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UNITED STATES

Form 10-K

For the Fiscal Year Ended December 31, 2001 — Commission File No. 0-2989

Commerce Bancshares, Inc.

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Title of class

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.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

As of February 20, 2002, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $2,435,000,000.

As of February 20, 2002, there were 65,488,542 shares of Registrant’s $5 Par Value Common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement with respect to the annual meeting of shareholders to be held on April 17, 2002, are incorporated in Part III.

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Commerce Bancshares, Inc.

Form 10-K

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General

      Commerce Bancshares, Inc. (the “Company”), a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Missouri on August 4, 1966. The Company presently owns all of the outstanding capital stock of four national banking associations, which are headquartered in Missouri, Illinois, Kansas, and Nebraska. The Nebraska bank is limited in its activities to the issuance of credit cards. The remaining three banking subsidiaries engage in general banking business, providing a broad range of retail, corporate, investment and private banking products and services to individuals and businesses. The Company also owns, directly or through its banking subsidiaries, various non-banking subsidiaries. Their activities include owning real estate which is leased to the Company’s banking subsidiaries, underwriting credit life and credit accident and health insurance, selling property and casualty insurance (relating to consumer loans made by the banking subsidiaries), venture capital investment, securities brokerage, and mortgage banking. The Company owns two second tier holding companies that are the direct owners of several of the above mentioned banks. The table setting forth the names and locations of the Company’s subsidiaries is included as Exhibit 21 hereto.

      The Company is the largest bank holding company headquartered in Missouri. Its principal offices are located at 1000 Walnut, Kansas City, Missouri (telephone number 816-234-2000). At December 31, 2001, the Company had consolidated assets of $12.9 billion, consolidated loans of $7.6 billion, and consolidated deposits of $10.0 billion.

      The Company’s Missouri bank charter comprises approximately 84% of the banking assets of the Company. Missouri, being centrally located in the United States, provides a natural site for production and distribution facilities and also serves as a transportation hub. The economy is well-diversified with many major industries represented, such as automobile manufacturing, aircraft manufacturing, food production and agricultural production together with related industries. Missouri has a relatively balanced real estate market and the Missouri unemployment rate is generally at or below the national average. There are no significant economic problems in general for the communities served by the Company. The adjacent states of Kansas and Illinois share many of the same characteristics in the communities being served and their local economies are generally stable and not abnormally weakened by the national economy.

      The Company regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions eligible for bank holding company ownership or control. In addition, the Company regularly considers the potential disposition of certain of its assets and branches. As a general rule, the Company publicly announces any material acquisitions or dispositions when a definitive agreement has been reached. The Company acquired Breckenridge Bancshares Company and its subsidiary, Centennial Bank, in March 2001. For additional information this acquisition and other branch disposition activity, refer to pages 8 and 43.

Operating Segments

      The Company is managed in three operating segments. The Consumer segment includes the retail branch network, consumer installment lending, bankcard, student lending, and discount brokerage services. It provides services through an extensive full-service branch network, and through the use of alternative delivery channels such as PC Banking and telephone banking. In 2001, this segment contributed 57% of total segment pre-tax income. The Commercial segment provides a full array of corporate lending, leasing, and international services, as well as business, government deposit and cash management services. It contributed 33% of total segment pre-tax income. The Money Management segment provides traditional trust and estate tax planning services, and advisory and discretionary investment portfolio management services. This segment also operates the Company’s family of proprietary mutual funds, which are available for sale to both trust and general retail customers. Fixed income investments are sold through the segment’s Capital Markets group. At December 31, 2001, the Money Management

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Supervision and Regulation

      The Company, as a bank holding company, is primarily regulated by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956 (BHC Act). Under the BHC Act the Federal Reserve Board’s prior approval is required in any case the Company proposes to acquire all or substantially all of the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. The BHC Act also prohibits, with certain exceptions, the Company from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any nonbanking company. Under the BHC Act, the Company may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries and may not acquire voting control of nonbanking companies unless the Federal Reserve Board determines such businesses and services to be closely related to banking. When reviewing bank acquisition applications for approval, the Federal Reserve Board considers, among other things, each subsidiary bank’s record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended (CRA). The Missouri, Kansas and Nebraska bank charters have current CRA ratings of “outstanding”, and the Illinois charter has a “satisfactory” rating.

      The Company is required to file with the Federal Reserve Board various reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board may also make examinations of the Company and each of its subsidiaries. The Company’s four banking subsidiaries are organized as national banking associations and are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC). All banks are also subject to regulation by the Federal Deposit Insurance Corporation. In addition, there are numerous other federal and state laws and regulations which control the activities of the Company and its banking subsidiaries, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuance of securities, dividend payments, and extensions of credit. This regulatory framework is intended primarily for the protection of depositors and the preservation of the federal deposit insurance funds, and not for the protection of security holders. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to employ assets and maximize income.

      Under Federal Reserve policy, the Company is expected to act as a source of financial strength to each of its bank subsidiaries and to commit resources to support each bank subsidiary in circumstances when it might not otherwise do so. The Federal Reserve Board may prohibit the payment of dividends by bank holding companies if their actions constitute unsafe or unsound practices. The OCC limits the payment of dividends by bank subsidiaries in any calendar year to the net profit of the current year combined with the retained net profits of the preceding two years. The payment of dividends by the bank subsidiaries may also be affected by factors such as the maintenance of adequate capital. At December 31, 2001, all of the subsidiary banks were “well-capitalized” under regulatory capital adequacy standards, as further discussed on page 57.

      These laws and regulations are under constant review by various agencies and legislatures, and are subject to sweeping change. Most recently was the passage of financial modernization legislation in late 1999, the Gramm-Leach-Bliley Act (GLB Act), which contains major changes in laws that previously kept the banking industry largely separate from the securities and insurance industries. The GLB Act authorizes the creation of a new kind of financial institution, known as a “financial holding company” and a new kind of bank subsidiary called a “financial subsidiary”, which may engage in a broader range of investment banking, insurance agency, brokerage, and underwriting activities. The GLB Act also includes privacy provisions that limit banks’ abilities to disclose non-public information about customers to non-affiliated entities. Banking organizations are not required to become financial holding companies, but instead may

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      In addition to its regulatory powers, the Federal Reserve impacts the conditions under which the Company operates by its influence over the national supply of bank credit. The Federal Reserve Board employs open market operations in U.S. Government securities, changes in the discount rate on bank borrowings, and changes in reserve requirements on bank deposits in implementing its monetary policy objectives. These instruments are used in varying combinations to influence the overall level of bank loans, investments and deposits, the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets and the level of inflation. The monetary policies of the Federal Reserve have had a significant effect on the operating results of financial institutions in the past, notably in the year just ended, and will continue to do so in the future. In view of changing conditions in the national economy and in the money markets, as well as the effect of credit policies of monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels or loan demand, or their effect on the financial statements of the Company.

Competition

      The Company has locations in regional markets throughout Missouri, Kansas and central Illinois, where the Company faces intense competition from hundreds of financial service providers. The Company competes with national and state banks for deposits, loans and trust accounts, and with savings and loan associations and credit unions for deposits. In addition, the Company competes with other financial intermediaries such as securities brokers and dealers, personal loan companies, insurance companies, finance companies, and certain governmental agencies. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and customer convenience, such as location of offices. The passage of the GLB Act, which removed barriers between banking and the securities and insurance industries, has resulted in greater competition among these industries.

Employees

      The Company and its subsidiaries employed 4,502 persons on a full-time basis and 800 persons on a part-time basis at December 31, 2001. The Company provides a variety of benefit programs including retirement and stock ownership plans as well as group life, health, accident, and other insurance. The Company also maintains training and educational programs designed to prepare employees for positions of increasing responsibility.

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Statistical Disclosure

      The information required by Securities Act Guide 3 — “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below.

      The Missouri, Illinois, and Kansas-chartered bank subsidiaries maintain their main offices in various office buildings listed below. These are owned by the bank subsidiary or a subsidiary of the bank. The banks lease unoccupied premises to the public. The buildings are located in the downtown areas of the cities they serve.

      The Nebraska credit card bank leases its offices in Omaha, Nebraska. Additionally, certain other installment loan and credit card functions operate out of leased offices in downtown Kansas City. The Company also has 190 branch locations in Missouri, Illinois and Kansas which are owned or leased, and an additional 148 off-site ATM locations.

      The information required by this item is set forth under the caption “Commitments and Contingencies” on page 62.

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      No matters were submitted during the fourth quarter of 2001 to a vote of security holders through the solicitation of proxies or otherwise.

Commerce Bancshares, Inc. (Parent)

      The following table sets forth the high and low prices of actual transactions for the Company’s common stock (CBSH) and cash dividends paid for the periods indicated (restated for the 5% stock dividend distributed in December 2001).

      Commerce Bancshares, Inc. common shares are publicly traded on The Nasdaq Stock Market (NASDAQ). NASDAQ is a highly-regulated electronic securities market comprised of competing Market Makers whose trading is supported by a communications network linking them to quotation dissemination, trade reporting, and order execution systems. The Company had 5,363 shareholders of record as of December 31, 2001.

      See below in Item 7 for Selected Financial Data.

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      The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. The historical trends reflected in the financial information presented below are not necessarily reflective of anticipated future results.

Key Ratios

Selected Financial Data

Results of Operations

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      The Company achieved its 11th consecutive year of record earnings in 2001, with net income of $182.0 million. This was a 1.9% increase over net income in 2000. Diluted earnings per share was $2.73, an increase of 3.8% over 2000. The return on average assets was 1.55%, the return on equity was 14.88%, and the efficiency ratio was 58.25%. The increase in net income over last year resulted from 9.8% growth in non-interest income and good control over non-interest expense. Net interest income declined 2.7% because of the slowing economy and strong interest rate reductions by the Federal Reserve. During 2001, the Federal Reserve reduced the federal funds target rate eleven times in an effort to stimulate a slowing economy. These actions had the related effect of reducing the prime rate from 9.5% in early January to 4.75% by year end. The rate reductions caused a significant portion of the Company’s earning assets to reprice downward faster than its interest bearing liabilities, resulting in lower net interest income. Non-interest income rose $24.7 million over 2000, mainly in the areas of deposit account charges, trust fees, and trading account profits. Non-interest expense increased $9.3 million, or 2.2%, and included a 7.0% increase in salaries and employee benefits. The provision for loan losses was $1.3 million higher than in the previous year mainly as a result of higher commercial loan losses.

      Net income in 2000 was $178.6 million, which was a $12.4 million, or 7.4%, increase over 1999. Diluted earnings per share increased 11.9% to $2.63 compared to $2.35 in 1999. The return on average assets was 1.62% and the return on equity was 16.22%. The increase in net income resulted from 3.1% growth in net interest income, 7.0% growth in non-interest income and flat credit costs, partly offset by non-interest expense, which was controlled to a 2.7% increase. Net interest income increased $14.7 million over 1999 mainly due to average loan growth of $585.2 million coupled with increased earning assets rates. Interest rate increases by the Federal Reserve late in 1999 and early in 2000 allowed a substantial portion of the loan portfolio to reprice rapidly, resulting in higher earnings rates. Loan growth during 2000 was mainly funded by maturities of investment securities, which generally yield lower rates than loans, thus creating a more profitable asset mix. Non-interest income rose $16.6 million, mainly in the areas of credit card fees, trust revenues, and gains realized on venture capital activity. Non-interest expense grew $11.4 million, partly due to increases in occupancy, data processing expense, and a substantial charitable contribution. Salaries and employee benefits expense rose $5.4 million, or 2.5%, over 1999. Costs were also well-controlled in several other expense areas, including equipment, supplies and communication, and marketing.

      On March 1, 2001, the Company acquired Breckenridge Bancshares Company and its subsidiary, Centennial Bank. The bank had three locations in the St. Louis area, with assets of $254 million, loans of $189 million, and deposits of $216 million. Common stock valued at $34.4 million was issued by the Company as consideration in the transaction. The acquisition was accounted for as a pooling of interests transaction; however, the Company’s financial statements were not restated because restated amounts did not differ materially from historical results.

      In 2001, the Company sold the assets and liabilities of one bank branch and the premises of two other branches as part of a continuing process of evaluating profit potential in the branch network. Pre-tax gains of $2.2 million were realized on these sales, which included loans of $662 thousand, premises of $714 thousand and deposits of $5.3 million. During 2000, the Company sold four bank branches with $42.7 million in loans and $71.5 million in deposits. Pre-tax gains of $5.9 million were realized on these transactions.

      The Company distributed a 5% stock dividend for the eighth consecutive year on December 14, 2001. All per share and average share data in this report has been restated to reflect the stock dividend.

Net Interest Income

      Net interest income, the largest source of revenue, results from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates.

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      Net interest income was $467.9 million in 2001, $480.7 million in 2000 and $466.0 million in 1999. Compared to the prior year, net interest income decreased $12.7 million, or 2.7%, in 2001 compared to an increase of $14.7 million, or 3.1%, in 2000. As previously mentioned, during 2001 a series of rate reductions by the Federal Reserve caused a significant portion of the Company’s earning assets to reprice downward. Most of these earning assets were loans, whose interest rates are tied to variable rate indices or the federal funds rate. While these rate reductions also allowed the deposit base to reprice downward, the overall decline in deposit rates was not enough to offset the effects of the change in asset rates. The net effect of the rate declines was to lower net interest income by $22.4 million (on a tax equivalent basis). The change in the economy also had an impact on growth in both earning assets and liabilities. Average deposit balances increased strongly during 2001, with total deposits growing by $526.3 million, or 5.9%. Average loans were essentially flat compared to 2000. The added liquidity from the deposit growth was invested in the longer term investment securities portfolio and in overnight investments. This added to the earning asset base, which increased net interest income. The effect of these changes in volume to both earning assets and interest bearing liabilities was to increase net interest income by $9.0 million. When combining

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      Tax equivalent interest income was $753.9 million in 2001, $815.5 million in 2000 and $754.7 million in 1999; and represented a decrease of $61.6 million, or 7.6%, in 2001 and an increase of $60.8 million, or 8.1%, in 2000. Average loan balances were flat during 2001, while loan yields declined 94 basis points. Increased liquidity provided by deposit growth allowed the Company to purchase investment securities, which increased an average of $292.5 million, and overnight investments in federal funds and repurchase agreements, which increased $314.3 million. However, average rates earned on investment securities and overnight investments fell 59 and 225 basis points, respectively, during 2001. The effect of interest rate declines on earning assets, especially loan rates, more than offset the income provided by higher average investment balances. During 2001, average loans increased $7.9 million and comprised 72% of average earning assets, down from 77% in 2000. During 2000, average loan balances grew $585.2 million, or 8.1%, with a corresponding decline in investment securities of $510.6 million. Loan yields improved 54 basis points during 2000, with the largest increase occurring in the business loan category.

      Total interest expense was $283.1 million in 2001, $331.5 million in 2000 and $284.6 million in 1999. Interest expense decreased $48.5 million, or 14.6% from 2000 due to rate declines of 68 basis points on deposits, 259 basis points on overnight borrowings, and 165 basis points on longer-term borrowings. The decline in deposit interest resulted mainly from rate reductions of 176 basis points paid on the Company’s Premium Money Market deposit accounts. Average interest bearing deposits grew $756.3 million, or 9.9%, during 2001, which provided the Company with additional funds available for investment. In 2000 compared to 1999, interest expense increased $46.9 million, or 16.5%, because of higher average rates paid on interest bearing deposits and short-term borrowings. The increase in deposit interest was mainly due to a 93 basis point increase in rates on Premium Money Market deposit accounts. Also, average rates paid on C.D.’s under $100,000 increased 39 basis points. Both average balances and rates paid on short-term borrowings rose during 2000. Partly offsetting these increases was a 3.5% decline in average interest bearing deposit balances. Premium and other money market deposits have represented 60% of total average interest bearing deposits during the past three years.

Provision for Loan Losses

      The provision for loan losses was $36.4 million in 2001, compared with $35.2 million in 2000 and $35.3 million in 1999. The provision for loan losses is recorded to bring the allowance for loan losses to a level deemed appropriate by management based on the factors mentioned in the following “Allowance for Loan Losses” section of this discussion.

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Non-Interest Income

     Non-interest income rose 9.8%, or $24.7 million, during 2001 to $277.5 million. Deposit account fees increased $13.5 million, or 19.0%, mainly due to growth in overdraft fees and commercial cash management revenue. Trust fees increased $4.2 million as a result of stronger personal trust business and included approximately $1.2 million in probate fees received from one trust customer. This growth was achieved in an environment of declining trust account asset valuations upon which fees are charged. The aggregate value of managed assets was $9.6 billion at December 31, 2001, compared to $10.1 billion at December 31, 2000. Custodial trust assets totaled $7.0 billion at year end 2001 and $6.1 billion at year end 2000. Credit card fee income rose $3.1 million over 2000 and was reflective of continued growth in debit card fees, but was partly offset by lower fee income from credit cardholders and merchant business. The latter was due in part to lower retail sales and lower merchant profit margins, especially during the second half of 2001. Bond trading account profits improved $6.7 million, or 78.4%, as a result of significantly higher sales of fixed income securities to correspondent bank and other commercial customers. Mortgage banking revenues rose $2.7 million largely due to an increase in personal mortgage loan origination volume, which was up 43.3%, and higher gains on sales of these loans to secondary investors. The above increases to income were partly offset by lower gains of $3.7 million on sales of banking branches, as fewer branches were sold during 2001 than in 2000. In addition, losses in a venture capital partnership in which the Company has an equity interest resulted in lower income. This was partly offset by higher net gains on securities transactions in the Company’s investment securities portfolio, as shown in the table below.

      Non-interest income totaled $252.8 million in 2000, which was a $16.6 million, or 7.0%, increase over 1999. Increased credit card transaction fees accounted for $7.0 million of the increase. These fees were higher due to stronger merchant and cardholder sales volumes, and an increase in debit card transactions. Trust fees increased $2.8 million in 2000 due to account growth, increases in the value of assets managed, and competitive pricing adjustments made in the third quarter of 2000. Deposit account charges increased $2.5 million, due mainly to improvements in overdraft fee collection. Other significant items contributing to non-interest income were $3.1 million in additional gains on the sales of banking branches, and growth in cash management fee production. The venture capital partnership in which the Company participates realized significant gains on investment sales in both 2000 and 1999. Partially offsetting these increases was a $1.7 million decline in trading account profits, which were negatively impacted by lower demand from correspondent bank customers who had less liquidity to purchase investments. In addition, mortgage banking revenue declined $1.4 million compared to the previous year due to lower gains on sales of personal mortgage loans. Net gains on securities transactions in 2000 decreased slightly compared to the previous year.

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      Shown below is a summary of realized gains and losses on securities transactions recorded by the Parent and its consolidated subsidiaries. It also shows the Company’s interest in the net earnings of a venture capital partnership investment which is recorded in other non-interest income.

Non-Interest Expense

      Non-interest expense was $439.6 million in 2001, an increase of $9.3 million, or 2.2%, compared to 2000. Salaries expense increased $13.6 million over the previous year due to merit increases for full-time employees. Employee benefits expense increased $1.8 million mainly because of higher social security taxes and employer-matching 401K contributions. Net occupancy and equipment costs grew 5.4% and 6.4%, respectively, over 2000 and were partly offset by declines in supplies and communication, data processing and marketing. Charitable contributions declined as a result of a large contribution made in 2000. Losses related to check processing declined due to several significant recoveries of previous years’ losses.

      Non-interest expense was $430.4 million in 2000, which represented a 2.7% increase over 1999. Salaries and employee benefits, the largest components of non-interest expense, were well-controlled during 2000. Salary increases were held to a 3.1% increase in 2000, and employee benefits decreased slightly. The rise in salary expense was due to additional employee incentive payments and merit increases. This rise was partly offset by a reduction in full-time equivalent employees of over 200 due to lower contract programmer staffing, and a reduction in retail branch facilities. The benefits decrease occurred because of a reduction in pension plan expense, resulting from lower service cost benefits earned and increases in the value of plan assets. Net occupancy expense rose $2.4 million over 1999, mainly due to lower outside tenant revenues associated with a Kansas City office building renovation currently in process. Data processing and software expense increased $4.3 million over 1999, mainly because of higher PC banking costs, and volume related processing fees, which increase with growth in customers, products,

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Income Taxes

      Income tax expense was $87.4 million in 2001, compared to $89.3 million in 2000 and $81.6 million in 1999. Income tax expense decreased 2.2% from 2000, compared to a .5% increase in pre-tax income. The effective tax rate on income from operations was 32.4%, 33.3% and 32.9% in 2001, 2000 and 1999, respectively. The effective tax rates were lower than the federal statutory rate of 35% mainly due to tax exempt interest on state and municipal obligations, federal tax credits realized, and various other tax initiatives. In addition, in 2000, appreciated securities were contributed to a charitable organization in exchange for state tax credits, which resulted in a $2.0 million tax reduction. These factors were partly offset by state and local income taxes and non-deductible goodwill amortization.

Financial Condition

Loan Portfolio Analysis

      A schedule of average balances invested in each category of loans appears on page 30. Classifications of consolidated loans by major category at December 31 for each of the past five years are as follows:

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      The contractual maturities of loan categories at December 31, 2001, and a breakdown of those loans between fixed rate and floating rate loans are as follows:

     Total loans declined $268.2 million, or 3.4%, during 2001 compared to growth of $329.8 million, or 4.4%, during 2000. The decline in 2001 came principally from business loans, personal real estate, and personal loans, which declined 9.5%, 7.9% and 7.7%, respectively. These decreases were partly offset by growth in business real estate loans of 15.3%. In 2000, loan growth was primarily the result of growth in business and business real estate loans.

      The Company currently generates approximately 31% of its loan portfolio in the St. Louis regional market and 28% in the Kansas City regional market. The portfolio is diversified from a business and retail standpoint, with 57% in loans to businesses and 43% in loans to individual consumers. A balanced approach to loan portfolio management and an aversion toward credit concentrations, from an industry, geographic and product perspective, have enabled the Company to sustain low levels of problem loans and loan losses.

      Total business loans amounted to $2.41 billion at December 31, 2001, compared to $2.66 billion at December 31, 2000, a decrease of $252.1 million, or 9.5%. The decline was predominately from portfolio decreases in the Kansas City and St. Louis markets. This group of loans is comprised primarily of loans to customers in the regional trade area of the bank subsidiaries in the central Midwest, encompassing the states of Missouri, Kansas, Illinois and adjacent Midwestern markets. The portfolio is diversified from an industry standpoint and includes businesses engaged in manufacturing, wholesaling, retailing, agribusiness, insurance, financial services, public utilities, and other service businesses. Emphasis is upon middle-market and community businesses with known local management and financial stability. The bank subsidiaries participate in credits of large, publicly traded companies when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. Consistent with management’s strategy and emphasis upon relationship banking, most borrowing customers also maintain deposit accounts and utilize other banking services. There were net loan charge-offs in this category of $9.1 million in 2001 compared to $4.6 million in 2000. Non-accrual business loans increased to $22.6 million (.9% of business loans) at December 31, 2001, and includes two business loans totaling $12.5 million which were placed on non-accrual in 2001. Non-accrual business loans at December 31, 2000, amounted to $9.6 million (.4% of business loans). Opportunities for growth in business loans

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      The portfolio of loans in this category amounted to $412.7 million at December 31, 2001, compared to $377.6 million at year end 2000, reflecting growth of $35.1 million, or 9.3%. Non-accrual loans in this category decreased to $501 thousand at year end 2001 compared to $1.8 million at year end 2000. The portfolio consists of residential construction, commercial construction and land development loans, predominantly in the local markets of the Company’s banking subsidiaries. Commercial construction loans are for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, strip shopping centers, and other commercial properties. Exposure to larger speculative office and rental space remains low. Residential construction and land development loans are primarily for projects located in the Kansas City and St. Louis metropolitan areas. The Company experienced $49 thousand net charge-offs in 2001 compared to $118 thousand net recoveries in 2000. Management is not aware of any significant adverse exposure in this category.

      Total business real estate loans were $1.51 billion at December 31, 2001, resulting from an increase of $200.0 million, or 15.3%. Growth in these loans occurred in the Company’s major markets in Missouri, Kansas and Illinois. At December 31, 2001, non-accrual balances amounted to $5.4 million, or .4% of the loans in this category, compared to $7.9 million at year end 2000. The Company experienced net charge-offs of $90 thousand in 2001 and $1.1 million in 2000. This category includes mortgage loans secured by commercial properties which are primarily located in the local and regional markets of the affiliate banks.

      The mortgage loans in this category are extended, predominantly, for owner-occupied residential properties. At December 31, 2001, there were $1.29 billion in loans outstanding compared to $1.40 billion at December 31, 2000, reflecting a decrease of $109.8 million, or 7.9%. The Company originates both adjustable rate and fixed rate mortgage loans. The Company retains adjustable rate mortgage loans, but sells fixed rate loans to other organizations. During 2001, in a declining rate environment, more fixed rate loans were originated but not retained, causing the decline in loans. The Company typically does not experience significant problem credits in this category. There were net charge-offs of $370 thousand in 2001 compared to $194 thousand in 2000. The non-accrual balances of loans in this category decreased to $147 thousand at December 31, 2001, compared to $264 thousand at year end 2000. The five year history of net charge-offs on the personal real estate loan category reflects nominal losses, and credit quality is considered to be strong.

      Total personal banking loans were $1.51 billion at December 31, 2001, and reflected a decrease of $126.8 million, or 7.7%, from the previous year. At December 31, 2001, personal banking loans consisted of installment loans (mainly auto) of $1.02 billion, home equity loans of $253.3 million and student loans of $238.1 million. In addition, $365.6 million were outstanding in unused home equity lines of credit, which can be drawn at the discretion of the borrower. These home equity lines are secured by first or second mortgages on residential property of the borrower. The underwriting terms for the home equity line product permit borrowing availability, in the aggregate, generally up to 80% or 90% of the appraised value of the collateral property. Given reasonably stable real estate values over time, the collateral margin improves with the regular amortization of mortgage loans. Approximately 36% of the loans in the personal banking category are extended on a floating interest rate basis. Net charge-offs were $8.8 million in 2001

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      Total credit card loans amounted to $510.3 million at December 31, 2001, compared to $524.9 million at December 31, 2000. The credit card portfolio is concentrated within regional markets served by the Company. Approximately 60% of the households in Missouri that own a Commerce credit card product also maintain a deposit relationship with a subsidiary bank. The Company has a variety of credit card products which offer ATM access to either advances against the credit card account or transactions against related deposit accounts. Approximately 84% of the outstanding credit card loans have a floating interest rate. Net charge-offs amounted to $19.0 million in 2001, which was a $3.2 million increase over 2000. The increase in losses was consistent with industry trends reflecting higher delinquency and bankruptcy levels, especially during the early part of 2001. The net charge-off ratios of 3.9% in 2001 and 3.2% in 2000 remain well below national averages. The Company refrains from national pre-approved mailing techniques which have caused some of the credit card problems experienced by other banking companies. Significant changes in loss trends are not currently anticipated by management.

Allowance for Loan Losses

      The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of an allocated and an unallocated component. To determine the allocated component of the allowance, the Company combines estimates of the reserves needed for loans evaluated on an individual basis with estimates of reserves needed for pools of loans with similar risk characteristics.

      Loans subject to individual evaluation generally consist of commercial and commercial real estate loans. These loans are analyzed and segregated by risk category according to the Company’s “watch list”, which is an internal risk rating system. Loans judged to reflect the highest risk profiles are evaluated individually for repayment potential and collateral adequacy, and in conjunction with current economic conditions and loss experience, allowances are estimated. Other loans identified on the Company’s “watch list” but not individually reviewed are aggregated and reserves are recorded using migration models, that track actual portfolio movements from problem asset loan grades to loss over a 5 to 10 year period. In the case of other more homogeneous loan portfolios, including auto loans, residential mortgages, home equity loans and credit card loans, the determination of the allocated reserve is computed on a pooled basis. For these loan pools, historical loss ratios by loan type, current loss and past due experience, and management’s judgment of recent and forecasted economic effects on portfolio performance are factors utilized to determine the appropriate reserve amounts.

      To mitigate the imprecision inherent in estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. This portion of the allowance includes management’s determination of the amounts necessary to offset credit risk issues associated with loan concentrations, economic uncertainties, industry concerns, adverse market changes in estimated or appraised collateral values, and other subjective factors. As such, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety.

      The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses rests upon various judgments and assumptions made by management. Factors that influence these judgments include past loan loss experience, current loan portfolio composition and characteristics, trends in portfolio risk ratings, levels of non-performing assets, prevailing regional and national economic conditions, and the Company’s ongoing examination process including that of its regulators. The Company has internal credit administration and loan review staffs that continuously review loan quality and report the results of their reviews and examinations to the Company’s senior management and Board of Directors.

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      The allowance for loan losses was 1.70% of loans outstanding at December 31, 2001 compared to 1.62% at December 31, 2000. The allowance for loan losses at year end covered non-performing assets (defined as non-accrual loans and foreclosed real estate) by 422%. Net charge-offs totaled $37.4 million in 2001 compared to $29.8 million in 2000. The ratio of net charge-offs to average loans outstanding in 2001 was .48% compared to .38% in 2000 and .41% in 1999. The provision for loan losses was $36.4 million, lower than 2001 net charge-offs by $991 thousand, compared to a provision of $35.2 million in 2000 and $35.3 million in 1999. The allowance at December 31, 2001, represented a 3.5 times multiple of net loan losses for 2001.

      Credit card loans outstanding at December 31, 2001 amounted to $510.3 million, or 6.7% of total loans. Net charge-offs on these loans increased to 3.88% of average credit card loans in 2001 compared to 3.17% in 2000. This increase in net charge-offs was consistent with industry trends, but the Company’s net charge-off experience for its credit card portfolio has been significantly better than industry averages. Delinquency trends rose slightly in the fourth quarter of 2001 for both the Company and the industry but the Company is still well below industry delinquency averages. The Company considers the allowance for loan losses of $130.0 million adequate to cover losses inherent in the loan portfolio at December 31, 2001.

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      The schedule which follows summarizes the relationship between loan balances and activity in the allowance for loan losses: