16.0%, in 2010 compared to 2009.
Certificates of deposit with balances under $100,000 fell on
average by $395.5 million, or 19.2%, while certificates of
deposit over $100,000 also decreased by $534.6 million, or
28.8%.
The following table shows year end deposits by type as a
percentage of total deposits.
| December 31 | ||||||||
| 2010 | 2009 | |||||||
|
Non-interest bearing demand
|
14.3 | % | 12.6 | % | ||||
|
Savings, interest checking and money market
|
67.5 | 64.8 | ||||||
|
Time open and C.D.’s of less than $100,000
|
9.7 | 12.7 | ||||||
|
Time open and C.D.’s of $100,000 and over
|
8.5 | 9.9 | ||||||
|
Total deposits
|
100.0 | % | 100.0 | % | ||||
Core deposits, which include demand, interest checking, savings,
and money market deposits, supported 67% of average earning
assets in 2010 and 59% in 2009. Average balances by major
deposit category for the last six years appear on page 60.
A maturity schedule of time deposits outstanding at
December 31, 2010 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. During 2010, the
Company entered into long-term structured repurchase agreements
totaling $400.0 million while previous long-term agreements
of $500.0 million matured. The new borrowings mature in
2013 and 2014. Total balances of federal funds
44
Table of Contents
purchased and repurchase agreements outstanding at year end 2010
were $982.8 million, a $120.4 million decrease from
the $1.1 billion balance outstanding at year end 2009. On
an average basis, these borrowings increased
$116.5 million, or 12.0% during 2010, with increases of
$63.3 million in federal funds purchased and
$53.2 million in repurchase agreements. The average rate
paid on total federal funds purchased and repurchase agreements
was .24% during 2010 and .38% during 2009.
Most of the Company’s long-term debt is comprised of fixed
rate advances from the FHLB. These borrowings declined from
$724.4 million at December 31, 2009 to
$104.7 million outstanding at December 31, 2010, due
to scheduled maturities of $494.7 million and prepayments
of $125.0 million. The average rate paid on FHLB advances
was 3.30% during 2010 and 3.68% during 2009. Most of the
remaining balance outstanding at December 31, 2010 is due
in 2017.
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 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 credit costs 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 and 2010, overall liquidity improved
significantly throughout the banking industry and in the Company
by a combination of growth in deposits, a decline in loans
outstanding and growth in marketable securities. As a result,
the Company’s average loans to deposits ratio, one measure
of liquidity, decreased from 79.8% in 2009 to 70.0% in 2010.
The Company’s most liquid assets include available for sale
marketable investment securities, federal funds sold, balances
at the Federal Reserve Bank, and securities purchased under
agreements to resell (resell agreements). At December 31,
2010 and 2009, such assets were as follows:
|
|
||||||||
| (In thousands) | 2010 | 2009 | ||||||
|
|
||||||||
|
Available for sale investment securities
|
$ | 7,294,303 | $ | 6,340,975 | ||||
|
Federal funds sold
|
10,135 | 22,590 | ||||||
|
Long-term securities purchased under agreements to resell
|
450,000 | — | ||||||
|
Balances at the Federal Reserve Bank
|
122,076 | 24,118 | ||||||
|
Total
|
$ | 7,876,514 | $ | 6,387,683 | ||||
Federal funds sold are sold to the Company’s correspondent
bank customers and are used to satisfy the daily cash needs of
the Company. Interest earning balances at the Federal Reserve
Bank (FRB), which have overnight maturities and are also used
for general liquidity purposes, earned an average rate of
25 basis points during 2010. In addition, as mentioned
previously, the Company purchased $450.0 million in
long-term resell agreements during 2010. The Company holds
marketable securities as collateral under these
45
Table of Contents
agreements, which totaled $468.5 million in fair value at
December 31, 2010. The Company’s available for sale
investment portfolio has maturities of approximately
$1.6 billion which are scheduled to occur during 2011 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, 2010, total investment
securities pledged for these purposes were as follows:
|
|
||||
| (In thousands) | 2010 | |||
|
|
||||
|
Investment securities pledged for the purpose of securing:
|
||||
|
Federal Reserve Bank borrowings
|
$ | 652,453 | ||
|
FHLB borrowings and letters of credit
|
231,535 | |||
|
Repurchase agreements
|
1,629,173 | |||
|
Other deposits
|
1,123,399 | |||
|
Total pledged securities
|
3,636,560 | |||
|
Unpledged and available for pledging
|
3,042,084 | |||
|
Ineligible for pledging
|
615,659 | |||
|
Total available for sale securities, at fair value
|
$ | 7,294,303 | ||
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,
2010, such deposits totaled $12.3 billion and represented
81.8% 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 2010,
total core deposits increased $1.3 billion, mainly in
non-interest bearing demand and money market accounts. This
increase was comprised of growth in consumer deposits of
$981.5 million and corporate and non-personal deposits of
$362.6 million. Some of the growth in corporate deposits
was the result of a tendency by businesses to maintain higher
levels of liquidity, in addition to low rate investment
alternatives. 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 2011. Time open and
certificates of deposit of $100,000 or greater totaled
$1.3 billion at December 31, 2010. These deposits are
normally considered more volatile and higher costing, and
comprised 8.5% of total deposits at December 31, 2010.
| (In thousands) | 2010 | 2009 | ||||||
|
Core deposit base:
|
||||||||
|
Non-interest bearing demand
|
$ | 2,150,725 | $ | 1,793,816 | ||||
|
Interest checking
|
818,359 | 735,870 | ||||||
|
Savings and money market
|
9,371,775 | 8,467,046 | ||||||
|
Total
|
$ | 12,340,859 | $ | 10,996,732 | ||||
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) | 2010 | 2009 | ||||||
|
|
||||||||
|
Borrowings:
|
||||||||
|
Federal funds purchased
|
$ | 4,910 | $ | 62,130 | ||||
|
Repurchase agreements
|
977,917 | 1,041,061 | ||||||
|
FHLB advances
|
104,675 | 724,386 | ||||||
|
Subordinated debentures
|
— | 4,000 | ||||||
|
Other long-term debt
|
7,598 | 7,676 | ||||||
|
Total
|
$ | 1,095,100 | $ | 1,839,253 | ||||
46
Table of Contents
Federal funds purchased and repurchase agreements are generally
borrowed overnight and amounted to $982.8 million at
December 31, 2010. 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 $577.9 million at
December 31, 2010, and structured repurchase agreements of
$400.0 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. The Company also borrows on a
secured basis through advances from the FHLB, which totaled
$104.7 million at December 31, 2010. All of these
advances have fixed interest rates and mature in 2011 through
2017. The Company’s other borrowings are mainly comprised
of 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 the discount window. 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, 2010.
| December 31, 2010 | ||||||||
|
|
||||||||
| (In thousands) | FHLB | Federal Reserve | ||||||
|
Total collateral value pledged
|
$ | 1,919,639 | $ | 1,489,448 | ||||
|
Advances outstanding
|
(104,675 | ) | — | |||||
|
Letters of credit issued
|
(502,214 | ) | — | |||||
|
Available for future advances
|
$ | 1,312,750 | $ | 1,489,448 | ||||
The Company’s average loans to deposits ratio was 70.0% at
December 31, 2010, 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 | |||
|
Commercial paper rating
|
A-1 | P-1 | ||
|
Rating outlook
|
Stable | Stable | ||
|
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 during the past ten years. The Company has no
subordinated or hybrid debt 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.
47
Table of Contents
The cash flows from the operating, investing and financing
activities of the Company resulted in a net decrease in cash and
cash equivalents of $3.2 million in 2010, 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 $671.2 million and has historically been a stable source
of funds. Investing activities used total cash of
$654.5 million in 2010, and consisted mainly of purchases
and maturities of available for sale investment securities and
changes in the level of the Company’s loan portfolio.
Growth in the investment securities portfolio used cash of
$830.6 million, and the purchase of long-term resell
agreements used cash of $450.0 million. The decline in the
loan portfolio provided cash of $644.3 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 used total cash of $19.9 million,
resulting from an $831.0 million increase in deposits,
partly offset by net debt repayments of $623.8 million and
a net decrease in federal funds purchased and repurchase
agreements of $120.4 million. Cash dividend payments
totaled $78.2 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) | 2010 | 2009 | 2008 | |||||||||
|
Stock sale program
|
$ | — | $ | 98.2 | $ | — | ||||||
|
Exercise of stock-based awards and sales to affiliate
non-employee directors
|
11.3 | 5.5 | 16.0 | |||||||||
|
Purchases of treasury stock
|
(41.0 | ) | (.5 | ) | (9.5 | ) | ||||||
|
Cash dividends paid
|
(78.2 | ) | (74.7 | ) | (72.1 | ) | ||||||
|
Cash provided (used)
|
$ | (107.9 | ) | $ | 28.5 | $ | (65.6 | ) | ||||
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) | 2010 | 2009 | 2008 | |||||||||
|
Dividends received from subsidiaries
|
$ | 105.1 | $ | 45.1 | $ | 76.2 | ||||||
|
Management fees
|
22.6 | 46.6 | 44.0 | |||||||||
|
Total
|
$ | 127.7 | $ | 91.7 | $ | 120.2 | ||||||
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,
2010, the Parent’s available for sale investment securities
totaled $101.5 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. There were no
borrowings outstanding under the line during 2010 or 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.
48
Table of Contents
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
|
||||||||||||||||
| 2010 | 2009 | 2008 | Guidelines | |||||||||||||
|
Risk-based capital ratios:
|
||||||||||||||||
|
Tier I capital
|
14.38 | % | 13.04 | % | 10.92 | % | 6.00 | % | ||||||||
|
Total capital
|
15.75 | 14.39 | 12.31 | 10.00 | ||||||||||||
|
Leverage ratio
|
10.17 | 9.58 | 9.06 | 5.00 | ||||||||||||
|
Tangible equity to assets
|
10.27 | 9.71 | 8.25 | |||||||||||||
|
Dividend payout ratio
|
35.52 | 44.15 | 38.54 | |||||||||||||
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) | 2010 | 2009 | 2008 | |||||||||
|
Regulatory risk-based capital:
|
||||||||||||
|
Tier I capital
|
$ | 1,828,965 | $ | 1,708,901 | $ | 1,510,959 | ||||||
|
Tier II capital
|
173,681 | 177,077 | 191,957 | |||||||||
|
Total capital
|
2,002,646 | 1,885,978 | 1,702,916 | |||||||||
|
Total risk-weighted assets
|
12,717,868 | 13,105,948 | 13,834,161 | |||||||||
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 2010,
approximately 1,103,000 shares were acquired under the
current Board authorization at an average price of $37.15 per
share.
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 2.8% in 2010
compared with 2009. The Company paid its seventeenth consecutive
annual stock dividend in December 2010.
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. 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. 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.
49
Table of Contents
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 $7.4 billion (including approximately
$3.4 billion in unused approved credit card lines), and the
contractual amount of standby letters of credit, totaling
$338.7 million at December 31, 2010. 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, 2010 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*
|
$ | 333 | $ | 59,618 | $ | 351,298 | $ | 101,024 | $ | 512,273 | ||||||||||
|
Operating lease obligations
|
5,831 | 9,160 | 6,180 | 19,694 | 40,865 | |||||||||||||||
|
Purchase obligations
|
50,523 | 80,099 | 11,450 | 4,750 | 146,822 | |||||||||||||||
|
Time open and C.D.’s*
|
2,189,969 | 436,932 | 116,717 | 544 | 2,744,162 | |||||||||||||||
|
Total
|
$ | 2,246,656 | $ | 585,809 | $ | 485,645 | $ | 126,012 | $ | 3,444,122 | ||||||||||
| * | Includes principal payments only. |
As of December 31, 2010, the Company has unrecognized tax
benefits that, if recognized, would impact the effective tax
rate in future periods. Due to the uncertainty of the amounts to
be ultimately paid as well as the timing of such payments, all
uncertain tax liabilities that have not been paid have been
excluded from the table above. Further detail on the impact of
income taxes is located in Note 9 of the consolidated
financial statements.
The Company funds a defined benefit pension plan for a portion
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 2011.
The Company has investments in several low-income housing
partnerships within the area it serves. At December 31,
2010, these investments totaled $5.5 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 to
$4.6 million at December 31, 2010.
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 2010,
purchases and sales of tax credits amounted to
$37.6 million and $43.8 million, respectively. At
December 31, 2010, the Company had outstanding purchase
commitments totaling $131.5 million.
50
Table of Contents
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 two of these concerns, the Parent has
unfunded commitments outstanding of $1.3 million at
December 31, 2010. The Parent also expects to fund
$21.9 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 net interest income 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, 2010 | September 30, 2010 | December 31, 2009 | ||||||||||||||||||||||
|
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
|
$ | 10.4 | 1.70 | % | $ | 13.1 | 2.05 | % | $ | 21.6 | 3.22 | % | ||||||||||||
|
200 basis points rising
|
7.6 | 1.25 | 11.5 | 1.79 | 17.3 | 2.57 | ||||||||||||||||||
|
100 basis points rising
|
2.8 | .46 | 5.3 | .83 | 10.6 | 1.58 | ||||||||||||||||||
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, 2010 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, 2010, the
Company calculated that a gradual increase in rates of
100 basis points would increase net interest income by
$2.8 million, or .5%, compared with an increase of
$10.6 million projected at December 31, 2009. A
200 basis point gradual rise in rates calculated at
December 31, 2010 would increase net interest income by
$7.6 million, or 1.3%, down from
51
Table of Contents
an increase of $17.3 million last year. Also, a gradual
increase of 300 basis points would increase net interest
income by $10.4 million, or 1.7%, compared to a growth of
$21.6 million at December 31, 2009.
Using rising rate models, the potential increase in net interest
income is lower at December 31, 2010 when compared to the
prior year due to several factors. These factors include a
decline of $970.3 million in average loan balances in 2010
compared to the previous year, which are mainly variable rate
assets, and average growth of $1.5 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 $468.2 million, mainly in money market
deposit accounts. Deposits have lower rates and are modeled to
re-price upwards more slowly, thus partially offsetting the
effect of a larger fixed rate securities portfolio. Other
borrowings (mainly FHLB advances) declined on average by
$467.7 million, resulting in lower interest expense.
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, 2010, the Company had entered into three
interest rate swaps with a notional amount of $15.7 million
which are designated as fair value hedges of certain fixed rate
loans. The Company also sells swap contracts to customers who
wish to modify their interest rate sensitivity. The Company
offsets the interest rate risk of these swaps by purchasing
matching contracts with offsetting pay/receive rates from other
financial institutions. The notional amount of these types of
swaps at December 31, 2010 was $482.3 million.
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. These agreements provide for reimbursement
of losses resulting from a third party default on the underlying
swap.
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,
2010 mature within 90 days, and the longest period to
maturity is 11 months.
Additionally, interest rate lock commitments issued on
residential mortgage loans held for resale are considered
derivative instruments. The interest rate exposure on these
commitments is economically hedged primarily with forward sale
contracts in the secondary market.
In all of these contracts, the Company is exposed to credit risk
in the event of nonperformance by counterparties, who may be
bank customers or other financial institutions. The Company
controls the credit
52
Table of Contents
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, 2010 and 2009. 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.
| 2010 | 2009 | |||||||||||||||||||||||
|
Positive
|
Negative
|
Positive
|
Negative
|
|||||||||||||||||||||
|
Notional
|
Fair
|
Fair
|
Notional
|
Fair
|
Fair
|
|||||||||||||||||||
| (In thousands) | Amount | Value | Value | Amount | Value | Value | ||||||||||||||||||
|
Interest rate swaps
|
$ | 498,071 | $ | 17,712 | $ | (18,958 | ) | $ | 503,530 | $ | 16,962 | $ | (17,816 | ) | ||||||||||
|
Interest rate caps
|
31,736 | 84 | (84 | ) | 16,236 | 239 | (239 | ) | ||||||||||||||||
|
Credit risk participation agreements
|
40,661 | — | (130 | ) | 53,246 | 140 | (239 | ) | ||||||||||||||||
|
Foreign exchange contracts
|
25,867 | 492 | (359 | ) | 17,475 | 415 | (295 | ) | ||||||||||||||||
|
Mortgage loan commitments
|
12,125 | 101 | (30 | ) | 9,767 | 44 | (16 | ) | ||||||||||||||||
|
Mortgage loan forward sale contracts
|
24,112 | 434 | (23 | ) | 19,986 | 184 | (5 | ) | ||||||||||||||||
|
Total at December 31
|
$ | 632,572 | $ | 18,823 | $ | (19,584 | ) | $ | 620,240 | $ | 17,984 | $ | (18,610 | ) | ||||||||||
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. Additional information is
presented in Note 13 on Segments in the consolidated
financial statements.
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.
53
Table of Contents
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, 2010
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 311,231 | $ | 259,296 | $ | 41,075 | $ | 611,602 | $ | 34,330 | $ | 645,932 | ||||||||||||
|
Provision for loan losses
|
(70,633 | ) | (24,825 | ) | (1,263 | ) | (96,721 | ) | (3,279 | ) | (100,000 | ) | ||||||||||||
|
Non-interest income
|
157,903 | 131,954 | 116,095 | 405,952 | (841 | ) | 405,111 | |||||||||||||||||
|
Investment securities losses, net
|
— | — | — | — | (1,785 | ) | (1,785 | ) | ||||||||||||||||
|
Non-interest expense
|
(287,359 | ) | (205,069 | ) | (106,438 | ) | (598,866 | ) | (32,268 | ) | (631,134 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 111,142 | $ | 161,356 | $ | 49,469 | $ | 321,967 | $ | (3,843 | ) | $ | 318,124 | |||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 331,607 | $ | 243,083 | $ | 40,691 | $ | 615,381 | $ | 20,121 | $ | 635,502 | ||||||||||||
|
Provision for loan losses
|
(84,019 | ) | (54,230 | ) | (520 | ) | (138,769 | ) | (21,928 | ) | (160,697 | ) | ||||||||||||
|
Non-interest income
|
163,150 | 114,637 | 114,445 | 392,232 | 4,027 | 396,259 | ||||||||||||||||||
|
Investment securities losses, net
|
— | — | — | — | (7,195 | ) | (7,195 | ) | ||||||||||||||||
|
Non-interest expense
|
(302,505 | ) | (191,628 | ) | (106,370 | ) | (600,503 | ) | (21,234 | ) | (621,737 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 108,233 | $ | 111,862 | $ | 48,246 | $ | 268,341 | $ | (26,209 | ) | $ | 242,132 | |||||||||||
|
2010 vs. 2009
|
||||||||||||||||||||||||
|
Increase (decrease) in income before income taxes:
|
||||||||||||||||||||||||
|
Amount
|
$ | 2,909 | $ | 49,494 | $ | 1,223 | $ | 53,626 | $ | 22,366 | $ | 75,992 | ||||||||||||
|
Percent
|
2.7 | % | 44.2 | % | 2.5 | % | 20.0 | % | N.M. | 31.4 | % | |||||||||||||
|
Year ended December 31, 2008
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 323,568 | $ | 203,961 | $ | 37,174 | $ | 564,703 | $ | 28,036 | $ | 592,739 | ||||||||||||
|
Provision for loan losses
|
(56,639 | ) | (13,526 | ) | (265 | ) | (70,430 | ) | (38,470 | ) | (108,900 | ) | ||||||||||||
|
Non-interest income
|
146,295 | 107,445 | 113,879 | 367,619 | 8,093 | 375,712 | ||||||||||||||||||
|
Investment securities gains, net
|
— | — | — | — | 30,294 | 30,294 | ||||||||||||||||||
|
Non-interest expense
|
(285,796 | ) | (180,779 | ) | (131,710 | ) | (598,285 | ) | (17,095 | ) | (615,380 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 127,428 | $ | 117,101 | $ | 19,078 | $ | 263,607 | $ | 10,858 | $ | 274,465 | ||||||||||||
|
2009 vs. 2008
|
||||||||||||||||||||||||
|
Increase (decrease) in income before income taxes:
|
||||||||||||||||||||||||
|
Amount
|
$ | (19,195 | ) | $ | (5,239 | ) | $ | 29,168 | $ | 4,734 | $ | (37,067 | ) | $ | (32,333 | ) | ||||||||
|
Percent
|
(15.1 | )% | (4.5 | )% | 152.9 | % | 1.8 | % | N.M. | (11.8 | )% | |||||||||||||
Consumer
The Consumer segment includes consumer deposits, consumer
finance, consumer debit and credit cards, and student lending.
Pre-tax income for 2010 was $111.1 million, an increase of
$2.9 million, or 2.7%, over 2009. This increase was mainly
due to declines of $15.1 million, or 5.0%, in non-interest
expense and $13.4 million in the provision for loan losses.
The decline in non-interest expense was largely due to lower
FDIC insurance expense, deposit account processing expense and
teller services expense. The provision for loan losses totaled
$70.6 million in 2010 compared to $84.0 million in the
prior year and included lower losses on marine and RV loans,
consumer credit card loans and other consumer loans. These lower
expenses were partly offset by a decline of $20.4 million
in net interest income, due to a $30.5 million decrease in
net allocated funding credits assigned to the Consumer
segment’s loan and deposit portfolios and a
$30.4 million decrease in loan interest income, partly
offset by a decline of $40.6 million in deposit interest
expense. Also, non-interest income decreased $5.2 million,
or 3.2%, from the prior year due to lower deposit account fees
(mainly overdraft charges). This decline was partly offset by an
increase in bank card fee income (primarily debit card fees) and
higher gains on sales of student loans. Total average loans
decreased 11.5% in 2010 compared to the prior year due to
declines in consumer loans and the sale of the student loan
portfolio mentioned below. Average deposits increased slightly
over the prior period, resulting mainly from growth in
54
Table of Contents
interest checking and premium money market deposit accounts,
partly offset by a decline in short-term certificates of deposit.
Pre-tax profitability for 2009 was $108.2 million, a
decrease of $19.2 million, or 15.1%, from 2008. The decline
in profitability was mainly due to an increase of
$27.4 million in the provision for loan losses and an
increase of $16.7 million in non-interest expense, which
were partly offset by higher net interest income of
$8.0 million and $16.9 million in non-interest income.
The increase in net interest income resulted 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
$24.5 million in net allocated funding credits and a
$20.4 million decrease in loan interest income. The
increase in the loan loss provision was mainly due to higher
consumer credit card and marine and RV loan charge-offs. An
increase of $16.9 million, or 11.5%, 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 $16.7 million, or 5.8%,
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 acquisition of a student
loan portfolio 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.
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. Pre-tax
income for 2010 increased $49.5 million, or 44.2%, compared
to the prior year. Net interest income increased
$16.2 million, or 6.7%, due to lower net allocated funding
costs of $31.5 million, which was partly offset by a
$17.7 million decline in loan interest income. The loan
loss provision in this segment totaled $24.8 million in
2010, a decrease of $29.4 million from the prior year.
During 2010, lower charge-offs occurred on construction and
business loans. Non-interest income increased
$17.3 million, or 15.1%, over the previous year due to
higher bank card fees (mainly corporate card). Non-interest
expense increased $13.4 million, or 7.0%, over the prior
year, mainly due to an increase in bank card fee expense and
higher write-downs and holding costs on foreclosed real estate
and personal property. These increases were partly offset by
lower costs for FDIC insurance and deposit account processing.
Average segment loans decreased 8.9% compared to 2009 as a
result of declines in business, construction and business real
estate loans, while average deposits increased 16.6% due to
growth in non-interest bearing demand and money market deposit
accounts.
In 2009, pre-tax profitability for the Commercial segment
decreased $5.2 million, or 4.5%, compared to the prior
year. The decline was mainly due to a higher loan loss provision
of $40.7 million and greater non-interest expense of
$10.8 million. Partly offsetting the increases in expense
were a $39.1 million, or 19.2%, increase in net interest
income and a $7.2 million increase in non-interest income.
The increase in net interest income was mainly due to lower net
allocated funding costs of $113.8 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 the loan loss provision
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
$7.2 million, or 6.7%, 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 $10.8 million,
or 6.0%, over the previous year, mainly due to higher FDIC
insurance expense and an increase in salaries and benefits
expense. Average segment loans decreased 4.9% compared to 2008
largely due to 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.
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Table of Contents
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, 2010, the Trust group managed
investments with a market value of $14.3 billion and
administered an additional $10.7 billion in non-managed
assets. It also provides investment management services to The
Commerce Funds, a series of mutual funds with $1.5 billion
in total assets at December 31, 2010. The segment includes
the Capital Markets Group, which sells 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 $49.5 million in 2010 compared
to $48.2 million in 2009, an increase of $1.2 million,
or 2.5%. Net interest income increased $384 thousand and was
impacted by a $10.3 million decline in deposit interest
expense, offset by an $8.0 million decrease in assigned net
funding credits and a $2.0 million decrease in loan
interest income. Non-interest income increased
$1.7 million, or 1.4%, due to higher trust fee income,
partly offset by lower bond trading income and brokerage fees.
Non-interest expense increased slightly due to higher corporate
management fees, partly offset by lower FDIC insurance expense.
Average assets increased $4.2 million during 2010 mainly
due to activity in the trading securities portfolio, partly
offset by a decline in loans. Average deposits decreased
$98.8 million, or 5.0%, during 2010 due to a decline in
certificates of deposit over $100,000, partly offset by growth
in premium money market accounts.
In 2009, pre-tax income for the Wealth segment was
$48.2 million compared to $19.1 million in 2008, an
increase of $29.2 million. The profitability increase was
the result of a $25.3 million decline in non-interest
expense, which was due to a $33.3 million loss on the
purchase of auction rate securities in 2008, as mentioned 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
$3.5 million, or 9.5%, largely due to a $14.6 million
decline in interest expense on short-term jumbo certificates of
deposit, and a $7.5 million decline in overnight borrowings
expense. These effects were partly offset by a $24.5 million
decrease in assigned net funding credits. Non-interest income
increased slightly over the prior year due to higher bond
trading income, partly offset by lower trust fee income and cash
sweep commissions. Average assets decreased $13.7 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.
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 2010, the pre-tax loss in this category was
$3.8 million, compared to a loss of $26.2 million in
2009. This increase was mainly due to a decline in the
unallocated loan loss provision of $18.6 million. In
addition, net interest income in this category, related to
earnings of the investment portfolio and interest expense on
borrowings not allocated to a segment, increased
$14.2 million and unallocated investment securities losses
decreased $5.4 million. Non-interest expense in this
category increased due to an unallocated debt prepayment penalty
of $11.8 million.
Impact
of Recently Issued Accounting Standards
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
56
Table of Contents
accounting requirements must be applied to transactions
occurring on or after January 1, 2010. Their adoption did
not have a significant effect on the Company’s consolidated
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 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. In February 2010, the
FASB issued ASU
2010-10,
“Amendments for Certain Investment Funds”, which
deferred the application of this new guidance for interests in
certain investment entities, such as mutual funds, private
equity funds, hedge funds, venture capital funds, and real
estate investment trusts, and clarified other aspects of the
guidance. Entities qualifying for this deferral will continue to
apply the previously existing consolidation guidance. The
guidance and its amendment were effective on January 1,
2010, and their adoption did not have a significant effect on
the Company’s financial statements.
Fair Value Measurements
In January 2010, the FASB
issued ASU
2010-06,
“Improving Disclosures about Fair Value Measurements”,
which requires additional disclosures related to transfers among
fair value hierarchy levels and the activity of Level 3
assets and liabilities. This ASU also provides clarification for
the disaggregation of fair value measurements of assets and
liabilities, and the discussion of inputs and valuation
techniques used for fair value measurements. The new disclosures
and clarification were effective January 1, 2010, except
for the disclosures related to the activity of Level 3
financial instruments. Those disclosures are effective
January 1, 2011 and are not expected to have a significant
effect on the Company’s consolidated financial statements.
Credit Quality of Financing Receivables and the Allowance
for Credit Losses
In July 2010, the FASB issued ASU
2010-20,
“Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses”. This
guidance is expected to facilitate the evaluation of the nature
of credit risk inherent in an entity’s loan portfolio, how
that risk influences the allowance for credit losses, and the
changes and reasons for those changes in the allowance. The ASU
requires disclosures about the activity in the allowance,
non-accrual and impaired loan status, credit quality indicators,
past due information, loan modifications, and significant loan
purchases and sales. Much of the disclosure is required on a
disaggregated level, by portfolio segment or class basis. The
disclosures about the activity in the allowance and loan
modifications during a reported period are effective for the
March 31, 2011 financial statements. Disclosure about loans
modified as troubled debt restructurings have been deferred
until further guidance for determining what constitutes a
troubled debt restructuring is issued, which is expected later
in 2011. The required disclosures have been included in
Notes 1 and 3 in the accompanying financial statements.
Adoption of the remaining requirements is not expected to have a
significant effect on the Company’s financial statements.
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
57
Table of Contents
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, 2010
|
For the Quarter Ended | |||||||||||||||
| (In thousands, except per share data) | 12/31/10 | 9/30/10 | 6/30/10 | 3/31/10 | ||||||||||||
|
Interest income
|
$ | 177,436 | $ | 178,916 | $ | 185,057 | $ | 188,069 | ||||||||
|
Interest expense
|
(16,759 | ) | (19,479 | ) | (21,949 | ) | (25,359 | ) | ||||||||
|
Net interest income
|
160,677 | 159,437 | 163,108 | 162,710 | ||||||||||||
|
Non-interest income
|
110,454 | 100,010 | 101,458 | 93,189 | ||||||||||||
|
Investment securities gains (losses), net
|
1,204 | 16 | 660 | (3,665 | ) | |||||||||||
|
Salaries and employee benefits
|
(86,562 | ) | (85,442 | ) | (87,108 | ) | (87,438 | ) | ||||||||
|
Other expense
|
(77,469 | ) | (70,144 | ) | (68,685 | ) | (68,286 | ) | ||||||||
|
Provision for loan losses
|
(21,647 | ) | (21,844 | ) | (22,187 | ) | (34,322 | ) | ||||||||
|
Income before income taxes
|
86,657 | 82,033 | 87,246 | 62,188 | ||||||||||||
|
Income taxes
|
(24,432 | ) | (26,012 | ) | (27,428 | ) | (18,377 | ) | ||||||||
|
Non-controlling interest
|
(304 | ) | (136 | ) | (84 | ) | 359 | |||||||||
|
Net income
|
$ | 61,921 | $ | 55,885 | $ | 59,734 | $ | 44,170 | ||||||||
|
Net income per common share – basic*
|
$ | .72 | $ | .63 | $ | .69 | $ | .50 | ||||||||
|
Net income per common share – diluted*
|
$ | .70 | $ | .64 | $ | .68 | $ | .50 | ||||||||
|
Weighted average shares – basic*
|
86,564 | 87,192 | 87,139 | 87,017 | ||||||||||||
|
Weighted average shares – diluted*
|
86,927 | 87,560 | 87,554 | 87,492 | ||||||||||||
|
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
|
102,519 | 102,414 | 98,363 | 92,963 | ||||||||||||
|
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
|
(68,259 | ) | (67,501 | ) | (73,533 | ) | (66,665 | ) | ||||||||
|
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*
|
$ | .57 | $ | .61 | $ | .43 | $ | .37 | ||||||||
|
Net income per common share – diluted*
|
$ | .57 | $ | .60 | $ | .43 | $ | .37 | ||||||||
|
Weighted average shares – basic*
|
86,818 | 86,278 | 84,264 | 83,462 | ||||||||||||
|
Weighted average shares – diluted*
|
87,192 | 86,616 | 84,551 | 83,797 | ||||||||||||
|
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*
|
$ | .52 | $ | .30 | $ | .67 | $ | .77 | ||||||||
|
Net income per common share – diluted*
|
$ | .52 | $ | .29 | $ | .67 | $ | .76 | ||||||||
|
Weighted average shares – basic*
|
83,370 | 83,190 | 83,075 | 82,978 | ||||||||||||
|
Weighted average shares – diluted*
|
83,986 | 83,861 | 83,742 | 83,687 | ||||||||||||
* Restated for the 5% stock
dividend distributed in 2010.
59
Table of Contents
| Years Ended December 31 | ||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
|
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)
|
$ | 2,887,427 | $ | 110,792 | 3.84 | % | $ | 3,119,778 | $ | 116,686 | 3.74 | % | $ | 3,478,927 | $ | 170,620 | 4.90 | % | ||||||||||||||||||
|
Real estate – construction and land
|
557,282 | 22,384 | 4.02 | 739,896 | 26,746 | 3.61 | 701,519 | 34,445 | 4.91 | |||||||||||||||||||||||||||
|
Real estate – business
|
2,029,214 | 102,451 | 5.05 | 2,143,675 | 108,107 | 5.04 | 2,281,664 | 136,955 | 6.00 | |||||||||||||||||||||||||||
|
Real estate – personal
|
1,476,031 | 76,531 | 5.18 | 1,585,273 | 87,085 | 5.49 | 1,522,172 | 88,322 | 5.80 | |||||||||||||||||||||||||||
|
Consumer
|
1,250,076 | 84,204 | 6.74 | 1,464,170 | 101,761 | 6.95 | 1,674,497 | 119,837 | 7.16 | |||||||||||||||||||||||||||
|
Revolving home equity
|
484,878 | 20,916 | 4.31 | 495,629 | 21,456 | 4.33 | 474,635 | 23,960 | 5.05 | |||||||||||||||||||||||||||
|
Student
(C)
|
246,395 | 5,783 | 2.35 | 344,243 | 9,440 | 2.74 | 13,708 | 287 | 2.10 | |||||||||||||||||||||||||||
|
Consumer credit card
|
760,079 | 89,225 | 11.74 | 727,422 | 89,045 | 12.24 | 776,810 | 83,972 | 10.81 | |||||||||||||||||||||||||||
|
Overdrafts
|
7,288 | — | — | 9,781 | — | — | 11,926 | — | — | |||||||||||||||||||||||||||
|
Total loans
|
9,698,670 | 512,286 | 5.28 | 10,629,867 | 560,326 | 5.27 | 10,935,858 | 658,398 | 6.02 | |||||||||||||||||||||||||||
|
Loans held for sale
|
358,492 | 6,091 | 1.70 | 397,583 | 8,219 | 2.07 | 347,441 | 14,968 | 4.31 | |||||||||||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||||||||||||||
|
U.S. government & federal agency
|
439,073 | 9,673 | 2.20 | 169,214 | 6,754 | 3.99 | 7,065 | 364 | 5.15 | |||||||||||||||||||||||||||
|
Government-sponsored enterprise obligations
|
203,593 | 4,591 | 2.25 | 137,928 | 4,219 | 3.06 | 176,018 | 7,075 | 4.02 | |||||||||||||||||||||||||||
|
State & municipal
obligations
(B)
|
966,694 | 45,469 | 4.70 | 873,607 | 43,882 | 5.02 | 695,542 | 37,770 | 5.43 | |||||||||||||||||||||||||||
|
Mortgage and asset-backed securities
|
4,795,219 | 151,781 | 3.17 | 3,739,967 | 167,087 | 4.47 | 2,469,467 | 125,369 | 5.08 | |||||||||||||||||||||||||||
|
Other marketable
securities
(B)
|
183,328 | 8,889 | 4.85 | 179,847 | 9,793 | 5.45 | 98,650 | 4,243 | 4.30 | |||||||||||||||||||||||||||
|
Trading
securities
(B)
|
21,899 | 671 | 3.06 | 16,927 | 506 | 2.99 | 28,840 | 1,355 | 4.70 | |||||||||||||||||||||||||||
|
Non-marketable
securities
(B)
|
113,326 | 7,216 | 6.37 | 136,911 | 6,398 | 4.67 | 133,996 | 7,730 | 5.77 | |||||||||||||||||||||||||||
|
Total investment securities
|
6,723,132 | 228,290 | 3.40 | 5,254,401 | 238,639 | 4.54 | 3,609,578 | 183,906 | 5.09 | |||||||||||||||||||||||||||
|
Short-term federal funds sold and securities purchased under
agreements to resell
|
6,542 | 48 | .73 | 43,811 | 222 | .51 | 425,273 | 8,287 | 1.95 | |||||||||||||||||||||||||||
|
Long-term securities purchased under agreements to resell
|
150,235 | 2,549 | 1.70 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Interest earning deposits with banks
|
171,883 | 427 | .25 | 325,744 | 807 | .25 | 46,670 | 198 | .42 | |||||||||||||||||||||||||||
|
Total interest earning assets
|
17,108,954 | 749,691 | 4.38 | 16,651,406 | 808,213 | 4.85 | 15,364,820 | 865,757 | 5.63 | |||||||||||||||||||||||||||
|
Less allowance for loan losses
|
(195,870 | ) | (181,417 | ) | (145,176 | ) | ||||||||||||||||||||||||||||||
|
Unrealized gain (loss) on investment securities
|
149,106 | 24,105 | 27,068 | |||||||||||||||||||||||||||||||||
|
Cash and due from banks
|
368,340 | 364,579 | 451,105 | |||||||||||||||||||||||||||||||||
|
Land, buildings and equipment – net
|
395,108 | 411,366 | 412,852 | |||||||||||||||||||||||||||||||||
|
Other assets
|
410,361 | 349,164 | 343,664 | |||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 18,235,999 | $ | 17,619,203 | $ | 16,454,333 | ||||||||||||||||||||||||||||||
|
LIABILITIES AND EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Interest bearing deposits:
|
||||||||||||||||||||||||||||||||||||
|
Savings
|
$ | 478,592 | 622 | .13 | $ | 438,748 | 642 | .15 | $ | 400,948 | 1,186 | .30 | ||||||||||||||||||||||||
|
Interest checking and money market
|
9,906,210 | 28,676 | .29 | 8,547,801 | 30,789 | .36 | 7,400,125 | 59,947 | .81 | |||||||||||||||||||||||||||
|
Time open & C.D.’s of less than $100,000
|
1,660,462 | 22,871 | 1.38 | 2,055,952 | 51,982 | 2.53 | 2,149,119 | 77,322 | 3.60 | |||||||||||||||||||||||||||
|
Time open & C.D.’s of $100,000 and over
|
1,323,952 | 13,847 | 1.05 | 1,858,543 | 35,371 | 1.90 | 1,629,500 | 55,665 | 3.42 | |||||||||||||||||||||||||||
|
Total interest bearing deposits
|
13,369,216 | 66,016 | .49 | 12,901,044 | 118,784 | .92 | 11,579,692 | 194,120 | 1.68 | |||||||||||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
1,085,121 | 2,584 | .24 | 968,643 | 3,699 | .38 | 1,373,625 | 25,085 | 1.83 | |||||||||||||||||||||||||||
|
Other
borrowings
(D)
|
452,810 | 14,948 | 3.30 | 920,467 | 31,527 | 3.43 | 1,092,746 | 37,905 | 3.47 | |||||||||||||||||||||||||||
|
Total borrowings
|
1,537,931 | 17,532 | 1.14 | 1,889,110 | 35,226 | 1.86 | 2,466,371 | 62,990 | 2.55 | |||||||||||||||||||||||||||
|
Total interest bearing liabilities
|
14,907,147 | 83,548 | .56 | % | 14,790,154 | 154,010 | 1.04 | % | 14,046,063 | 257,110 | 1.83 | % | ||||||||||||||||||||||||
|
Non-interest bearing demand deposits
|
993,753 | 920,118 | 670,118 | |||||||||||||||||||||||||||||||||
|
Other liabilities
|
346,312 | 176,676 | 140,333 | |||||||||||||||||||||||||||||||||
|
Equity
|
1,988,787 | 1,732,255 | 1,597,819 | |||||||||||||||||||||||||||||||||
|
Total liabilities and equity
|
$ | 18,235,999 | $ | 17,619,203 | $ | 16,454,333 | ||||||||||||||||||||||||||||||
|
Net interest margin (T/E)
|
$ | 666,143 | $ | 654,203 | $ | 608,647 | ||||||||||||||||||||||||||||||
|
Net yield on interest earning assets
|
3.89 | % | 3.93 | % | 3.96 | % | ||||||||||||||||||||||||||||||
|
Percentage increase (decrease) in net interest margin
(T/E) compared to the prior year
|
1.83 | % | 7.48 | % | 9.85 | % | ||||||||||||||||||||||||||||||
| (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 $4,620,000 in 2010, $3,922,000 in 2009, $3,553,000 in 2008, $2,895,000 in 2007, $1,826,000 in 2006, and $1,035,000 in 2005. Investment securities interest income include tax equivalent adjustments of $15,593,000 in 2010, $14,779,000 in 2009, $12,355,000 in 2008, $13,079,000 in 2007, $9,476,000 in 2006 and $3,626,000 in 2005. 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 | ||||||||||||||||||||||||||||||||||||||
| 2007 | 2006 | 2005 |
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 | |||||||||||||||||||||||||||||
| $ | 3,110,386 | $ | 209,523 | 6.74 | % | $ | 2,688,722 | $ | 177,543 | 6.60 | % | $ | 2,336,681 | $ | 125,354 | 5.36 | % | 4.32 | % | |||||||||||||||||||
| 671,986 | 49,436 | 7.36 | 540,574 | 40,477 | 7.49 | 480,864 | 28,422 | 5.91 | 2.99 | |||||||||||||||||||||||||||||
| 2,204,041 | 154,819 | 7.02 | 2,053,455 | 140,659 | 6.85 | 1,794,269 | 106,167 | 5.92 | 2.49 | |||||||||||||||||||||||||||||
| 1,521,066 | 90,537 | 5.95 | 1,415,321 | 79,816 | 5.64 | 1,339,900 | 71,222 | 5.32 | 1.95 | |||||||||||||||||||||||||||||
| 1,558,302 | 115,184 | 7.39 | 1,352,047 | 95,074 | 7.03 | 1,242,163 | 80,431 | 6.48 | .13 | |||||||||||||||||||||||||||||
| 443,748 | 33,526 | 7.56 | 445,376 | 33,849 | 7.60 | 429,911 | 26,463 | 6.16 | 2.44 | |||||||||||||||||||||||||||||
| —— | — | — | — | — | — | 357,319 | 17,050 | 4.77 | NM | |||||||||||||||||||||||||||||
| 665,964 | 84,856 | 12.74 | 595,252 | 77,737 | 13.06 | 554,471 | 66,552 | 12.00 | 6.51 | |||||||||||||||||||||||||||||
| 13,823 | — | — | 14,685 | — | — | 13,995 | — | — | (12.23 | ) | ||||||||||||||||||||||||||||
| 10,189,316 | 737,881 | 7.24 | 9,105,432 | 645,155 | 7.09 | 8,549,573 | 521,661 | 6.10 | 2.55 | |||||||||||||||||||||||||||||
| 321,916 | 21,940 | 6.82 | 315,950 | 21,788 | 6.90 | 11,909 | 657 | 5.52 | NM | |||||||||||||||||||||||||||||
| 9,063 | 506 | 5.58 | 49,735 | 2,160 | 4.34 | 132,894 | 6,570 | 4.94 | 27.00 | |||||||||||||||||||||||||||||
| 401,107 | 15,999 | 3.99 | 590,504 | 20,657 | 3.50 | 933,410 | 33,398 | 3.58 | (26.25 | ) | ||||||||||||||||||||||||||||
| 594,154 | 33,416 | 5.62 | 414,282 | 22,499 | 5.43 | 137,007 | 6,591 | 4.81 | 47.81 | |||||||||||||||||||||||||||||
| 2,120,521 | 102,243 | 4.82 | 2,201,685 | 96,270 | 4.37 | 2,812,757 | 114,978 | 4.09 | 11.26 | |||||||||||||||||||||||||||||
| 129,622 | 7,355 | 5.67 | 200,013 | 10,695 | 5.35 | 216,984 | 8,808 | 4.06 | (3.31 | ) | ||||||||||||||||||||||||||||
| 22,321 | 1,144 | 5.13 | 17,444 | 884 | 5.07 | 10,624 | 478 | 4.50 | 15.57 | |||||||||||||||||||||||||||||
| 92,251 | 5,710 | 6.19 | 85,211 | 7,863 | 9.23 | 78,709 | 4,984 | 6.33 | 7.56 | |||||||||||||||||||||||||||||
| 3,369,039 | 166,373 | 4.94 | 3,558,874 | 161,028 | 4.52 | 4,322,385 | 175,807 | 4.07 | 9.24 | |||||||||||||||||||||||||||||
| 527,304 | 25,881 | 4.91 | 299,554 | 15,637 | 5.22 | 116,553 | 4,102 | 3.52 | (43.79 | ) | ||||||||||||||||||||||||||||
| —— | — | — | — | — | — | — | — | — | NM | |||||||||||||||||||||||||||||
| —— | — | — | — | — | — | — | — | — | NM | |||||||||||||||||||||||||||||
| 14,407,575 | 952,075 | 6.61 | 13,279,810 | 843,608 | 6.35 | 13,000,420 | 702,227 | 5.40 | 5.65 | |||||||||||||||||||||||||||||
| (132,234 | ) | (129,224 | ) | (129,272 | ) | 8.67 | ||||||||||||||||||||||||||||||||
| 25,333 | (9,443 | ) | 22,607 | NM | ||||||||||||||||||||||||||||||||||
| 463,970 | 470,826 | 508,389 | (6.24 | ) | ||||||||||||||||||||||||||||||||||
| 400,161 | 376,375 | 369,471 | 1.35 | |||||||||||||||||||||||||||||||||||
| 315,522 | 250,260 | 201,829 | 15.25 | |||||||||||||||||||||||||||||||||||
| $ | 15,480,327 | $ | 14,238,604 | $ | 13,973,444 | 5.47 | ||||||||||||||||||||||||||||||||
| $ | 392,942 | 2,067 | .53 | $ | 393,870 | 2,204 | .56 | $ | 403,158 | 1,259 | .31 | 3.49 | ||||||||||||||||||||||||||
| 6,996,943 | 114,027 | 1.63 | 6,717,280 | 94,238 | 1.40 | 6,745,714 | 52,112 | .77 | 7.99 | |||||||||||||||||||||||||||||
| 2,359,386 | 110,957 | 4.70 | 2,077,257 | 85,424 | 4.11 | 1,736,804 | 50,597 | 2.91 | (.89 | ) | ||||||||||||||||||||||||||||
| 1,480,856 | 73,739 | 4.98 | 1,288,845 | 58,381 | 4.53 | 983,703 | 30,779 | 3.13 | 6.12 | |||||||||||||||||||||||||||||
| 11,230,127 | 300,790 | 2.68 | 10,477,252 | 240,247 | 2.29 | 9,869,379 | 134,747 | 1.37 | 6.26 | |||||||||||||||||||||||||||||
| 1,696,613 | 83,464 | 4.92 | 1,455,544 | 70,154 | 4.82 | 1,609,868 | 48,776 | 3.03 | (7.59 | ) | ||||||||||||||||||||||||||||
| 292,446 | 13,775 | 4.71 | 182,940 | 8,744 | 4.78 | 366,072 | 12,464 | 3.40 | 4.34 | |||||||||||||||||||||||||||||
| 1,989,059 | 97,239 | 4.89 | 1,638,484 | 78,898 | 4.82 | 1,975,940 | 61,240 | 3.10 | (4.89 | ) | ||||||||||||||||||||||||||||
| 13,219,186 | 398,029 | 3.01 | % | 12,115,736 | 319,145 | 2.63 | % | 11,845,319 | 195,987 | 1.65 | % | 4.71 | ||||||||||||||||||||||||||
| 647,888 | 642,545 | 655,729 | 8.67 | |||||||||||||||||||||||||||||||||||
| 134,278 | 99,396 | 90,752 | 30.71 | |||||||||||||||||||||||||||||||||||
| 1,478,975 | 1,380,927 | 1,381,644 | 7.56 | |||||||||||||||||||||||||||||||||||
| $ | 15,480,327 | $ | 14,238,604 | $ | 13,973,444 | 5.47 | % | |||||||||||||||||||||||||||||||
| $ | 554,046 | $ | 524,463 | $ | 506,240 | |||||||||||||||||||||||||||||||||
| 3.85 | % | 3.95 | % | 3.89 | % | |||||||||||||||||||||||||||||||||
| 5.64 | % | 3.60 | % | 1.32 | % | |||||||||||||||||||||||||||||||||
| (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 2010. In December 2008, the Company purchased $358,451,000 of student loans with the intent to hold to maturity. In October 2010, the seller elected to repurchase the loans under the terms of the original agreement. | |
| (D) | Interest expense of $2,000, $38,000 and $123,000 which was capitalized on construction projects in 2010, 2006 and 2005, 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, 2010 | ||||||||||||||||||||||||||||||||
| 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)
|
$ | 2,920 | 3.77 | % | $ | 2,918 | 3.82 | % | $ | 2,881 | 3.93 | % | $ | 2,830 | 3.83 | % | ||||||||||||||||
|
Real estate – construction and land
|
498 | 4.17 | 530 | 4.00 | 568 | 3.90 | 634 | 4.01 | ||||||||||||||||||||||||
|
Real estate – business
|
2,003 | 5.01 | 1,999 | 5.10 | 2,029 | 5.08 | 2,088 | 5.00 | ||||||||||||||||||||||||
|
Real estate – personal
|
1,444 | 5.00 | 1,451 | 5.13 | 1,484 | 5.25 | 1,526 | 5.35 | ||||||||||||||||||||||||
|
Consumer
|
1,191 | 6.61 | 1,234 | 6.65 | 1,270 | 6.72 | 1,307 | 6.94 | ||||||||||||||||||||||||
|
Revolving home equity
|
483 | 4.31 | 485 | 4.32 | 483 | 4.32 | 488 | 4.31 | ||||||||||||||||||||||||
|
Student
|
22 | 2.10 | 315 | 2.40 | 322 | 2.38 | 329 | 2.28 | ||||||||||||||||||||||||
|
Consumer credit card
|
776 | 10.82 | 763 | 11.29 | 738 | 12.32 | 763 | 12.58 | ||||||||||||||||||||||||
|
Overdrafts
|
8 | — | 7 | — | 7 | — | 8 | — | ||||||||||||||||||||||||
|
Total loans
|
9,345 | 5.22 | 9,702 | 5.21 | 9,782 | 5.33 | 9,973 | 5.37 | ||||||||||||||||||||||||
|
Loans held for sale
|
93 | 2.38 | 305 | 1.78 | 557 | 1.63 | 484 | 1.60 | ||||||||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||||||||||
|
U.S. government & federal agency
|
436 | 2.32 | 437 | 1.07 | 443 | 3.43 | 439 | 1.99 | ||||||||||||||||||||||||
|
Government-sponsored enterprise obligations
|
187 | 2.25 | 235 | 2.12 | 225 | 2.16 | 167 | 2.59 | ||||||||||||||||||||||||
|
State & municipal
obligations
(A)
|
1,091 | 4.45 | 982 | 4.53 | 893 | 4.87 | 899 | 5.04 | ||||||||||||||||||||||||
|
Mortgage and asset-backed securities
|
5,221 | 2.86 | 5,101 | 2.77 | 4,390 | 3.47 | 4,457 | 3.69 | ||||||||||||||||||||||||
|
Other marketable
securities
(A)
|
177 | 5.01 | 183 | 5.18 | 193 | 4.55 | 181 | 4.67 | ||||||||||||||||||||||||
|
Trading
securities
(A)
|
32 | 3.35 | 23 | 2.87 | 19 | 2.93 | 14 | 2.91 | ||||||||||||||||||||||||
|
Non-marketable
securities
(A)
|
107 | 5.98 | 109 | 9.43 | 114 | 4.26 | 123 | 5.91 | ||||||||||||||||||||||||
|
Total investment securities
|
7,251 | 3.15 | 7,070 | 3.05 | 6,277 | 3.67 | 6,280 | 3.81 | ||||||||||||||||||||||||
|
Short-term federal funds sold and securities purchased under
agreements to resell
|
5 | .61 | 7 | .69 | 7 | .76 | 7 | .84 | ||||||||||||||||||||||||
|
Long-term securities purchased under agreements to resell
|
397 | 1.69 | 199 | 1.72 | — | — | — | — | ||||||||||||||||||||||||
|
Interest earning deposits with banks
|
87 | .25 | 171 | .25 | 322 | .25 | 108 | .24 | ||||||||||||||||||||||||
|
Total interest earning assets
|
17,178 | 4.22 | 17,454 | 4.19 | 16,945 | 4.49 | 16,852 | 4.64 | ||||||||||||||||||||||||
|
Less allowance for loan losses
|
(195 | ) | (195 | ) | (196 | ) | (197 | ) | ||||||||||||||||||||||||
|
Unrealized gain (loss) on investment securities
|
176 | 159 | 133 | 128 | ||||||||||||||||||||||||||||
|
Cash and due from banks
|
365 | 367 | 378 | 364 | ||||||||||||||||||||||||||||
|
Land, buildings and equipment – net
|
388 | 392 | 397 | 402 | ||||||||||||||||||||||||||||
|
Other assets
|
383 | 444 | 401 | 413 | ||||||||||||||||||||||||||||
|
Total assets
|
$ | 18,295 | $ | 18,621 | $ | 18,058 | $ | 17,962 | ||||||||||||||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||||||
|
Interest bearing deposits:
|
||||||||||||||||||||||||||||||||
|
Savings
|
$ | 480 | .14 | $ | 482 | .16 | $ | 490 | .11 | $ | 461 | .10 | ||||||||||||||||||||
|
Interest checking and money market
|
10,316 | .27 | 9,980 | .28 | 9,872 | .31 | 9,447 | .30 | ||||||||||||||||||||||||
|
Time open & C.D.’s under $100,000
|
1,533 | 1.18 | 1,642 | 1.32 | 1,703 | 1.43 | 1,766 | 1.56 | ||||||||||||||||||||||||
|
Time open & C.D.’s $100,000 & over
|
1,232 | .93 | 1,417 | .97 | 1,323 | 1.08 | 1,324 | 1.20 | ||||||||||||||||||||||||
|
Total interest bearing deposits
|
13,561 | .43 | 13,521 | .47 | 13,388 | .52 | 12,998 | .56 | ||||||||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
1,125 | .12 | 1,024 | .23 | 1,027 | .32 | 1,166 | .29 | ||||||||||||||||||||||||
|
Other borrowings
|
231 | 2.96 | 350 | 3.09 | 502 | 3.02 | 735 | 3.70 | ||||||||||||||||||||||||
|
Total borrowings
|
1,356 | .61 | 1,374 | .96 | 1,529 | 1.21 | 1,901 | 1.61 | ||||||||||||||||||||||||
|
Total interest bearing liabilities
|
14,917 | .45 | % | 14,895 | .52 | % | 14,917 | .59 | % | 14,899 | .69 | % | ||||||||||||||||||||
|
Non-interest bearing demand deposits
|
1,041 | 1,006 | 980 | 947 | ||||||||||||||||||||||||||||
|
Other liabilities
|
287 | 701 | 199 | 194 | ||||||||||||||||||||||||||||
|
Equity
|
2,050 | 2,019 | 1,962 | 1,922 | ||||||||||||||||||||||||||||
|
Total liabilities and equity
|
$ | 18,295 | $ | 18,621 | $ | 18,058 | $ | 17,962 | ||||||||||||||||||||||||
|
Net interest margin (T/E)
|
$ | 166 | $ | 165 | $ | 168 | $ | 167 | ||||||||||||||||||||||||
|
Net yield on interest earning assets
|
3.83 | % | 3.75 | % | 3.97 | % | 4.03 | % | ||||||||||||||||||||||||
(A) Includes tax equivalent
calculations.
62
Table of Contents
| 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 | ||||||||||||||||||||||||
|
Revolving 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
|
376 | 3.08 | 274 | 5.26 | 11 | 3.73 | 11 | 3.75 | ||||||||||||||||||||||||
|
Government-sponsored enterprise obligations
|
142 | 2.84 | 139 | 2.90 | 148 | 2.98 | 123 | 3.60 | ||||||||||||||||||||||||
|
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 | ||||||||||||||||||||||||
|
Short-term 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.
63
Table of Contents
The information required by this item is set forth on
pages 51 through 53 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, 2010 and 2009, 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,
2010. 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, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, 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, 2010, 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 25, 2011
expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Kansas City, Missouri
February 25, 2011
64
Table of Contents
Commerce
Bancshares, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
| December 31 | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
ASSETS
|
||||||||
|
Loans
|
$ | 9,410,982 | $ | 10,145,324 | ||||
|
Allowance for loan losses
|
(197,538 | ) | (194,480 | ) | ||||
|
Net loans
|
9,213,444 | 9,950,844 | ||||||
|
Loans held for sale
|
63,751 | 345,003 | ||||||
|
Investment securities:
|
||||||||
|
Available for sale ($429,439,000 and $537,079,000 pledged in
2010 and
|
||||||||
|
2009, respectively, to secure structured repurchase agreements)
|
7,294,303 | 6,340,975 | ||||||
|
Trading
|
11,710 | 10,335 | ||||||
|
Non-marketable
|
103,521 | 122,078 | ||||||
|
Total investment securities
|
7,409,534 | 6,473,388 | ||||||
|
Short-term federal funds sold and securities purchased under
agreements to resell
|
10,135 | 22,590 | ||||||
|
Long-term securities purchased under agreements to resell
|
450,000 | — | ||||||
|
Interest earning deposits with banks
|
122,076 | 24,118 | ||||||
|
Cash and due from banks
|
328,464 | 417,126 | ||||||
|
Land, buildings and equipment – net
|
383,397 | 402,633 | ||||||
|
Goodwill
|
125,585 | 125,585 | ||||||
|
Other intangible assets – net
|
10,937 | 14,333 | ||||||
|
Other assets
|
385,016 | 344,569 | ||||||
|
Total assets
|
$ | 18,502,339 | $ | 18,120,189 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest bearing demand
|
$ | 2,150,725 | $ | 1,793,816 | ||||
|
Savings, interest checking and money market
|
10,190,134 | 9,202,916 | ||||||
|
Time open and C.D.’s of less than $100,000
|
1,465,050 | 1,801,332 | ||||||
|
Time open and C.D.’s of $100,000 and over
|
1,279,112 | 1,412,387 | ||||||
|
Total deposits
|
15,085,021 | 14,210,451 | ||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
982,827 | 1,103,191 | ||||||
|
Other borrowings
|
112,273 | 736,062 | ||||||
|
Other liabilities
|
298,754 | 184,580 | ||||||
|
Total liabilities
|
16,478,875 | 16,234,284 | ||||||
|
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 86,788,322 and
83,127,401 shares in 2010 and 2009, respectively
|
433,942 | 415,637 | ||||||
|
Capital surplus
|
971,293 | 854,490 | ||||||
|
Retained earnings
|
555,778 | 568,532 | ||||||
|
Treasury stock of 61,839 and 22,328 shares in 2010 and
2009, respectively, at cost
|
(2,371 | ) | (838 | ) | ||||
|
Accumulated other comprehensive income
|
63,345 | 46,407 | ||||||
|
Total Commerce Bancshares, Inc. stockholders’ equity
|
2,021,987 | 1,884,228 | ||||||
|
Non-controlling interest
|
1,477 | 1,677 | ||||||
|
Total equity
|
2,023,464 | 1,885,905 | ||||||
|
Total liabilities and equity
|
$ | 18,502,339 | $ | 18,120,189 | ||||
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) | 2010 | 2009 | 2008 | |||||||||
|
INTEREST INCOME
|
||||||||||||
|
Interest and fees on loans
|
$ | 507,666 | $ | 556,404 | $ | 654,845 | ||||||
|
Interest on loans held for sale
|
6,091 | 8,219 | 14,968 | |||||||||
|
Interest on investment securities
|
212,697 | 223,860 | 171,551 | |||||||||
|
Interest on short-term federal funds sold and securities
purchased under agreements to resell
|
48 | 222 | 8,287 | |||||||||
|
Interest on long-term securities purchased under agreements to
resell
|
2,549 | — | — | |||||||||
|
Interest on deposits with banks
|
427 | 807 | 198 | |||||||||
|
Total interest income
|
729,478 | 789,512 | 849,849 | |||||||||
|
INTEREST EXPENSE
|
||||||||||||
|
Interest on deposits:
|
||||||||||||
|
Savings, interest checking and money market
|
29,298 | 31,431 | 61,133 | |||||||||
|
Time open and C.D.’s of less than $100,000
|
22,871 | 51,982 | 77,322 | |||||||||
|
Time open and C.D.’s of $100,000 and over
|
13,847 | 35,371 | 55,665 | |||||||||
|
Interest on federal funds purchased and securities sold under
agreements to repurchase
|
2,584 | 3,699 | 25,085 | |||||||||
|
Interest on other borrowings
|
14,946 | 31,527 | 37,905 | |||||||||
|
Total interest expense
|
83,546 | 154,010 | 257,110 | |||||||||
|
Net interest income
|
645,932 | 635,502 | 592,739 | |||||||||
|
Provision for loan losses
|
100,000 | 160,697 | 108,900 | |||||||||
|
Net interest income after provision for loan losses
|
545,932 | 474,805 | 483,839 | |||||||||
|
NON-INTEREST INCOME
|
||||||||||||
|
Bank card transaction fees
|
148,888 | 122,124 | 113,862 | |||||||||
|
Deposit account charges and other fees
|
92,637 | 106,362 | 110,361 | |||||||||
|
Trust fees
|
80,963 | 76,831 | 80,294 | |||||||||
|
Bond trading income
|
21,098 | 22,432 | 15,665 | |||||||||
|
Consumer brokerage services
|
9,190 | 10,831 | 12,156 | |||||||||
|
Loan fees and sales
|
23,116 | 21,273 | (2,413 | ) | ||||||||
|
Other
|
29,219 | 36,406 | 45,787 | |||||||||
|
Total non-interest income
|
405,111 | 396,259 | 375,712 | |||||||||
|
INVESTMENT SECURITIES GAINS (LOSSES), NET
|
||||||||||||
|
Impairment (losses) reversals on debt securities
|
13,058 | (32,783 | ) | — | ||||||||
|
Noncredit-related losses (reversals) on securities not expected
to be sold
|
(18,127 | ) | 30,310 | — | ||||||||
|
Net impairment losses
|
(5,069 | ) | (2,473 | ) | — | |||||||
|
Realized gains (losses) on sales and fair value adjustments
|
3,284 | (4,722 | ) | 30,294 | ||||||||
|
Investment securities gains (losses), net
|
(1,785 | ) | (7,195 | ) | 30,294 | |||||||
|
NON-INTEREST EXPENSE
|
||||||||||||
|
Salaries and employee benefits
|
346,550 | 345,779 | 333,612 | |||||||||
|
Net occupancy
|
46,987 | 45,925 | 46,317 | |||||||||
|
Equipment
|
23,324 | 25,472 | 24,569 | |||||||||
|
Supplies and communication
|
27,113 | 32,156 | 35,335 | |||||||||
|
Data processing and software
|
67,935 | 61,789 | 56,387 | |||||||||
|
Marketing
|
18,161 | 18,231 | 19,994 | |||||||||
|
Deposit insurance
|
19,246 | 27,373 | 2,051 | |||||||||
|
Debt extinguishment
|
11,784 | — | — | |||||||||
|
Loss on purchase of auction rate securities
|
— | — | 33,266 | |||||||||
|
Indemnification obligation
|
(4,405 | ) | (2,496 | ) | (9,619 | ) | ||||||
|
Other
|
74,439 | 67,508 | 73,468 | |||||||||
|
Total non-interest expense
|
631,134 | 621,737 | 615,380 | |||||||||
|
Income before income taxes
|
318,124 | 242,132 | 274,465 | |||||||||
|
Less income taxes
|
96,249 | 73,757 | 85,077 | |||||||||
|
Net income before non-controlling interest
|
221,875 | 168,375 | 189,388 | |||||||||
|
Less non-controlling interest expense (income)
|
165 | (700 | ) | 733 | ||||||||
|
NET INCOME
|
$ | 221,710 | $ | 169,075 | $ | 188,655 | ||||||
|
Net income per share – basic
|
$ | 2.54 | $ | 1.98 | $ | 2.26 | ||||||
|
Net income per share – diluted
|
$ | 2.52 | $ | 1.97 | $ | 2.24 | ||||||
See
accompanying notes to consolidated financial
statements.
66
Table of Contents
Commerce
Bancshares, Inc. and Subsidiaries
| For the Years Ended December 31 | ||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
OPERATING ACTIVITIES
|
||||||||||||
|
Net income
|
$ | 221,710 | $ | 169,075 | $ | 188,655 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Provision for loan losses
|
100,000 | 160,697 | 108,900 | |||||||||
|
Provision for depreciation and amortization
|
48,924 | 51,514 | 50,696 | |||||||||
|
Amortization of investment security premiums, net
|
21,635 | 2,348 | 3,946 | |||||||||
|
Deferred income tax expense (benefit)
|
(9,085 | ) | (7,310 | ) | 2,656 | |||||||
|
Investment securities (gains) losses, net
|
1,785 | 7,195 | (30,294 | ) | ||||||||
|
Gain on sale of branch
|
— | (644 | ) | (6,938 | ) | |||||||
|
Gain on sale of held to maturity student loans
|
(6,914 | ) | — | — | ||||||||
|
Impairment losses (reversals) on loans held for sale
|
191 | (3,796 | ) | 9,398 | ||||||||
|
Net gains on sales of loans held for sale
|
(10,402 | ) | (12,201 | ) | (3,168 | ) | ||||||
|
Proceeds from sales of loans held for sale
|
635,743 | 577,726 | 235,305 | |||||||||
|
Originations of loans held for sale
|
(344,360 | ) | (545,380 | ) | (366,873 | ) | ||||||
|
Net (increase) decrease in trading securities
|
(928 | ) | (14,014 | ) | 13,281 | |||||||
|
Stock-based compensation
|
6,021 | 6,642 | 6,389 | |||||||||
|
Decrease in interest receivable
|
12,041 | 2,943 | 2,908 | |||||||||
|
Decrease in interest payable
|
(9,462 | ) | (18,574 | ) | (28,351 | ) | ||||||
|
Increase (decrease) in income taxes payable
|
2,714 | (3,067 | ) | (1,204 | ) | |||||||
|
Net tax benefit related to equity compensation plans
|
(1,178 | ) | (557 | ) | (1,928 | ) | ||||||
|
Loss on purchase of auction rate securities
|
— | — | 33,266 | |||||||||
|
Prepayment of FDIC insurance premiums
|
— | (63,739 | ) | — | ||||||||
|
Other changes, net
|
2,742 | (13,570 | ) | 650 | ||||||||
|
Net cash provided by operating activities
|
671,177 | 295,288 | 217,294 | |||||||||
|
INVESTING ACTIVITIES
|
||||||||||||
|
Net cash and cash equivalents paid in acquisitions/dispositions
|
— | (3,494 | ) | (54,490 | ) | |||||||
|
Cash paid in exchange of investment securities for student loans
|
— | — | (17,164 | ) | ||||||||
|
Proceeds from sales of available for sale securities
|
78,640 | 207,852 | 131,843 | |||||||||
|
Proceeds from maturities/pay downs of available for sale
securities
|
2,308,323 | 1,332,347 | 1,311,605 | |||||||||
|
Purchases of available for sale securities
|
(3,217,600 | ) | (4,078,962 | ) | (2,396,109 | ) | ||||||
|
Net (increase) decrease in loans
|
644,314 | 999,086 | (412,593 | ) | ||||||||
|
Long-term securities purchased under agreements to resell
|
(450,000 | ) | — | — | ||||||||
|
Purchases of land, buildings and equipment
|
(18,528 | ) | (29,247 | ) | (42,563 | ) | ||||||
|
Sales of land, buildings and equipment
|
397 | 151 | 495 | |||||||||
|
Net cash used in investing activities
|
(654,454 | ) | (1,572,267 | ) | (1,478,976 | ) | ||||||
|
FINANCING ACTIVITIES
|
||||||||||||
|
Net increase in non-interest bearing demand, savings, interest
checking and money market deposits
|
1,300,555 | 2,041,513 | 381,276 | |||||||||
|
Net decrease in time open and C.D.’s
|
(469,557 | ) | (693,941 | ) | (36,612 | ) | ||||||
|
Long-term securities sold under agreements to repurchase
|
400,000 | — | — | |||||||||
|
Repayment of long-term securities sold under agreements to
repurchase
|
(500,000 | ) | — | — | ||||||||
|
Net increase (decrease) in short-term federal funds purchased
and securities sold under agreements to repurchase
|
(20,364 | ) | 76,654 | (212,375 | ) | |||||||
|
Additional other long-term borrowings
|
— | 100,000 | 375,000 | |||||||||
|
Repayment of other long-term borrowings
|
(623,789 | ) | (311,719 | ) | (10,855 | ) | ||||||
|
Net increase (decrease) in other short-term borrowings
|
— | (800,000 | ) | 799,997 | ||||||||
|
Purchases of treasury stock
|
(40,984 | ) | (528 | ) | (9,490 | ) | ||||||
|
Issuance of stock under open market stock sale program, stock
purchase and equity compensation plans
|
11,310 | 103,641 | 15,978 | |||||||||
|
Net tax benefit related to equity compensation plans
|
1,178 | 557 | 1,928 | |||||||||
|
Cash dividends paid on common stock
|
(78,231 | ) | (74,720 | ) | (72,055 | ) | ||||||
|
Net cash provided by (used in) financing activities
|
(19,882 | ) | 441,457 | 1,232,792 | ||||||||
|
Decrease in cash and cash equivalents
|
(3,159 | ) | (835,522 | ) | (28,890 | ) | ||||||
|
Cash and cash equivalents at beginning of year
|
463,834 | 1,299,356 | 1,328,246 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 460,675 | $ | 463,834 | $ | 1,299,356 | ||||||
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, 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 ($.864 per share)
|
(72,055 | ) | (72,055 | ) | ||||||||||||||||||||||||
|
Net tax benefit related to equity compensation plans
|
1,928 | 1,928 | ||||||||||||||||||||||||||
|
Stock-based compensation
|
6,389 | 6,389 | ||||||||||||||||||||||||||
|
Issuance under stock purchase and equity compensation plans, net
|
1,778 | 2,994 | 11,206 | 15,978 | ||||||||||||||||||||||||
|
5% stock dividend, net
|
18,033 | 134,927 | (153,118 | ) | (158 | ) | ||||||||||||||||||||||
|
Adoption of fair value guidance allowing use of transaction
price at initial measurement
|
903 | 903 | ||||||||||||||||||||||||||
|
Adoption of guidance requiring recognition of liabilities for
benefits payable under split-dollar life insurance arrangements
|
(716 | ) | (716 | ) | ||||||||||||||||||||||||
|
Change in pension benefit obligation resulting from change in
measurement date
|
348 | 348 | ||||||||||||||||||||||||||
|
Balance, December 31, 2008
|
379,505 | 621,458 | 633,159 | (761 | ) | (56,729 | ) | 2,835 | 1,579,467 | |||||||||||||||||||
|
Net income
|
169,075 | (700 | ) | 168,375 | ||||||||||||||||||||||||
|
Change in unrealized gain (loss) related to available for sale
securities for which a portion of an
other-than-temporary
impairment has been recorded in earnings, net of tax
|
7,596 | 7,596 | ||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on all other available for sale
securities, net of tax
|
93,075 | 93,075 | ||||||||||||||||||||||||||
|
Change related to pension plan, net of tax
|
2,465 | 2,465 | ||||||||||||||||||||||||||
|
Total comprehensive income
|
271,511 | |||||||||||||||||||||||||||
|
Distributions to non-controlling interest
|
(458 | ) | (458 | ) | ||||||||||||||||||||||||
|
Purchase of treasury stock
|
(528 | ) | (528 | ) | ||||||||||||||||||||||||
|
Cash dividends paid ($.871 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 | ||||||||||||||||||||
|
Net income
|
221,710 | 165 | 221,875 | |||||||||||||||||||||||||
|
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
|
14,243 | 14,243 | ||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on all other available for sale
securities, net of tax
|
1,813 | 1,813 | ||||||||||||||||||||||||||
|
Change related to pension plan, net of tax
|
882 | 882 | ||||||||||||||||||||||||||
|
Total comprehensive income
|
238,813 | |||||||||||||||||||||||||||
|
Distributions to non-controlling interest
|
(365 | ) | (365 | ) | ||||||||||||||||||||||||
|
Purchase of treasury stock
|
(40,984 | ) | (40,984 | ) | ||||||||||||||||||||||||
|
Cash dividends paid ($.895 per share)
|
(78,231 | ) | (78,231 | ) | ||||||||||||||||||||||||
|
Net tax benefit related to equity compensation plans
|
1,178 | 1,178 | ||||||||||||||||||||||||||
|
Stock-based compensation
|
6,021 | 6,021 | ||||||||||||||||||||||||||
|
Issuance under stock purchase and equity compensation plans, net
|
2,196 | 3,102 | 6,012 | 11,310 | ||||||||||||||||||||||||
|
5% stock dividend, net
|
16,109 | 106,502 | (156,233 | ) | 33,439 | (183 | ) | |||||||||||||||||||||
|
Balance, December 31, 2010
|
$ | 433,942 | $ | 971,293 | $ | 555,778 | $ | (2,371 | ) | $ | 63,345 | $ | 1,477 | $ | 2,023,464 | |||||||||||||
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.
Cash and
Cash Equivalents
In the accompanying consolidated statements of cash flows, cash
and cash equivalents include “Cash and due from
banks”, “Short-term 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, 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.
Non-Accrual
Loans
Loans are placed on non-accrual status when management does not
expect to collect payments consistent with acceptable and agreed
upon terms of repayment. Business, construction real estate,
business real estate, and personal real estate loans that are
contractually 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.
Consumer, revolving home equity and credit card loans are exempt
under regulatory rules from being classified as non-accrual.
When a loan is placed on non-accrual status, any interest
previously accrued but not collected is reversed against current
income, and the loan is charged-off to the extent uncollectible.
Principal and interest payments received on non-accrual loans
are generally applied to principal. Interest is
69
Table of Contents
included in income only after all previous loan charge-offs have
been recovered, and is recorded only as received. The loan is
returned to accrual status only when the borrower has brought
all past due principal and interest payments current and, in the
opinion of management, the borrower has demonstrated the ability
to make future payments of principal and interest as scheduled.
A six month history of sustained payment performance is
generally required before reinstatement of accrual status.
Restructured
Loans
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 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. Business, business real estate, construction real
estate and personal real estate loans whose terms have been
modified in a troubled debt restructuring with impairment
charges are generally placed on non-accrual status. Other loans
identified as troubled debt restructurings were so designated
because they were renewed at interest rates that were not deemed
to represent current market rates for debt of similar risk.
These loans are performing under their modified terms, and
interest continues to be accrued and recognized in income.
Troubled debt restructurings also include certain credit card
loans which have been modified under various debt management and
assistance programs.
Impaired
Loans
Loans are evaluated regularly by management for impairment.
Included in impaired loans are all non-accrual loans, as well as
loans whose terms have been modified in a troubled debt
restructuring, as discussed above. Once a loan has been
identified as impaired, impairment is measured based on either
the present value of the expected future cash flows at the
loan’s initial effective interest rate or the fair value of
the collateral if collateral dependent. Factors considered in
determining impairment include delinquency status, cash flow
analysis, credit analysis, and collateral value and availability.
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 flow 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 losses on known or anticipated problem loans as well
as for loans which are not currently known to require specific
allowances. Management has established a process to determine
the amount of the allowance for loan losses which assesses the
risks and losses inherent in its portfolio. Business,
construction real estate and business real estate loans are
normally larger and more complex, and their collection rates are
harder to predict. These loans are more likely to be collateral
dependent and are allocated a larger reserve, due to their
potential volatility. Personal real estate, credit card,
consumer and revolving home equity loans, are individually
smaller and perform in a more homogenous manner, making loss
estimates more predictable. Management’s
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process provides an allowance consisting of a specific allowance
component based on certain individually evaluated loans and a
general component based on estimates of reserves needed for
pools of loans.
Loans subject to individual evaluation generally consist of
business, construction real estate, business real estate and
personal real estate loans on non-accrual status. These impaired
loans are evaluated individually for the impairment of repayment
potential and collateral adequacy, and in conjunction with
current economic conditions and loss experience, allowances are
estimated. Certain other impaired loans identified as troubled
debt restructurings are collectively evaluated because they have
similar risk characteristics. Loans which have not been
identified as impaired are segregated by loan type and
sub-type
and
are collectively evaluated. Reserves calculated for these loan
pools are estimated using a consistent methodology that
considers historical loan loss experience by loan type,
delinquencies, current economic factors, loan risk ratings and
industry concentrations.
The Company’s estimate of the allowance for loan losses and
the corresponding provision for loan losses is based on various
judgments and assumptions made by management. The amount of the
allowance for loan losses is highly dependent on
management’s estimates affecting valuation, appraisal of
collateral, evaluation of performance and status, and the amount
and timing of future cash flows expected to be received on
impaired loans. 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 loan review process.
The estimates, appraisals, evaluations, and cash flows utilized
by management 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.
Loans, or portions of loans, are charged off to the extent
deemed uncollectible. Loan charge-offs reduce the allowance for
loan losses, and recoveries of loans previously charged off are
added back to the allowance. Business, business real estate,
construction real estate and personal real estate loans are
generally charged down to estimated collectible balances when
they are placed on non-accrual status. Consumer 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.
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,
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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 enters into short-term purchases of securities under
agreements to resell which are accounted for as collateralized
financing transactions. Securities delivered under these
transactions are delivered to either the dealer custody account
at the Federal Reserve Bank or to the applicable counterparty.
Collateral is valued daily and the Company may require
counterparties to deposit additional collateral or the Company
may return collateral pledged when appropriate to maintain full
collateralization for these transactions. At December 31,
2010, the Company had entered into $450.0 million of
long-term agreements to resell and had accepted securities
valued at $468.5 million as collateral.
Securities sold under agreements to repurchase are offered to
cash management customers as an automated, collateralized
investment account. Securities sold are also used by the Bank to
obtain favorable borrowing rates on its purchased funds, and at
December 31, 2010, included $400.0 million of
long-term structured repurchase agreements. As of
December 31, 2010, the Company had pledged
$1.6 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
and is comprised of commercial and residential real estate and
other non-real estate property, including auto and recreational
and marine
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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. The
Company held $12.0 million in foreclosed real estate and
$10.4 million in other repossessed personal property at
December 31, 2010.
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 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
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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, 2010, 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 fair value measurements
of mortgage loan commitments include the value of loan servicing
rights.
Pension
Plan
The Company’s pension plan is described in Note 10,
Employee Benefit Plans. 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.
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Table of Contents
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. The Company applies 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. The Company’s restricted share
awards are considered to be a class of participating security.
All per share data has been restated to reflect the 5% stock
dividend distributed in December 2010.
| 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.
| 3. | Loans and Allowance for Loan Losses |
Major classifications within the Company’s loan portfolio
at December 31, 2010 and 2009 are as follows:
| (In thousands) | 2010 | 2009 | ||||||
|
Commercial:
|
||||||||
|
Business
|
$ | 2,957,043 | $ | 2,877,936 | ||||
|
Real estate – construction and land
|
460,853 | 665,110 | ||||||
|
Real estate – business
|
2,065,837 | 2,104,030 | ||||||
|
Personal Banking:
|
||||||||
|
Real estate – personal
|
1,440,386 | 1,537,687 | ||||||
|
Consumer
|
1,164,327 | 1,333,763 | ||||||
|
Revolving home equity
|
477,518 | 489,517 | ||||||
|
Student
|
— | 331,698 | ||||||
|
Consumer credit card
|
831,035 | 799,503 | ||||||
|
Overdrafts
|
13,983 | 6,080 | ||||||
|
Total loans
|
$ | 9,410,982 | $ | 10,145,324 | ||||
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, 2010
|
$ | 94,907 | ||
|
Additions
|
109,631 | |||
|
Amounts collected
|
(138,820 | ) | ||
|
Amounts written off
|
— | |||
|
Balance at December 31, 2010
|
$ | 65,718 | ||
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,
2010 to principal holders (over 10% ownership) 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
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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 or 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, 2010, unfunded loan commitments totaled
$7.4 billion (which included $3.4 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, 2010, loans of
$2.9 billion were pledged at the FHLB as collateral for
borrowings and letters of credit obtained to secure public
deposits. Additional loans of $1.3 billion were pledged at
the Federal Reserve Bank as collateral for discount window
borrowings.
The Company has a net investment in direct financing and sales
type leases of $243.5 million and $281.4 million at
December 31, 2010 and 2009, respectively, which is included
in business loans on the Company’s consolidated balance
sheets. This investment includes deferred income of
$25.4 million and $32.3 million at December 31,
2010 and 2009, respectively. The net investment in operating
leases amounted to $10.8 million and $7.2 million at
December 31, 2010 and 2009, respectively, and is included
in other assets on the Company’s consolidated balance
sheets.
In October 2010, the Company sold its student loan portfolio,
formerly acquired from a student loan agency with the intent to
hold until maturity. The loans had been acquired in 2008 in
exchange for certain auction rate securities issued by the same
agency. The agency, as allowed under the original exchange
contract, elected to repurchase the loans, which totaled
approximately $311 million. The Company recorded a
$6.9 million gain in connection with the sale, which is
included in loan fees and sales in the accompanying income
statement. On December 30, 2010, the Company purchased
business real estate loans totaling $40.1 million from
another financial institution. These loans are to borrowers
within the Company’s existing markets, and were without
evidence of deterioration in credit quality at the acquisition
date.
Allowance
for loan losses
A summary of the activity in the allowance for losses follows:
| Years Ended December 31 | ||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
Balance, January 1
|
$ | 194,480 | $ | 172,619 | $ | 133,586 | ||||||
|
Additions:
|
||||||||||||
|
Provision for loan losses
|
100,000 | 160,697 | 108,900 | |||||||||
|
Total additions
|
100,000 | 160,697 | 108,900 | |||||||||
|
Deductions:
|
||||||||||||
|
Loan losses
|
114,573 | 154,410 | 85,093 | |||||||||
|
Less recoveries
|
17,631 | 15,574 | 15,226 | |||||||||
|
Net loan losses
|
96,942 | 138,836 | 69,867 | |||||||||
|
Balance, December 31
|
$ | 197,538 | $ | 194,480 | $ | 172,619 | ||||||
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The following table shows the balance in the allowance for loan
losses at December 31, 2010, and the related loan balance,
disaggregated on the basis of impairment methodology. Loans
evaluated under
ASC 310-10-35
include loans on non-accrual status with balances exceeding $500
thousand, which are individually evaluated for impairment, and
other impaired loans deemed to have similar risk
characteristics, which are collectively evaluated. All other
loans are collectively evaluated for impairment under
ASC 450-20.
|
Personal
|
||||||||||||
| (In thousands) | Commercial | Banking | Total | |||||||||
|
At December 31, 2010
|
||||||||||||
|
Allowance for loan losses:
|
||||||||||||
|
Ending balance: evaluated for impairment under
|
||||||||||||
|
ASC
310-10-35
|
$ | 6,127 | $ | 3,243 | $ | 9,370 | ||||||
|
Ending balance: evaluated
|
||||||||||||
|
for impairment under ASC
450-20
|
108,680 | 79,488 | 188,168 | |||||||||
|
Loans outstanding, net of allowance:
|
||||||||||||
|
Ending balance: evaluated
|
||||||||||||
|
for impairment under
|
||||||||||||
|
ASC
310-10-35
|
118,532 | 26,828 | 145,360 | |||||||||
|
Ending balance: evaluated
|
||||||||||||
|
for impairment under ASC
450-20
|
5,365,201 | 3,900,421 | 9,265,622 | |||||||||
Impaired
loans
Impaired loans totaled $145.4 million and
$208.4 million at December 31, 2010 and 2009,
respectively, and are comprised of loans on non-accrual status
and loans which have been restructured. The restructured loans
have been extended to borrowers who are experiencing financial
difficulty and who have been granted a concession. They are
largely comprised of certain business, construction and business
real estate loans classified as substandard. Upon maturity, the
loans renewed at interest rates judged not to be market rates
for new debt with similar risk, and as a result were classified
as troubled debt restructurings. These loans totaled
$41.3 million and $85.7 million at December 31,
2010 and 2009, respectively. These restructured loans are
performing in accordance with their modified terms, and because
the Company believes it probable that all amounts due under the
modified terms of the agreements will be collected, interest on
these loans is being recognized on an accrual basis. Troubled
debt restructurings also include certain credit card loans under
various debt management and assistance programs, which totaled
$18.8 million at December 31, 2010 and
$16.0 million at December 31, 2009.
The categories of impaired loans at December 31 for the last two
years are presented in the following table:
| (In thousands) | 2010 | 2009 | ||||||
|
Non-accrual loans
|
$ | 85,275 | $ | 106,613 | ||||
|
Restructured loans
|
60,085 | 101,765 | ||||||
|
Total impaired loans
|
$ | 145,360 | $ | 208,378 | ||||
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The following table provides additional information about
impaired loans held by the Company at December 31, 2010,
segregated between loans for which an allowance for credit
losses has been provided and loans for which no allowance has
been provided.
|
Unpaid
|
Interest
|
|||||||||||||||
|
Recorded
|
Principal
|
Related
|
Income
|
|||||||||||||
| (In thousands) | Investment | Balance | Allowance | Recognized * | ||||||||||||
|
With no related allowance recorded:
|
||||||||||||||||
|
Business
|
$ | 3,544 | $ | 5,095 | $ | — | $ | — | ||||||||
|
Real estate – construction and land
|
30,979 | 55,790 | — | — | ||||||||||||
|
Real estate – business
|
4,245 | 5,295 | — | — | ||||||||||||
|
Real estate – personal
|
755 | 755 | — | — | ||||||||||||
| $ | 39,523 | $ | 66,935 | $ | — | $ | — | |||||||||
|
With an allowance recorded:
|
||||||||||||||||
|
Business
|
$ | 18,464 | $ | 21,106 | $ | 1,665 | $ | 395 | ||||||||
|
Real estate – construction and land
|
39,719 | 52,587 | 2,538 | 756 | ||||||||||||
|
Real estate – business
|
21,581 | 25,713 | 1,924 | 387 | ||||||||||||
|
Real estate – personal
|
7,294 | 9,489 | 936 | 25 | ||||||||||||
|
Consumer credit card
|
18,779 | 18,779 | 2,307 | 1,304 | ||||||||||||
| $ | 105,837 | $ | 127,674 | $ | 9,370 | $ | 2,867 | |||||||||
|
Total at December 31, 2010
|
$ | 145,360 | $ | 194,609 | $ | 9,370 | $ | 2,867 | ||||||||
| * | Represents interest income recognized since date of impairment. Interest shown is interest recognized in 2010 on accruing restructured loans as noted above. |
Average impaired loans were $173.0 million during 2010,
consisting of $91.3 million in non-accrual loans and
$81.7 million in restructured loans, compared to
$160.6 million during 2009.
Delinquent
and non-accrual loans
The following table provides aging information on the
Company’s past due and accruing loans, in addition to the
balances of loans on non-accrual status, at December 31,
2010. Non-accrual loans totaled $85.3 million and
$106.6 million at December 31, 2010 and 2009,
respectively. Loans 90 days delinquent and still accruing
interest amounted to $20.5 million and $42.6 million
at December 31, 2010 and 2009, respectively.
|
Current or
|
||||||||||||||||||||
|
Less
|
90 Days
|
|||||||||||||||||||
|
Than 30
|
Past Due
|
|||||||||||||||||||
|
Days Past
|
30-89 Days
|
and Still
|
||||||||||||||||||
| (In thousands) | Due | Past Due | Accruing | Non-accrual | Total | |||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Business
|
$ | 2,927,403 | $ | 19,853 | $ | 854 | $ | 8,933 | $ | 2,957,043 | ||||||||||
|
Real estate – construction and land
|
400,420 | 7,464 | 217 | 52,752 | 460,853 | |||||||||||||||
|
Real estate – business
|
2,040,794 | 8,801 | — | 16,242 | 2,065,837 | |||||||||||||||
|
Personal Banking:
|
||||||||||||||||||||
|
Real estate – personal
|
1,413,905 | 15,579 | 3,554 | 7,348 | 1,440,386 | |||||||||||||||
|
Consumer
|
1,145,561 | 15,899 | 2,867 | — | 1,164,327 | |||||||||||||||
|
Revolving home equity
|
475,764 | 929 | 825 | — | 477,518 | |||||||||||||||
|
Consumer credit card
|
806,373 | 12,513 | 12,149 | — | 831,035 | |||||||||||||||
|
Overdrafts
|
13,555 | 428 | — | — | 13,983 | |||||||||||||||
|
Total at December 31, 2010
|
$ | 9,223,775 | $ | 81,466 | $ | 20,466 | $ | 85,275 | $ | 9,410,982 | ||||||||||
78
Table of Contents
Credit
quality
The following table provides information about the credit
quality of the Commercial loan portfolio, using the
Company’s internal rating system as an indicator. The
information below was updated as of December 31, 2010 for
this indicator. The credit quality of Personal Banking loans is
monitored on the basis of aging/delinquency, and this
information is provided in the table above.
The internal rating system is a series of grades reflecting
management’s risk assessment, based on its analysis of the
borrower’s financial condition. The “pass”
category consists of a range of loan grades that reflect
increasing, though still acceptable, risk. Movement of risk
through the various grade levels in the “pass”
category is monitored for early identification of credit
deterioration. The “special mention” rating is
attached to loans where the borrower exhibits material negative
financial trends due to borrower specific or systemic conditions
that, if left uncorrected, threaten its capacity to meet its
debt obligations. The borrower is believed to have sufficient
financial flexibility to react to and resolve its negative
financial situation. It is a transitional grade that is closely
monitored for improvement or deterioration. The
“substandard” rating is applied to loans where the
borrower exhibits well-defined weaknesses that jeopardize its
continued performance and are of a severity that the distinct
possibility of default exists. Loans are placed on
“non-accrual” when management does not expect to
collect payments consistent with acceptable and agreed upon
terms of repayment, as discussed in Note 1.
| Commercial Loans | ||||||||||||
|
Real
|
Real
|
|||||||||||
|
Estate-
|
Estate-
|
|||||||||||
| (In thousands) | Business | Construction | Business | |||||||||
|
Pass
|
$ | 2,801,328 | $ | 327,167 | $ | 1,878,005 | ||||||
|
Special mention
|
67,142 | 29,345 | 77,527 | |||||||||
|
Substandard
|
79,640 | 51,589 | 94,063 | |||||||||
|
Non-accrual
|
8,933 | 52,752 | 16,242 | |||||||||
|
Total at December 31, 2010
|
$ | 2,957,043 | $ | 460,853 | $ | 2,065,837 | ||||||
Loans
held for sale
In addition to the portfolio of loans which are intended to be
held to maturity, the Company historically originates loans
which it intends to sell in secondary markets. Loans classified
as held for sale primarily consist of loans originated to
students while attending colleges and universities. Most of this
portfolio was sold under contracts with the Federal Department
of Education and various student loan agencies. Significant
future student loan originations are not anticipated, because
under statutory requirements effective July 1, 2010, the
Company is prohibited from making federally guaranteed student
loans. Also included as held for sale are certain fixed rate
residential mortgage loans which are sold in the secondary
market, generally within three months of origination. The
following table presents information about loans held for sale,
including an impairment valuation allowance resulting from
declines in fair value below cost, which is further discussed in
Note 16 on Fair Value Measurements.
| (In thousands) | 2010 | 2009 | ||||||
|
Balance outstanding at end of year:
|
||||||||
|
Student loans, at cost
|
$ | 53,901 | $ | 335,358 | ||||
|
Residential mortgage loans, at cost
|
10,419 | 10,473 | ||||||
|
Valuation allowance on student loans
|
(569 | ) | (828 | ) | ||||
|
Total loans held for sale, at lower of cost or fair value
|
$ | 63,751 | $ | 345,003 | ||||
|
Net gains on sales:
|
||||||||
|
Student loans
|
$ | 8,398 | $ | 9,738 | ||||
|
Residential mortgage loans
|
2,004 | 2,463 | ||||||
|
Total gains on sales of loans held for sale, net
|
$ | 10,402 | $ | 12,201 | ||||
79
Table of Contents
| 4. | Investment Securities |
Investment securities, at fair value, consisted of the following
at December 31, 2010 and 2009.
| (In thousands) | 2010 | 2009 | ||||||||||
|
Available for sale:
|
||||||||||||
|
U.S. government and federal agency obligations
|
$ | 455,537 | $ | 447,038 | ||||||||
|
Government-sponsored enterprise obligations
|
201,895 | 165,814 | ||||||||||
|
State and municipal obligations
|
1,119,485 | 939,338 | ||||||||||
|
Agency mortgage-backed securities
|
2,491,199 | 2,262,003 | ||||||||||
|
Non-agency mortgage-backed securities
|
455,790 | 609,016 | ||||||||||
|
Other asset-backed securities
|
2,354,260 | 1,701,569 | ||||||||||
|
Other debt securities
|
176,964 | 176,331 | ||||||||||
|
Equity securities
|
39,173 | 39,866 | ||||||||||
|
Total available for sale
|
7,294,303 | 6,340,975 | ||||||||||
|
Trading
|
11,710 | 10,335 | ||||||||||
|
Non-marketable
|
103,521 | 122,078 | ||||||||||
|
Total investment securities
|
$ | 7,409,534 | $ | 6,473,388 | ||||||||
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 borrowing and regulatory purposes,
which totaled $45.2 million and $72.6 million at
December 31, 2010 and December 31, 2009, 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 $58.2 million and
$49.5 million at December 31, 2010 and
December 31, 2009, respectively. In the absence of readily
ascertainable market values, these securities are carried at
estimated fair value.
A summary of the available for sale investment securities by
maturity groupings as of December 31, 2010 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, 2010. 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 agencies such as FHLMC, FNMA, GNMA and FDIC, in addition to
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
80
Table of Contents
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
|
$ | 168,836 | $ | 169,163 | .02 | % | ||||||
|
After 1 but within 5 years
|
104,069 | 111,101 | 1.83 | |||||||||
|
After 5 but within 10 years
|
161,973 | 175,273 | 1.79 | |||||||||
|
Total U.S. government and federal agency obligations
|
434,878 | 455,537 | 1.11 | |||||||||
|
Government-sponsored enterprise obligations:
|
||||||||||||
|
Within 1 year
|
82,263 | 82,889 | 2.37 | |||||||||
|
After 1 but within 5 years
|
106,418 | 108,156 | 1.87 | |||||||||
|
After 5 but within 10 years
|
11,380 | 10,850 | 2.25 | |||||||||
|
Total government-sponsored enterprise obligations
|
200,061 | 201,895 | 2.10 | |||||||||
|
State and municipal obligations:
|
||||||||||||
|
Within 1 year
|
141,499 | 143,745 | 3.69 | |||||||||
|
After 1 but within 5 years
|
428,899 | 437,716 | 2.93 | |||||||||
|
After 5 but within 10 years
|
285,211 | 282,224 | 2.95 | |||||||||
|
After 10 years
|
261,411 | 255,800 | 2.54 | |||||||||
|
Total state and municipal obligations
|
1,117,020 | 1,119,485 | 2.94 | |||||||||
|
Mortgage and asset-backed securities:
|
||||||||||||
|
Agency mortgage-backed securities
|
2,437,123 | 2,491,199 | 3.61 | |||||||||
|
Non-agency mortgage-backed securities
|
459,363 | 455,790 | 6.17 | |||||||||
|
Other asset-backed securities
|
2,342,866 | 2,354,260 | 1.49 | |||||||||
|
Total mortgage and asset-backed securities
|
5,239,352 | 5,301,249 | 2.89 | |||||||||
|
Other debt securities:
|
||||||||||||
|
Within 1 year
|
20,036 | 20,227 | ||||||||||
|
After 1 but within 5 years
|
145,847 | 156,737 | ||||||||||
|
Total other debt securities
|
165,883 | 176,964 | ||||||||||
|
Equity securities
|
7,569 | 39,173 | ||||||||||
|
Total available for sale investment securities
|
$ | 7,164,763 | $ | 7,294,303 | ||||||||
Included in U.S. government securities are
U.S. Treasury inflation-protected securities, which totaled
$445.7 million, at fair value, at December 31, 2010.
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 $150.1 million, at
fair value, of auction rate securities, which were purchased
from bank customers in 2008. Equity securities are primarily
comprised of investments in common stock held by the Parent,
which totaled $35.9 million, at fair value, at
December 31, 2010.
81
Table of Contents
For securities classified as available for sale, the following
table shows the unrealized gains and losses (pre-tax) in
accumulated other comprehensive income, by security type.
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
||||||||||||||
| (In thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
|
December 31, 2010
|
||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 434,878 | $ | 20,659 | $ | — | $ | 455,537 | ||||||||
|
Government-sponsored enterprise obligations
|
200,061 | 2,364 | (530 | ) | 201,895 | |||||||||||
|
State and municipal obligations
|
1,117,020 | 19,108 | (16,643 | ) | 1,119,485 | |||||||||||
|
Mortgage and asset-backed securities:
|
||||||||||||||||
|
Agency mortgage-backed securities
|
2,437,123 | 57,516 | (3,440 | ) | 2,491,199 | |||||||||||
|
Non-agency mortgage-backed securities
|
459,363 | 10,940 | (14,513 | ) | 455,790 | |||||||||||
|
Other asset-backed securities
|
2,342,866 | 12,445 | (1,051 | ) | 2,354,260 | |||||||||||
|
Total mortgage and asset-backed securities
|
5,239,352 | 80,901 | (19,004 | ) | 5,301,249 | |||||||||||
|
Other debt securities
|
165,883 | 11,081 | — | 176,964 | ||||||||||||
|
Equity securities
|
7,569 | 31,604 | — | 39,173 | ||||||||||||
|
Total
|
$ | 7,164,763 | $ | 165,717 | $ | (36,177 | ) | $ | 7,294,303 | |||||||
|
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 | |||||||
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, 2010, the fair value of
securities on this watch list was $241.7 million.
As of December 31, 2010, the Company had recorded OTTI on
certain non-agency mortgage-backed securities, part of the watch
list mentioned above, which had an aggregate fair value of
$163.6 million. The credit portion of the impairment
totaled $7.5 million and was recorded in earnings. The
noncredit-related portion of the impairment totaled
$12.2 million on a pre-tax basis, and has been recognized
in accumulated other comprehensive income. The Company does not
intend to sell these securities and believes it is not more
likely than not that it will be required to sell the securities
before the recovery of their amortized cost.
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
82
Table of Contents
bases of the securities. Significant inputs to the cash flow
models used to calculate the credit losses on these securities
included the following:
| Significant Inputs | Range | |||
|
Prepayment CPR
|
2% - 25% | |||
|
Projected cumulative default
|
11% - 51% | |||
|
Credit support
|
0% - 11% | |||
|
Loss severity
|
33% - 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) | 2010 | 2009 | ||||||
|
Balance, January 1
|
$ | 2,473 | $ | — | ||||
|
Credit losses on debt securities for which impairment was not
previously recognized
|
353 | 3,619 | ||||||
|
Credit losses on debt securities for which impairment was
previously recognized
|
4,716 | — | ||||||
|
Credit losses reversed on securities sold
|
— | (1,146 | ) | |||||
|
Balance, December 31
|
$ | 7,542 | $ | 2,473 | ||||
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, 2010
|
||||||||||||||||||||||||
|
Government-sponsored enterprise obligations
|
$ | 10,850 | $ | 530 | $ | — | $ | — | $ | 10,850 | $ | 530 | ||||||||||||
|
State and municipal obligations
|
345,775 | 7,470 | 82,269 | 9,173 | 428,044 | 16,643 | ||||||||||||||||||
|
Mortgage and asset-backed securities:
|
||||||||||||||||||||||||
|
Agency mortgage-backed securities
|
660,326 | 3,440 | — | — | 660,326 | 3,440 | ||||||||||||||||||
|
Non-agency mortgage-backed securities
|
15,893 | 36 | 170,545 | 14,477 | 186,438 | 14,513 | ||||||||||||||||||
|
Other asset-backed securities
|
487,822 | 1,029 | 24,928 | 22 | 512,750 | 1,051 | ||||||||||||||||||
|
Total mortgage and asset-backed securities
|
1,164,041 | 4,505 | 195,473 | 14,499 | 1,359,514 | 19,004 | ||||||||||||||||||
|
Total
|
$ | 1,520,666 | $ | 12,505 | $ | 277,742 | $ | 23,672 | $ | 1,798,408 | $ | 36,177 | ||||||||||||
|
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
|
$ | 924,200 | $ | 21,215 | $ | 353,979 | $ | 35,645 | $ | 1,278,179 | $ | 56,860 | ||||||||||||
83
Table of Contents
The total available for sale portfolio consisted of
approximately 1,300 individual securities at December 31,
2010, with 259 securities in a loss position. Securities with
temporary impairment totaled 243, of which 17 securities, or 2%
of the portfolio value, had been in a loss position for
12 months or longer.
The Company’s holdings of state and municipal obligations
included gross unrealized losses of $16.6 million at
December 31, 2010. Of these losses, $9.9 million
related to auction rate securities, which are discussed above,
and $6.7 million related to other state and municipal
obligations. This portfolio, excluding auction rate securities,
totaled $969.4 million at fair value, or 13.3% of total
available for sale securities. The average credit quality of the
portfolio, excluding auction rate securities, is Aa2 as rated by
Moody’s. The portfolio is diversified in order to reduce
risk, and information about the largest holdings, by state and
economic sector, is shown in the table below.
|
Average
|
Average
|
|||||||||||
|
% of
|
Life
|
Rating
|
||||||||||
| Portfolio | (in years) | (Moody’s) | ||||||||||
|
At December 31, 2010
|
||||||||||||
|
Texas
|
11.1 | % | 4.9 | Aa1 | ||||||||
|
Washington
|
6.6 | 1.9 | Aa2 | |||||||||
|
Illinois
|
6.0 | 3.9 | Aa2 | |||||||||
|
Missouri
|
5.1 | 1.9 | Aa1 | |||||||||
|
Indiana
|
4.6 | 2.3 | Aa2 | |||||||||
|
General obligation
|
26.2 | % | 3.9 | Aa2 | ||||||||
|
Housing
|
19.5 | 5.9 | Aa1 | |||||||||
|
Transportation
|
16.5 | 3.2 | Aa3 | |||||||||
|
Lease
|
10.8 | 3.3 | Aa2 | |||||||||
|
Refunded
|
6.9 | 2.6 | Aaa | |||||||||
The credit ratings (Moody’s rating or equivalent) at
December 31, 2010 in the state and municipal bond portfolio
(excluding auction rate securities) are shown in the following
table.
|
% of
|
||||
| Portfolio | ||||
|
Aaa
|
16.8 | % | ||
|
Aa
|
64.0 | |||
|
A
|
14.1 | |||
|
Baa
|
3.1 | |||
|
Not rated
|
2.0 | |||
| 100.0 | % | |||
The remaining unrealized losses on the Company’s
investments, as shown in the preceding tables, are largely
contained in the portfolio of non-agency mortgage-backed
securities. These securities are not guaranteed by an outside
agency and are dependent on payments received from the
underlying mortgage collateral. While virtually all of these
securities, at purchase date, were comprised of senior tranches
and were highly rated by various rating agencies, the adverse
housing market, liquidity pressures and overall economic climate
has resulted in low fair values for these securities. Also, as
mentioned above, the Company maintains a watch list comprised
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.
84
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) | 2010 | 2009 | 2008 | |||||||||
|
Proceeds from sales of available for sale securities
|
$ | 78,448 | $ | 202,544 | $ | 109,543 | ||||||
|
Proceeds from sales/redemption of non-marketable securities
|
192 | 5,308 | 22,300 | |||||||||
|
Total proceeds
|
$ | 78,640 | $ | 207,852 | $ | 131,843 | ||||||
|
Available for sale:
|
||||||||||||
|
Gains realized on sales
|
$ | 3,639 | $ | 10,311 | $ | 9,946 | ||||||
|
Losses realized on sales
|
(151 | ) | (9,989 | ) | (4,743 | ) | ||||||
|
Other-than-temporary
impairment recognized on debt securities
|
(5,069 | ) | (2,473 | ) | — | |||||||
|
Non-marketable:
|
||||||||||||
|
Gains realized on sales/redemption
|
52 | 1,087 | 22,300 | |||||||||
|
Losses realized on sales
|
— | (170 | ) | — | ||||||||
|
Fair value adjustments, net
|
(256 | ) | (5,961 | ) | 2,791 | |||||||
|
Investment securities gains (losses), net
|
$ | (1,785 | ) | $ | (7,195 | ) | $ | 30,294 | ||||
Investment securities with a fair value of $3.6 billion and
$4.1 billion were pledged at December 31, 2010 and
2009, 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 $429.4 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, 2010 and 2009:
| (In thousands) | 2010 | 2009 | ||||||
|
Land
|
$ | 107,906 | $ | 107,002 | ||||
|
Buildings and improvements
|
512,826 | 504,916 | ||||||
|
Equipment
|
222,606 | 225,621 | ||||||
|
Total
|
843,338 | 837,539 | ||||||
|
Less accumulated depreciation and amortization
|
459,941 | 434,906 | ||||||
|
Net land, buildings and equipment
|
$ | 383,397 | $ | 402,633 | ||||
Depreciation expense of $35.1 million, $37.0 million
and $35.3 million for 2010, 2009 and 2008, respectively,
was included in occupancy expense and equipment expense in the
consolidated income statements. Repairs and maintenance expense
of $18.5 million, $18.6 million and $20.1 million
for 2010, 2009 and 2008, respectively, was included in occupancy
expense and equipment expense. Interest expense capitalized on
construction projects in the past three years has not been
significant.
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Table of Contents
| 6. | Goodwill and Other Intangible Assets |
Goodwill and other intangible assets are summarized in the
following table.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Valuation
|
Net
|
Carrying
|
Accumulated
|
Valuation
|
Net
|
|||||||||||||||||||||||||
| (In thousands) | Amount | Amortization | Allowance | Amount | Amount | Amortization | Allowance | Amount | ||||||||||||||||||||||||
|
Amortizable intangible assets:
|
||||||||||||||||||||||||||||||||
|
Core deposit premium
|
$ | 25,720 | $ | (16,108 | ) | $ | — | $ | 9,612 | $ | 25,720 | $ | (12,966 | ) | $ | — | $ | 12,754 | ||||||||||||||
|
Mortgage servicing rights
|
3,082 | (1,572 | ) | (185 | ) | 1,325 | 2,898 | (1,206 | ) | (113 | ) | 1,579 | ||||||||||||||||||||
|
Total amortizable intangible assets
|
28,802 | (17,680 | ) | (185 | ) | 10,937 | 28,618 | (14,172 | ) | (113 | ) | 14,333 | ||||||||||||||||||||
|
Goodwill
|
125,585 | — | — | 125,585 | 125,585 | — | — | 125,585 | ||||||||||||||||||||||||
|
Total intangible assets
|
$ | 154,387 | $ | (17,680 | ) | $ | (185 | ) | $ | 136,522 | $ | 154,203 | $ | (14,172 | ) | $ | (113 | ) | $ | 139,918 | ||||||||||||
As a result of ongoing assessments, no impairment of goodwill
was recorded in 2010, 2009 or 2008. Further, the regular annual
review on January 1, 2011 revealed no impairment as of that
date. There were no changes in the carrying amount of goodwill
or its allocation among operating segments, as shown in the
following table, during the past three years.
|
Consumer
|
Commercial
|
Wealth
|
Total
|
|||||||||||||
| (In thousands) | Segment | Segment | Segment | Goodwill | ||||||||||||
|
Balance at December 31, 2010
|
$ | 67,765 | $ | 57,074 | $ | 746 | $ | 125,585 | ||||||||
Changes in the net carrying amount of other intangible assets
for the years ended December 31, 2009 and 2010 are shown in
the following table.
|
Core
|
Mortgage
|
|||||||
|
Deposit
|
Servicing
|
|||||||
| (In thousands) | Premium | Rights | ||||||
|
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 | ||||||
|
Originations
|
— | 184 | ||||||
|
Amortization
|
(3,142 | ) | (366 | ) | ||||
|
Impairment
|
— | (72 | ) | |||||
|
Balance at December 31, 2010
|
$ | 9,612 | $ | 1,325 | ||||
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, 2010, temporary impairment of $185 thousand
had been 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.
Aggregate amortization expense on intangible assets for the
years ended December 31, 2010, 2009 and 2008 was
$3.5 million, $4.0 million and $4.3 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, 2010. The
Company’s actual amortization expense in any given period
may be different from
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Table of Contents
the estimated amounts depending upon the acquisition of
intangible assets, changes in mortgage interest rates,
prepayment rates and other market conditions.
| (In thousands) | ||||
|
2011
|
$ | 2,868 | ||
|
2012
|
2,335 | |||
|
2013
|
1,801 | |||
|
2014
|
1,326 | |||
|
2015
|
980 | |||
| 7. | Deposits |
At December 31, 2010, the scheduled maturities of total
time open and certificates of deposit were as follows:
| (In thousands) | ||||
|
Due in 2011
|
$ | 2,189,969 | ||
|
Due in 2012
|
205,917 | |||
|
Due in 2013
|
231,015 | |||
|
Due in 2014
|
43,771 | |||
|
Due in 2015
|
72,946 | |||
|
Thereafter
|
544 | |||
|
Total
|
$ | 2,744,162 | ||
The following table shows a detailed breakdown of the maturities
of time open and certificates of deposit, by size category, at
December 31, 2010.
|
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
|
$ | 259,544 | $ | 43,347 | $ | 387,770 | $ | 10,217 | $ | 700,878 | ||||||||||
|
Due in over 3 through 6 months
|
348,099 | 55,164 | 368,148 | 12,483 | 783,894 | |||||||||||||||
|
Due in over 6 through 12 months
|
376,233 | 51,098 | 232,388 | 45,478 | 705,197 | |||||||||||||||
|
Due in over 12 months
|
227,927 | 103,638 | 204,273 | 18,355 | 554,193 | |||||||||||||||
|
Total
|
$ | 1,211,803 | $ | 253,247 | $ | 1,192,579 | $ | 86,533 | $ | 2,744,162 | ||||||||||
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, 2010 totaled $49.9 million.
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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 | |||||||||||||||
|
2010
|
||||||||||||||||||||
|
Federal funds purchased and repurchase agreements
|
.1 | % | .1 | % | $ | 624,847 | $ | 1,130,555 | $ | 582,827 | ||||||||||
|
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 | |||||||||||||||
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, 2010 were comprised of non-insured customer
funds totaling $577.9 million, which were secured by a
portion of the Company’s investment portfolio.
Long-term borrowings of the Company consisted of the following
at December 31, 2010:
|
Year End
|
||||||||||||||
|
Maturity
|
Weighted
|
Year End
|
||||||||||||
| (Dollars in thousands) | Borrower | Date | Rate | Balance | ||||||||||
|
FHLB advances
|
Subsidiary bank | 2011 | 4.3 | % | $ | 250 | ||||||||
| 2012 | 4.6 | 460 | ||||||||||||
| 2013-16 | 4.9 | 3,965 | ||||||||||||
| 2017 | 3.5 | 100,000 | ||||||||||||
|
Structured repurchase agreements
|
Subsidiary bank | 2013-14 | .0 | 400,000 | ||||||||||
|
Structured note payable
|
Venture capital subsidiary | 2012 | .0 | 7,515 | ||||||||||
|
Non-recourse lease financing notes
|
Bank leasing subsidiary | 2011 | 6.3 | 83 | ||||||||||
|
Total
|
$ | 512,273 | ||||||||||||
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. In November 2010, the Company elected to repay
FHLB advances totaling $125.0 million in advance of their
maturity dates. These advances had a weighted average rate of
4.2%, and a prepayment penalty of $11.8 million was paid.
Total outstanding advances at December 31, 2010 were
$104.7 million. Nearly all of the outstanding advances have
fixed interest rates and contain prepayment penalties. The FHLB
has also issued letters of credit, totaling $502.2 million
at December 31, 2010, to secure the Company’s
obligations to certain depositors of public funds.
Structured repurchase agreements totaled $400.0 million at
December 31, 2010. The repurchase agreements were issued
upon the maturity of $500.0 million of other structured
repurchase agreements in August 2010. The new borrowings have
floating interest rates based upon various published constant
maturity swap (CMS) rates and will mature in 2013 through 2014.
As of year end they did not bear interest because of low CMS
rates.
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Table of Contents
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
2010, 2009 and 2008 on a consolidated basis amounted to
$93.0 million, $172.6 million and $285.5 million,
respectively.
| 9. | Income Taxes |
The components of income tax expense (benefit) from operations
for the years ended December 31, 2010, 2009 and 2008 were
as follows:
| (In thousands) | Current | Deferred | Total | |||||||||
|
Year ended December 31, 2010:
|
||||||||||||
|
U.S. federal
|
$ | 98,592 | $ | (6,612 | ) | $ | 91,980 | |||||
|
State and local
|
6,742 | (2,473 | ) | 4,269 | ||||||||
| $ | 105,334 | $ | (9,085 | ) | $ | 96,249 | ||||||
|
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 | |||||||
The components of income tax expense (benefit) recorded directly
to stockholders’ equity for the years ended
December 31, 2010, 2009 and 2008 were as follows:
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
Unrealized gain (loss) on securities available for sale
|
$ | 9,841 | $ | 61,701 | $ | (40,724 | ) | |||||
|
Compensation expense for tax purposes in excess of amounts
recognized for financial reporting purposes
|
(1,201 | ) | (557 | ) | (1,941 | ) | ||||||
|
Accumulated pension (benefit) loss
|
327 | 1,476 | (9,833 | ) | ||||||||
|
Other
|
— | — | 549 | |||||||||
|
Income tax expense (benefit) allocated to stockholders’
equity
|
$ | 8,967 | $ | 62,620 | $ | (51,949 | ) | |||||
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Table of Contents
Significant components of the Company’s deferred tax assets
and liabilities at December 31, 2010 and 2009 were as
follows:
| (In thousands) | 2010 | 2009 | ||||||
|
Deferred tax assets:
|
||||||||
|
Loans, principally due to allowance for loan losses
|
$ | 90,875 | $ | 90,774 | ||||
|
Equity-based compensation
|
13,707 | 13,987 | ||||||
|
Accrued expenses
|
8,886 | 7,102 | ||||||
|
Deferred compensation
|
5,374 | 5,264 | ||||||
|
Other
|
9,135 | 7,758 | ||||||
|
Total deferred tax assets
|
127,977 | 124,885 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Unrealized gain on securities available for sale
|
49,225 | 39,384 | ||||||
|
Equipment lease financing
|
47,976 | 45,551 | ||||||
|
Land, buildings and equipment
|
20,579 | 25,571 | ||||||
|
Intangibles
|
4,700 | 4,919 | ||||||
|
Accretion on investment securities
|
3,922 | 6,055 | ||||||
|
Prepaid expenses
|
2,775 | 3,137 | ||||||
|
Other
|
2,541 | 2,926 | ||||||
|
Total deferred tax liabilities
|
131,718 | 127,543 | ||||||
|
Net deferred tax asset (liability)
|
$ | (3,741 | ) | $ | (2,658 | ) | ||
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 2021 if it cannot be utilized. At December 31,
2010, the tax benefit related to the remaining NOL carryforward
was $416 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 2010, 2009 and 2008
is as follows:
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
Computed “expected” tax expense
|
$ | 111,286 | $ | 84,991 | $ | 95,806 | ||||||
|
Increase (decrease) in income taxes resulting from:
|
||||||||||||
|
Tax-exempt interest, net of cost to carry
|
(12,745 | ) | (11,813 | ) | (9,902 | ) | ||||||
|
Tax deductible dividends on allocated shares held by the
Company’s ESOP
|
(1,096 | ) | (1,087 | ) | (1,084 | ) | ||||||
|
State and local income taxes, net of federal tax benefit
|
2,775 | 1,770 | 226 | |||||||||
|
Other
|
(3,971 | ) | (104 | ) | 31 | |||||||
|
Total income tax expense
|
$ | 96,249 | $ | 73,757 | $ | 85,077 | ||||||
Cash payments of income taxes, net of refunds, amounted to
$100.6 million, $82.9 million and $84.4 million
on a consolidated basis during 2010, 2009 and 2008,
respectively. The Parent had net receipts of $2.0 million,
$4.9 million and $2.7 million during 2010, 2009 and
2008, respectively, from tax benefits.
It is the Company’s policy to recognize interest and
penalties related to income tax matters in income tax expense.
The Company recorded tax benefits related to interest and
penalties of $68 thousand, $156 thousand and $73 thousand in
2010, 2009 and 2008, respectively. At December 31, 2010 and
2009, liabilities for interest and penalties were $268 thousand
and $335 thousand, respectively.
As of December 31, 2010 and 2009, the gross amount of
unrecognized tax benefits was $1.6 million and
$2.7 million, respectively, and the total amount of
unrecognized tax benefits that would impact the effective tax
rate, if recognized, was $1.1 million and
$2.1 million, respectively. While it is expected that the
amount of
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Table of Contents
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 income tax by
federal, state and local government taxing authorities. During
2010, the Internal Revenue Service concluded an examination of
the Company’s tax returns for the years ended
December 31, 2006 through 2008. The examination resulted in
an immaterial adjustment to income taxes recorded in the
financial statements. Tax years 2009 and 2010 remain open to
examination for U.S. federal income tax. The years open to
examination by state and local government authorities vary by
jurisdiction.
The activity in the accrued liability for unrecognized tax
benefits for the years ended December 31, 2010 and 2009 was
as follows:
| (In thousands) | 2010 | 2009 | ||||||
|
Unrecognized tax benefits at beginning of year
|
$ | 2,714 | $ | 3,350 | ||||
|
Gross increases – tax positions in prior period
|
166 | 9 | ||||||
|
Gross decreases – tax positions in prior period
|
(1,044 | ) | (667 | ) | ||||
|
Gross increases – current-period tax positions
|
328 | 349 | ||||||
|
Settlements
|
(251 | ) | (14 | ) | ||||
|
Lapse of statute of limitations
|
(300 | ) | (313 | ) | ||||
|
Unrecognized tax benefits at end of year
|
$ | 1,613 | $ | 2,714 | ||||
| 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) | 2010 | 2009 | 2008 | |||||||||
|
Payroll taxes
|
$ | 20,226 | $ | 20,587 | $ | 20,290 | ||||||
|
Medical plans
|
18,248 | 20,164 | 17,340 | |||||||||
|
401K plan
|
11,448 | 9,771 | 9,537 | |||||||||
|
Pension plans
|
1,815 | 3,023 | (1,797 | ) | ||||||||
|
Other
|
2,138 | 1,945 | 2,081 | |||||||||
|
Total employee benefits
|
$ | 53,875 | $ | 55,490 | $ | 47,451 | ||||||
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 compensation.
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. With this change,
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 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. Effective January 1, 2011, all
remaining benefits accrued under the pension plan were frozen.
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
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Table of Contents
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
satisfy the statutory minimum required contribution as defined
by the Pension Protection Act, which is intended to provide for
current service accruals 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
2010 and the minimum required contribution for 2011 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, $10
thousand and $12 thousand during fiscal 2010, 2009 and 2008,
respectively.
Benefit obligations of the CERP at the December 31, 2010
and 2009 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) | 2010 | 2009 | ||||||
|
Projected benefit obligation
|
$ | 2,829 | $ | 2,557 | ||||
|
Accumulated benefit obligation
|
$ | 2,829 | $ | 2,557 | ||||
The following items are components of the net pension cost for
the years ended December 31, 2010, 2009 and 2008.
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
Service cost-benefits earned during the year
|
$ | 716 | $ | 683 | $ | 1,025 | ||||||
|
Interest cost on projected benefit obligation
|
5,505 | 5,473 | 5,236 | |||||||||
|
Expected return on plan assets
|
(6,614 | ) | (6,123 | ) | (8,165 | ) | ||||||
|
Amortization of unrecognized net loss
|
2,208 | 2,990 | 107 | |||||||||
|
Net periodic pension cost (income)
|
$ | 1,815 | $ | 3,023 | $ | (1,797 | ) | |||||
The following table sets forth the pension plans’ funded
status, using valuation dates of December 31, 2010 and 2009.
| (In thousands) | 2010 | 2009 | ||||||
|
Change in projected benefit obligation
|
||||||||
|
Projected benefit obligation at prior valuation date
|
$ | 98,148 | $ | 91,430 | ||||
|
Service cost
|
716 | 683 | ||||||
|
Interest cost
|
5,505 | 5,473 | ||||||
|
Benefits paid
|
(4,768 | ) | (4,639 | ) | ||||
|
Actuarial (gain) loss
|
4,256 | 5,201 | ||||||
|
Projected benefit obligation at valuation date
|
103,857 | 98,148 | ||||||
|
Change in plan assets
|
||||||||
|
Fair value of plan assets at prior valuation date
|
93,498 | 85,852 | ||||||
|
Actual return (loss) on plan assets
|
10,084 | 12,275 | ||||||
|
Employer contributions
|
10 | 10 | ||||||
|
Benefits paid
|
(4,768 | ) | (4,639 | ) | ||||
|
Fair value of plan assets at valuation date
|
98,824 | 93,498 | ||||||
|
Funded status and net amount recognized at valuation date
|
$ | (5,033 | ) | $ | (4,650 | ) | ||
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Table of Contents
The accumulated benefit obligation, which represents the
liability of a plan using only benefits as of the measurement
date, was $103.9 million and $98.1 million for the
combined plans on December 31, 2010 and 2009, respectively.
Amounts not yet reflected in net periodic benefit cost and
included in accumulated other comprehensive income (loss) at
December 31, 2010 and 2009 are shown below, including
amounts recognized in other comprehensive income during the
periods. All amounts are shown on a pre-tax basis.
| (In thousands) | 2010 | 2009 | ||||||
|
Prior service credit (cost)
|
$ | — | $ | — | ||||
|
Accumulated loss
|
(27,406 | ) | (28,828 | ) | ||||
|
Accumulated other comprehensive loss
|
(27,406 | ) | (28,828 | ) | ||||
|
Cumulative employer contributions in excess of net periodic
benefit cost
|
22,373 | 24,178 | ||||||
|
Net amount recognized as an accrued benefit liability on the
December 31 balance sheet
|
$ | (5,033 | ) | $ | (4,650 | ) | ||
|
Net gain (loss) arising during period
|
$ | (786 | ) | $ | 951 | |||
|
Amortization of net loss
|
2,208 | 2,990 | ||||||
|
Total recognized in other comprehensive income
|
$ | 1,422 | $ | 3,941 | ||||
|
Total income (expense) recognized in net periodic pension
cost and other comprehensive income
|
$ | (393 | ) | $ | 918 | |||
The estimated net loss to be amortized from accumulated other
comprehensive income into net periodic pension cost in 2011 is
$2.1 million.
The following assumptions, on a weighted average basis, were
used in accounting for the plans.
| 2010 | 2009 | 2008 | ||||||||||
|
Determination of benefit obligation at year end:
|
||||||||||||
|
Discount rate
|
5.40 | % | 5.75 | % | 6.00 | % | ||||||
|
Assumed credit on cash balance accounts
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
Determination of net periodic benefit cost for year ended:
|
||||||||||||
|
Discount rate
|
5.75 | % | 6.00 | % | 6.25 | % | ||||||
|
Long-term rate of return on assets
|
7.25 | % | 7.25 | % | 8.00 | % | ||||||
|
Assumed credit on cash balance accounts
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
93
Table of Contents
The following table shows the fair values of the Company’s
pension plan assets by asset category at December 31, 2010
and 2009. Information about the valuation techniques and inputs
used to measure fair value are provided in Note 16 on Fair
Value Measurements.
| Fair Value Measurements | ||||||||||||||||
|
Quoted
|
||||||||||||||||
|
Prices in
|
||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
| (In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
December 31, 2010
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
|
$ | 22 | $ | 22 | $ | — | $ | — | ||||||||
|
U.S. government obligations
|
3,964 | 3,964 | — | — | ||||||||||||
|
Government-sponsored enterprise
obligations
(a)
|
9,771 | — | 9,771 | — | ||||||||||||
|
State and municipal obligations
|
3,644 | — | 3,644 | — | ||||||||||||
|
Agency mortgage-backed
securities
(b)
|
5,848 | — | 5,848 | — | ||||||||||||
|
Non-agency mortgage-backed securities
|
7,802 | — | 7,802 | — | ||||||||||||
|
Other asset-backed securities
|
6,060 | — | 6,060 | — | ||||||||||||
|
Corporate
bonds
(c)
|
19,676 | — | 19,676 | — | ||||||||||||
|
International bonds
|
2,274 | — | 2,274 | — | ||||||||||||
|
Equity securities and mutual
funds:
(d)
|
||||||||||||||||
|
U.S. large-cap
|
17,806 | 17,806 | — | — | ||||||||||||
|
U.S. mid-cap
|
8,849 | 8,849 | — | — | ||||||||||||
|
U.S. small-cap
|
3,344 | 3,344 | — | — | ||||||||||||
|
International developed markets
|
1,951 | 1,951 | — | — | ||||||||||||
|
Emerging markets
|
2,771 | 2,771 | — | — | ||||||||||||
|
Money market funds
|
5,042 | 5,042 | — | — | ||||||||||||
|
Total
|
$ | 98,824 | $ | 43,749 | $ | 55,075 | $ | — | ||||||||
|
December 31, 2009
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Government-sponsored enterprise
obligations
(a)
|
$ | 8,096 | $ | — | $ | 8,096 | $ | — | ||||||||
|
State and municipal obligations
|
2,053 | — | 2,053 | — | ||||||||||||
|
Agency mortgage-backed
securities
(b)
|
4,946 | — | 4,946 | — | ||||||||||||
|
Non-agency mortgage-backed securities
|
3,919 | — | 3,919 | — | ||||||||||||
|
Other asset-backed securities
|
1,349 | — | 1,349 | — | ||||||||||||
|
Corporate
bonds
(c)
|
23,104 | — | 23,104 | — | ||||||||||||
|
International bonds
|
500 | — | 500 | — | ||||||||||||
|
Equity securities and mutual
funds:
(d)
|
||||||||||||||||
|
U.S. large-cap
|
22,819 | 22,819 | — | — | ||||||||||||
|
U.S. mid-cap
|
10,595 | 10,595 | — | — | ||||||||||||
|
Emerging markets
|
781 | 781 | — | — | ||||||||||||
|
Money market funds
|
15,336 | 15,336 | — | — | ||||||||||||
|
Total
|
$ | 93,498 | $ | 49,531 | $ | 43,967 | $ | — | ||||||||
| (a) | This category represents bonds (excluding mortgage-backed securities) issued by agencies such as the Federal Home Loan Bank, the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association. | |
| (b) | This category represents mortgage-backed securities issued by the agencies mentioned in (a). | |
| (c) | This category represents investment grade bonds of U.S. issuers from diverse industries. | |
| (d) | 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, consumer goods, and industrial materials sectors. |
94
Table of Contents
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, 2010. Under the
current policy, the long-term investment target mix for the plan
is 35% equity securities 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 has historically been based on
a review of various published bond indices, and a discount rate
based on this method was used in determining the
December 31, 2009 and prior year benefit obligations. At
December 31, 2010, the Company changed this selection, and
the discount rate used in determining the year end benefit
obligation was based on matching the Company’s estimated
plan cash flows to a yield curve derived from a portfolio of
corporate bonds rated AA by Moody’s. The Company intends to
use the new basis for determining discount rates in the future.
The assumed overall expected long-term rate of return on pension
plan assets used in calculating 2010 pension plan expense was
7.25%. Determination of the plan’s expected rate of return
is based upon historical and anticipated returns of the asset
classes invested in by the pension plan and the allocation
strategy currently in place among those classes. The rate used
in plan calculations may be adjusted by management for current
trends in the economic environment. The average
10-year
annualized return for the Company’s pension plan was 4.8%.
During 2010, the plan’s rate of return was 11.0%, compared
to 13.8% in 2009. 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 the plan
freeze, growth in asset values in 2010 and lower anticipated
amortization of investment losses in 2011, partly offset by the
effect of a lower discount rate in 2011, the Company expects to
incur pension expense of $1.3 million in 2011, compared to
$1.8 million in 2010.
The following future benefit payments are expected to be paid:
| (In thousands) | ||||
|
2011
|
$ | 5,868 | ||
|
2012
|
6,078 | |||
|
2013
|
6,326 | |||
|
2014
|
6,552 | |||
|
2015
|
6,789 | |||
|
2016-2020
|
36,067 | |||
| 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, 2010,
3,146,432 shares remained available for issuance under the
plan. The stock-based compensation expense that was charged
against income was $6.0 million, $6.6 million and
$6.4 million for the years ended December 31, 2010,
2009 and 2008, respectively. The total income tax benefit
recognized in the income statement for share-based compensation
arrangements was $2.2 million, $2.5 million and
$2.4 million for the years ended December 31, 2010,
2009 and 2008, respectively.
During 2010, stock-based compensation was issued 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
95
Table of Contents
status of the Company’s nonvested share awards as of
December 31, 2010 and changes during the year then ended is
presented below.
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Grant Date
|
||||||||
| Shares | Fair Value | |||||||
|
Nonvested at January 1, 2010
|
379,374 | $ | 35.46 | |||||
|
Granted
|
161,723 | 37.52 | ||||||
|
Vested
|
(55,857 | ) | 37.20 | |||||
|
Forfeited
|
(14,834 | ) | 34.53 | |||||
|
Nonvested at December 31, 2010
|
470,406 | $ | 36.00 | |||||
The total fair value (at vest date) of shares vested during
2010, 2009 and 2008 was $2.1 million, $1.7 million and
$1.8 million, respectively.
In previous years, stock appreciation rights (SARs) and stock
options have also been granted, and were granted with exercise
prices equal to the market price of the Company’s stock at
the date of grant. SARs, which the Company granted in 2006 and
subsequent years, vest on a graded basis over 4 years of
continuous service and have
10-year
contractual terms. 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 also have
10-year
contractual terms.
In determining compensation cost, the Black-Scholes
option-pricing model is used to estimate the fair value of
options and SARs on date of grant. The Black-Scholes model is a
closed-end model that uses various assumptions as shown 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 weighted average fair values of
SARs granted during 2009 and 2008. No SARs were granted during
2010.
| 2009 | 2008 | |||||||
|
Weighted per share average fair value at grant date
|
$ | 6.78 | $ | 7.50 | ||||
|
Assumptions:
|
||||||||
|
Dividend yield
|
2.7 | % | 2.3 | % | ||||
|
Volatility
|
20.8 | % | 18.4 | % | ||||
|
Risk-free interest rate
|
3.2 | % | 3.5 | % | ||||
|
Expected term
|
7.3 years | 7.2 years | ||||||
A summary of option activity during 2010 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, 2010
|
2,401,891 | $ | 29.81 | |||||||||||||
|
Granted
|
— | — | ||||||||||||||
|
Forfeited
|
— | — | ||||||||||||||
|
Expired
|
(14,679 | ) | 31.22 | |||||||||||||
|
Exercised
|
(581,102 | ) | 26.20 | |||||||||||||
|
Outstanding at December 31, 2010
|
1,806,110 | $ | 30.96 | 2.6 years | $ | 15,842 | ||||||||||
|
Exercisable at December 31, 2010
|
1,806,110 | $ | 30.96 | 2.6 years | $ | 15,842 | ||||||||||
|
Vested and expected to vest at December 31, 2010
|
1,806,110 | $ | 30.96 | 2.6 years | $ | 15,842 | ||||||||||
96
Table of Contents
A summary of SAR activity during 2010 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, 2010
|
1,752,956 | $ | 39.73 | |||||||||||||
|
Granted
|
— | — | ||||||||||||||
|
Forfeited
|
(16,527 | ) | 38.27 | |||||||||||||
|
Expired
|
(24,149 | ) | 39.63 | |||||||||||||
|
Exercised
|
(2,172 | ) | 37.21 | |||||||||||||
|
Outstanding at December 31, 2010
|
1,710,108 | $ | 39.71 | 6.2 years | $ | 1,019 | ||||||||||
|
Exercisable at December 31, 2010
|
1,706,227 | $ | 39.71 | 6.2 years | $ | 1,012 | ||||||||||
|
Vested and expected to vest at December 31, 2010
|
1,275,514 | $ | 39.97 | 5.9 years | $ | 544 | ||||||||||
Additional information about stock options and SARs exercises is
presented below.
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
Intrinsic value of options and SARs exercised
|
$ | 7,005 | $ | 3,249 | $ | 10,006 | ||||||
|
Cash received from options and SARs exercised
|
$ | 10,563 | $ | 4,729 | $ | 15,186 | ||||||
|
Tax benefit realized from options and SARs exercised
|
$ | 1,042 | $ | 636 | $ | 1,745 | ||||||
As of December 31, 2010, there was $10.6 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
3.3 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 64,277 at December 31, 2010. In 2010,
20,175 shares were purchased at an average price of $37.03
and in 2009, 23,352 shares were purchased at an average
price of $32.45.
| * | All share and per share amounts in this note have been restated for the 5% stock dividend distributed in 2010. |
| 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 of other comprehensive income is the
unrealized holding gains and losses on available for sale
securities. These gains and losses have been separated into two
groups in the table below, as required by current accounting
guidance on
other-than-temporary
impairment on debt securities. 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 gain or loss in fair
value is recorded in other comprehensive income (loss). Changes
in the noncredit-related gain or 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
97
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 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) | 2010 | 2009 | 2008 | |||||||||
|
Available for sale debt securities for which OTTI has been
recognized:
|
||||||||||||
|
Unrealized holding gains subsequent to initial OTTI recognition
|
$ | 22,973 | $ | 12,251 | $ | — | ||||||
|
Income tax expense
|
(8,730 | ) | (4,655 | ) | — | |||||||
|
Net unrealized gains
|
14,243 | 7,596 | — | |||||||||
|
Other available for sale investment securities:
|
||||||||||||
|
Unrealized holding gains (losses)
|
6,412 | 150,443 | (101,968 | ) | ||||||||
|
Income tax (expense) benefit on unrealized gains/losses
|
(2,470 | ) | (57,152 | ) | 38,684 | |||||||
|
Reclassification adjustment for (gains) losses realized and
included in net income
|
(3,488 | ) | (322 | ) | (5,201 | ) | ||||||
|
Reclassification adjustment for tax expense (benefit) on
realized gains/losses
|
1,359 | 106 | 2,040 | |||||||||
|
Net unrealized gains (losses)
|
1,813 | 93,075 | (66,445 | ) | ||||||||
|
Prepaid pension cost:
|
||||||||||||
|
Amortization of accumulated pension loss
|
2,208 | 2,990 | 107 | |||||||||
|
Net gain (loss) arising during period
|
(786 | ) | 951 | (26,544 | ) | |||||||
|
Income tax (expense) benefit on change in pension loss
|
(540 | ) | (1,476 | ) | 10,046 | |||||||
|
Change in pension loss
|
882 | 2,465 | (16,391 | ) | ||||||||
|
Other comprehensive income (loss)
|
$ | 16,938 | $ | 103,136 | $ | (82,836 | ) | |||||
The end of period components of accumulated other comprehensive
income (loss) are shown in the table below. At December 31,
2010, accumulated other comprehensive income was
$63.3 million, net of tax. It was comprised of
$7.5 million in unrealized holding losses on available for
sale debt securities for which OTTI has been recorded,
$87.8 million in unrealized holding gains on other
available for sale securities, and $17.0 million in
accumulated pension loss.
|
Accumulated
|
||||||||||||
|
Unrealized
|
Other
|
|||||||||||
|
Gains (Losses)
|
Pension
|
Comprehensive
|
||||||||||
| (In thousands) | on Securities | Loss | Income (Loss) | |||||||||
|
Balance at December 31, 2008
|
$ | (36,412 | ) | $ | (20,317 | ) | $ | (56,729 | ) | |||
|
Current period other comprehensive income
|
100,671 | 2,465 | 103,136 | |||||||||
|
Balance at December 31, 2009
|
64,259 | (17,852 | ) | 46,407 | ||||||||
|
Current period other comprehensive income
|
16,056 | 882 | 16,938 | |||||||||
|
Balance at December 31, 2010
|
$ | 80,315 | $ | (16,970 | ) | $ | 63,345 | |||||
98
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 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 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. In early 2010, the Company
determined that the internal interest rate ascribed to business
units for providing non-contractual deposit funds should be
adjusted to make it more reactive to market changes and reflect
recent economic conditions. The resulting change to segment net
interest income lowered total segment contribution and
redistributed income among segments. The information for 2009 in
the table below has been revised to reflect the lower rate
environment during that year.
99
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, 2010:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 311,231 | $ | 259,296 | $ | 41,075 | $ | 611,602 | $ | 34,330 | $ | 645,932 | ||||||||||||
|
Provision for loan losses
|
(70,633 | ) | (24,825 | ) | (1,263 | ) | (96,721 | ) | (3,279 | ) | (100,000 | ) | ||||||||||||
|
Non-interest income
|
157,903 | 131,954 | 116,095 | 405,952 | (841 | ) | 405,111 | |||||||||||||||||
|
Investment securities losses, net
|
— | — | — | — | (1,785 | ) | (1,785 | ) | ||||||||||||||||
|
Non-interest expense
|
(287,359 | ) | (205,069 | ) | (106,438 | ) | (598,866 | ) | (32,268 | ) | (631,134 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 111,142 | $ | 161,356 | $ | 49,469 | $ | 321,967 | $ | (3,843 | ) | $ | 318,124 | |||||||||||
|
Year ended December 31, 2009:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 331,607 | $ | 243,083 | $ | 40,691 | $ | 615,381 | $ | 20,121 | $ | 635,502 | ||||||||||||
|
Provision for loan losses
|
(84,019 | ) | (54,230 | ) | (520 | ) | (138,769 | ) | (21,928 | ) | (160,697 | ) | ||||||||||||
|
Non-interest income
|
163,150 | 114,637 | 114,445 | 392,232 | 4,027 | 396,259 | ||||||||||||||||||
|
Investment securities losses, net
|
— | — | — | — | (7,195 | ) | (7,195 | ) | ||||||||||||||||
|
Non-interest expense
|
(302,505 | ) | (191,628 | ) | (106,370 | ) | (600,503 | ) | (21,234 | ) | (621,737 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 108,233 | $ | 111,862 | $ | 48,246 | $ | 268,341 | $ | (26,209 | ) | $ | 242,132 | |||||||||||
|
Year ended December 31, 2008:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 323,568 | $ | 203,961 | $ | 37,174 | $ | 564,703 | $ | 28,036 | $ | 592,739 | ||||||||||||
|
Provision for loan losses
|
(56,639 | ) | (13,526 | ) | (265 | ) | (70,430 | ) | (38,470 | ) | (108,900 | ) | ||||||||||||
|
Non-interest income
|
146,295 | 107,445 | 113,879 | 367,619 | 8,093 | 375,712 | ||||||||||||||||||
|
Investment securities gains, net
|
— | — | — | — | 30,294 | 30,294 | ||||||||||||||||||
|
Non-interest expense
|
(285,796 | ) | (180,779 | ) | (131,710 | ) | (598,285 | ) | (17,095 | ) | (615,380 | ) | ||||||||||||
|
Income (loss) before income taxes
|
$ | 127,428 | $ | 117,101 | $ | 19,078 | $ | 263,607 | $ | 10,858 | $ | 274,465 | ||||||||||||
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.
Segment
Balance Sheet Data
|
Segment
|
Other/
|
Consolidated
|
||||||||||||||||||||||
| (In thousands) | Consumer | Commercial | Wealth | Totals | Elimination | Totals | ||||||||||||||||||
|
Average balances for 2010:
|
||||||||||||||||||||||||
|
Assets
|
$ | 3,445,052 | $ | 5,703,714 | $ | 720,226 | $ | 9,868,992 | $ | 8,367,007 | $ | 18,235,999 | ||||||||||||
|
Loans, including held for sale
|
3,338,327 | 5,558,648 | 671,163 | 9,568,138 | 489,024 | 10,057,162 | ||||||||||||||||||
|
Goodwill and other intangible assets
|
77,515 | 59,816 | 746 | 138,077 | — | 138,077 | ||||||||||||||||||
|
Deposits
|
8,290,834 | 4,102,458 | 1,881,692 | 14,274,984 | 87,985 | 14,362,969 | ||||||||||||||||||
|
Average balances for 2009:
|
||||||||||||||||||||||||
|
Assets
|
$ | 3,891,311 | $ | 6,232,582 | $ | 716,002 | $ | 10,839,895 | $ | 6,779,308 | $ | 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 | ||||||||||||||||||
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.
100
Table of Contents
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 20, 2010, the Company distributed a 5% stock
dividend on its $5 par common stock for the seventeenth
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.
The Company applies the two-class method of computing income per
share. Under current 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. Unvested share-based
awards are further discussed in Note 11 on Stock-Based
Compensation.
| (In thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
|
Basic income per common share:
|
||||||||||||
|
Net income attributable to Commerce Bancshares, Inc.
|
$ | 221,710 | $ | 169,075 | $ | 188,655 | ||||||
|
Less income allocated to unvested restricted stockholders
|
1,208 | 741 | 592 | |||||||||
|
Net income available to common stockholders
|
$ | 220,502 | $ | 168,334 | $ | 188,063 | ||||||
|
Distributed income
|
$ | 77,796 | $ | 74,384 | $ | 71,829 | ||||||
|
Undistributed income
|
$ | 142,706 | $ | 93,950 | $ | 116,234 | ||||||
|
Weighted average common shares outstanding
|
86,977 | 85,217 | 83,154 | |||||||||
|
Distributed income per share
|
$ | .90 | $ | .88 | $ | .86 | ||||||
|
Undistributed income per share
|
1.64 | 1.10 | 1.40 | |||||||||
|
Basic income per common share
|
$ | 2.54 | $ | 1.98 | $ | 2.26 | ||||||
|
Diluted income per common share:
|
||||||||||||
|
Net income attributable to Commerce Bancshares, Inc.
|
$ | 221,710 | $ | 169,075 | $ | 188,655 | ||||||
|
Less income allocated to unvested restricted stockholders
|
1,204 | 740 | 589 | |||||||||
|
Net income available to common stockholders
|
$ | 220,506 | $ | 168,335 | $ | 188,066 | ||||||
|
Distributed income
|
$ | 77,796 | $ | 74,384 | $ | 71,829 | ||||||
|
Undistributed income
|
$ | 142,710 | $ | 93,951 | $ | 116,237 | ||||||
|
Weighted average common shares outstanding
|
86,977 | 85,217 | 83,154 | |||||||||
|
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
|
405 | 334 | 665 | |||||||||
|
Weighted average diluted common shares outstanding
|
87,382 | 85,551 | 83,819 | |||||||||
|
Distributed income per share
|
$ | .89 | $ | .87 | $ | .86 | ||||||
|
Undistributed income per share
|
1.63 | 1.10 | 1.38 | |||||||||
|
Diluted income per common share
|
$ | 2.52 | $ | 1.97 | $ | 2.24 | ||||||
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Table of Contents
The diluted income per common share computation for the years
ended December 31, 2010, 2009 and 2008 excludes
1.7 million, 2.8 million and 1.7 million,
respectively, in unexercised stock options and SARs because
their inclusion would have been anti-dilutive to income per
share.
The table below shows activity in the outstanding shares of the
Company’s common stock during the past three years. Shares
in the table below are presented on an historical basis and have
not been restated for the annual 5% stock dividends.
| Years Ended December 31 | ||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
Shares outstanding at January 1
|
83,008 | 75,791 | 71,796 | |||||||||
|
Issuance of stock:
|
||||||||||||
|
Awards and sales under employee and director plans
|
603 | 394 | 620 | |||||||||
|
Stock offering
|
— | 2,895 | — | |||||||||
|
5% stock dividend
|
4,122 | 3,949 | 3,607 | |||||||||
|
Purchases of treasury stock
|
(1,103 | ) | (16 | ) | (231 | ) | ||||||
|
Other
|
(6 | ) | (5 | ) | (1 | ) | ||||||
|
Shares outstanding at December 31
|
86,624 | 83,008 | 75,791 | |||||||||
The Company maintains a treasury stock buyback program
authorized by its Board of Directors. At December 31, 2010,
1,758,578 shares were available for purchase under the
current Board authorization.
| 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.
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Table of Contents
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, 2010:
|
||||||||||||||||||||||||
|
Total Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 2,002,646 | 15.75 | % | $ | 1,017,429 | 8.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,762,382 | 14.03 | 1,004,781 | 8.00 | $ | 1,255,977 | 10.00 | % | ||||||||||||||||
|
Tier I Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 1,828,965 | 14.38 | % | $ | 508,715 | 4.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,604,873 | 12.78 | 502,391 | 4.00 | $ | 753,586 | 6.00 | % | ||||||||||||||||
|
Tier I Capital (to adjusted
|
||||||||||||||||||||||||
|
quarterly average assets):
|
||||||||||||||||||||||||
|
(Leverage Ratio)
|
||||||||||||||||||||||||
|
Commerce Bancshares, Inc. (consolidated)
|
$ | 1,828,965 | 10.17 | % | $ | 719,411 | 4.00 | % | N.A. | N.A. | ||||||||||||||
|
Commerce Bank, N.A.
|
1,604,873 | 9.00 | 713,230 | 4.00 | $ | 891,538 | 5.00 | % | ||||||||||||||||
|
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 | % | ||||||||||||||||
At December 31, 2010, the Company met all capital
requirements to which it is subject, and the Bank’s capital
position exceeded the regulatory definition of well-capitalized.
| 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 fair value accounting, or write-downs
of individual assets.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Depending
on the nature of the asset or liability, the Company uses
various valuation techniques and assumptions when estimating
fair value. For accounting disclosure purposes, a three-level
valuation hierarchy of fair value measurements has been
established. The valuation hierarchy is based upon the
transparency of inputs to the valuation of an asset or liability
as of the measurement date. The three levels are defined as
follows:
| • | Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. | |
| • | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds). |
103
Table of Contents
| • | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider. |
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded or disclosed at
fair value, the Company considers the principal or most
advantageous market in which it would transact and considers
assumptions that market participants would use when pricing the
asset or liability. When possible, the Company looks to active
and observable markets to price identical assets or liabilities.
When identical assets and liabilities are not traded in active
markets, the Company looks to observable market data for similar
assets and liabilities. Nevertheless, certain assets and
liabilities are not actively traded in observable markets and
the Company must use alternative valuation techniques to derive
an estimated fair value measurement.
Valuation
methods for instruments measured at fair value on a recurring
basis
Following is a description of the Company’s valuation
methodologies used for instruments measured at fair value on a
recurring basis:
Available
for sale investment securities
For available for sale securities, changes in fair value,
including that portion of
other-than-temporary
impairment unrelated to credit loss, are recorded in other
comprehensive income. As mentioned in Note 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 observable data, or are
supported by observable levels at which transactions are
executed in the marketplace. These measurements are classified
as Level 2 in the fair value hierarchy. Where quoted prices
are available in an active market, the measurements are
classified as Level 1. Most of the Level 1
measurements apply to common stock and U.S. Treasury
obligations.
Valuation methods and inputs, by class of security:
| • | U.S. government and federal agency obligations |
U.S. treasury bills, bonds and notes, including
inflation-protected securities, are valued using live data from
active market makers and inter-dealer brokers. Valuations for
stripped coupon and principal issues are derived from yield
curves generated from various dealer contacts and live data
sources.
| • | Government-sponsored enterprise obligations |
Government-sponsored enterprise obligations are evaluated using
cash flow valuation models. Inputs used are live market data,
cash settlements, Treasury market yields, and floating rate
indices such as LIBOR, CMT, and Prime.
| • | State and municipal obligations, excluding auction rate securities |
A yield curve is generated and applied to bond sectors, and
individual bond valuations are extrapolated. Inputs used to
generate the yield curve are bellwether issue levels,
established trading spreads between similar issuers or credits,
historical trading spreads over widely accepted market
benchmarks, new issue scales, and verified bid information. Bid
information is verified by corroborating the data against
external sources such as broker-dealers, trustees/paying agents,
issuers, or non-affiliated bondholders.
104
Table of Contents
| • | Mortgage and asset-backed securities |
Collateralized mortgage obligations and other asset-backed
securities are valued at the tranche level. For each tranche
valuation, the process generates predicted cash flows for the
tranche, applies a market based (or benchmark) yield/spread for
each tranche, and incorporates deal collateral performance and
tranche level attributes to determine tranche-specific spreads
to adjust the benchmark yield. Tranche cash flows are generated
from new deal files and prepayment/default assumptions. Tranche
spreads are based on tranche characteristics such as average
life, type, volatility, ratings, underlying collateral and
performance, and prevailing market conditions. The appropriate
tranche spread is applied to the corresponding benchmark, and
the resulting value is used to discount the cash flows to
generate an evaluated price.
Valuation of agency pass-through securities, typically issued
under GNMA, FNMA, FHLMC, and SBA programs, are primarily derived
from information from the To Be Announced (TBA) market. This
market consists of generic mortgage pools which have not been
received for settlement. Snapshots of the TBA market, using live
data feeds distributed by multiple electronic platforms, and in
conjunction with other indices, are used to compute a price
based on discounted cash flow models.
| • | Other debt securities |
Other debt securities are valued using active markets and
inter-dealer brokers as well as bullet spread scales and option
adjusted spreads. The spreads and models use yield curves, terms
and conditions of the bonds, and any special features (i.e.,
call or put options, redemption features, etc.).
| • | Equity securities |
Equity securities are priced using the market prices for each
security from the major stock exchanges or other electronic
quotation systems. These are generally classified as
Level 1 measurements. Stocks which trade infrequently are
classified as Level 2.
At December 31, 2010, the Company held certain auction rate
securities in its available for sale portfolio, totaling
$150.1 million at fair value. The auction process by which
the auction rate securities are normally priced has not
functioned since 2008, and the fair value of these securities
cannot be based on observable market prices due to the
illiquidity in the market. The fair values of the auction rate
securities are estimated using a discounted cash flows analysis.
Estimated cash flows are based on mandatory interest rates paid
under failing auctions and projected over an estimated market
recovery period. The cash flows are discounted at an estimated
market rate reflecting adjustments for liquidity premium and
nonperformance risk. Because many of the inputs significant to
the measurement are not observable, these measurements are
classified as Level 3 measurements.
Trading
securities
The securities in the Company’s trading portfolio are
priced by averaging several broker quotes for similar
instruments, and are classified as Level 2 measurements.
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.
105
Table of Contents
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 a proprietary model whose significant inputs are readily observable market parameters, primarily yield curves. The results of the model are constantly validated through comparison to active trading in the marketplace. These fair value measurements are classified as Level 2. | |
| • | Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations from global market makers, and are classified as Level 2. | |
| • | The fair values of mortgage loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market. However, these prices are adjusted by a factor which considers the likelihood that a commitment will ultimately result in a closed loan. This estimate is based on the Company’s historical data and its judgment about future economic trends. Based on the unobservable nature of this adjustment, these measurements are classified as Level 3. | |
| • | The Company’s contracts related to credit risk guarantees are valued under a proprietary model which uses significant unobservable inputs and assumptions about the creditworthiness of the counterparty to the guaranteed interest rate swap contract. Consequently, these measurements are classified as Level 3. |
Assets
held in trust
Assets held in an outside trust for the Company’s deferred
compensation plan consist of investments in mutual funds. The
fair value measurements are based on quoted prices in active
markets and classified as Level 1. The Company has recorded
an asset representing the total investment amount. The Company
has also recorded a corresponding nonfinancial liability,
representing the Company’s liability to the plan
participants.
106
Table of Contents
The table below presents the carrying values of assets and
liabilities measured at fair value on a recurring basis at
December 31, 2010 and 2009. There were no transfers among
levels during these years.
| Fair Value Measurements Using | ||||||||||||||||
|
Quoted
|
||||||||||||||||
|
Prices in
|
||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Total Fair
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
| (In thousands) | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
As of December 31, 2010
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Available for sale securities:
|
||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 455,537 | $ | 448,087 | $ | 7,450 | $ | — | ||||||||
|
Government-sponsored enterprise obligations
|
201,895 | — | 201,895 | — | ||||||||||||
|
State and municipal obligations
|
1,119,485 | — | 969,396 | 150,089 | ||||||||||||
|
Agency mortgage-backed securities
|
2,491,199 | — | 2,491,199 | — | ||||||||||||
|
Non-agency mortgage-backed securities
|
455,790 | — | 455,790 | — | ||||||||||||
|
Other asset-backed securities
|
2,354,260 | — | 2,354,260 | — | ||||||||||||
|
Other debt securities
|
176,964 | — | 176,964 | — | ||||||||||||
|
Equity securities
|
39,173 | 22,900 | 16,273 | — | ||||||||||||
|
Trading securities
|
11,710 | — | 11,710 | — | ||||||||||||
|
Private equity investments
|
53,860 | — | — | 53,860 | ||||||||||||
|
Derivatives*
|
18,823 | — | 18,288 | 535 | ||||||||||||
|
Assets held in trust
|
4,213 | 4,213 | — | — | ||||||||||||
|
Total assets
|
7,382,909 | 475,200 | 6,703,225 | 204,484 | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives*
|
19,584 | — | 19,401 | 183 | ||||||||||||
|
Total liabilities
|
$ | 19,584 | $ | — | $ | 19,401 | $ | 183 | ||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
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 fair value of each class of derivative is shown in Note 18. |
107
Table of Contents
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, 2010:
|
||||||||||||||||
|
Balance at January 1, 2010
|
$ | 167,836 | $ | 44,827 | $ | 108 | $ | 212,771 | ||||||||
|
Total gains or losses (realized/unrealized):
|
||||||||||||||||
|
Included in earnings
|
— | (156 | ) | 375 | 219 | |||||||||||
|
Included in other comprehensive income
|
(9,460 | ) | — | — | (9,460 | ) | ||||||||||
|
Purchases, issuances, and settlements, net
|
(8,287 | ) | 9,189 | (131 | ) | 771 | ||||||||||
|
Balance at December 31, 2010
|
$ | 150,089 | $ | 53,860 | $ | 352 | $ | 204,301 | ||||||||
|
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, 2010
|
$ | — | $ | (44 | ) | $ | 702 | $ | 658 | |||||||
|
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 | ) | ||||||
Gains and losses on the Level 3 assets and liabilities in
the table above are reported in the following income categories:
|
Investment
|
||||||||||||||||
|
Other
|
Securities Gains
|
|||||||||||||||
|
Loan Fees
|
Non-Interest
|
(Losses),
|
||||||||||||||
| (In thousands) | and Sales | Income | Net | Total | ||||||||||||
|
For the year ended December 31, 2010:
|
||||||||||||||||
|
Total gains or losses included in earnings
|
$ | 274 | $ | 101 | $ | (156 | ) | $ | 219 | |||||||
|
Change in unrealized gains or losses relating to assets still
held at December 31, 2010
|
$ | 482 | $ | 220 | $ | (44 | ) | $ | 658 | |||||||
|
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 | ) | ||||||
108
Table of Contents
Valuation
methods for instruments measured at fair value on a nonrecurring
basis
Following is a description of the Company’s valuation
methodologies used for other financial and nonfinancial
instruments measured at fair value on a nonrecurring basis.
Collateral
dependent impaired loans
While the overall loan portfolio is not carried at fair value,
the Company periodically records nonrecurring adjustments to the
carrying value of loans based on fair value measurements for
partial charge-offs of the uncollectible portions of those
loans. Nonrecurring adjustments also include certain impairment
amounts for collateral dependent loans when establishing the
allowance for loan losses. Such amounts are generally based on
the fair value of the underlying collateral supporting the loan.
In determining the value of real estate collateral, the Company
relies on external appraisals and assessment of property values
by its internal staff. In the case of non-real estate
collateral, reliance is placed on a variety of sources,
including external estimates of value and judgments based on the
experience and expertise of internal specialists. Because many
of these inputs are not observable, the measurements are
classified as Level 3. Changes in fair value recognized for
partial charge-offs of loans and loan impairment reserves on
loans held by the Company at December 31, 2010 and 2009 are
shown in the table below.
Loans
held for sale
Loans held for sale are carried at the lower of cost or fair
value. The portfolio has historically consisted primarily of
student loans, and to a lesser extent, residential real estate
loans. As mentioned in Note 3 on Loans and Allowance for
Loan Losses, during 2010 most of the Company’s student loan
portfolio was sold under contract to the Federal Department of
Education and various student loan agencies. Since 2008, when
the secondary market for student loans was disrupted by
liquidity concerns, several agencies have been unable to
consistently purchase loans under existing contractual terms.
Loans under contract to these agencies have been evaluated using
a fair value measurement method based on a discounted cash flows
analysis, which was classified as Level 3 and resulted in
an impairment reserve of $828 thousand at December 31,
2009. During 2010, $191 thousand of additional impairment was
recorded on certain loans based on market indications, while
$450 thousand of the reserve was reversed as the related loans
were sold. The fair value of the student loan portfolio for
which performance concern exists was $12.1 million at
December 31, 2010. The measurement of fair value for other
student loans is based on the specific prices mandated in the
underlying sale contracts, the estimated exit price, and is
classified as Level 2. Fair value measurements on mortgage
loans held for sale are based on quoted market prices for
similar loans in the secondary market and are classified as
Level 2.
Private
equity investments and restricted stock
These assets are included in non-marketable investment
securities in the consolidated balance sheets. They include
investments in private equity concerns held by the Parent
company which are carried at cost, reduced by
other-than-temporary
impairment. These investments are periodically evaluated for
impairment based on their estimated fair value as determined by
review of available information, most of which is provided as
monthly or quarterly internal financial statements, annual
audited financial statements, investee tax returns, and in
certain situations, through research into and analysis of the
assets and investments held by those private equity concerns.
Restricted stock consists of stock issued by the Federal Reserve
Bank and FHLB which is held by the bank subsidiary as required
for regulatory purposes. Generally, there are restrictions on
the sale
and/or
liquidation of these investments, and they are carried at cost,
reduced by
other-than-temporary
impairment. Fair value measurements for these securities are
classified as Level 3.
Mortgage
servicing rights
The Company initially measures its mortgage servicing rights at
fair value, and amortizes them over the period of estimated net
servicing income. They are periodically assessed for impairment
based on fair value at the reporting date. Mortgage servicing
rights do not trade in an active market with readily observable
prices. Accordingly, the fair value is estimated based on a
valuation model which calculates the present value of
109
Table of Contents
estimated future net servicing income. The model incorporates
assumptions that market participants use in estimating future
net servicing income, including estimates of prepayment speeds,
market discount rates, cost to service, float earnings rates,
and other ancillary income, including late fees. The fair value
measurements are classified as Level 3.
Goodwill
and core deposit premium
Valuation of goodwill to determine impairment is performed on an
annual basis, or more frequently if there is an event or
circumstance that would indicate impairment may have occurred.
The process involves calculations to determine the fair value of
each reporting unit on a stand-alone basis. A combination of
formulas using current market multiples, based on recent sales
of financial institutions within the Company’s geographic
marketplace, is used to estimate the fair value of each
reporting unit. That fair value is compared to the carrying
amount of the reporting unit, including its recorded goodwill.
Impairment is considered to have occurred if the fair value of
the reporting unit is lower than the carrying amount of the
reporting unit. The fair value of the Company’s common
stock relative to its computed book value per share is also
considered as part of the overall evaluation. These measurements
are classified as Level 3.
Core deposit premiums are recognized at the time a portfolio of
deposits is acquired, using valuation techniques which calculate
the present value of the estimated net cost savings attributable
to the core deposit base, relative to alternative costs of funds
and tax benefits, if applicable, over the expected remaining
economic life of the depositors. Subsequent evaluations are made
when facts or circumstances indicate potential impairment may
have occurred. The Company uses estimates of discounted future
cash flows, comparisons with alternative sources for deposits,
consideration of income potential generated in other product
lines by current customers, geographic parameters, and other
demographics to estimate a current fair value of a specific
deposit base. If the calculated fair value is less than the
carrying value, impairment is considered to have occurred. This
measurement is classified as Level 3.
Foreclosed
assets
Foreclosed assets consist of loan collateral which has been
repossessed through foreclosure. This collateral is comprised of
commercial and residential real estate and other non-real estate
property, including auto, marine and recreational vehicles.
Foreclosed assets are recorded as held for sale initially at the
lower of the loan balance or fair value of the collateral less
estimated selling costs. Subsequent to foreclosure, valuations
are updated periodically, and the assets may be marked down
further, reflecting a new cost basis. Fair value measurements
may be based upon appraisals, third-party price opinions, or
internally developed pricing methods. These measurements are
classified as Level 3.
Long-lived
assets
During 2010, the Company recorded an impairment loss on an
office building, which formerly housed its check processing
operations, in addition to losses on several branch facilities.
In accordance with
ASC 360-10-35,
they were written down to estimated fair value, or estimated
fair value less cost to sell if the property is held for sale.
Fair value was estimated in a process which considered current
local commercial real estate market conditions and the judgment
of the sales agent on pricing and sales strategy. These fair
value measurements are classified as Level 3.
110
Table of Contents
For assets measured at fair value on a nonrecurring basis during
2010 and 2009, and still held as of December 31, 2010 and
2009, the following table provides the adjustments to fair value
recognized during the respective periods, the level of valuation
assumptions used to determine each adjustment, and the carrying
value of the related individual assets or portfolios at
December 31, 2010 and 2009.
| Fair Value Measurements Using | ||||||||||||||||||||
|
Quoted Prices in
|
Significant
|
|||||||||||||||||||
|
Active Markets for
|
Significant Other
|
Unobservable
|
||||||||||||||||||
|
Identical Assets
|
Observable Inputs
|
Inputs
|
Total Gains
|
|||||||||||||||||
| (In thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | (Losses) | |||||||||||||||
|
As of December 31, 2010
|
||||||||||||||||||||
|
Loans
|
$ | 51,157 | $ | — | $ | — | $ | 51,157 | $ | (17,134 | ) | |||||||||
|
Loans held for sale
|
5,125 | 5,125 | (191 | ) | ||||||||||||||||
|
Private equity investments
|
960 | — | — | 960 | (100 | ) | ||||||||||||||
|
Mortgage servicing rights
|
1,325 | — | — | 1,325 | (72 | ) | ||||||||||||||
|
Foreclosed assets
|
8,484 | — | — | 8,484 | (4,004 | ) | ||||||||||||||
|
Long-lived assets
|
6,372 | — | — | 6,372 | (2,018 | ) | ||||||||||||||
|
As of December 31, 2009
|
||||||||||||||||||||
|
Loans
|
$ | 66,773 | $ | — | $ | — | $ | 66,773 | $ | (41,468 | ) | |||||||||
|
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 available
for sale 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 short-term federal funds sold and
securities purchased under agreements to resell, interest
earning deposits with banks, and cash and due from banks
approximate fair value. Federal funds sold and securities
purchased under agreements to resell classified as short-term
generally mature in 90 days or less. The fair value of
long-term securities purchased under agreements to resell is
estimated by discounting contractual maturities using an
estimate of the current market rate for similar instruments.
111
Table of Contents
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 pricing of these accounts. The fair value of certificates of
deposit is based on the discounted value of cash flows, taking
early withdrawal optionality into account. Discount rates are
based on the Company’s approximate cost of obtaining
similar maturity funding in the market.
Borrowings
The fair value of short-term borrowings such as federal funds
purchased and securities sold under agreements to repurchase,
which generally mature or reprice within 90 days,
approximates their carrying value. The fair value of long-term
structured repurchase agreements and other long-term debt is
estimated by discounting contractual maturities using an
estimate of the current market rate for similar instruments.
The estimated fair values of the Company’s financial
instruments are as follows:
| 2010 | 2009 | |||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
| (In thousands) | Amount | Fair Value | Amount | Fair Value | ||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Loans, including held for sale
|
$ | 9,474,733 | $ | 9,482,631 | $ | 10,490,327 | $ | 10,513,232 | ||||||||
|
Available for sale investment securities
|
7,294,303 | 7,294,303 | 6,340,975 | 6,340,975 | ||||||||||||
|
Trading securities
|
11,710 | 11,710 | 10,335 | 10,335 | ||||||||||||
|
Non-marketable securities
|
103,521 | 103,521 | 122,078 | 122,078 | ||||||||||||
|
Short-term federal funds sold and securities purchased under
agreements to resell
|
10,135 | 10,135 | 22,590 | 22,590 | ||||||||||||
|
Long-term securities purchased under agreements to resell
|
450,000 | 454,783 | — | — | ||||||||||||
|
Interest earning deposits with banks
|
122,076 | 122,076 | 24,118 | 24,118 | ||||||||||||
|
Cash and due from banks
|
328,464 | 328,464 | 417,126 | 417,126 | ||||||||||||
|
Accrued interest receivable
|
62,512 | 62,512 | 74,553 | 74,553 | ||||||||||||
|
Derivative instruments
|
18,823 | 18,823 | 17,984 | 17,984 | ||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Non-interest bearing demand deposits
|
$ | 2,150,725 | $ | 2,150,725 | $ | 1,793,816 | $ | 1,793,816 | ||||||||
|
Savings, interest checking and money market deposits
|
10,190,134 | 10,190,134 | 9,202,916 | 9,202,916 | ||||||||||||
|
Time open and C.D.’s
|
2,744,162 | 2,761,796 | 3,213,719 | 3,243,627 | ||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
982,827 | 987,472 | 1,103,191 | 1,102,995 | ||||||||||||
|
Other borrowings
|
112,273 | 122,514 | 736,062 | 757,365 | ||||||||||||
|
Accrued interest payable
|
12,108 | 12,108 | 21,570 | 21,570 | ||||||||||||
|
Derivative instruments
|
19,584 | 19,584 | 18,610 | 18,610 | ||||||||||||
112
Table of Contents
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.
| 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) | 2010 | 2009 | ||||||
|
Interest rate swaps
|
$ | 498,071 | $ | 503,530 | ||||
|
Interest rate caps
|
31,736 | 16,236 | ||||||
|
Credit risk participation agreements
|
40,661 | 53,246 | ||||||
|
Foreign exchange contracts
|
25,867 | 17,475 | ||||||
|
Mortgage loan commitments
|
12,125 | 9,767 | ||||||
|
Mortgage loan forward sale contracts
|
24,112 | 19,986 | ||||||
|
Total notional amount
|
$ | 632,572 | $ | 620,240 | ||||
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
113
Table of Contents
Company’s risks and responsibilities as guarantor are
further discussed in Note 19 on Commitments, Contingencies
and Guarantees.
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, 2010, the Company had entered
into three interest rate swaps with a notional amount of
$15.7 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) | 2010 | 2009 | 2008 | |||||||||
|
Gain (loss) on interest rate swaps
|
$ | (305 | ) | $ | 573 | $ | (1,035 | ) | ||||
|
Gain (loss) on loans
|
291 | (571 | ) | 1,029 | ||||||||
|
Amount of hedge ineffectiveness
|
$ | (14 | ) | $ | 2 | $ | (6 | ) | ||||
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, 2010 was $482.3 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 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,
2010 was $15.9 million, for which the Company had posted
collateral of $15.1 million. Most of these features require
contract settlement, which if triggered on December 31,
2010 would have required a cash disbursement of
$1.1 million, in addition to collateral posted.
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 20.7% of the total customer swap portfolio. If this
group of manufacturing counterparties failed to perform, and if
the underlying collateral proved to be of no value, the Company
would incur a loss of $2.9 million, based on amounts at
December 31, 2010.
114
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 | |||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
|
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 | $ | (1,159 | ) | $ | (918 | ) | ||||||||||||
|
Total derivatives designated as hedging instruments
|
$ | — | $ | 64 | $ | (1,159 | ) | $ | (918 | ) | ||||||||||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||||||||||||||||
|
Interest rate swaps
|
Other assets | $ | 17,712 | $ | 16,898 | Other liabilities | $ | (17,799 | ) | $ | (16,898 | ) | ||||||||||||
|
Interest rate caps
|
Other assets | 84 | 239 | Other liabilities | (84 | ) | (239 | ) | ||||||||||||||||
|
Credit risk participation agreements
|
Other assets | — | 140 | Other liabilities | (130 | ) | (239 | ) | ||||||||||||||||
|
Foreign exchange contracts
|
Other assets | 492 | 415 | Other liabilities | (359 | ) | (295 | ) | ||||||||||||||||
|
Mortgage loan commitments
|
Other assets | 101 | 44 | Other liabilities | (30 | ) | (16 | ) | ||||||||||||||||
|
Mortgage loan forward sale
|
||||||||||||||||||||||||
|
contracts
|
Other assets | 434 | 184 | Other liabilities | (23 | ) | (5 | ) | ||||||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 18,823 | $ | 17,920 | $ | (18,425 | ) | $ | (17,692 | ) | ||||||||||||||
|
Total derivatives
|
$ | 18,823 | $ | 17,984 | $ | (19,584 | ) | $ | (18,610 | ) | ||||||||||||||
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) Recognized in
|
|||||||||||||
| Income on Derivative | Income on Derivative | |||||||||||||
| For the Years Ended December 31 | ||||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||||
|
Derivatives in fair value hedging relationships:
|
||||||||||||||
|
Interest rate swaps
|
Interest and fees on loans | $ | (305 | ) | $ | 573 | $ | (1,035 | ) | |||||
|
Total
|
$ | (305 | ) | $ | 573 | $ | (1,035 | ) | ||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||||||
|
Interest rate swaps
|
Other non-interest income | $ | 1,202 | $ | 360 | $ | 1,519 | |||||||
|
Interest rate caps
|
Other non-interest income | 32 | 11 | — | ||||||||||
|
Credit risk participation agreements
|
Other non-interest income | 101 | 16 | 19 | ||||||||||
|
Foreign exchange contracts
|
Other non-interest income | 12 | 130 | 35 | ||||||||||
|
Mortgage loan commitments
|
Loan fees and sales | 43 | (164 | ) | 184 | |||||||||
|
Mortgage loan forward sale contracts
|
Loan fees and sales | 231 | 247 | (58 | ) | |||||||||
|
Total
|
$ | 1,621 | $ | 600 | $ | 1,699 | ||||||||
115
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 $6.2 million, $6.3 million
and $6.1 million in 2010, 2009 and 2008, respectively. A
summary of minimum lease commitments follows:
|
(In thousands)
|
Type of Property | |||||||||||
|
Real
|
||||||||||||
| Year Ended December 31 | Property | Equipment | Total | |||||||||
|
2011
|
$ | 5,455 | $ | 376 | $ | 5,831 | ||||||
|
2012
|
4,602 | 195 | 4,797 | |||||||||
|
2013
|
4,294 | 69 | 4,363 | |||||||||
|
2014
|
3,550 | — | 3,550 | |||||||||
|
2015
|
2,630 | — | 2,630 | |||||||||
|
After
|
19,694 | — | 19,694 | |||||||||
|
Total minimum lease payments
|
$ | 40,865 | ||||||||||
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 2011.
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) | 2010 | 2009 | ||||||
|
Commitments to extend credit:
|
||||||||
|
Credit card
|
$ | 3,395,261 | $ | 3,285,041 | ||||
|
Other
|
3,977,542 | 3,753,526 | ||||||
|
Standby letters of credit, net of participations
|
338,724 | 404,144 | ||||||
|
Commercial letters of credit
|
14,258 | 21,329 | ||||||
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, 2010, the Company had recorded a liability
in the amount of $3.4 million, representing the carrying
value of the guarantee obligations associated with the standby
letters of credit. This amount will
116
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 $338.7 million at December 31, 2010.
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 2010,
purchases and sales of tax credits amounted to
$37.6 million and $43.8 million, respectively. At
December 31, 2010, the Company had outstanding purchase
commitments totaling $131.5 million. The commitments are
expected to be funded in 2011 through 2014.
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, 2010, believes sufficient collateral is
available to cover potential swap losses. The RPAs are carried
at fair value throughout their term, with all changes in fair
value, including those due to a change in the third party’s
creditworthiness, recorded in current earnings. The terms of the
RPAs, which correspond to the terms of the underlying swaps,
range from 5 to 10 years. At December 31, 2010, the
liability recorded for guarantor RPAs was $130 thousand, and the
notional amount of the underlying swaps was $40.7 million.
At December 31, 2010, the Company carried a liability of
$4.4 million representing its obligation to share certain
estimated litigation costs of Visa, Inc. (Visa). An escrow
account has been established by Visa and is being used to fund
actual litigation settlements as they occur. The escrow account
was funded initially with proceeds from an initial public
offering in 2008 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.
On April 6, 2010 a suit was filed against Commerce Bank,
N.A. (the Bank) in the U.S. District Court for the Western
District of Missouri by a customer alleging that overdraft fees
relating to debit card transactions have been unfairly assessed
by the Bank. The suit seeks
class-action
status for Bank customers who may have been similarly affected.
A second suit alleging the same facts and also seeking
class-action
status was filed on June 4, 2010 in Missouri state court.
As these cases are in a very early stage, a probable outcome is
presently not determinable. The Company has other lawsuits
pending at December 31, 2010, arising in the normal course
of business. In the opinion of management, after consultation
with legal counsel, none of these suits will have a significant
effect on the financial condition or results of operations of
the Company.
| 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 75% of the outstanding stock of Tower. At
December 31, 2010, Tower owned 192,345 shares of
Company stock. Tower is primarily engaged in the business of
owning, developing, leasing and managing real property.
117
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) | 2010 | 2009 | 2008 | |||||||||
|
Rent on leased parking lots
|
$ | 353 | $ | 353 | $ | 501 | ||||||
|
Leasing agent fees
|
3 | 14 | 19 | |||||||||
|
Operation of parking garages
|
107 | 115 | 114 | |||||||||
|
Building management fees
|
1,769 | 1,704 | 1,525 | |||||||||
|
Property construction management fees
|
24 | 61 | 118 | |||||||||
|
Dividends paid on Company stock held by Tower
|
172 | 167 | 166 | |||||||||
|
Total
|
$ | 2,428 | $ | 2,414 | $ | 2,443 | ||||||
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. From time
to time, the Bank extends additional credit to Tower for
construction and development projects. No construction loans
were outstanding during 2010, 2009 and 2008.
Beginning in 2009, Tower leased office space in the Kansas City
bank headquarters building, owned by the Company. Rent paid to
the Company totaled $69 thousand in 2010 and $45 thousand in
2009, at $15.50 and $15.25 per square foot, respectively.
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.
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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) | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Investment in consolidated subsidiaries:
|
||||||||
|
Banks
|
$ | 1,797,853 | $ | 1,670,328 | ||||
|
Non-banks
|
45,143 | 43,173 | ||||||
|
Cash
|
55 | 52 | ||||||
|
Securities purchased under agreements to resell
|
77,700 | 47,525 | ||||||
|
Investment securities:
|
||||||||
|
Available for sale
|
101,534 | 115,157 | ||||||
|
Non-marketable
|
3,664 | 3,911 | ||||||
|
Advances to subsidiaries, net of borrowings
|
11,298 | 13,797 | ||||||
|
Income tax benefits
|
— | 1,201 | ||||||
|
Other assets
|
11,966 | 14,138 | ||||||
|
Total assets
|
$ | 2,049,213 | $ | 1,909,282 | ||||
|
Liabilities and stockholders’ equity
|
||||||||
|
Indemnification obligation
|
$ | 4,432 | $ | 8,837 | ||||
|
Pension obligation
|
5,033 | 4,650 | ||||||
|
Income taxes payable
|
2,456 | — | ||||||
|
Other liabilities
|
15,305 | 11,567 | ||||||
|
Total liabilities
|
27,226 | 25,054 | ||||||
|
Stockholders’ equity
|
2,021,987 | 1,884,228 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,049,213 | $ | 1,909,282 | ||||
Condensed
Statements of Income
| For the Years Ended December 31 | ||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
Income
|
||||||||||||
|
Dividends received from consolidated subsidiaries:
|
||||||||||||
|
Banks
|
$ | 105,000 | $ | 45,001 | $ | 75,900 | ||||||
|
Non-banks
|
105 | 129 | 270 | |||||||||
|
Earnings of consolidated subsidiaries, net of dividends
|
110,809 | 128,536 | 103,618 | |||||||||
|
Interest and dividends on investment securities
|
12,842 | 1,406 | 2,326 | |||||||||
|
Management fees charged subsidiaries
|
22,621 | 46,613 | 44,035 | |||||||||
|
Investment securities gains (losses)
|
(56 | ) | 1,804 | 20,857 | ||||||||
|
Other
|
2,092 | 2,538 | 642 | |||||||||
|
Total income
|
253,413 | 226,027 | 247,648 | |||||||||
|
Expense
|
||||||||||||
|
Salaries and employee benefits
|
21,293 | 39,528 | 36,586 | |||||||||
|
Professional fees
|
2,322 | 3,080 | 2,698 | |||||||||
|
Data processing fees paid to affiliates
|
3,180 | 11,337 | 11,677 | |||||||||
|
Indemnification obligation
|
(4,405 | ) | (2,495 | ) | (9,619 | ) | ||||||
|
Other
|
7,451 | 10,941 | 11,280 | |||||||||
|
Total expense
|
29,841 | 62,391 | 52,622 | |||||||||
|
Income tax expense (benefit)
|
1,862 | (5,439 | ) | 6,371 | ||||||||
|
Net income
|
$ | 221,710 | $ | 169,075 | $ | 188,655 | ||||||
119
Table of Contents
Condensed
Statements of Cash Flows
| For the Years Ended December 31 | ||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
|
Operating Activities
|
||||||||||||
|
Net income
|
$ | 221,710 | $ | 169,075 | $ | 188,655 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Earnings of consolidated subsidiaries, net of dividends
|
(110,809 | ) | (128,536 | ) | (103,618 | ) | ||||||
|
Other adjustments, net
|
(4,787 | ) | (1,093 | ) | (21,257 | ) | ||||||
|
Net cash provided by operating activities
|
106,114 | 39,446 | 63,780 | |||||||||
|
Investing Activities
|
||||||||||||
|
(Increase) decrease in securities purchased under agreements to
resell
|
(30,175 | ) | 18,900 | (66,425 | ) | |||||||
|
Decrease in investment in subsidiaries, net
|
101 | 353 | 99 | |||||||||
|
Proceeds from sales of investment securities
|
185 | 11,812 | 26,653 | |||||||||
|
Proceeds from maturities/pay downs of investment securities
|
26,487 | 105,944 | 73,291 | |||||||||
|
Purchases of investment securities
|
(110 | ) | (195,935 | ) | (13,232 | ) | ||||||
|
(Increase) decrease in advances to subsidiaries, net
|
2,499 | (9,080 | ) | (20,425 | ) | |||||||
|
Net (purchases) sales of equipment
|
1,629 | (409 | ) | (127 | ) | |||||||
|
Net cash provided by (used in) investing activities
|
616 | (68,415 | ) | (166 | ) | |||||||
|
Financing Activities
|
||||||||||||
|
Purchases of treasury stock
|
(40,984 | ) | (528 | ) | (9,490 | ) | ||||||
|
Issuance under open market stock sale program, stock purchase
and equity compensation plans
|
11,310 | 103,641 | 15,978 | |||||||||
|
Net tax benefit related to equity compensation plans
|
1,178 | 557 | 1,928 | |||||||||
|
Cash dividends paid on common stock
|
(78,231 | ) | (74,720 | ) | (72,055 | ) | ||||||
|
Net cash provided by (used in) financing activities
|
(106,727 | ) | 28,950 | (63,639 | ) | |||||||
|
Increase (decrease) in cash
|
3 | (19 | ) | (25 | ) | |||||||
|
Cash at beginning of year
|
52 | 71 | 96 | |||||||||
|
Cash at end of year
|
$ | 55 | $ | 52 | $ | 71 | ||||||
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 2010 or 2009, while average borrowings were $245 thousand
during 2008.
In January 2010, several administrative functions formerly
reported by the Parent were transferred to the Bank in order to
present a more accurate organizational structure within the
Company. Certain employee payrolls and fixed assets were
transferred, and various expense allocations relating to these
functions, formerly reported by the Parent, declined during the
remainder of 2010.
The Parent carries the Visa indemnification obligation,
discussed in Note 19, which was $4.4 million at
December 31, 2010 compared to $8.8 million at
December 31, 2009. The liability is adjusted as covered
suits are settled or additional funding is made to Visa’s
litigation escrow account, which resulted in declines in the
120
Table of Contents
liability of $4.4 million in 2010 and $2.5 million
during 2009. In 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.
At December 31, 2010, the fair value of available for sale
investment securities held by the Parent consisted of
investments of $35.9 million in marketable common stock and
$65.7 million in non-agency mortgage-backed securities. The
Parent’s unrealized net gain in fair value on its
investments was $34.2 million at December 31, 2010.
The corresponding net of tax unrealized gain included in
stockholders’ equity was $21.2 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 $59.1 million at December 31, 2010.
The Parent plans to fund an additional $23.2 million
relating to private equity investments over the next several
years. The investments are made directly by the Parent and
through non-bank subsidiaries.
| 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, 2010.
The Company’s internal control over financial reporting as
of December 31, 2010 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.
121
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, 2010, 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
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 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, 2010, 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, 2010 and 2009, 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,
2010, and our report dated February 25, 2011 expressed an
unqualified opinion on those consolidated financial statements.
Kansas City, Missouri
February 25, 2011
122
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 at the end of
Part I under the caption “Executive Officers of the
Registrant” and under the captions “Election of the
2014 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 Web site.
| 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 2014 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 by Item 9(c) of Schedule 14A
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.
123
| 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).
124
Table of Contents
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 25th day of February 2011.
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 25th day of February 2011.
| 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
|
||
|
Earl H. Devanny, III
|
||
|
W. Thomas Grant, II
|
||
|
James B. Hebenstreit
|
||
|
Jonathan M. Kemper
|
A majority of the Board of Directors* | |
|
Terry O. Meek
|
||
|
Benjamin F. Rassieur, III
|
||
|
Todd R. Schnuck
|
||
|
Dan C. Simons
|
||
|
Andrew C. Taylor
|
||
|
Kimberly G. Walker
|
| * | 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
125
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 February 3, 2011, 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 28, 2011.
(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. 2011 Compensatory Arrangement
with CEO and Named Executive Officers was filed in current
report on
Form 8-K
dated February 3, 2011, 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.
(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.
E-1
Table of Contents
(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
101 – Interactive data files pursuant to Rule 405
of
Regulation S-T:
(i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Income, (iii) the Consolidated
Statements of Changes in Equity, (iv) the Consolidated
Statements of Cash Flows and (v) the Notes to Consolidated
Financial Statements, tagged as blocks of text *
*As provided in Rule 406T of
Regulation S-T,
this information is furnished and not filed for purposes of
Sections 11 and 12 of the Securities Act of 1933 and
Section 18 of the Securities Exchange Act of 1934.
E-2
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Removed and ReservedPart 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