10-Q
Table of Contents

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

For the quarterly period ended March 31, 2009
OR
            
         
         
         
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from           to                    
Commission File No. 0-2989
 
COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
 
     
Missouri
(State of Incorporation)
  43-0889454
(IRS Employer Identification No.)
     
1000 Walnut,
Kansas City, MO
(Address of principal executive offices)
 
64106
(Zip Code)
     
(816) 234-2000
(Registrant’s telephone number, including area code)
   
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
  Yes o     No þ
 
As of April 30, 2009, the registrant had outstanding 76,335,051 shares of its $5 par value common stock, registrant’s only class of common stock.
 


 

 
Commerce Bancshares, Inc. and Subsidiaries
 
Form 10-Q
 
                 
INDEX          
Page
 
  Financial Information        
                 
    Item 1.   Financial Statements        
                 
        Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008     3  
                 
        Consolidated Statements of Income for the Three Months Ended March 31, 2009 and 2008     4  
                 
        Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2009 and 2008     5  
                 
        Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008     6  
                 
        Notes to Consolidated Financial Statements     7  
                 
    Item 2.   Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations     32  
                 
    Item 3.   Quantitative and Qualitative Disclosures about Market Risk     56  
                 
    Item 4.   Controls and Procedures     56  
             
Part II   Other Information        
                 
    Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     57  
                 
    Item 6.   Exhibits     57  
         
    58  
         
    59  
 EX-31.1
 EX-31.2
 EX-32


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Table of Contents

 
PART I: FINANCIAL INFORMATION
 
Item 1. FINANCIAL STATEMENTS
 
Commerce Bancshares, Inc. and Subsidiaries
 
CONSOLIDATED BALANCE SHEETS
                 
   
    March 31
    December 31
 
    2009     2008  
   
    (Unaudited)        
    (In thousands)  
 
ASSETS
               
Loans
  $ 10,940,869     $ 11,283,246  
Allowance for loan losses
    (180,868 )     (172,619 )
 
 
Net loans
    10,760,001       11,110,627  
 
 
Loans held for sale
    502,440       361,298  
Investment securities:
               
Available for sale ($535,826,000 and $525,993,000 pledged in 2009 and 2008, respectively, to secure structured repurchase agreements)
    4,550,908       3,630,753  
Trading
    15,808       9,463  
Non-marketable
    140,077       139,900  
 
 
Total investment securities
    4,706,793       3,780,116  
 
 
Federal funds sold and securities purchased under agreements to resell
    43,050       169,475  
Interest earning deposits with banks
    592,162       638,158  
Cash and due from banks
    374,748       491,723  
Land, buildings and equipment, net
    407,064       411,168  
Goodwill
    125,585       125,585  
Other intangible assets, net
    16,339       17,191  
Other assets
    419,275       427,106  
 
 
Total assets
  $ 17,947,457     $ 17,532,447  
 
 
                 
LIABILITIES AND EQUITY                
Deposits:
               
Non-interest bearing demand
  $ 1,507,168     $ 1,375,000  
Savings, interest checking and money market
    8,128,465       7,610,306  
Time open and C.D.’s of less than $100,000
    2,119,252       2,067,266  
Time open and C.D.’s of $100,000 and over
    2,202,726       1,842,161  
 
 
Total deposits
    13,957,611       12,894,733  
 
 
Federal funds purchased and securities sold under agreements to repurchase
    1,001,552       1,026,537  
Other borrowings
    847,275       1,747,781  
Other liabilities
    530,978       283,929  
 
 
Total liabilities
    16,337,416       15,952,980  
 
 
Commerce Bancshares, Inc. stockholders’ equity:
               
Preferred stock, $1 par value
               
Authorized and unissued 2,000,000 shares
           
Common stock, $5 par value
               
Authorized 100,000,000 shares; issued 76,110,061 shares in 2009 and 75,901,097 shares in 2008
    380,550       379,505  
Capital surplus
    623,236       621,458  
Retained earnings
    645,736       633,159  
Treasury stock of 26,718 shares in 2009 and 18,789 shares in 2008, at cost
    (990 )     (761 )
Accumulated other comprehensive loss
    (40,920 )     (56,729 )
 
 
Total Commerce Bancshares, Inc. stockholders’ equity
    1,607,612       1,576,632  
Non-controlling interest
    2,429       2,835  
 
 
Total equity
    1,610,041       1,579,467  
 
 
Total liabilities and equity
  $ 17,947,457     $ 17,532,447  
 
 
See accompanying notes to consolidated financial statements.


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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF INCOME
                 
   
    For the Three Months
 
    Ended March 31  
(In thousands, except per share data)   2009     2008  
   
    (Unaudited)  
 
INTEREST INCOME
               
Interest and fees on loans
  $ 142,409     $ 174,338  
Interest and fees on loans held for sale
    3,432       3,917  
Interest on investment securities
    47,470       40,897  
Interest on federal funds sold and securities purchased under agreements to resell
    114       3,401  
Interest on deposits with banks
    449        
 
 
Total interest income
    193,874       222,553  
 
 
INTEREST EXPENSE
               
Interest on deposits:
               
Savings, interest checking and money market
    8,053       20,614  
Time open and C.D.’s of less than $100,000
    14,747       25,259  
Time open and C.D.’s of $100,000 and over
    11,300       17,300  
Interest on federal funds purchased and securities sold under agreements to repurchase
    1,230       11,752  
Interest on other borrowings
    8,529       7,521  
 
 
Total interest expense
    43,859       82,446  
 
 
Net interest income
    150,015       140,107  
Provision for loan losses
    43,168       20,000  
 
 
Net interest income after provision for loan losses
    106,847       120,107  
 
 
NON-INTEREST INCOME
               
Deposit account charges and other fees
    25,592       27,075  
Bank card transaction fees
    27,168       26,308  
Trust fees
    18,873       20,113  
Trading account profits and commissions
    5,396       4,164  
Consumer brokerage services
    3,308       3,409  
Loan fees and sales
    2,961       2,140  
Other
    9,133       8,951  
 
 
Total non-interest income
    92,431       92,160  
 
 
INVESTMENT SECURITIES GAINS (LOSSES), NET
               
Impairment losses on securities
    (21,885 )      
Less noncredit-related losses on securities not expected to be sold
    21,332        
 
 
Net impairment losses
    (553 )      
Realized gains (losses) on sales and fair value adjustments
    (1,619 )     23,323  
 
 
Investment securities gains (losses), net
    (2,172 )     23,323  
 
 
NON-INTEREST EXPENSE
               
Salaries and employee benefits
    86,753       83,010  
Net occupancy
    11,812       12,069  
Equipment
    6,322       5,907  
Supplies and communication
    8,684       8,724  
Data processing and software
    14,347       13,563  
Marketing
    4,347       5,287  
Indemnification obligation
          (8,808 )
Other
    20,621       20,429  
 
 
Total non-interest expense
    152,886       140,181  
 
 
Income before income taxes
    44,220       95,409  
Less income taxes
    13,592       30,668  
 
 
Net income before non-controlling interest
    30,628       64,741  
Less non-controlling interest expense (income)
    (208 )     574  
 
 
Net income attributable to Commerce Bancshares, Inc. 
  $ 30,836     $ 64,167  
 
 
Less earnings allocated to unvested restricted stockholders
    134       210  
 
 
Net income allocated to common stockholders
  $ 30,702     $ 63,957  
 
 
Net income per common share — basic
  $ .41     $ .85  
Net income per common share — diluted
  $ .40     $ .84  
 
 
See accompanying notes to consolidated financial statements.


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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
                                                         
   
    Commerce Bancshares, Inc. Shareholders              
                            Accumulated
             
                            Other
    Non-
       
(In thousands,
  Common
    Capital
    Retained
    Treasury
    Comprehensive
    Controlling
       
except per share data)   Stock     Surplus     Earnings     Stock     Income (Loss)     Interest     Total  
   
    (Unaudited)  
 
Balance January 1, 2009
  $ 379,505     $ 621,458     $ 633,159     $ (761 )   $ (56,729 )   $ 2,835     $ 1,579,467  
 
 
Net income
                    30,836                       (208 )     30,628  
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
                                    483               483  
Change in unrealized gain (loss) on all other available for sale securities, net of tax
                                    14,901               14,901  
Amortization of pension loss, net of tax
                                    425               425  
                                                         
Total comprehensive income
                                                    46,437  
                                                         
Distributions to non-controlling interest
                                            (198 )     (198 )
Purchase of treasury stock
                            (357 )                     (357 )
Issuance of stock under open market sale program
    15       (9 )                                     6  
Issuance of stock under purchase and equity compensation plans
    266       1,001               (42 )                     1,225  
Net tax benefit related to equity compensation plans
            80                                       80  
Stock-based compensation
            1,640                                       1,640  
Issuance of nonvested stock awards
    764       (934 )             170                        
Cash dividends paid ($.240 per share)
                    (18,259 )                             (18,259 )
 
 
Balance March 31, 2009
  $ 380,550     $ 623,236     $ 645,736     $ (990 )   $ (40,920 )   $ 2,429     $ 1,610,041  
 
 
Balance January 1, 2008
  $ 359,694     $ 475,220     $ 669,142     $ (2,477 )   $ 26,107     $ 2,470     $ 1,530,156  
 
 
Net income
                    64,167                       574       64,741  
Change in unrealized gain (loss) on available for sale securities, net of tax
                                    2,984               2,984  
                                                         
Total comprehensive income
                                                    67,725  
                                                         
Distributions to non-controlling interest
                                            (197 )     (197 )
Purchase of treasury stock
                            (5,017 )                     (5,017 )
Issuance of stock under purchase and equity compensation plans
            (2,114 )             6,149                       4,035  
Net tax benefit related to equity compensation plans
            307                                       307  
Stock-based compensation
            1,757                                       1,757  
Issuance of nonvested stock awards
    88       (760 )             672                        
Cash dividends paid ($.238 per share)
                    (17,985 )                             (17,985 )
Adoption of SFAS 157
                    903                               903  
Adoption of EITF 06-4
                    (716 )                             (716 )
 
 
Balance March 31, 2008
  $ 359,782     $ 474,410     $ 715,511     $ (673 )   $ 29,091     $ 2,847     $ 1,580,968  
 
 
See accompanying notes to consolidated financial statements.


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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
   
    For the Three Months
 
    Ended March 31  
(In thousands)   2009     2008  
   
    (Unaudited)  
 
OPERATING ACTIVITIES:
               
Net income attributable to Commerce Bancshares, Inc. 
  $ 30,836     $ 64,167  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    43,168       20,000  
Provision for depreciation and amortization
    12,659       12,880  
Amortization (accretion) of investment security premiums/discounts, net
    (300 )     1,444  
Investment securities (gains) losses, net(A)
    2,172       (23,323 )
Gain on sale of branch
    (644 )      
Net gains on sales of loans held for sale
    (760 )     (1,169 )
Originations of loans held for sale
    (188,954 )     (145,311 )
Proceeds from sales of loans held for sale
    49,770       54,187  
Net (increase) decrease in trading securities
    (23,835 )     13,990  
Stock-based compensation
    1,640       1,757  
(Increase) decrease in interest receivable
    (634 )     7,861  
Increase (decrease) in interest payable
    3,394       (10,505 )
Increase in income taxes payable
    13,430       32,622  
Net tax benefit related to equity compensation plans
    (80 )     (307 )
Other changes, net
    (11,366 )     16,456  
 
 
Net cash provided by (used in) operating activities
    (69,504 )     44,749  
 
 
INVESTING ACTIVITIES:
               
Cash paid in branch sale
    (3,494 )      
Proceeds from sales of investment securities(A)
    2,032       116,436  
Proceeds from maturities/pay downs of investment securities(A)
    235,716       292,521  
Purchases of investment securities(A)
    (855,915 )     (632,836 )
Net (increase) decrease in loans
    307,458       (339,959 )
Purchases of land, buildings and equipment
    (5,684 )     (11,974 )
Sales of land, buildings and equipment
    41       145  
 
 
Net cash used in investing activities
    (319,846 )     (575,667 )
 
 
FINANCING ACTIVITIES:
               
Net increase in non-interest bearing demand, savings, interest checking and money market deposits
    628,446       137,751  
Net increase (decrease) in time open and C.D.’s
    414,304       (122,830 )
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
    (24,985 )     218,017  
Repayment of long-term borrowings
    (100,506 )     (1,775 )
Additional long-term borrowings
          200,000  
Net decrease in short-term borrowings
    (800,000 )      
Purchases of treasury stock
    (357 )     (5,017 )
Issuance of stock under open market stock sale program, stock purchase and equity compensation plans
    1,231       4,035  
Net tax benefit related to equity compensation plans
    80       307  
Cash dividends paid on common stock
    (18,259 )     (17,985 )
 
 
Net cash provided by financing activities
    99,954       412,503  
 
 
Decrease in cash and cash equivalents
    (289,396 )     (118,415 )
Cash and cash equivalents at beginning of year
    1,299,356       1,328,246  
 
 
Cash and cash equivalents at March 31
  $ 1,009,960     $ 1,209,831  
 
 
(A) Available for sale and non-marketable securities
               
 
 
Income tax net payments (refunds)
  $ 90     $ (783 )
Interest paid on deposits and borrowings
  $ 40,458     $ 92,944  
 
 
See accompanying notes to consolidated financial statements.


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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009 (Unaudited)
 
1.  Principles of Consolidation and Presentation
 
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2008 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2009 are not necessarily indicative of results to be attained for the full year or any other interim periods.
 
The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2008 Annual Report on Form 10-K.
 
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 March 31, 2009 and December 31, 2008 are as follows.
 
                 
   
    March 31
    December 31
 
(In thousands)   2009     2008  
   
 
Business
  $ 3,261,293     $ 3,404,371  
Real estate – construction and land
    756,770       837,369  
Real estate – business
    2,184,050       2,137,822  
Real estate – personal
    1,610,726       1,638,553  
Consumer
    1,550,642       1,615,455  
Home equity
    496,177       504,069  
Student
    350,758       358,049  
Consumer credit card
    725,752       779,709  
Overdrafts
    4,701       7,849  
 
 
Total loans
  $ 10,940,869     $ 11,283,246  
 
 
 
Included in the table above are impaired loans amounting to $110.0 million at March 31, 2009 and $72.9 million at December 31, 2008. A loan is considered to be impaired when, based on current information and events, it is probable that all amounts due under the contractual terms of the agreement will not be collected. Such loans increased $37.1 million in the first quarter of 2009, mainly because of higher levels of impaired construction and land real estate loans. At March 31, 2009, approximately 10% of this construction portfolio was considered to be impaired.


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Table of Contents

The Company’s portfolio of construction loans amounted to 6.9% of total loans outstanding at March 31, 2009. The table below shows the Company’s holdings of the major types of construction loans.
 
                                 
   
    March 31
          December 31
       
(In thousands)   2009     % of Total     2008     % of Total  
   
 
Residential land and land development
  $ 220,735       29.2 %   $ 246,335       29.4 %
Residential construction
    141,482       18.7       141,405       16.9  
Commercial land and land development
    136,620       18.0       139,726       16.7  
Commercial construction
    257,933       34.1       309,903       37.0  
 
 
Total real estate-construction and land loans
  $ 756,770       100.0 %   $ 837,369       100.0 %
 
 
 
Total business real estate loans were $2.2 billion at March 31, 2009 and comprised 20.0% of the Company’s total loan portfolio. Approximately 42% of these loans were for owner-occupied real estate properties, which present lower risk profiles. 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.
 
In addition to its basic portfolio, the Company originates other 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. The Company maintains contracts with various student loan agencies to sell student loans when the student graduates and the loan enters into repayment status. 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 impairment losses resulting from declines in fair value, which are further discussed in Note 14 on Fair Value Measurements. Previously recognized impairment losses amounting to $867 thousand were reversed during the current quarter, as certain impaired loans were sold in accordance with contractual terms.
 
                 
   
    March 31
    December 31
 
(In thousands)   2009     2008  
   
 
Balance outstanding:
               
Student
  $ 483,967     $ 358,556  
Residential mortgage
    18,473       2,742  
 
 
Total loans held for sale balance
  $ 502,440     $ 361,298  
 
 
Decline in fair value below cost
  $ (8,531 )   $ (9,398 )
 
 
 
                 
   
    For the Three Months Ended March 31  
    2009     2008  
   
 
Net gains on sales:
               
Student
  $ 221     $ 946  
Residential mortgage
    539       223  
 
 
Total gains on sales of loans held for sale, net
  $ 760     $ 1,169  
 
 


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The following is a summary of the allowance for loan losses for the three months ended March 31, 2009 and 2008.
 
                 
   
(In thousands)   2009     2008  
   
 
Balance, January 1
  $ 172,619     $ 133,586  
 
 
Additions:
               
Provision for loan losses
    43,168       20,000  
 
 
Total additions
    43,168       20,000  
 
 
Deductions:
               
Loans charged off
    38,420       16,980  
Less recoveries on loans
    3,501       5,083  
 
 
Net loans charged off
    34,919       11,897  
 
 
Balance, March 31
  $ 180,868     $ 141,689  
 
 
 
4.  Investment Securities
 
Investment securities, at fair value, consisted of the following at March 31, 2009 and December 31, 2008.
 
                 
   
    March 31
    December 31
 
(In thousands)   2009     2008  
   
 
Available for sale:
               
U.S. government and federal agency obligations
  $ 11,997     $ 11,594  
Government-sponsored enterprise obligations
    153,031       141,957  
State and municipal obligations
    856,699       719,752  
Agency mortgage-backed securities
    2,321,134       1,711,404  
Non-agency mortgage-backed securities
    593,900       620,479  
Other asset-backed securities
    374,946       253,756  
Other debt securities
    192,328       121,861  
Equity securities
    46,873       49,950  
 
 
Total available for sale
    4,550,908       3,630,753  
 
 
Trading
    15,808       9,463  
Non-marketable
    140,077       139,900  
 
 
Total investment securities
  $ 4,706,793     $ 3,780,116  
 
 
 
Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank (FRB) stock held for debt and regulatory purposes, which totaled $85.8 million and $84.4 million at March 31, 2009 and December 31, 2008, respectively. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $54.2 million and $55.4 million at March 31, 2009 and December 31, 2008, respectively.


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A summary of the available for sale investment securities by maturity groupings as of March 31, 2009 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by government-sponsored agencies such as the FHLMC, FNMA and GNMA, and non-agency mortgage-backed securities which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.
 
                 
   
    Amortized
    Fair
 
(Dollars in thousands)   Cost     Value  
   
 
U.S. government and federal agency obligations:
               
Within 1 year
  $ 700     $ 707  
After 1 but within 5 years
    10,351       11,290  
 
 
Total U.S. government and federal agency obligations
    11,051       11,997  
 
 
Government-sponsored enterprise obligations:
               
Within 1 year
    17,852       18,009  
After 1 but within 5 years
    131,392       135,022  
 
 
Total government-sponsored enterprise obligations
    149,244       153,031  
 
 
State and municipal obligations:
               
Within 1 year
    120,399       121,667  
After 1 but within 5 years
    355,283       366,508  
After 5 but within 10 years
    125,704       126,437  
After 10 years
    242,754       242,087  
 
 
Total state and municipal obligations
    844,140       856,699  
 
 
Mortgage and asset-backed securities:
               
Agency mortgage-backed securities
    2,277,200       2,321,134  
Non-agency mortgage-backed securities
    712,568       593,900  
Other asset-backed securities
    394,399       374,946  
 
 
Total mortgage and asset-backed securities
    3,384,167       3,289,980  
 
 
Other debt securities:
               
After 1 but within 5 years
    176,519       183,867  
After 5 but within 10 years
    8,699       8,461  
 
 
Total other debt securities
    185,218       192,328  
 
 
Equity securities
    11,005       46,873  
 
 
Total available for sale investment securities
  $ 4,584,825     $ 4,550,908  
 
 
 
Included in state and municipal obligations are $171.4 million, at fair value, of auction rate securities (ARS), which were purchased from bank customers in the third quarter of 2008. These bonds are normally traded in a competitive bidding process at weekly/monthly auctions. These auctions have not performed since early 2008, and this market has not recovered. Interest is currently being paid at the maximum failed auction rates. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $40.6 million at March 31, 2009.


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For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type. Included in gross unrealized losses are other-than-temporary impairment (OTTI) losses of $21.3 million relating to certain non-agency mortgage-backed securities, which represent the noncredit-related portion of the overall impairment amount.
 
                                 
   
          Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
 
(In thousands)   Cost     Gains     Losses     Value  
   
 
March 31, 2009
                               
U.S. government and federal agency obligations
  $ 11,051     $ 948     $ (2 )   $ 11,997  
Government-sponsored enterprise obligations
    149,244       3,787             153,031  
State and municipal obligations
    844,140       15,733       (3,174 )     856,699  
Mortgage and asset-backed securities:
                               
Agency mortgage-backed securities
    2,277,200       45,565       (1,631 )     2,321,134  
Non-agency mortgage-backed securities
    712,568       1,417       (120,085 )     593,900  
Other asset-backed securities
    394,399       1,293       (20,746 )     374,946  
 
 
Total mortgage and asset-backed securities
    3,384,167       48,275       (142,462 )     3,289,980  
 
 
Other debt securities
    185,218       7,849       (739 )     192,328  
Equity securities
    11,005       35,868             46,873  
 
 
Total
  $ 4,584,825     $ 112,460     $ (146,377 )   $ 4,550,908  
 
 
December 31, 2008
                               
U.S. government and federal agency obligations
  $ 10,478     $ 1,116     $     $ 11,594  
Government-sponsored enterprise obligations
    135,825       6,132             141,957  
State and municipal obligations
    715,421       10,794       (6,463 )     719,752  
Mortgage and asset-backed securities:
                               
Agency mortgage-backed securities
    1,685,821       26,609       (1,026 )     1,711,404  
Non-agency mortgage-backed securities
    742,090       816       (122,427 )     620,479  
Other asset-backed securities
    275,641       113       (21,998 )     253,756  
 
 
Total mortgage and asset-backed securities
    2,703,552       27,538       (145,451 )     2,585,639  
 
 
Other debt securities
    116,527       5,404       (70 )     121,861  
Equity securities
    7,680       42,270             49,950  
 
 
Total
  $ 3,689,483     $ 93,254     $ (151,984 )   $ 3,630,753  
 
 
 
The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with FASB Staff Position (FSP) No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. In March 2009, the Company adopted FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which changed the accounting requirements for OTTI for debt securities, and, in certain prescribed circumstances, separated the amount of total impairment into credit and noncredit-related amounts.
 
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


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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. Prior to March 2009, the Company had not incurred OTTI on its debt securities.
 
In March 2009, the Company recorded OTTI on four non-agency mortgage-backed securities, having an aggregate par value of $66.6 million. The credit portion of the impairment totaled $553 thousand and was recorded in current earnings. The noncredit-related portion of the impairment totaled $21.3 million on a pre-tax basis, and has been recognized in other comprehensive income. The Company does not intend to sell these securities and believes it is not more likely than not that it will be required to sell the securities before the recovery of their amortized cost.
 
The credit portion of the loss on these four securities was based on the cash flows projected to be received over the estimated life of the securities, discounted at present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities included the following:
 
     
 
Significant Inputs   Range
 
 
Average collateral loan to value
  48% - 74%
% of loans delinquent greater than 60 days
  .53% - 13.9%
Credit support
  3.9% - 13.4%
Lowest credit rating per bond
  B - Caa1
 
 
 
Additional OTTI on these and other securities may arise in future periods due to further deterioration in the general economy and national housing markets, which contribute to changing cash flows, loss severities and delinquency levels of the securities’ underlying collateral, which would negatively affect the Company’s financial results.
 
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 the four securities for which a portion of an other-than-temporary impairment has been recognized in other comprehensive income.
 
                                                 
   
    Less than 12 months     12 months or longer     Total  
          Unrealized
          Unrealized
          Unrealized
 
(In thousands)   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
   
 
At March 31, 2009
                                               
U.S. government and federal agency obligations
  $ 1,508     $ 2     $     $     $ 1,508     $ 2  
State and municipal obligations
    236,197       3,151       406       23       236,603       3,174  
Mortgage and asset-backed securities:
                                               
Agency mortgage-backed securities
    167,746       1,630       102       1       167,848       1,631  
Non-agency mortgage-backed securities
    258,296       53,821       277,229       66,264       535,525       120,085  
Other asset-backed securities
    209,531       12,318       19,278       8,428       228,809       20,746  
 
 
Total mortgage and asset-backed securities
    635,573       67,769       296,609       74,693       932,182       142,462  
 
 
Other debt securities
    19,624       739                   19,624       739  
 
 
Total
  $ 892,902     $ 71,661     $ 297,015     $ 74,716     $ 1,189,917     $ 146,377  
 
 
 


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    Less than 12 months     12 months or longer     Total  
          Unrealized
          Unrealized
          Unrealized
 
(In thousands)   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
   
 
At December 31, 2008
                                               
State and municipal obligations
  $ 175,770     $ 6,457     $ 369     $ 6     $ 176,139     $ 6,463  
Mortgage and asset-backed securities:
                                               
Agency mortgage-backed securities
    183,577       1,003       4,664       23       188,241       1,026  
Non-agency mortgage-backed securities
    412,002       95,153       176,013       27,274       588,015       122,427  
Other asset-backed securities
    216,187       16,696       22,514       5,302       238,701       21,998  
 
 
Total mortgage and asset-backed securities
    811,766       112,852       203,191       32,599       1,014,957       145,451  
 
 
Other debt securities
    2,691       70                   2,691       70  
 
 
Total
  $ 990,227     $ 119,379     $ 203,560     $ 32,605     $ 1,193,787     $ 151,984  
 
 
 
Out of the total available for sale portfolio, consisting of approximately 1,000 individual securities at March 31, 2009, 253 securities were temporarily impaired, of which 43 securities, or 7% of the portfolio value, have been in a loss position for 12 months or longer.
 
The unrealized losses on the Company’s investments, as shown in the preceding tables, are largely contained in the portfolio of non-agency mortgage-backed securities. These securities are not guaranteed by an outside agency and are dependent on payments received from the underlying mortgage collateral. While all of these securities, at purchase date, were comprised of senior tranches and were highly rated by various rating agencies, the adverse housing market, liquidity pressures and overall economic climate has resulted in low fair values for these securities. Also, as mentioned above, the Company maintains a watch list comprised mostly of these securities, and has recorded OTTI losses on four of these securities. The Company continues to closely monitor the performance of these securities. State and municipal obligations and agency mortgage-backed securities have smaller unrealized losses, due to the nature of the bonds and the guarantee provided to agency mortgage-backed securities, while the fair values of other asset-backed securities have been depressed to some degree by the current economic recession and its impact to the consumer. Most of the ARS held by the Company, which are included in state and municipal obligations, have Moody’s credit ratings of A3 or higher and Fitch ratings of A or higher. Gross unrealized losses on ARS were approximately $921 thousand at March 31, 2009, or 29% of the overall gross unrealized loss on state and municipal obligations, and related mainly to bonds secured by government guaranteed student loans.
 
The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.
 
The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
 
                 
   
    For the Three
 
    Months Ended
 
    March 31  
(In thousands)   2009     2008  
   
 
Proceeds from sales of available for sale securities
  $ 2,032     $ 94,240  
Proceeds from sales/redemption of non-marketable securities
          22,196  
 
 
Total proceeds
  $ 2,032     $ 116,436  
 
 
Available for sale:
               
Gains realized on sales
  $ 8     $ 461  
Losses realized on sales
          (744 )
Other-than-temporary impairment recognized
    (553 )     (1,939 )
Non-marketable:
               
Gains realized on sales/redemption
          22,196  
Fair value adjustments
    (1,627 )     3,349  
 
 
Investment securities gains (losses), net
  $ (2,172 )   $ 23,323  
 
 
 
At March 31, 2009, securities carried at $2.7 billion were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowing capacity at the Federal Reserve Bank. Securities pledged

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under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $535.8 million, while securities pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral approximated $2.1 billion at March 31, 2009.
 
5.  Goodwill and Other Intangible Assets
 
The following table presents information about the Company’s intangible assets which have estimable useful lives.
 
                                                                 
   
    March 31, 2009     December 31, 2008  
    Gross
                      Gross
                   
    Carrying
    Accumulated
    Valuation
    Net
    Carrying
    Accumulated
    Valuation
    Net
 
(In thousands)   Amount     Amortization     Allowance     Amount     Amount     Amortization     Allowance     Amount  
   
 
Amortizable intangible assets:
                                                               
Core deposit premium
  $ 25,720     $ (10,285 )   $     $ 15,435     $ 25,720     $ (9,324 )   $     $ 16,396  
Mortgage servicing rights
    2,119       (925 )     (290 )     904       1,816       (871 )     (150 )     795  
 
 
Total
  $ 27,839     $ (11,210 )   $ (290 )   $ 16,339     $ 27,536     $ (10,195 )   $ (150 )   $ 17,191  
 
 
 
Aggregate amortization expense on intangible assets was $1.2 million and $1.1 million, respectively, for the three month periods ended March 31, 2009 and 2008. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2009. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.
 
         
   
(In thousands)      
   
 
2009
  $ 3,878  
2010
    3,338  
2011
    2,800  
2012
    2,283  
2013
    1,705  
 
 
 
Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2009 is as follows.
 
                         
   
                Mortgage
 
          Core Deposit
    Servicing
 
(In thousands)   Goodwill     Premium     Rights  
   
 
Balance at January 1, 2009
  $ 125,585     $ 16,396     $ 795  
Originations
                303  
Amortization
          (961 )     (54 )
Impairment
                (140 )
 
 
Balance at March 31, 2009
  $ 125,585     $ 15,435     $ 904  
 
 
 
Goodwill allocated to the Company’s operating segments at March 31, 2009 and December 31, 2008 is shown below.
 
         
   
(In thousands)      
   
 
Consumer segment
  $ 67,765  
Commercial segment
    57,074  
Money Management segment
    746  
 
 
Total goodwill
  $ 125,585  
 
 


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6.  Guarantees
 
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured and in the event of nonperformance by the customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.
 
Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2009 that net liability was $3.3 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $396.5 million at March 31, 2009.
 
The Company guarantees payments to holders of certain trust preferred securities issued by two wholly owned grantor trusts. Preferred securities issued by Breckenridge Capital Trust I, amounting to $4.0 million are due in 2030 and may be redeemed beginning in 2010. These securities have a 10.875% interest rate throughout their term. Securities issued by West Pointe Statutory Trust I, amounting to $10.0 million, are due in 2034 and may be redeemed beginning in 2009. These securities have a variable interest rate, which was 3.57% at March 31, 2009. The rate is based on LIBOR, and resets on a quarterly basis. The maximum potential future payments guaranteed by the Company, which includes future interest and principal payments through maturity, was estimated to be approximately $32.4 million at March 31, 2009. At March 31, 2009, the Company had a recorded liability of $14.1 million in principal and accrued interest to date, representing amounts owed to the security holders.
 
The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at March 31, 2009, believes sufficient collateral is available to cover potential swap losses. The Company receives a fee from the institution at the inception of the contract, which is recorded as a liability representing the fair value of the RPA. Any future changes in fair value, including those due to a change in the third party’s creditworthiness, are recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 5 to 10 years. At March 31, 2009, the liability recorded for guarantor RPAs was $273 thousand, and the notional amount of the underlying swaps was $35.8 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated, but is dependent upon the fair value of the interest rate swaps at the time of default. If an event of default on all contracts had occurred at March 31, 2009, the Company would have been required to make payments of approximately $4.0 million.
 
At March 31, 2009 the Company had recorded a liability of $11.3 million representing its obligation to share certain estimated litigation costs of Visa, Inc. (Visa). This obligation resulted from revisions in October 2007 to Visa’s by-laws affecting all member banks, as part of an overall reorganization in which the member banks indemnified Visa on certain covered litigation. The covered litigation related mainly to American Express and Discover suits, which are now settled, and other interchange litigation, which has not yet been settled. As part of the reorganization, Visa held an initial public offering in March 2008. An escrow account was established in conjunction with the offering, and is being used to fund actual litigation settlements as


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they occur. The escrow account was funded initially with proceeds from the offering, and subsequently with contributions by Visa. The Company’s indemnification obligation is periodically adjusted to reflect changes in estimates of litigation costs, and is reduced as funding occurs in the escrow account. The Company currently anticipates that its proportional share of eventual escrow funding will more than offset its liability related to the Visa litigation.
 
7.  Pension
 
The amount of net pension cost (income) for the three months ended March 31, 2009 and 2008 is as follows.
 
                 
   
    For the Three Months Ended
 
    March 31  
(In thousands)   2009     2008  
   
 
Service cost — benefits earned during the period
  $ 268     $ 253  
Interest cost on projected benefit obligation
    1,363       1,294  
Expected return on plan assets
    (1,598 )     (2,000 )
Amortization of unrecognized net loss
    675        
 
 
Net periodic pension cost (income)
  $ 708     $ (453 )
 
 
 
Substantially all benefits under the Company’s defined benefit pension plan were frozen effective January 1, 2005. During the first three months of 2009, the Company made no funding contributions to its defined benefit pension plan, and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2009. The Company recognized expense for the defined benefit pension plan for the first three months of 2009 compared to income in prior periods. This occurred because of lower fair values of plan assets at the measurement date, a decline in the anticipated rate of return on plan assets in 2009, and amortization of prior year differences between actual and anticipated returns on plan assets. The Company expects to recognize additional expense during the remainder of 2009.
 
Statement of Financial Accounting Standards No. 158, which the Company adopted on December 31, 2006, required measurement of plan assets and benefit obligations as of fiscal year end, beginning in 2008. According, the Company changed its 2008 measurement date from September 30 to December 31. It recorded an adjustment to reflect this change on December 31, 2008, which reduced the accrued benefit liability and increased retained earnings by $561 thousand on a pre-tax basis.


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8.  Common Stock
 
Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company adopted FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”, on January 1, 2009, which requires application of the two-class method of computing earnings per share. Under this pronouncement, 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 earnings per share amounts for the unvested share-based awards and for common stock. Earnings per share attributable to common stock is shown in the table below. Prior period earnings per share data has been retroactively adjusted to conform to the pronouncement. Unvested share-based awards are further discussed in Note 13 below.
 
                 
   
    For the Three
 
    Months Ended
 
    March 31  
(In thousands, except per share data)   2009     2008  
   
 
Basic earnings per common share:
               
Net income attributable to Commerce Bancshares, Inc. 
  $ 30,836     $ 64,167  
Less earnings allocated to unvested restricted stockholders
    134       212  
 
 
Net income available to common stockholders
  $ 30,702     $ 63,955  
 
 
Distributed earnings
  $ 18,174     $ 17,926  
Undistributed earnings
  $ 12,528     $ 46,029  
 
 
Weighted average common shares outstanding
    75,702       75,264  
 
 
Distributed earnings per share
  $ .24     $ .24  
Undistributed earnings per share
    .17       .61  
 
 
Basic earnings per common share
  $ .41     $ .85  
 
 
Diluted earnings per common share:
               
Net income attributable to Commerce Bancshares, Inc. 
  $ 30,836     $ 64,167  
Less earnings allocated to unvested restricted stockholders
    134       210  
 
 
Net income available to common stockholders
  $ 30,702     $ 63,957  
 
 
Distributed earnings
  $ 18,174     $ 17,926  
Undistributed earnings
  $ 12,528     $ 46,031  
 
 
Weighted average common shares outstanding
    75,702       75,264  
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
    305       643  
 
 
Weighted average diluted common shares outstanding
    76,007       75,907  
 
 
Distributed earnings per share
  $ .24     $ .23  
Undistributed earnings per share
    .16       .61  
 
 
Diluted earnings per common share
  $ .40     $ .84  
 
 
 
On February 27, 2009, the Company initiated an at-the-market offering of its common stock. Pursuant to this offering, the Company may, from time to time, offer and sell shares of its common stock having aggregate gross sales proceeds of up to $200 million. The proceeds of this offering will be used for general corporate purposes. During the first quarter of 2009, the Company issued 2,900 shares.


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9.  Other Comprehensive Income (Loss)
 
As mentioned in Note 4 on Investment Securities, the Company adopted FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, in March 2009. Under its provisions, credit-related losses on debt securities with other-than-temporary impairment are recorded in current earnings, while the noncredit-related portion of the overall loss in fair value is recorded in other comprehensive income (loss). The Company recorded other-than-temporary impairments on certain debt securities in March 2009. Subsequent changes in the fair value of these securities through March 31, 2009 are shown separately in the table below.
 
The Company’s other components of other comprehensive income (loss) consist of the unrealized holding gains and losses on available for sale investment securities for which an other-than-temporary impairment has not been recorded (including the holding gains and losses on certain securities prior to the recognition of other-than-temporary impairment), and the amortization of accumulated pension loss which has been recognized in net periodic benefit cost.
 
                 
   
    For the Three
 
    Months Ended
 
    March 31  
(In thousands)   2009     2008  
   
 
Available for sale securities for which a portion of an other-than-temporary impairment has been recorded in earnings:
               
Unrealized holding gains
  $ 778     $  
Income tax expense
    295        
 
 
Holding gains
    483        
 
 
Other available for sale investment securities:
               
Unrealized holding gains
    24,043       2,591  
Reclassification adjustment for (gains) losses included in net income
    (8 )     2,222  
 
 
Net unrealized gains on securities
    24,035       4,813  
Income tax expense
    9,134       1,829  
 
 
Holding gains
    14,901       2,984  
 
 
Prepaid pension cost:
               
Amortization of accumulated pension loss
    675        
Income tax benefit
    (250 )      
 
 
Accumulated pension loss
    425        
 
 
Other comprehensive income
  $ 15,809     $ 2,984  
 
 
 
At March 31, 2009, accumulated other comprehensive loss was $40.9 million, net of tax. It was comprised of $12.7 million in unrealized holding losses on available for sale securities for which a portion of other-than-temporary impairment has been recorded in earnings, $8.3 million in unrealized holding losses on other available for sale securities, and $19.9 million in accumulated pension loss.
 
10.  Segments
 
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Commercial, Consumer and Money Management. The Consumer segment includes the consumer portion of the retail branch network (loans, deposits, and other personal banking services), indirect and other consumer financing, consumer debit and credit bank cards, and student lending. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as Merchant and Commercial bank card products. The Money Management segment provides traditional trust and estate tax planning, advisory and discretionary investment management, as well as discount brokerage services, and the Private Banking product portfolio.


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As products or business units grow or diminish, or processing channels are refined, or as periodic changes in organizational structure are made, management may decide that associated business activities should also be rearranged between reporting segments. In the first quarter of 2009, selected business units were realigned between reporting segments so that discount brokerage services and Private Banking accounts were moved from Consumer to Money Management, while portions of indirect lending were moved from Commercial to the Consumer segment. The figures presented below for 2008 have been revised to incorporate these changes in order to provide comparable data.
 
The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues among the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below.
 
                                                 
   
                Money
    Segment
    Other/
    Consolidated
 
(In thousands)   Consumer     Commercial     Management     Totals     Elimination     Totals  
   
 
Three Months Ended March 31,
2009:
                                               
Net interest income
  $ 87,816     $ 56,145     $ 9,978     $ 153,939     $ (3,924 )   $ 150,015  
Provision for loan losses
    (20,619 )     (14,173 )     (271 )     (35,063 )     (8,105 )     (43,168 )
Non-interest income
    35,424       26,539       28,924       90,887       1,544       92,431  
Investment securities losses, net
                            (2,172 )     (2,172 )
Non-interest expense
    (72,812 )     (47,098 )     (26,195 )     (146,105 )     (6,781 )     (152,886 )
 
 
Income before income taxes
  $ 29,809     $ 21,413     $ 12,436     $ 63,658     $ (19,438 )   $ 44,220  
 
 
Three Months Ended March 31, 2008:
                                               
Net interest income
  $ 80,096     $ 48,734     $ 9,267     $ 138,097     $ 2,010     $ 140,107  
Provision for loan losses
    (10,970 )     (1,211 )     (7 )     (12,188 )     (7,812 )     (20,000 )
Non-interest income
    37,565       25,754       29,342       92,661       (501 )     92,160  
Investment securities gains, net
                            23,323       23,323  
Non-interest expense
    (70,188 )     (44,973 )     (24,589 )     (139,750 )     (431 )     (140,181 )
 
 
Income before income taxes
  $ 36,503     $ 28,304     $ 14,013     $ 78,820     $ 16,589     $ 95,409  
 
 
 
The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies, which have been developed to reflect the underlying economics of the businesses. The policies address the methodologies applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided) by assets and liabilities based on their maturity, prepayment and/or repricing characteristics.
 
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. Investment securities gains and non-interest expense for this category during the first three months of 2008 included stock redemption gains and litigation accrual adjustments related to the bank subsidiary’s membership in Visa.
 
The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments’ financial condition and results of operations if they were independent entities.


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11.  Derivative Instruments
 
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties, and are not a measure of loss exposure. The largest group of notional amounts relate to interest rate swaps, which are discussed in more detail below. Through its International Department, the Company enters into foreign exchange contracts consisting mainly of contracts to purchase or deliver foreign currencies for customers at specific future dates. Also, mortgage loan commitments and forward sales contracts result from the Company’s mortgage banking operation, in which fixed rate personal real estate loans are originated and sold to other institutions. The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. The Company’s risks and responsibilities as guarantor are further discussed in Note 6 on Guarantees.
 
                 
   
    March 31
    December 31
 
(In thousands)   2009     2008  
   
 
Interest rate swaps
  $ 502,648     $ 492,111  
Credit risk participation agreements
    55,361       47,750  
Foreign exchange contracts:
               
Forward contracts
    6,436       6,226  
Option contracts
    8,340       3,300  
Mortgage loan commitments
    26,559       23,784  
Mortgage loan forward sale contracts
    46,360       26,996  
 
 
Total notional amount
  $ 645,704     $ 600,167  
 
 
 
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 rate do not adversely affect the net interest margin and cash flows. Interest rate swaps are used on a limited basis as part of this strategy. At March 31, 2009, the Company had entered into three interest rate swaps with a notional amount of $17.7 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 Three
 
    Months Ended
 
    March 31  
(In thousands)   2009     2008  
   
 
Gain (loss) on interest rate swaps
  $ 75     $ (468 )
Gain (loss) on loans
    (95 )     468  
 
 
Amount of hedge ineffectiveness
  $ (20 )   $  
 
 
 
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 March 31, 2009 was $484.9 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 exchanges typically involve marketable securities. 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, the counterparties can request immediate and ongoing collateralization on


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derivative instruments in net liability positions. The aggregate fair value of interest rate swap contracts with credit risk-related contingent features that were in a liability position on March 31, 2009 was $25.0 million, for which the Company had posted collateral of $18.7 million. If the credit risk-related contingent features underlying these agreements were triggered on March 31, 2009, the Company would be required to post an additional $8.3 million of collateral to its counterparties. 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 36.2% of the total customer swap portfolio. If this group of manufacturing counterparties failed to perform, and if the underlying collateral proved to be of no value, the Company would incur a loss of $6.7 million, based on amounts at March 31, 2009.
 
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”. This Statement modified the accounting for initial recognition of fair value for certain interest rate swap contracts held by the Company. Former accounting guidance precluded immediate recognition in earnings of an unrealized gain or loss, measured as the difference between the transaction price and fair value of these instruments at initial recognition. This former guidance was nullified by SFAS No. 157, which states that the immediate recognition of a gain or loss is appropriate under certain circumstances. In accordance with the new recognition requirements, the Company increased equity by $903 thousand on January 1, 2008 to reflect the swaps at fair value as defined by SFAS No. 157.
 
The fair values of the Company’s derivative instruments are shown in the table below.
 
                                         
   
    Asset Derivatives                  
        March 31
    Dec. 31
                 
        2009     2008                  
              Liability Derivatives  
                        March 31
    Dec. 31
 
                        2009     2008  
                           
    Balance
              Balance
           
    Sheet
              Sheet
           
(In thousands)   Location   Fair Value     Location   Fair Value  
   
 
Derivatives designated as hedging instruments under Statement 133:
                                       
Interest rate swaps
  Other assets   $     $     Other liabilities   $ (1,352 )   $ (1,413 )
 
 
Total derivatives designated as hedging instruments under Statement 133
      $     $         $ (1,352 )   $ (1,413 )
 
 
Derivatives not designated as hedging instruments under Statement 133:
                                       
Interest rate swaps
  Other assets   $ 24,008     $ 25,274     Other liabilities   $ (23,676 )   $ (25,155 )
Credit risk participation agreements
  Other assets     112       117     Other liabilities     (273 )     (178 )
Foreign exchange contracts:
                                       
Forward contracts
  Other assets     88       207     Other liabilities     (139 )     (217 )
Option contracts
  Other assets     13       18     Other liabilities     (13 )     (18 )
Mortgage loan commitments
  Other assets     494       198     Other liabilities     (2 )     (6 )
Mortgage loan forward sale contracts
  Other assets     6       21     Other liabilities     (279 )     (88 )
 
 
Total derivatives not designated as hedging instruments under Statement 133
      $ 24,721     $ 25,835         $ (24,382 )   $ (25,662 )
 
 
Total derivatives
      $ 24,721     $ 25,835         $ (25,734 )   $ (27,075 )
 
 


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The effects of derivative instruments on the consolidated statements of income are shown in the table below.
 
                     
   
    Location of Gain or (Loss)
  Amount of Gain or (Loss)
 
    Recognized in Income on
  Recognized in Income on
 
    Derivative   Derivative  
       
        For the Three Months
 
        Ended March 31  
(In thousands)       2009     2008  
   
 
Derivatives in Statement 133 fair value hedging relationships:
                   
Interest rate swaps
  Interest and fees on loans   $ 75     $ (468 )
 
 
Total
      $ 75     $ (468 )
 
 
Derivatives not designated as hedging instruments under Statement 133:
                   
Interest rate swaps
  Other non-interest income   $ 212     $ 216  
Credit risk participation agreements
  Other non-interest income     5       7  
Foreign exchange contracts:
                   
Forward contracts
  Other non-interest income     (41 )     83  
Option contracts
  Other non-interest income            
Mortgage loan commitments
 
Loan fees and sales
    300       59  
Mortgage loan forward sale contracts
 
Loan fees and sales
    (206 )     51  
 
 
Total
      $ 270     $ 416  
 
 
 
12.  Income Taxes
 
For the first quarter of 2009, income tax expense amounted to $13.6 million, compared to $30.7 million in the first quarter of 2008. The effective income tax rate for the Company, including the effect of non-controlling interest, was 30.6% in the current quarter compared to 32.3% in the same quarter last year.
 
13.  Stock-Based Compensation
 
The Company normally issues most of its annual stock-based compensation during the first quarter. In recent years, stock-based compensation has been issued in the form of both stock appreciation rights (SARs) and nonvested stock. During the first quarter of 2009, stock-based compensation was issued solely in the form of nonvested stock awards. The stock-based compensation expense that has been charged against income was $1.6 million in the first three months of 2009 and $1.8 million in the first three months of 2008.


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The 2009 stock awards vest in 5 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards, as of March 31, 2009, and changes during the three month period then ended is presented below.
 
                 
   
          Weighted
 
          Average
 
          Grant Date
 
    Shares     Fair Value  
   
 
Nonvested at January 1, 2009
    227,986     $ 41.81  
 
 
Granted
    157,024       35.87  
Vested
    (28,820 )     39.09  
Forfeited
           
 
 
Nonvested at March 31, 2009
    356,190     $ 39.41  
 
 
 
SARs and stock options are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and have 10-year contractual terms. SARs, which the Company granted in 2006, 2007 and 2008, vest on a graded basis over 4 years of continuous service. All SARs must be settled in stock under provisions of the plan. Stock options, which were granted in 2005 and previous years, vest on a graded basis over 3 years of continuous service. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs and options on date of grant. The table below shows the fair values of SARs granted during the first three months of 2008, including the model assumptions for those grants. Information for the first three months of 2009 has not been shown, as no options or SARs were granted during that period.
 
         
   
    Three Months
 
    Ended March 31  
    2008  
   
 
Weighted per share average fair value at grant date
  $ 8.27  
Assumptions:
       
Dividend yield
    2.3 %
Volatility
    18.4 %
Risk-free interest rate
    3.5 %
Expected term
    7.2 years  
 
 
 
A summary of option activity during the first three months of 2009 is presented below.
 
                                 
   
                Weighted
       
          Weighted
    Average
       
          Average
    Remaining
    Aggregate
 
          Exercise
    Contractual
    Intrinsic
 
(Dollars in thousands, except per share data)   Shares     Price     Term     Value  
   
 
Outstanding at January 1, 2009
    2,395,333     $ 32.05                  
 
 
Granted
                           
Forfeited
                           
Expired
                           
Exercised
    (53,240 )     23.81                  
 
 
Outstanding at March 31, 2009
    2,342,093     $ 32.24       3.9 years     $ 12,224  
 
 


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A summary of SAR activity during the first three months of 2009 is presented below.
 
                                 
   
                Weighted
       
          Weighted
    Average
       
          Average
    Remaining
    Aggregate
 
          Exercise
    Contractual
    Intrinsic
 
(Dollars in thousands, except per share data)   Shares     Price     Term     Value  
   
 
Outstanding at January 1, 2009
    1,600,228     $ 43.83                  
 
 
Granted
                           
Forfeited
    (700 )     42.79                  
Expired
                           
Exercised
                           
 
 
Outstanding at March 31, 2009
    1,599,528     $ 43.83       7.9 years     $  
 
 
 
14.  Fair Value Measurements
 
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale and trading securities, certain non-marketable securities relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as loans held for sale, mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or market accounting, or write-downs of individual assets.
 
SFAS No. 157, “Fair Value Measurements”, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants 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, which are in accordance with SFAS No. 157. SFAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
 
  •  Level 1 — inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
 
  •  Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
 
  •  Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.
 
When determining the fair value measurements for assets and liabilities required or permitted to be recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets and the Company must use alternative valuation techniques to derive an estimated fair value measurement. The Company adopted FSP FAS 157-4 in March 2009 and has applied its guidance in estimating fair values for securities where the market volume and level of activity have significantly decreased. The application of the FSP did not result in a change in valuation technique or related inputs.


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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
 
Available for sale securities are accounted for in accordance with SFAS 115 and related guidance. 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 and in accordance with FSP FAS 115-2 and FAS 124-2, 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 major security type:
 
  •  U.S. government and federal agency obligations
These securities are valued using live data from active market makers and inter-dealer brokers.
 
  •  Government-sponsored enterprise obligations
Government-sponsored enterprise obligations are evaluated using cash flow valuation models. Inputs used are live market data, cash settlements, Treasury market yields, and floating rate indices such as LIBOR, CMT, and Prime.
 
  •  State and municipal obligations, excluding auction rate securities
An internal yield curve is generated and applied to bond sectors, and individual bond valuations are extrapolated. Inputs used to generate the yield curve are bellwether issue levels, established trading spreads between similar issuers or credits, historical trading spreads over widely accepted market benchmarks, new issue scales, and verified bid information. Bid information is verified by corroborating the data against external sources such as broker-dealers, trustees/paying agents, issuers, or non-affiliated bondholders.
 
  •  Mortgage and asset-backed securities
All mortgage-backed securities (agency and non-agency) and other asset-backed securities are valued at the tranche level. For each tranche valuation, the process generates predicted cash flows for the tranche and determines a benchmark yield. The final price is determined by inputting the predicted cash flows into a model that will determine principal and interest payments along with an average life. The yield from the model is used to discount the predicted cash flows to generate an evaluated price. Inputs for the model include swap curve or a Treasury benchmark curve, as well as a spread that is generated based on average life, type, volatility, ratings, collateral and collateral performance.
 
  •  Other debt securities
Other debt securities are valued using active markets and inter-dealer brokers as well as bullet spread scales and option adjusted spreads. The spreads and models use yield curves, terms and conditions of the bonds, and any special features (i.e., call or put options, redemption features, etc.).
 
  •  Equity securities
Equity securities are priced using the market prices for each security from the major stock exchanges or other electronic quotation systems.


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At March 31, 2009, the Company held certain auction rate securities (ARS) in its available for sale portfolio, totaling $171.4 million. Nearly all of these securities were purchased from customers during the third quarter of 2008. The auction process by which the ARS are normally priced has failed since the first quarter of 2008, and the fair value of these securities cannot be based on observable market prices due to the illiquidity in the market. The fair values of the ARS are currently estimated using a discounted cash flows analysis. The analysis compares the present value of cash flows based on mandatory rates paid under failing auctions with the present value of estimated cash flows for similar securities, after adjustment for liquidity premium and nonperformance risk. The cash flows were projected over an estimated market recovery period, or in some cases, a shorter period if refinancing by specific issuers is expected. The discount rate was based on the published Treasury rate for the period commensurate with the estimated holding period. In developing the inputs, discussions were held with traders, both internal and external to the Company, who are familiar with the ARS markets. Because many of the inputs significant to the measurement are not observable, these measurements are classified as Level 3 measurements.
 
Trading securities
 
The securities in the Company’s trading portfolio are priced by averaging several broker quotes for identical instruments, and are classified as Level 2 measurements.
 
Private equity investments
 
These securities are held by the Company’s venture capital subsidiaries and are included in non-marketable investment securities in the consolidated balance sheets. Valuation of these nonpublic investments requires significant management judgment due to the absence of quoted market prices. Each quarter, valuations are performed utilizing available market data and other factors. Market data includes published trading multiples for private equity investments of similar size. The multiples are considered in conjunction with current operating performance, future expectations, financing and sales transactions, and other investment-specific issues. The Company applies its valuation methodology consistently from period to period, and believes that its methodology is similar to that used by other market participants. These fair value measurements are classified as Level 3.
 
Derivatives
 
The Company’s derivative instruments include interest rate swaps, foreign exchange forward contracts, commitments and sales contracts related to personal mortgage loan origination activity, and certain credit risk guarantee agreements. When appropriate, the impact of credit standing as well as any potential credit enhancements, such as collateral, has been considered in the fair value measurement.
 
  •  Valuations for interest rate swaps are derived from proprietary models whose significant inputs are readily observable market parameters, primarily yield curves. The results of the models are constantly validated through comparison to active trading in the marketplace. These fair value measurements are classified as Level 2.
 
  •  Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations from global market makers, and are classified as Level 2.
 
  •  The fair values of mortgage loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market. However, these prices are adjusted by a factor which considers the likelihood that a commitment will ultimately result in a closed loan. This estimate is based on the Company’s historical data and its judgment about future economic trends. Based on the unobservable nature of this adjustment, these measurements are classified as Level 3.
 
  •  The Company’s contracts related to credit risk guarantees are valued under an internally developed methodology which uses significant unobservable inputs and assumptions about the creditworthiness of the counterparty to the guaranteed interest rate swap contract. Consequently, these measurements are classified as Level 3.


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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.
 
The table below presents the March 31, 2009 carrying values of assets and liabilities measured at fair value on a recurring basis.
 
                                 
   
          Fair Value Measurements Using  
          Quoted
             
          Prices in
             
          Active
             
          Markets
    Significant
       
          for
    Other
    Significant
 
          Identical
    Observable
    Unobservable
 
          Assets
    Inputs
    Inputs
 
(In thousands)   3/31/09     (Level 1)     (Level 2)     (Level 3)  
   
 
Assets:
                               
Available for sale securities:
                               
U.S. government and federal agency obligations
  $ 11,997     $ 11,997     $     $  
Government-sponsored enterprise obligations
    153,031             153,031        
State and municipal obligations
    856,699             685,286       171,413  
Agency mortgage-backed securities
    2,321,134             2,321,134        
Non-agency mortgage-backed securities
    593,900             593,900        
Other asset-backed securities
    374,946             374,946        
Other debt securities
    192,328             192,328        
Equity securities
    46,873       28,516       18,357        
Trading securities
    15,808             15,808        
Private equity investments
    48,284                   48,284  
Derivatives
    24,721             24,109       612  
Assets held in trust
    2,566       2,566              
 
 
Total assets
    4,642,287       43,079       4,378,899       220,309  
 
 
Liabilities:
                               
Derivatives
    25,734             25,180       554  
 
 
Total liabilities
  $ 25,734     $     $ 25,180     $ 554  
 
 


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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
                                 
   
    Fair Value Measurements Using
 
    Significant Unobservable Inputs
 
    (Level 3)  
    State and
    Private
             
    Municipal
    Equity
             
(In thousands)   Obligations     Investments     Derivatives     Total  
   
 
For the three months ended March 31, 2009:
                               
 
 
Balance at January 1, 2009
  $ 167,996     $ 49,494     $ 64     $ 217,554  
Total gains or losses (realized /unrealized):
                               
Included in earnings
          (1,552 )     99       (1,453 )
Included in other comprehensive income
    3,361                   3,361  
Purchases, issuances, and settlements, net
    56       342       (105 )     293  
 
 
Balance at March 31, 2009
  $ 171,413     $ 48,284     $ 58     $ 219,755  
 
 
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2009
  $     $ (1,552 )   $ 223     $ (1,329 )
 
 
 
Gains and losses on the Level 3 assets and liabilities in the table above are reported in the following income categories:
 
                                 
   
                Investment
       
                Securities
       
          Other Non-
    Gains
       
    Loan Fees
    Interest
    (Losses),
       
(In thousands)   and Sales     Income     Net     Total  
   
 
For the three months ended March 31, 2009:
                               
 
 
Total gains or losses included in earnings
  $ 94     $ 5     $ (1,552 )   $ (1,453 )
 
 
Change in unrealized gains or losses relating to assets still held at March 31, 2009
  $ 218     $ 5     $ (1,552 )   $ (1,329 )
 
 
 
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 instruments measured at fair value on a nonrecurring basis.
 
Collateral dependent impaired loans
 
While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans to reflect partial write-downs that are based on the value of the underlying collateral. In determining the value of real estate collateral, the Company relies on external appraisals and assessment of property values by its internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Because many of these inputs are not observable, the measurements are classified as Level 3. The carrying value of these impaired loans was $35.2 million at March 31, 2009, and charge-offs of $10.3 million related to these loans were recorded during the first three months of 2009.
 
Loans held for sale
 
Loans held for sale are carried at the lower of cost or market value. The portfolio consists primarily of student loans, and to a lesser extent, residential real estate loans. The Company’s student loans are


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contracted for sale with various secondary market institutions. Since 2008, the secondary market for student loans has been disrupted by liquidity concerns. Consequently, several investors are currently unable to consistently purchase loans under existing contractual terms. Loans under contract to these investors, in addition to other investors whose future liquidity is of concern, have been identified for evaluation. Such loans amounted to $187.9 million at March 31, 2009. They were evaluated using a fair value measurement method based on a discounted cash flows analysis, which was classified as Level 3. Previously recorded impairment losses of $867 thousand were reversed during the current quarter, as certain of the related loans were sold in accordance with their contract terms. The measurement of fair value for the remaining 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 private equity investments held by the Parent company which are carried at cost, reduced by other-than-temporary impairment. These investments are periodically evaluated for impairment based on their estimated fair value. The valuation methodology is described above under the recurring measurements for “Private equity investments”. Also included is 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. Fair value measurements for these securities are classified as Level 3.
 
Mortgage servicing rights
 
The Company initially measures its mortgage servicing rights at fair value, and amortizes them over the period of estimated net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The fair value measurements are classified as Level 3.
 
Goodwill and core deposit premium
 
Valuation of goodwill to determine impairment is performed on an annual basis, or more frequently if there is an event or circumstance that would indicate impairment may have occurred. The process involves calculations to determine the fair value of each reporting unit on a stand-alone basis. A combination of formulas using current market multiples, based on recent sales of financial institutions within the Company’s geographic marketplace, is used to estimate the fair value of each reporting unit. That fair value is compared to the carrying amount of the reporting unit, including its recorded goodwill. Impairment is considered to have occurred if the fair value of the reporting unit is lower than the carrying amount of the reporting unit.
 
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.


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Foreclosed assets
 
Foreclosed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, recreational and marine vehicles. Foreclosed assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. Foreclosed assets which have been subsequently adjusted during the current quarter totaled $279 thousand at March 31, 2009. Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements are classified as Level 2. Other fair value measurements may be based on internally developed pricing methods, and those measurements are classified as Level 3.
 
For assets measured at fair value on a nonrecurring basis during the first quarter of 2009, and still held as of March 31, 2009, the following table provides the adjustments to fair value recognized during the period, the level of valuation assumptions used to determine each adjustment, and the carrying value of the related individual assets or portfolios at March 31, 2009.
 
                                         
   
          Fair Value Measurements Using        
          Quoted
                   
          Prices in
                   
          Active
                   
          Markets
    Significant
             
          for
    Other
    Significant
       
          Identical
    Observable
    Unobservable
       
          Assets
    Inputs
    Inputs
    Total Gains
 
(In thousands)   3/31/09     (Level 1)     (Level 2)     (Level 3)     (Losses)  
   
 
Loans
  $ 35,220     $     $     $ 35,220     $ (10,296 )
Loans held for sale
    187,852                   187,852       867  
Private equity investments
    825                   825       (75 )
Mortgage servicing rights
    904                   904       (140 )
Foreclosed assets
    279             279             (324 )
 
 
 
15.  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
 
Fair values are estimated for various groups of loans segregated by 1) type of loan, 2) fixed/adjustable interest terms and 3) performing/non-performing status. The fair value of performing loans is calculated by discounting all simulated cash flows. Cash flows include all principal and interest to be received, taking embedded optionality such as the customer’s right to prepay into account. Discount rates are computed for each loan category using implied forward market rates adjusted to recognize each loan’s approximate credit risk. Fair value of impaired loans approximates their carrying value because such loans are recorded at the appraised or estimated recoverable value of the collateral or the underlying cash flow.
 
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 14 on Fair Value Measurements. In general, these fair values are based on prices obtained from stock exchanges, pricing models, or bid quotations received from securities dealers. Fair values are estimated for those investments for which a market source is not readily available.


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A schedule of investment securities by category and maturity is provided in Note 4 on Investment Securities. Fair value estimates are based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership, possible tax ramifications or estimated transaction costs.
 
Federal Funds Sold and Securities Purchased under Agreements to Resell, Interest Earning Deposits With Banks and Cash and Due From Banks
 
The carrying amounts of federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell generally mature in 90 days or less.
 
Accrued Interest Receivable/Payable
 
The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values because of the relatively short time period between the accrual period and the expected receipt or payment due date.
 
Derivative Instruments
 
A detailed description of the fair value measurement of derivative instruments is provided in Note 14 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, securities sold under agreements to repurchase, and borrowings under the Federal Reserve’s Term Auction Facility, which mature or reprice within 90 days, approximates their carrying value. The fair value of long-term debt is estimated by discounting contractual maturities using an estimate of the current market rate for similar instruments.


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The estimated fair values of the Company’s financial instruments are as follows:
 
                 
   
    March 31, 2009  
    Carrying
    Estimated
 
(In thousands)   Amount     Fair Value  
   
 
Financial Assets
               
Loans, including held for sale
  $ 11,443,309     $ 11,721,856  
Available for sale investment securities
    4,550,908       4,550,908  
Trading securities
    15,808       15,808  
Non-marketable securities
    140,077       140,077  
Federal funds sold and securities purchased under agreements to resell
    43,050       43,050  
Accrued interest receivable
    78,130       78,130  
Derivative instruments
    24,721       24,721  
Cash and due from banks
    374,748       374,748  
Interest earning deposits with banks
    592,162       592,162  
 
 
Financial Liabilities
               
Non-interest bearing demand deposits
  $ 1,507,168     $ 1,507,168  
Savings, interest checking and money market deposits
    8,128,465       8,128,465  
Time open and C.D.’s
    4,321,978       4,396,350  
Federal funds purchased and securities sold under agreements to repurchase
    1,001,552       996,856  
Other borrowings
    847,275       892,664  
Accrued interest payable
    43,538       43,538  
Derivative instruments
    25,734       25,734  
 
 
 
Off-Balance Sheet Financial Instruments
 
The fair value of letters of credit and commitments to extend credit is based on the fees currently charged to enter into similar agreements. The aggregate of these fees is not material.
 
Limitations
 
Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company’s 2008 Annual Report on Form 10-K. Results of operations for the three month period ended March 31, 2009 are not necessarily indicative of results to be attained for any other period.
 
Forward Looking Information
 
This report may contain “forward-looking statements” that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors


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could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as “expects”, “anticipates”, “believes”, “estimates”, variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company’s market area, and competition with other entities that offer financial services.
 
Critical Accounting Policies
 
The Company’s consolidated financial statements are prepared based on the application of certain accounting policies, some of which require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company’s reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgments are necessary when 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 investment securities, and accounting for income taxes.
 
Allowance for Loan Losses
 
The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company’s estimate of the losses inherent in the loan portfolio at any point in time. While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, lease, construction and business real estate loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal loans, including personal mortgage, credit card and consumer loans, are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Further discussion of the methodologies used in establishing the allowance is provided in the Provision and Allowance for Loan Losses section of this discussion.
 
Valuation of Investment Securities
 
The Company carries its investment securities at fair value, and in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 157 and related guidance, the Company employs valuation techniques which utilize observable inputs when those inputs are available. These observable inputs reflect assumptions market participants would use in pricing the security, developed based on market data obtained from sources independent of the Company. When such information is not available, the Company employs valuation techniques which utilize unobservable inputs, or those which reflect the 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


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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. SFAS No. 157, which requires fair value measurements to be classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on unobservable, internally-derived inputs) is discussed in more detail in Note 14 to the consolidated financial statements. Most of the available for sale investment portfolio is priced utilizing industry-standard models that consider various assumptions which are observable in the marketplace, or can be derived from observable data. Such securities totaled approximately $4.3 billion, or 95.3% of the available for sale portfolio at March 31, 2009, and were classified as Level 2 measurements. The Company also holds $171.4 million in auction rate securities. These were classified as Level 3 measurements, as no market currently exists for these securities, and fair values were derived from internally generated cash flow valuation models which used unobservable inputs which were significant to the overall measurement.
 
In accordance with FASB Staff Position No. FAS 115-2 and 124-2, 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 basis 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.
 
During the current quarter, non-agency guaranteed mortgage-backed securities with a par value of $66.6 million were identified as other than temporarily impaired. The credit-related impairment loss on these securities amounted to $553 thousand 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 $21.3 million on a pre-tax basis.
 
The Company, through its direct holdings and its Small Business Investment subsidiaries, has numerous private equity investments, categorized as non-marketable securities in the accompanying consolidated balance sheets. These investments are reported at fair value, and totaled $54.2 million at March 31, 2009. Changes in fair value are reflected in current earnings, and reported in investment securities gains (losses), net in the consolidated statements of income. Because there is no observable market data for these securities, their fair values are internally developed using available information and management’s judgment. Although management believes its estimates of fair value reasonably reflect the fair value of these securities, key assumptions regarding the projected financial performance of these companies, the evaluation of the investee 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
 
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. Accrued income taxes represent the net amount of current income taxes which are expected to be paid attributable to operations as of the balance sheet date. Deferred income taxes represent the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Current and deferred income taxes are reported as either a component of other assets or other liabilities in


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the consolidated balance sheets, depending on whether the balances are assets or liabilities. Judgment is required in applying the principles of SFAS No. 109. The Company regularly monitors taxing authorities for changes in laws and regulations and their interpretations by the judicial systems. The aforementioned changes, and changes that may result from the resolution of income tax examinations by federal and state taxing authorities, may impact the estimate of accrued income taxes and could materially impact the Company’s financial position and results of operations.
 
Selected Financial Data
                 
   
    Three Months Ended
 
    March 31  
    2009     2008  
   
 
Per Share Data
               
Net income per common share – basic
  $ .41     $ .85  
Net income per common share – diluted
    .40       .84  
Cash dividends
    .240       .238  
Book value
    21.19       20.95  
Market price
    36.30       40.03  
Selected Ratios
               
(Based on average balance sheets)
               
Loans to deposits(1)
    87.23 %     91.78 %
Non-interest bearing deposits to total deposits
    5.82       5.45  
Equity to loans(1)
    13.83       14.03  
Equity to deposits
    12.06       12.88  
Equity to total assets
    9.30       9.63  
Return on total assets
    .73       1.59  
Return on total equity
    7.82       16.52  
(Based on end-of-period data)
               
Non-interest income to revenue(2)
    38.12       39.68  
Efficiency ratio(3)
    62.58       59.87  
Tier I risk-based capital ratio
    11.05       10.45  
Total risk-based capital ratio
    12.42       11.66  
Tangible equity to assets ratio(4)
    8.24       8.62  
Tier I leverage ratio
    8.93       8.88  
 
 
(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).


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Results of Operations
 
Summary
                                 
   
    Three Months Ended
    Increase
 
    March 31     (Decrease)  
(Dollars in thousands)   2009     2008     Amount     Percent  
   
 
Net interest income
  $ 150,015     $ 140,107     $ 9,908       7.1 %
Provision for loan losses
    (43,168 )     (20,000 )     23,168       115.8  
Non-interest income
    92,431       92,160       271       .3  
Investment securities gains (losses), net
    (2,172 )     23,323       (25,495 )     N.M.  
Non-interest expense
    (152,886 )     (140,181 )     12,705       9.1  
Income taxes
    (13,592 )     (30,668 )     (17,076 )     (55.7 )
Non-controlling interest (expense) income
    208       (574 )     782       N.M.  
 
 
Net income*
  $ 30,836     $ 64,167     $ (33,331 )     (51.9 )%
 
 
* Net income shown in the table above and mentioned throughout this discussion refers to Net income attributable to Commerce Bancshares, Inc. as shown in the accompanying statements of income.
 
For the quarter ended March 31, 2009, net income amounted to $30.8 million, a decrease of $33.3 million, or 51.9%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was .73%, the annualized return on average equity was 7.82%, and the efficiency ratio was 62.58%. Diluted earnings per share was $.40, a decrease of 52.4% compared to $.84 per share in the first quarter of 2008. The first quarter of 2008 included a $22.2 million pre-tax gain on the redemption of Visa, Inc. (Visa) common stock and the reversal of certain Visa litigation charges of $8.8 million on a pre-tax basis, which had the effect of increasing earnings per share by $.26 in 2008.
 
Net income for the first quarter of 2009 compared to the same period last year included growth of $9.9 million, or 7.1%, in net interest income, coupled with slight growth in non-interest income, which increased $271 thousand. Compared to the same period last year, non-interest expense increased $12.7 million, largely due to an $8.8 million reduction in an indemnification obligation in the first quarter of 2008 which did not reoccur in the first quarter of 2009, as mentioned above. In addition, salaries and employee benefits costs increased $3.7 million and data processing and software expenses increased $784 thousand. The provision for loan losses totaled $43.2 million for the current quarter, representing an increase of $23.2 million over the first quarter of 2008. Investment securities gains declined $25.5 million due to the gain on the redemption of Visa common stock in the first quarter of 2008, mentioned above, coupled with a net unrealized loss in fair value on certain private equity investments in the current quarter.
 
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 of approximately $4.7 million, and recorded a pre-tax gain of $644 thousand. In May 2008, the Company sold its banking branch, including the facility, in Independence, Kansas. In this transaction, approximately $23.3 million in loans, $85.0 million in deposits, and various other assets and liabilities were sold, and the Company recorded a pre-tax gain of $6.9 million.


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Net Interest Income
 
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.
 
Analysis of Changes in Net Interest Income
                         
   
    Three Months Ended
 
    March 31, 2009 vs. 2008  
    Change due to        
    Average
    Average
       
(In thousands)   Volume     Rate     Total  
   
 
Interest income, fully taxable equivalent basis:
                       
Loans
  $ 1,737     $ (33,594 )   $ (31,857 )
Loans held for sale
    1,876       (2,361 )     (485 )
Investment securities:
                       
U.S. government and federal agency securities
    (1,727 )     (189 )     (1,916 )
State and municipal obligations
    3,380       (1,053 )     2,327  
Mortgage and asset-backed securities
    5,613       952       6,565  
Other securities
    (146 )     8       (138 )
 
 
Total interest on investment securities
    7,120       (282 )     6,838  
 
 
Federal funds sold and securities purchased under agreements to resell
    (2,580 )     (707 )     (3,287 )
Interest earning deposits with banks
    449             449  
 
 
Total interest income
    8,602       (36,944 )     (28,342 )
 
 
Interest expense:
                       
Deposits:
                       
Savings
    34       (239 )     (205 )
Interest checking and money market
    932       (13,288 )     (12,356 )
Time open & C.D.’s of less than $100,000
    (2,638 )     (7,874 )     (10,512 )
Time open & C.D.’s of $100,000 and over
    5,504       (11,504 )     (6,000 )
 
 
Total interest on deposits
    3,832       (32,905 )     (29,073 )
 
 
Federal funds purchased and securities sold under agreements to repurchase
    (4,837 )     (5,685 )     (10,522 )
Other borrowings
    4,668       (3,660 )     1,008  
 
 
Total interest expense
    3,663       (42,250 )     (38,587 )
 
 
Net interest income, fully taxable equivalent basis
  $ 4,939     $ 5,306     $ 10,245  
 
 
 
Net interest income for the first quarter of 2009 was $150.0 million, a $9.9 million, or 7.1%, increase over the first quarter of 2008. The increase in net interest income was primarily the result of lower rates paid on interest bearing deposits and borrowings and an increase in average investment securities, partly offset by lower loan yields. The decline in rates on interest earning assets and interest bearing liabilities resulted from actions taken by the Federal Reserve Bank to reduce interest rate levels, which caused the earning assets and interest bearing liabilities to reprice downward. The Company’s net interest rate margin was 3.83% for the first quarter of 2009, compared to 4.06% in the previous quarter and 3.83% in the first quarter of 2008.
 
Total interest income, on a tax equivalent basis (T/E), decreased $28.3 million, or 12.5%, from the first quarter of 2008. Interest income on loans (T/E) declined $31.9 million, primarily the result of a 127 basis point decrease in rates earned on the loan portfolio. Interest income on investment securities (T/E) increased


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$6.8 million, as average balances increased $548.9 million, or 15.9%, while yields increased slightly. Interest income on overnight investments in federal funds sold and securities purchased under agreements to resell decreased $3.3 million, primarily due to a decrease in average balances of $381.3 million coupled with a decline of 236 basis points in rates earned. Beginning October 1, 2008, amounts held with the Federal Reserve Bank began earning interest. This contributed $449 thousand to interest income in the first quarter of 2009. The average tax equivalent yield on total interest earning assets was 4.93% in the first quarter of 2009 compared to 6.03% in the first quarter of 2008.
 
Total interest expense decreased $38.6 million, or 46.8%, compared to the first quarter of 2008, primarily due to a $29.1 million decrease in interest expense paid on interest bearing deposits, coupled with a $10.5 million decrease in interest expense paid on federal funds purchased and securities sold under agreements to repurchase. The decrease in interest expense paid on deposits resulted from a 111 basis point decrease in average rates, offset slightly by an increase in average balances. Average rates paid on interest checking and money market accounts decreased 72 basis points, while average balances increased $703.6 million, or 9.8%, resulting in a net decrease in interest expense of $12.4 million. Additionally, interest expense paid on certificates of deposit decreased $16.5 million as a result of a decrease in average rates paid of 190 basis points, offset by an increase in average balances of $277.5 million, or 7.1%. Interest expense on federal funds purchased and securities sold under agreements to repurchase decreased $10.5 million compared to first quarter 2008 as a result of a decrease in average balances of $633.4 million, or 38.9%, coupled with a 240 basis point decrease in average rates paid. Much of the decrease in average balances occurred in federal funds purchased, which was due to efforts to reduce inter-bank borrowing exposure. The average balance of other borrowings increased $477.6 million, or 65.4%, compared to first quarter 2008 and included higher average advances from the Federal Home Loan Bank and borrowings under the Federal Reserve’s Term Auction Facility program. The impact of these increases in average balances was partially offset by a 128 basis point decrease in average rates paid on other borrowings. The overall average rate incurred on all interest bearing liabilities decreased to 1.21% in the first quarter of 2009 compared to 2.40% in the first quarter of 2008.
 
Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.
 
Non-Interest Income
 
                                 
   
    Three Months
    Increase
 
    Ended March 31     (Decrease)  
(Dollars in thousands)   2009     2008     Amount     Percent  
   
 
Deposit account charges and other fees
  $ 25,592     $ 27,075     $ (1,483 )     (5.5 )%
Bank card transaction fees
    27,168       26,308       860       3.3  
Trust fees
    18,873       20,113       (1,240 )     (6.2 )
Trading account profits and commissions
    5,396       4,164       1,232       29.6  
Consumer brokerage services
    3,308       3,409       (101 )     (3.0 )
Loan fees and sales
    2,961       2,140       821       38.4  
Other
    9,133       8,951       182       2.0  
 
 
Total non-interest income
  $ 92,431     $ 92,160     $ 271       .3 %
 
 
Non-interest income as a % of total revenue*
    38.1 %     39.7 %                
Total revenue per full-time equivalent employee
  $ 46.4     $ 45.3                  
 
 
* Total revenue includes net interest income and non-interest income.
 
For the first quarter of 2009, total non-interest income amounted to $92.4 million compared with $92.2 million in the same quarter last year, which was an increase of $271 thousand, or .3%. The slight increase over last year resulted mainly from increases in bond trading income, bank card fees, and loan fees and sales, but was offset by reductions in deposit and trust fees. Bank card fees for the quarter increased $860 thousand, or 3.3%, over the first quarter of last year, primarily due to continued growth in transaction fees


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earned on corporate cards and debit cards, which grew by 19.7% and 3.0%, respectively, but were negatively impacted by lower retail sales affecting both merchant and credit card fees. Trust fees for the quarter decreased $1.2 million, or 6.2%, from the same quarter last year and reflected the impact that lower markets have had on trust asset values this quarter. Deposit account fees declined $1.5 million, or 5.5%, from the same period last year as a result of an 11.6% decline in overdraft fee income, partly offset by growth in corporate cash management fees of 10.3%. Bond trading income for the current quarter totaled $5.4 million, an increase of $1.2 million, or 29.6%, due to strong sales to correspondent banks. Consumer brokerage services revenue decreased slightly by $101 thousand, or 3.0%, mainly due to lower mutual fund fees. Loan fees and sales revenue increased $821 thousand, or 38.4%, as a result of higher mortgage banking revenue due to refinancing activity and increased gains on sales of student loans. Other non-interest income for the current quarter increased $182 thousand, or 2.0%, over the same quarter last year. Most of this increase was due to a gain of $644 thousand recorded on the sale of the Lakin branch, mentioned previously, and an impairment charge of $1.1 million, recorded in the first quarter of 2008, on an office building held for sale. Partly offsetting these increases were declines in equipment rental income, cash sweep commissions and tax credit sales income, in addition to losses on the disposal of repossessed assets.
 
Investment Securities Gains (Losses), Net
 
Net gains and losses on investment securities which were recognized in earnings during the three months ended March 31, 2009 and 2008 are shown in the table below. Net securities losses amounted to $2.2 million in the first quarter of 2009, compared to net gains of $23.3 million in the same quarter last year. Most of the net gain in 2008 resulted from a $22.2 million gain on the redemption of Visa common stock. During the current quarter, non-agency guaranteed mortgage-backed securities with a par value of $66.6 million were identified as other than temporarily impaired. The credit-related impairment loss on these securities amounted to $553 thousand, which was recorded in current earnings and included in the table below. The noncredit-related loss on these securities, which was recorded in other comprehensive income, was $21.3 million. Also shown below are net gains and losses relating to non-marketable private equity investments, which are primarily held by the Parent’s majority-owned venture capital subsidiaries. These include fair value adjustments, in addition to gains and losses realized upon disposition. The portion of this activity attributable to minority interests is reported as non-controlling interest in the consolidated income statement, resulting in income of $332 thousand during the first quarter of 2009 and $490 thousand in expense for the same period last year.
 
                 
   
    Three Months
 
    Ended March 31  
(In thousands)   2009     2008  
   
 
Available for sale:
               
Preferred equity securities
  $     $ (3,361 )
Other bonds
    (545 )     1,139  
Non-marketable:
               
Private equity investments
    (1,627 )     3,349  
Visa Class B stock
          22,196  
 
 
Total investment securities gains (losses), net
  $ (2,172 )   $ 23,323  
 
 


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Non-Interest Expense
 
                                 
   
    Three Months
    Increase
 
    Ended March 31     (Decrease)  
(Dollars in thousands)   2009     2008     Amount     Percent  
   
 
Salaries and employee benefits
  $ 86,753     $ 83,010     $ 3,743       4.5 %
Net occupancy
    11,812       12,069       (257 )     (2.1 )
Equipment
    6,322       5,907       415       7.0  
Supplies and communication
    8,684       8,724       (40 )     (.5 )
Data processing and software
    14,347       13,563       784       5.8  
Marketing
    4,347       5,287       (940 )     (17.8 )
Indemnification obligation
          (8,808 )     8,808       N.M.  
Other
    20,621       20,429       192       .9  
 
 
Total non-interest expense
  $ 152,886     $ 140,181     $ 12,705       9.1 %
 
 
 
Non-interest expense for the first quarter of 2009 amounted to $152.9 million, an increase of $12.7 million, or 9.1%, compared with $140.2 million recorded in the first quarter of last year. Included in non-interest expense in the first quarter of last year was a reduction of $8.8 million in certain Visa indemnification costs that did not reoccur in the current quarter. Exclusive of this item, non-interest expense in the current quarter grew 2.6% compared to the same period last year. Compared with the first quarter of last year, salaries and benefits expense increased $3.7 million, or 4.5%, resulting mainly from increased staffing, related to several growth initiatives, and higher pension costs. Full-time equivalent employees increased to 5,222 at March 31, 2009 compared to 5,128 at March 31, 2008. Occupancy costs declined by $257 thousand, or 2.1%, from the same quarter last year, primarily due to lower seasonal maintenance costs, and partly offset by higher building depreciation expense. Equipment expenses increased $415 thousand, or 7.0%, over the same quarter last year due to higher maintenance contract expense and depreciation expense on data processing equipment. Supplies and communication expense was flat, while marketing costs declined $940 thousand, or 17.8%. Data processing and software costs increased $784 thousand, or 5.8%, mainly as a result of higher costs for several new software and servicing systems, partly offset by a slight reduction in bank card processing costs. Other non-interest expense increased $192 thousand, or .9%, over the same quarter last year primarily due to a $3.6 million increase in FDIC insurance expense, partly offset by an impairment charge of $2.3 million related to foreclosed land which was recorded in the first quarter of 2008. The FDIC is currently considering a one-time special assessment on the banking industry which could raise deposit insurance premiums significantly. While not finalized, it is expected that this assessment would be paid in the third quarter of 2009, based on average deposits in the second quarter of 2009.


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Provision and Allowance for Loan Losses
 
                         
   
    Three Months Ended  
(Dollars in thousands)   Mar. 31, 2009     Mar. 31, 2008     Dec. 31, 2008  
   
 
Provision for loan losses
  $ 43,168     $ 20,000     $ 41,333  
 
 
Net loan charge-offs (recoveries):
                       
Business
    3,842       (509 )     2,099  
Real estate-construction and land
    9,226       774       4,021  
Real estate-business
    776       902       978  
Consumer credit card
    10,763       6,593       8,674  
Consumer
    9,333       3,956       6,901  
Home equity
    300       (6 )     91  
Real estate-personal
    545       101       1,358  
Overdrafts
    134       86       623  
 
 
Total net loan charge-offs
  $ 34,919     $ 11,897     $ 24,745  
 
 
 
                         
   
    Three Months Ended  
    Mar. 31, 2009     Mar. 31, 2008     Dec. 31, 2008  
   
 
Annualized net loan charge-offs*:
                       
Business
    .47 %     %     .25 %
Real estate-construction and land
    4.58       .45       2.21  
Real estate-business
    .15       .16       .17  
Consumer credit card
    5.94       3.48       4.48  
Consumer
    2.40       .97       1.64  
Home equity
    .24             .07  
Real estate-personal
    .14       .03       .35  
Overdrafts
    6.48       2.45       23.49  
 
 
Total annualized net loan charge-offs
    1.28 %     .44 %     .90 %
 
 
* as a percentage of average loans (excluding loans held for sale)
 
The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of a specific allowance component based on certain individually evaluated loans and a general component based on estimates of reserves needed for pools of loans with similar risk characteristics.
 
Loans subject to individual evaluation are defined by the Company as impaired, and generally consist of business, construction, commercial real estate and personal real estate loans on non-accrual status. These loans are evaluated individually for the impairment of repayment potential and collateral adequacy, and in conjunction with current economic conditions and loss experience, allowances are estimated. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic factors, loan risk ratings and industry concentrations.
 
In using this process and the information available, management must consider various assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these subjective factors, actual outcomes of inherent losses can differ from original estimates. The process of determining adequate levels of the allowance for loan losses is subject to regular review by the Company’s Credit Administration personnel and outside regulators.


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Net loan charge-offs for the first quarter of 2009 amounted to $34.9 million, compared with $24.7 million in the prior quarter and $11.9 million in the first quarter of last year. The increase in net charge-offs in the first quarter of 2009 compared to the previous quarter was mainly due to increased losses of $4.5 million in consumer and credit card loans, $5.2 million in construction and land real estate loans, and $1.7 million in business loans. Consumer credit card net charge-offs totaled $10.8 million in the current quarter, and increased $2.1 million compared to the previous quarter. Consumer loan charge-offs totaled $9.3 million in the current quarter, and increased $2.4 million over the previous quarter. The increase in consumer loan charge-offs was mostly due to higher net charge-offs on marine and recreational vehicle loans, which increased $1.6 million. The ratio of annualized total net loan charge-offs to total average loans was 1.28%, compared to .90% in the previous quarter and .44% in the first quarter of last year.
 
For the first quarter of 2009, annualized net charge-offs on average construction and land loans were 4.58% compared with 2.21% in the previous quarter and .45% in the same period last year. Additionally, annualized net charge-offs on average consumer credit card loans were 5.94%, compared with 4.48% in the previous quarter and 3.48% in the same period last year. Consumer loan net charge-offs for the quarter amounted to 2.40% of average consumer loans, compared to 1.64% in the previous quarter and .97% in the same quarter last year.
 
The provision for loan losses for the first quarter of 2009 totaled $43.2 million, which was a $1.8 million increase compared to the previous quarter and a $23.2 million increase compared to the first quarter of 2008. The amount of the provision in each quarter was determined by management’s review and analysis of the adequacy of the allowance for loan losses, involving all the activities and factors described above regarding that process. The higher provision in the current quarter was influenced by higher incurred losses within the loan portfolio and an increase in classified loans, stemming from increasing risk in the broader economy.
 
The allowance for loan losses at March 31, 2009 amounted to $180.9 million, or 1.65% of total loans (excluding loans held for sale) compared to $172.6 million, or 1.53%, at December 31, 2008 and $141.7 million, or 1.30%, at March 31, 2008. The increase in the allowance compared to previous periods resulted primarily from higher provisions, as noted above. The Company considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at March 31, 2009.


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Risk Elements of Loan Portfolio
 
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are consumer loans that are exempt under regulatory rules from being classified as non-accrual.
 
                 
   
    March 31
    December 31
 
(Dollars in thousands)   2009     2008  
   
 
Non-accrual loans:
               
Business
  $ 11,084     $ 4,007  
Real estate – construction and land
    74,985       48,871  
Real estate – business
    16,737       13,137  
Real estate – personal
    7,117       6,794  
Consumer
    96       87  
 
 
Total non-accrual loans
    110,019       72,896  
 
 
Foreclosed real estate
    8,666       6,181  
 
 
Total non-performing assets
  $ 118,685     $ 79,077  
 
 
Non-performing assets as a percentage of total loans
    1.08 %     .70 %
Non-performing assets as a percentage of total assets
    .66 %     .45 %
 
 
Loans past due 90 days and still accruing interest:
               
Business
  $ 6,593     $ 1,459  
Real estate – construction and land
    3,944       466  
Real estate – business
    2,653       1,472  
Real estate – personal
    4,697       4,717  
Consumer
    2,320       3,478  
Home equity
    441       440  
Student
    15,115       14,018  
Consumer credit card
    15,648       13,914  
 
 
Total loans past due 90 days and still accruing interest
  $ 51,411     $ 39,964  
 
 
 
Non-accrual loans, which are also considered impaired, totaled $110.0 million at March 31, 2009, and increased $37.1 million over amounts recorded at December 31, 2008. The increase over December 31, 2008 occurred mainly in construction and land real estate non-accrual loans, which increased $26.1 million, and in business non-accrual loans, which increased $7.1 million. At March 31, 2009, non-accrual loans were comprised mainly of construction and land real estate loans (68.2%), business real estate loans (15.2%) and business loans (10.1%). Foreclosed real estate increased $2.5 million to a balance of $8.7 million at March 31, 2009. The increase was mainly due to the acquisition of one property with a carrying value of $2.4 million.
 
Total loans past due 90 days or more and still accruing interest amounted to $51.4 million as of March 31, 2009, and increased $11.4 million over December 31, 2008. The increase in the past due totals at March 31, 2009 compared to December 31, 2008 resulted mainly from increases of $5.1 million in business and $3.5 million in construction and land real estate loan delinquencies.
 
In addition to the non-accrual loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are


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primarily classified as substandard under the Company’s internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $304.0 million at March 31, 2009 compared with $338.7 million at December 31, 2008, resulting in a decrease of 10.3%. Most of the decrease occurred in construction and land real estate loans, which declined from $135.3 million at year end to $97.9 million at March 31, 2009. The overall balance at March 31, 2009 also included $107.5 million in business loans and $53.6 million in business real estate loans.
 
Income Taxes
 
Income tax expense was $13.6 million in the first quarter of 2009, compared to $17.8 million in the fourth quarter of 2008 and $30.7 million in the first quarter of 2008. The Company’s effective income tax rate, including the effect of non-controlling interest, was 30.6% in the first quarter of 2009, compared with 28.8% in the fourth quarter of 2008 and 32.3% in the first quarter of 2008. The changes in the effective tax rate for the first quarter of 2009 compared to the first and fourth quarters of 2008 were primarily due to changes in the mix of taxable and non-taxable income during those periods.


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Financial Condition
 
Balance Sheet
 
Total assets of the Company were $17.9 billion at March 31, 2009 compared to $17.5 billion at December 31, 2008. Earning assets (excluding fair value adjustments on investment securities) amounted to $16.8 billion at March 31, 2009 consisting of 68% in loans and 28% in investment securities, compared to $16.2 billion at December 31, 2008.
 
During the first quarter of 2009, average loans, excluding loans held for sale, increased $158.7 million, or 1.5% compared to the previous quarter, representing annualized growth of 6.0%. The increase in loans was mainly the result of the acquisition of $358.5 million, at fair value, in federally guaranteed student loans late in the fourth quarter of last year. The effect of this acquisition increased average balances by $299.1 million in the current quarter. Late in the fourth quarter of last year, the Company reclassified certain loans collateralized by land to either construction or personal real estate loans. The effect of this reclassification, which was fully reflected in average balances in the current quarter, was to increase average construction loans by $105.3 million and personal real estate loans by $94.1 million, and decrease business real estate, business, and consumer loans by $142.1 million, $37.0 million, and $20.3 million, respectively.
 
Exclusive of these changes, the average balances for business and construction loans declined by $11.8 million and $12.4 million, respectively. This decline was reflective of lower customer line of credit usage and continued reductions in outstanding balances as borrowers have reacted to the difficult economy by reducing debt. In addition, average balances for consumer, consumer credit card, and personal real estate loans declined by $69.9 million, $35.7 million, and $16.5 million, respectively, as pay-downs exceeded new loan originations for these products. Also, the Company has reduced its marketing efforts on both consumer credit cards and marine and recreational vehicle lending products.
 
Average available for sale investment securities (excluding fair value adjustments) increased to $3.8 billion in the current quarter, an increase of $128.6 million compared to the previous quarter. Period end balances (excluding fair value adjustments) increased $895.3 million during the quarter, up from $3.7 billion at December 31, 2008 to $4.6 billion at March 31, 2009. During the current quarter, maturities and principal pay-downs of securities amounted to $237.4 million. The Company reinvested $716.8 million in agency-guaranteed mortgage-backed securities, $151.6 million in other asset-backed securities, and $138.7 million in state and municipal obligations. Sales of securities during the first quarter of 2009 were not significant, while the previous quarter included sales of auction rate securities totaling $369 million in par value.
 
Average deposits increased $813.9 million, or 6.5%, in the current quarter, up to $13.3 billion during the first quarter of 2009 compared to $12.4 billion during the fourth quarter of 2008. The growth in average deposits resulted mainly from increases in certificates of deposit ($345.6 million), interest checking and money market deposits ($372.4 million), and non-interest bearing demand deposits ($80.5 million). These increases occurred in both consumer and corporate accounts. Approximately 66% of the increase over the previous quarter in certificates of deposit and 38% of the increase in interest checking and money market deposits were related to corporate customers. The average loans to deposits ratio in the current quarter was 87.2% compared to 91.1% in the previous quarter.
 
During the current quarter, the Company’s average borrowings decreased $413.7 million, or 15.8%, from the previous quarter. The decrease was mainly the result of a decline of $238.2 million in advances from the FHLB, coupled with a decline of $88.3 million in borrowings under the Federal Reserve’s Term Auction Facility. Additionally, average borrowings of federal funds purchased declined by $69.1 million.


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Liquidity and Capital Resources
 
Liquidity Management
 
The Company’s most liquid assets are comprised of available for sale investment securities, federal funds sold, securities purchased under agreements to resell, and balances at the Federal Reserve Bank, as follows:
 
                         
   
    March 31
    March 31
    December 31
 
(In thousands)   2009     2008     2008  
   
 
Liquid assets:
                       
Federal funds sold
  $ 33,050     $ 171,282     $ 59,475  
Securities purchased under agreements to resell
    10,000       353,751       110,000  
Available for sale investment securities
    4,550,908       3,413,816       3,630,753  
Balances at the Federal Reserve Bank
    592,162             638,158  
 
 
Total
  $ 5,186,120     $ 3,938,849     $ 4,438,386  
 
 
 
Federal funds sold and securities purchased under agreements to resell totaled $43.1 million at March 31, 2009. These investments normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available for sale investment portfolio was $4.6 billion at March 31, 2009, and included an unrealized net loss of $33.9 million. The overall net loss includes a $94.2 million unrealized loss on mortgage and asset-backed securities held by the bank subsidiary and a $35.9 million unrealized gain on common stock held by the Parent. The portfolio includes maturities of approximately $752 million over the next 12 months, which offer 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, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. At March 31, 2009, total investment securities pledged for these purposes were as follows:
 
         
   
    March 31
 
(In thousands)   2009  
   
 
Investment securities pledged for the purpose of securing:
       
Federal Reserve Bank borrowings
  $ 327,848  
FHLB borrowings and letters of credit
    339,361  
Securities sold under agreements to repurchase
    1,368,601  
Other deposits
    640,536  
 
 
Total pledged, at fair value
  $ 2,676,346  
 
 
 
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 March 31, 2009, such deposits totaled $9.6 billion and represented 69.0% 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. Time open and certificates of deposit of $100,000 and over totaled $2.2 billion at March 31, 2009. These accounts are normally considered more volatile and higher costing, and comprised 15.8% of total deposits at March 31, 2009.
 


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    March 31
    March 31
    December 31
 
(In thousands)   2009     2008     2008  
   
 
Core deposit base:
                       
Non-interest bearing demand
  $ 1,507,168     $ 1,442,782     $ 1,375,000  
Interest checking
    522,303       461,630       700,714  
Savings and money market
    7,606,162       6,827,138       6,909,592  
 
 
Total
  $ 9,635,633     $ 8,731,550     $ 8,985,306  
 
 
 
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, securities sold under agreements to repurchase, and advances from the Federal Reserve Bank and FHLB, as follows:
 
                         
   
    March 31
    March 31
    December 31
 
(In thousands)   2009     2008     2008  
   
 
Borrowings:
                       
Federal funds purchased
  $ 159,360     $ 295,790     $ 24,900  
Securities sold under agreements to repurchase
    842,192       1,161,446       1,001,637  
FHLB advances
    825,233       759,724       1,025,721  
Subordinated debentures
    14,310       14,310       14,310  
Term auction facility
                700,000  
Other long-term debt
    7,732       7,830       7,750  
 
 
Total
  $ 1,848,827     $ 2,239,100     $ 2,774,318  
 
 
 
Federal funds purchased and securities sold under agreements to repurchase are generally borrowed overnight, and amounted to $1.0 billion at March 31, 2009. Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Securities sold under agreements to repurchase are secured by a portion of the Company’s investment portfolio and are comprised of both non-insured customer funds, totaling $342.2 million at March 31, 2009, and structured repurchase agreements of $500.0 million purchased from an upstream financial institution. The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through its Term Auction Facility (TAF) or the discount window, although no such borrowings were outstanding at the current quarter end. The Company also borrows on a secured basis through advances from the FHLB, which totaled $825.2 million at March 31, 2009. Most of these advances have fixed interest rates and mature in 2009 through 2017. In addition, the Company has $14.3 million in outstanding subordinated debentures issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts. Other outstanding long-term borrowings relate mainly to the Company’s leasing activities and private equity investments.

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The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged and permits borrowings from either the discount window or the TAF. 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 March 31, 2009:
 
                 
   
    March 31, 2009  
       
          Federal
 
(In thousands)   FHLB     Reserve  
   
 
Collateral value pledged
  $ 2,487,746     $ 1,346,391  
Advances outstanding
    (825,233 )      
Letters of credit issued
    (1,272,789 )      
 
 
Available for future advances
  $ 389,724     $ 1,346,391  
 
 
 
In addition to those mentioned above, several other sources of liquidity are available. The Company has strong long-term deposit ratings from Moody’s and Standard & Poor’s of Aa2 and A+, respectively. Additionally, its sound commercial paper rating of A-1 from Standard & Poor’s and short-term rating of P-1 from Moody’s would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been issued or outstanding during the past ten years. Neither the Company nor its banking subsidiary has any subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed debt offerings. Future financing could also include the issuance of common or preferred stock. As mentioned in Note 8 on Common Stock and as discussed further below, in February 2009, the Company entered into an equity distribution agreement with a broker dealer pursuant to which the Company may periodically offer and sell shares of the Company’s common stock having aggregate gross sales proceeds of up to $200 million.
 
Cash and cash equivalents (defined as “Cash and due from banks”, “Federal funds sold and securities purchased under agreements to resell”, and “Interest earning deposits with banks” as segregated in the accompanying balance sheets) was $1.0 billion at March 31, 2009 compared to $1.3 billion at December 31, 2008. The $289.4 million decline includes changes in the various cash flows resulting from the operating, investing and financing activities of the Company, as shown in the accompanying statement of cash flows for March 31, 2009. Operating activities include net income adjusted for certain non-cash items, in addition to changes in the levels of loans held for sale and securities held for trading purposes. During the first quarter of 2009, operating activities used cash of $69.5 million, partly due to activity in these portfolios. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $319.8 million. Most of the cash outflow was due to $855.9 million in purchases of investment securities, partly offset by $237.7 million in proceeds from sales, maturities and pay downs, and a $307.5 million decline in the loan portfolio. Financing activities provided cash of $100.0 million, resulting from increases of $414.3 million in certificates of deposit and $628.4 million in other deposit accounts. These cash inflows were partly offset by decreases of $700.0 million in TAF borrowings and $200.5 million in FHLB advances. Future short-term liquidity needs arising from daily operations are not expected to vary significantly, and the Company believes it will be able to meet these cash flow needs.


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Capital Management
 
The Company and its bank subsidiary maintain strong regulatory capital ratios, which exceed the well-capitalized guidelines under federal banking regulations. Information about the Company’s risk-based capital is shown below:
 
                         
   
                Minimum Ratios
 
                for
 
    March 31
    December 31
    Well-Capitalized
 
(Dollars in thousands)   2009     2008     Banks  
   
 
Risk-adjusted assets
  $ 13,815,101     $ 13,834,161          
Tier I risk-based capital
    1,527,020       1,510,959          
Total risk-based capital
    1,715,965       1,702,916          
Tier I risk-based capital ratio
    11.05 %     10.92 %     6.00 %
Total risk-based capital ratio
    12.42 %     12.31 %     10.00 %
Tier I leverage ratio
    8.93 %     9.06 %     5.00 %
 
 
 
The Company maintains a treasury stock buyback program, and in February 2008 was authorized by the Board of Directors to repurchase up to 3,000,000 shares of its common stock. In 2008, the Company elected to cease market purchases of treasury stock and preserve its cash and capital position. Accordingly, during the quarter ended March 31, 2009 the Company purchased only 11,005 shares of treasury stock at an average cost of $32.41 per share. At March 31, 2009, 2,866,547 shares remained available for purchase under the current Board authorization.
 
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. The Company paid a per share cash dividend of $.24 in the first quarter of 2009, which was a .8% increase compared to the fourth quarter of 2008.
 
Common Equity Offering
 
On February 27, 2009, the Company entered into an equity distribution agreement with a broker dealer, acting as the Company’s sales agent, relating to the offering of the Company’s common stock having aggregate gross sales proceeds of up to $200 million. This offering is described in a prospectus supplement, including the associated base prospectus, which the Company filed with the Securities and Exchange Commission on February 27, 2009.
 
Sales of these shares will be made by means of brokers’ transactions on or through the Nasdaq Global Select Market (“NASDAQ”), trading facilities of national securities associations or alternative trading systems, block transactions and such other transactions as may be agreed upon by the Company and the sales agent, at market prices prevailing at the time of the sale or at prices related to the prevailing market prices. The Company and the sales agent will determine jointly, as often as daily, how many shares to sell under this offering until all shares of common stock subject to the offering have been sold, or until the Company or the sales agent terminate the offering.
 
During the first quarter of 2009, 2,900 shares were issued under this offering. Gross proceeds from these sales were $99 thousand, with an average sale price of $34.06 per share. Commissions paid to the sales agent for the sale of these shares were $1,481. After payment of commissions but before expenses relating to the offering, net proceeds during the first quarter of 2009 totaled $97 thousand, with average net sale proceeds of $33.54 per share.
 
Subsequently, another 685,833 shares were sold during the period April 1 — May 6, 2009 (the “Subsequent Period”), for gross proceeds of $23.6 million, with an average sale price of $34.40 per share. Commissions paid to the sales agent for the sale of these shares were $354 thousand. After payment of commissions but before expenses relating to the offering, net proceeds during the Subsequent Period totaled $23.2 million, with average net sale proceeds of $33.88 per share.


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Commitments 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, which at March 31, 2009 totaled $7.7 billion (including approximately $3.6 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts amounted to $396.5 million and $24.4 million, respectively, at March 31, 2009. Since many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the balance sheet, amounted to $3.3 million at March 31, 2009. 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.
 
The Company periodically purchases various state tax credits arising from third-party property redevelopment. Most of the tax credits are resold to third parties, although some may be retained for use by the Company. During the first three months of 2009, purchases and sales of tax credits amounted to $6.2 million and $6.5 million, respectively, and at March 31, 2009, outstanding purchase commitments totaled $142.8 million. The Company has additional funding commitments arising from several investments in private equity concerns, classified as non-marketable investment securities in the accompanying consolidated balance sheets, amounting to $1.6 million at March 31, 2009. The Company also has unfunded commitments relating to its investments in low-income housing partnerships, which amounted to $2.9 million at March 31, 2009.


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Segment Results
 
The table below is a summary of segment pre-tax income results for the first three months of 2009 and 2008. In the first quarter of 2009, selected business units were realigned between reporting segments so that discount brokerage services and Private Banking accounts were moved from Consumer to Money Management, while portions of indirect lending were moved from Commercial to the Consumer segment. The information presented below for 2008 has been revised to incorporate these changes in order to provide comparable data.
 
                                                 
   
                Money
    Segment
    Other/
    Consolidated
 
(In thousands)   Consumer     Commercial     Management     Totals     Elimination     Totals  
   
 
Three Months Ended March 31, 2009:
                                               
Net interest income
  $ 87,816     $ 56,145     $ 9,978     $ 153,939     $ (3,924 )   $ 150,015  
Provision for loan losses
    (20,619 )     (14,173 )     (271 )     (35,063 )     (8,105 )     (43,168 )
Non-interest income
    35,424       26,539       28,924       90,887       1,544       92,431  
Investment securities losses, net
                            (2,172 )     (2,172 )
Non-interest expense
    (72,812 )     (47,098 )     (26,195 )     (146,105 )     (6,781 )     (152,886 )
 
 
Income before income taxes
  $ 29,809     $ 21,413     $ 12,436     $ 63,658     $ (19,438 )   $ 44,220  
 
 
Three Months Ended March 31, 2008:
                                               
Net interest income
  $ 80,096     $ 48,734     $ 9,267     $ 138,097     $ 2,010     $ 140,107  
Provision for loan losses
    (10,970 )     (1,211 )     (7 )     (12,188 )     (7,812 )     (20,000 )
Non-interest income
    37,565       25,754       29,342       92,661       (501 )     92,160  
Investment securities gains, net
                            23,323       23,323  
Non-interest expense
    (70,188 )     (44,973 )     (24,589 )     (139,750 )     (431 )     (140,181 )
 
 
Income before income taxes
  $ 36,503     $ 28,304     $ 14,013     $ 78,820     $ 16,589     $ 95,409  
 
 
Decrease in income before income taxes:
                                               
 
 
Amount
  $ (6,694 )   $ (6,891 )   $ (1,577 )   $ (15,162 )   $ (36,027 )   $ (51,189 )
 
 
Percent
    (18.3 )%     (24.3 )%     (11.3 )%     (19.2 )%     N.M.       (53.7 )%
 
 
 
Consumer
 
For the three months ended March 31, 2009, income before income taxes for the Consumer segment decreased $6.7 million, or 18.3%, from the first quarter of 2008. This decrease was mainly due to an increase of $9.6 million in net loan charge-offs, occurring mainly in marine and recreational vehicle, consumer credit card, and other consumer loans. In addition, non-interest income declined $2.1 million, coupled with an increase of $2.6 million in non-interest expense. Partly offsetting these effects was a $7.7 million increase in net interest income. The increase in net interest income resulted mainly from a $22.3 million decrease in deposit interest expense, party offset by a decline of $11.9 million net allocated funding credits assigned to the Consumer segment’s loan and deposit portfolios and a $2.7 million decrease in loan interest income. The decrease in non-interest income resulted mainly from declines in deposit account fees (mainly overdraft charges), bank card fee income (primarily credit card fees) and losses on the disposal of assets acquired through foreclosure or repossession. These declines were partly offset by an increase in mortgage banking revenue due to refinancing activity. Non-interest expense grew $2.6 million, or 3.7%, over the previous year due to higher FDIC insurance expense, loan servicing fees, teller services expense and online banking costs, partly offset by lower marketing expense.


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Commercial
 
For the three months ended March 31, 2009, income before taxes for the Commercial segment decreased $6.9 million, or 24.3%, compared to the same period in the previous year. Net loan charge-offs in this segment totaled $14.2 million in the first quarter of 2009, an increase of $13.0 million over the first quarter of 2008. During 2009, higher charge-offs occurred on construction and business loans. Net interest income increased $7.4 million, or 15.2%, due to lower net allocated funding costs of $33.7 million and a decrease in deposit interest expense of $2.3 million, which were partly offset by a $28.6 million decline in loan interest income. Non-interest income increased by $785 thousand, or 3.0%, over the previous year due to higher cash management fees and bank card fees (mainly corporate card), partly offset by lower gains on renewals and sales of equipment leases and lower tax credit sales income. Non-interest expense increased $2.1 million, or 4.7%, over the previous year, mainly due to higher salaries and benefits expense, corporate management fees, FDIC insurance expense, and allocated cash management charges. These increases were partly offset by a $2.3 million impairment charge on foreclosed land which was recorded in the first quarter of 2008.
 
Money Management
 
Money Management segment pre-tax profitability for the three months ended March 31, 2009 decreased $1.6 million, or 11.3%, from the same period in the previous year. Net interest income increased $711 thousand, or 7.7%, and was impacted by a $3.6 million decline in deposit interest expense and a $3.4 million decline in overnight borrowings expense, offset by a $5.2 million decrease in assigned net funding credits. Non-interest income declined $418 thousand, or 1.4%, from the prior year due to lower trust fee income, partly offset by higher bond trading income. Non-interest expense increased $1.6 million, or 6.5%, mainly due to higher FDIC insurance expense and allocated processing costs.
 
The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing policies, the excess of the total provision over charge-offs is not allocated to a business segment, and is included in this category. The pre-tax profitability of this category was lower than in the previous period by $36.0 million. This decline was mainly due to unallocated amounts recorded in the first quarter of 2008: securities gains of $22.2 million and an $8.8 million reduction in a Visa litigation obligation, both related to the bank subsidiary’s membership in Visa. 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, declined $5.9 million.
 
Impact of Recently Issued Accounting Standards
 
The Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, on January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that provides the highest priority to measurements using quoted prices in active markets and the lowest priority to measurements based on unobservable data. The Statement does not require any new fair value measurements. The Statement also modifies the guidance for initial recognition of fair value for certain derivative contracts held by the Company. Former accounting guidance precluded immediate recognition in earnings of an unrealized gain or loss, measured as the difference between the transaction price and fair value of these instruments at initial recognition. This guidance was nullified by the Statement. In accordance with the new recognition requirements of the Statement, the Company increased equity by $903 thousand on January 1, 2008.
 
The Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, at December 31, 2006. The Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. Beginning in 2008, the Statement also


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required an employer to measure plan assets and obligations as of the date of its fiscal year end statement of financial position. In order to transition to a fiscal year end measurement date, the Company used earlier measurements to allocate net periodic benefit cost for the period between September 30, 2007 (the previous measurement date) and December 31, 2008 proportionately between retained earnings and net periodic benefit cost recognized during 2008. The Company recorded the transition adjustment, which increased retained earnings by $348 thousand, on December 31, 2008.
 
In September 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. This EITF Issue addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee based on the substantive agreement with the employee, because the postretirement benefit obligation is not effectively settled through the purchase of the insurance policy. The EITF Issue was effective January 1, 2008, and the Company’s adoption on that date resulted in a reduction to equity of $716 thousand.
 
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised), “Business Combinations”. The Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting be used for business combinations, but broadens the scope of Statement 141 and contains improvements to the application of this method. The Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Costs incurred to effect the acquisition are to be recognized separately from the acquisition. Assets and liabilities arising from contractual contingencies must be measured at fair value as of the acquisition date. Contingent consideration must also be measured at fair value as of the acquisition date. The Statement also changes the accounting for negative goodwill arising from a bargain purchase, requiring recognition in earnings instead of allocation to assets acquired. For business combinations achieved in stages (step acquisitions), the assets and liabilities must be recognized at the full amounts of their fair values, while under former guidance the entity was acquired in a series of purchases, with costs and fair values being identified and measured at each step. The Statement applies to business combinations occurring after January 1, 2009.
 
Also in December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”. The Statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Statement establishes a single method of accounting for changes in a parent’s ownership interest if the parent retains its controlling interest, deeming these to be equity transactions. Such changes include the parent’s purchases and sales of ownership interests in its subsidiary and the subsidiary’s acquisition and issuance of its ownership interests. The Statement also requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. It changes the way the consolidated income statement is presented, requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest, and requires disclosure of these amounts on the face of the consolidated statement of income. The Statement was effective on January 1, 2009, and its adoption did not have a significant effect on the Company’s consolidated financial statements.
 
In June 2008, the FASB posted Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This pronouncement defines unvested stock awards which contain nonforfeitable rights to dividends as securities which participate in undistributed earnings. Such participating securities must be included in the computation of earnings per share under the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. The Company was required to apply the two-class method to its computation of earnings per share effective January 1, 2009, and its application did not have a significant effect on the computation of earnings per share attributable to common shareholders.


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In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. The amendment requires additional disclosures about asset investment policies and strategies for defined benefit and other postretirement plans. Disclosures about plan asset categories are also required, including fair value measurements, valuation techniques, risk concentrations, and rate of return assumptions. The disclosures are required on an annual basis, effective with the December 31, 2009 financial statements.
 
In January 2009, the FASB issued Staff Position No. EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20”. The amendment’s purpose is to achieve a more consistent determination of whether an other-than-temporary impairment has occurred on beneficial interests. Specifically, the new pronouncement no longer requires the usage of market participant assumptions about future cash flows in determining other-than-temporary impairment under the EITF 99-20 model, and aligns that model’s impairment guidance with SFAS 115. The Company has not yet been required to assess impairment under EITF 99-20, and its assessments have been in accordance with SFAS 115 guidelines.
 
In April 2009, the FASB issued Staff Position (FSP) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. The FSP provides additional guidance on reliance on transaction prices or quoted prices when estimating fair value in accordance with FAS 157, when market volume and activity have significantly decreased. The FSP reaffirms the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. However, it requires additional analysis of transaction prices or quoted prices, and the consideration of adjustments to these inputs, depending on market conditions and the orderliness of the transactions. The Company adopted the FSP in March 2009, and its application did not result in a change in valuation techniques and related inputs.
 
The FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, in April 2009. This FSP requires certain disclosures about the fair value of financial instruments, previously required only in annual financial statements, in interim period financial statements as well. These requirements extend to all financial instruments for which it is practicable to estimate fair value, whether fair value is recognized or not recognized in the statement of financial position. The Company adopted the FSP in March 2009 and has presented this information in Note 15 on Fair Value of Financial Instruments in the accompanying consolidated financial statements.
 
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. The FSP’s purpose is to make guidance on other-than-temporary impairment for debt securities more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The FSP includes guidance on evaluating whether an impairment of a debt security is other than temporary, determination of the amount of impairment to be recognized in earnings and other comprehensive income, and subsequent accounting for these securities. It requires a new presentation on the statement of earnings which shows the total impairment, offset for that amount considered noncredit-related and recognized in other comprehensive income. Various additional disclosures are required for investments in an unrealized loss position, in addition to information about the methodologies and inputs used in calculating the portion of impairment recognized in earnings. The Company adopted the FSP in March 2009, and has presented the required disclosures in Note 4 on Investment Securities in the accompanying consolidated financial statements.


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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
 
Three Months Ended March 31, 2009 and 2008
 
                                                 
   
    First Quarter 2009     First Quarter 2008  
          Interest
    Avg. Rates
          Interest
    Avg. Rates
 
    Average
    Income/
    Earned/
    Average
    Income/
    Earned/
 
(Dollars in thousands)   Balance     Expense     Paid     Balance     Expense     Paid  
   
 
ASSETS:
                                               
Loans:
                                               
Business(A)
  $ 3,340,514     $ 29,746       3.61 %   $ 3,503,869     $ 48,761       5.60 %
Real estate – construction and land
    816,433       6,716       3.34       684,388       9,958       5.85  
Real estate – business
    2,140,638       26,923       5.10       2,233,985       36,024       6.49  
Real estate – personal
    1,620,844       22,858       5.72       1,526,240       22,584       5.95  
Consumer
    1,579,456       26,950       6.92       1,635,503       29,901       7.35  
Home equity
    504,820       5,361       4.31       458,794       6,876       6.03  
Student
    353,650       3,220       3.69                    
Consumer credit card
    734,510       21,554       11.90       761,197       21,081       11.14  
Overdrafts
    8,388                   14,118              
 
 
Total loans
    11,099,253       143,328       5.24       10,818,094       175,185       6.51  
 
 
Loans held for sale
    463,477       3,432       3.00       312,532       3,917       5.04  
Investment securities:
                                               
U.S. government and federal agency
    133,905       1,192       3.61       304,270       3,108       4.11  
State and municipal obligations(A)
    747,219       9,455       5.13       505,539       7,128       5.67  
Mortgage and asset-backed securities
    2,826,302       36,237       5.20       2,373,242       29,672       5.03  
Other marketable securities(A)
    142,166       2,046       5.84       113,995       1,402       4.95  
Trading securities(A)
    16,564       123       3.01       50,006       732       5.89  
Non-marketable securities(A)
    141,244       1,425       4.09       111,429       1,598       5.77  
 
 
Total investment securities
    4,007,400       50,478       5.11       3,458,481       43,640       5.08  
 
 
Federal funds sold and securities purchased under agreements to resell
    109,889       114       .42       491,227       3,401       2.78  
Interest earning deposits with banks
    600,608       449       .30                    
 
 
Total interest earning assets
    16,280,627       197,801       4.93       15,080,334       226,143       6.03  
 
 
Less allowance for loan losses
    (172,964 )                     (134,926 )                
Unrealized gain (loss) on investment securities
    (48,658 )                     64,340                  
Cash and due from banks
    378,038                       460,145                  
Land, buildings and equipment, net
    414,954                       411,709                  
Other assets
    340,052                       346,732                  
 
 
Total assets
  $ 17,192,049                     $ 16,228,334                  
 
 
                                                 
LIABILITIES AND EQUITY:                                                
Interest bearing deposits:
                                               
Savings
  $ 417,474       155       .15     $ 381,498       360       .38  
Interest checking and money market
    7,881,388       7,898       .41       7,177,754       20,254       1.13  
Time open & C.D.’s of less than $100,000
    2,092,092       14,747       2.86       2,317,963       25,259       4.38  
Time open & C.D.’s of $100,000 and over
    2,093,235       11,300       2.19       1,589,816       17,300       4.38  
 
 
Total interest bearing deposits
    12,484,189       34,100       1.11       11,467,031       63,173       2.22  
 
 
Borrowings:
                                               
Federal funds purchased and securities sold under agreements to repurchase
    994,807       1,230       .50       1,628,247       11,752       2.90  
Other borrowings(B)
    1,207,688       8,529       2.86       730,074       7,521       4.14 <