Exhibit 13
At the foundation of Commerce Bancshares, Inc. is innovation and the ability
to evolve with our customers. From our inception, we've built a banking
franchise that balances technology with customer convenience, delivering
sophisticated financial sevices to our customers in the Midwest. We will
follow this approach as we move into the next century of banking.
CONTENTS ANNUAL MEETING
Chairman's Letter Page 2 The annual meeting of Shareholders
will be held Wednesday, April 16,
1997 at 10:00 a.m. in the 18th Floor
Management Report Page 6 Board Room, Commerce Bank
Building, 1000 Walnut, Kansas City,
Missouri.
Management's Discussion and
Analysis of Consolidated TRANSFER AGENT, REGISTRAR AND
Financial Condition and DIVIDENT DISBURSING AGENT
Results of Operations Page 20 First Chicago Trust Company of New
York, P.O. Box 2500, Jersey City,
New Jersey 07303-2500,
800-446-2617.
Financial Statements of
Commerce Bancshares, Inc.
and Subsidiaries Page 40 NOTICE
Shareholders, analysts or potential
investors desiring additional
Notes to Financial information may make their requests
Statements Page 44 in writing to Mr. Jeffery D.
Aberdeen, Controller, at the address
of the Company.
Independent Auditors'
Report Page 57
Directors and Officers Inside Back Cover
DIVIDENT REINVESTMENT PROGRAM
We are pleased to announce that Commerce Brokerage Services, Inc.*, now offers
Equity Divident Reinvestment for securities held within a Commerce brokerage
account. Our brokerage customers may elect this option for approximately 6,200
individual securities, including the common stock of Commerce Bancshares, Inc.
For information, please contact any of our Regional Investment Specialists or
one of our main brokerage offices.
St. Louis 314-746-8777 Kansas City 816-234-2416
800-356-1606 800-772-SAVE
* An affiliate of Commerce Bancshares, Inc. and a registered broker-dealer.
FINANCIAL HIGHLIGHTS
(This page not included in the EDGARized exhibit.)
1
CHAIRMAN'S LETTER
(This section not included in the EDGARized exhibit.)
2 - 5
MANAGEMENT REPORT
(This section not included in the EDGARized exhibit.)
6 - 18
Commerce Bancshares, Inc.
CONTENTS
Pages
-----
Common Stock Data Below
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 20 through 39
Consolidated Financial Statements:
Balance Sheets 40
Statements of Income 41
Statements of Cash Flows 42
Statements of Stockholders' Equity 43
Notes to Financial Statements 44 through 56
Independent Auditors' Report 57
Statement of Management's Responsibility 57
Summary of Quarterly Statements of Income 58
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COMMON STOCK DATA
Commerce Bancshares, Inc. (Parent)
The following table sets forth the high and low prices for the Company's common
stock (CBSH) and cash dividends paid for the periods indicated (restated for the
1996 stock dividend).
Cash
1996 High Low Dividends
- --------------------------------------------------------------------------------
First Quarter $36.55 $33.10 $.181
Second Quarter 35.12 32.50 .181
Third Quarter 38.57 31.67 .181
Fourth Quarter 49.50 36.79 .181
1995
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First Quarter $27.89 $24.49 $.163
Second Quarter 29.25 27.44 .163
Third Quarter 36.17 27.44 .163
Fourth Quarter 36.43 33.79 .163
1994
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First Quarter $28.29 $24.19 $.129
Second Quarter 28.18 25.27 .147
Third Quarter 28.94 25.48 .147
Fourth Quarter 27.86 24.49 .147
Commerce Bancshares, Inc. common shares are publicly traded in the over-the-
counter market on the NASDAQ National Market System. Prices reflected in the
table above are last-sale prices and represent actual transactions. The Company
had 5,733 shareholders of record as of December 31, 1996.
19
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. The historical trends
reflected in the restated financial information presented below are not
reflective of anticipated future results.
KEY RATIOS
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1996 1995 1994 1993 1992
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(Based on average balance sheets):
Return on total assets 1.28% 1.21% 1.21% 1.14% 1.04%
Return on stockholders' equity 13.40 12.72 13.05 12.99 12.88
Efficiency ratio 60.96 62.60 65.10 64.58 65.35
Loans to deposits 67.07 68.28 61.07 58.08 57.71
Net yield on interest earning assets
(on a tax equivalent basis) 4.40 4.50 4.46 4.22 4.06
Non-interest bearing deposits to total deposits 19.65 19.81 19.60 19.72 18.63
Equity to total assets 9.53 9.48 9.30 8.75 8.04
Cash dividend payout ratio 23.28 24.07 22.07 21.28 21.58
==================================================================================================================================
SELECTED FINANCIAL DATA
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(In thousands, except per share data) 1996 1995 1994 1993 1992
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Net interest income $ 365,743 $ 355,745 $ 314,617 $ 284,524 $ 247,708
Provision for loan losses 24,522 14,629 5,845 11,381 19,146
Non-interest income 159,162 133,150 121,028 121,423 108,607
Non-interest expense 317,954 305,484 282,078 257,316 225,456
Net income 119,512 107,640 96,111 86,894 71,655
Net income per common and
common equivalent share* 3.11 2.71 2.59 2.37 2.11
Total assets 9,698,186 9,573,951 8,035,574 8,047,413 7,541,613
Loans 5,472,342 5,317,813 4,432,662 4,024,075 3,687,415
Investment securities 2,721,515 2,594,753 2,645,420 2,805,630 2,456,795
Deposits 8,166,429 8,193,092 6,990,430 6,839,470 6,458,651
Long-term debt 14,120 14,562 6,487 6,894 7,267
Stockholders' equity 924,271 883,783 728,198 712,620 603,718
Cash dividends per common share* .724 .653 .570 .504 .455
==================================================================================================================================
* Restated for 5% stock dividend distributed in December 1996
RESULTS OF OPERATIONS
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$ Change % Change
(Dollars in thousands) '96-'95 '95-'94 '96-'95 '95-'94
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Net interest income $ 9,998 $41,128 2.8% 13.1%
Provision for loan losses 9,893 8,784 67.6 150.3
Non-interest income 26,012 12,122 19.5 10.0
Non-interest expense 12,470 23,406 4.1 8.3
Income taxes 1,775 9,531 2.9 18.5
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Net income $11,872 $11,529 11.0% 12.0%
===================================================================================================================================
Consolidated net income for 1996 was $119.5 million, an 11.0% increase over 1995
net income. Earnings per share increased 14.8% to $3.11 in 1996 compared to
1995. These earnings occurred mainly as a result of modest growth in net
interest income, significant growth in non-interest income and control over non-
interest expenses, partially offset by a significantly higher provision for loan
losses. The increase in non-interest income was due mainly to increases in fees
from deposit accounts, credit cards and trust services, combined with gains on
investment securities. The change in non-interest expense includes a decrease of
$6.7 million in federal deposit insurance expense, coupled with relatively flat
costs for marketing and data processing. The return on total assets increased to
1.28% in 1996 compared to 1.21% in 1995, and return on stockholders' equity
increased to 13.40% in 1996 compared to 12.72% in 1995.
20
Net income was $107.6 million in 1995 compared to $96.1 million in 1994. The
$11.5 million increase over 1994 includes the effects of four acquisitions
completed in 1995, which contributed $6.4 million after tax to net income, and a
$6.5 million decrease in federal deposit insurance expense.
During the past year, Commerce Bancshares, Inc. and its subsidiaries (the
Company) was focused on improving internal efficiency and profitability. Fee
income opportunities were reviewed and new revenues were obtained, especially in
the deposit account fee area. Also, through a series of internal mergers, the
number of bank charters was reduced from 16 at year end 1995 to 6 at year end
1996. As a result, a number of back office operations were centralized and tasks
eliminated. These mergers enable the Company to reduce overhead costs while
expanding services to a larger customer base. Additionally, customers will gain
access to additional banking facilities in portions of Kansas, Missouri and
Illinois. The Company sold branches in Illinois and Missouri in 1996 as part of
a continuing effort to evaluate retail delivery services. These sales did not
have a material effect on the financial statements of the Company. The Company
continues to evaluate growth opportunities and customer needs, opening 4 full-
service facilities in 1996 and early 1997. The Company has signed a definitive
agreement to merge with Shawnee Bank Shares, Inc., a one-bank holding company in
the metropolitan Kansas City area with three locations and $205 million in
assets. The merger is expected to be completed in the second quarter of 1997.
In 1995, banks with assets of $1.2 billion were acquired at a cost of $12.0
million in treasury stock, $75.7 million in newly issued common stock and $94.1
million in cash. Banks with assets totaling $376 million were acquired in 1994,
requiring treasury stock of $44.5 million, newly issued common stock of $3.5
million and $2.7 million in cash. Certain of these transactions have been
recorded using the pooling of interests method of accounting. However, prior
year financial results have not been restated for these poolings because those
restated amounts do not differ materially from the Company's historical
operating results.
The Board of Directors declared the third annual consecutive 5% stock dividend
on October 4, 1996. Certificates evidencing the dividend were distributed to
stockholders on December 13, 1996. All per share and average share data in this
report has been restated to reflect the 1996 stock dividend.
NET INTEREST INCOME
Net interest income, the Company's primary earnings source, is the difference
between interest income generated by earning assets and the expense paid on
interest bearing liabilities. The following table summarizes the changes in net
interest income on a fully tax 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. Management believes this allocation method, applied on a
consistent basis, provides meaningful comparisons between the respective
periods.
21
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (Cont.)
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Change due to Change due to
Average Average Average Average
(In thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME,
FULLY TAXABLE EQUIVALENT BASIS
Loan $18,857 $(15,762) $ 3,095 $ 76,193 $50,198 $126,391
Investment securities:
U.S. government & federal agency securities 3,553 (318) 3,235 (21,642) 5,519 (16,123)
State & municipal securities (632) 115 (517) 5,833 195 6,028
Other securities (4,656) 2,022 (2,634) 7,923 1,927 9,850
Federal funds sold and securities purchased
under agreements to resell 15,362 (2,103) 13,259 2,981 3,637 6,618
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 32,484 (16,046) 16,438 71,288 61,476 132,764
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings (332) (457) (789) 944 392 1,336
Interest bearing demand 17,014 (8,376) 8,638 2,791 25,901 28,692
Time open & C.D.'s of less than $100,000 (353) 1,452 1,099 15,928 24,455 40,383
Time open & C.D.'s of $100,000 and over 555 (379) 176 2,231 2,986 5,217
Federal funds purchased and securities
sold under agreements to repurchase 24 (2,389) (2,365) 5,485 7,923 13,408
Long-term debt and other borrowings (106) 14 (92) 689 (85) 604
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 16,802 (10,135) 6,667 28,068 61,572 89,640
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income, fully taxable equivalent basis $15,682 $ (5,911) $ 9,771 $ 43,220 $ (96) $ 43,124
==============================================================================================================================
Net interest income was $365.7 million in 1996, $355.7 million in 1995 and
$314.6 million in 1994. This represents an increase in 1996 of $10.0 million or
2.8% and an increase in 1995 of $41.1 million or 13.1%. The net yield on earning
assets was 4.40% in 1996, 4.50% in 1995 and 4.46% in 1994. The decrease in the
net yield on earning assets of 10 basis points in 1996 was due mainly to a
reduction of 19 basis points in rates earned on average interest earning assets
coupled with a 10 basis point decline in rates paid on average interest bearing
liabilities. The overall increase in net interest income of $10.0 million was
the result of volume increases in average deposits which also funded average
loan growth of $160.0 million. Average interest earning assets were $8.41
billion, $8.01 billion and $7.12 billion in 1996, 1995 and 1994 respectively;
while average interest earning liabilities were $6.84 billion, $6.52 billion and
$5.80 billion in 1996, 1995 and 1994 respectively.
Tax equivalent interest income was $652.5 million in 1996, $636.0 million in
1995 and $503.3 million in 1994; and represents an increase of $16.4 million or
2.6% in 1996 and an increase of $132.8 million or 26.4% in 1995. The increased
interest income in 1996 was due mainly to growth in average loans of $160.0
million, mostly in the personal lending areas, offset by a decrease in average
loan yields of 21 basis points. Also federal funds sold balances increased by an
average of $213.3 million which provided additional interest earnings even
though rates on federal funds were down 46 basis points. Average balances of
investment securities in 1996 were only slightly lower than the previous year.
Loans represented 63% of average interest earning assets in 1996, investment
securities represented 31% and short-term federal funds sold and securities
purchased under agreement to resell represented 6%. The increase in interest
income in 1995 was due to both increases in average yields on interest earning
assets of 87 basis points during the year coupled with an increase in average
interest earning assets of $895.4 million, of which $731.3 million was due to
bank acquisitions in 1995 and 1994.
Total interest expense was $281.9 million in 1996, $275.3 million in 1995 and
$185.7 million in 1994, and represents an increase of $6.6 million or 2.4% in
1996 and an increase of $89.6 million or 48.3% in 1995.
22
The increase in 1996 was due mainly to an increase in average interest bearing
deposits of $312.9 million but offset by a 6 basis point decline in rates paid
on deposits. The increase in interest bearing deposits occurred mainly in the
Company's Premium Money Market accounts which grew by an average of $388.9
million in conjunction with growth in other money market accounts and virtually
no growth in certificates of deposit. This growth was offset by a decline in
interest checking accounts which decreased by an average of $239.3 million.
Premium and other money market, interest checking, savings and certificates of
deposit represented 41%, 16%, 5% and 38%, respectively, of total average
interest bearing deposits. The increase in interest expense in 1995 was mainly
due to an increase in average rates paid on deposits of 95 basis points combined
with an increase in average interest bearing liabilities as a result of bank
acquisitions during 1995 and 1994. These acquisitions increased average interest
bearing deposits by $678.7 million. Interest on other interest bearing
liabilities in 1996 declined by $2.5 million mainly as a result of decreases in
average rates paid on federal funds purchased and securities sold under
agreements to repurchase. In 1995 interest on other interest bearing liabilities
increased by $14.0 million mainly as a result of higher average rates paid on
federal funds purchased and securities sold under agreements to repurchase.
PROVISION AND ALLOWANCE
FOR LOAN LOSSES
Management records the provision for loan losses, on an individual bank basis,
in amounts sufficient to result in an allowance for loan losses that will cover
current net charge-offs and risks believed to be inherent in the loan portfolio
of each bank. Amounts thus charged against current income are based on such
factors as past loan loss experience, current loan portfolio mix, evaluation of
actual and potential losses in the loan portfolio, prevailing regional and
national economic conditions that might have an impact on the portfolio, regular
reviews and examinations of the loan portfolio conducted by internal loan
reviewers supervised by Commerce Bancshares, Inc. (the Parent), and reviews and
examinations by bank regulatory authorities. The balance in the allowance for
loan losses is reduced when a loan or part thereof is considered by management
to be uncollectible. Recoveries on loans previously charged off are added back
to the allowance. During periods of growth in the loan portfolio, a portion of
the provision may be taken to reflect management's desire to maintain a
satisfactory allowance to protect the Company from those losses which occur as a
natural part of doing business.
As with any financial institution, weak economic conditions, higher inflation,
interest rates, or unemployment may lead to increased losses in the loan
portfolio. Conversely, improvements in economic conditions tend to reduce the
amounts charged against the allowance. Management has established various
controls in order to limit future losses at the lending affiliates, such as: 1)
a "watch list" of possible problem loans, 2) specific loan retention limits in
relation to the size of each affiliate and market, 3) documented policies
concerning loan administration (loan file documentation, disclosures, approvals,
etc.) and 4) a loan review staff employed by the Parent which travels to
subsidiary banks to audit for adherence to established Company controls and to
review the quality and anticipated collectibility of the portfolio. Management
determines which loans are possibly uncollectible or represent a greater risk of
loss and makes additional provision to expense, if necessary, to maintain the
allowance at a satisfactory level on an individual bank basis.
The allowance for loan losses at December 31, 1996, was 1.79% of loans
outstanding compared to 1.85% at year end 1995. The allowance for loan losses at
year end covered non-performing assets (defined as non-accrual loans, loans 90
days delinquent and still accruing interest, and foreclosed real estate) by
246%. Net charge-offs totaled $24.8 million in 1996 compared to $16.2 million in
1995. The increase in net charge-offs in 1996 compared to 1995 was mainly
attributable to higher credit losses in the credit card and personal banking
loan categories. The provision for loan losses was $24.5 million, approximately
equal to 1996 net charge-offs, compared to a provision of $14.6 million in 1995
and $5.8 million in 1994.
23
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (CONT.)
A subsidiary bank is an issuer of Visa and MasterCard credit cards. Credit card
loans outstanding at year end 1996 amounted to $563.3 million, or 10.3% of total
loans. The percentage of consumer loans outstanding which are generated through
credit revolving balances and cash advances is significantly higher for Commerce
than it is for a banking group that does not issue credit cards. Because credit
card loans traditionally have a higher than average ratio of net charge-offs to
loans outstanding when compared with other portfolio segments, management
requires that a separate allowance for loan losses on credit card loans be
maintained which, on a consolidated basis, was $15.9 million or 2.82% of credit
card loans outstanding at December 31, 1996. Net charge-offs amounted to 2.92%
of average credit card loans for 1996 compared to 2.30% in 1995. During 1996,
the banking industry has experienced increasing credit losses on these loans
primarily due to high levels of consumer installment and revolving debt, rising
delinquency, and decade-high levels of personal bankruptcies. Net charge-offs at
major banks this year have ranged generally from 3.5% to over 6% of credit card
loans. The Company has also experienced an increase in losses on credit card
loans due to these same factors. However, its net charge-off experience has been
significantly lower than industry averages.
Other than as previously noted, management is not aware of any significant risks
in the current loan portfolio mix that would result from concentrations of loans
within any particular market, industry, or portfolio segment. Other than for the
credit card risk mentioned above, management does not allocate the allowance for
loan losses. It is deemed to be a general reserve available for all types of
loan losses. The allowance at year end 1996 represented a 3.95 multiple of net
loan losses for the year just ended.
Based on current economic conditions, management considers the December 31, 1996
allowance adequate to cover the possible risk of loss in the loan portfolio at
the present time. Various appraisals and estimates of current value influence
the calculation of the required allowance at any point in time. If economic
conditions in the region deteriorate significantly, it is possible that
additional assets would be classified as non-performing, and accordingly,
additional provision for possible losses would be required. Such an event and
its duration cannot be predicted at this time.
24
The schedule which follows summarizes the relationship between loan balances and
activity in the allowance for loan losses account:
Years Ended December 31
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(Dollars in thousands) 1996 1995 1994 1993 1992
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Net loans outstanding at end of period (A) $5,472,342 $5,317,813 $4,432,662 $4,024,075 $3,687,415
- --------------------------------------------------------------------------------------------------------------------------------
Average loans outstanding (A) $5,321,584 $5,161,552 $4,180,065 $3,835,834 $3,474,285
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at beginning of period $ 98,537 $ 87,179 $ 85,830 $ 77,149 $ 61,676
- --------------------------------------------------------------------------------------------------------------------------------
Additions to allowance through
charges to expense 24,522 14,629 5,845 11,381 19,146
- --------------------------------------------------------------------------------------------------------------------------------
Allowances of acquired banks - 12,932 2,953 3,661 4,507
- --------------------------------------------------------------------------------------------------------------------------------
Recovery of loans previously charged off:
Business 1,739 1,632 2,540 3,690 1,841
Construction - - 3 508 52
Business real estate 416 542 663 562 2,584
Personal real estate 123 99 226 141 162
Personal banking 2,628 2,633 2,259 2,528 2,193
Credit card 2,172 2,163 2,015 1,947 1,771
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Total recoveries 7,078 7,069 7,706 9,376 8,603
- --------------------------------------------------------------------------------------------------------------------------------
Loans charged off:
Business 4,912 3,422 2,511 3,858 4,258
Construction - - - 12 31
Business real estate 205 391 1,243 418 1,538
Personal real estate 341 208 196 395 351
Personal banking 9,327 7,413 3,442 3,897 3,302
Credit card 17,129 11,838 7,763 7,157 7,303
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Total loans charged off 31,914 23,272 15,155 15,737 16,783
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Net loans charged off 24,836 16,203 7,449 6,361 8,180
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Balance at end of period $ 98,223 $ 98,537 $ 87,179 $ 85,830 $ 77,149
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding .47% .31% .18% .17% .24%
Ratio of allowance to loans
at end of period 1.79% 1.85% 1.97% 2.13% 2.09%
Ratio of provision to average
loans outstanding .46% .28% .14% .30% .55%
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(A) Net of unearned income; before deducting allowance for loan losses.
NON-INTEREST INCOME
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% change
(Dollars in thousands) 1996 1995 199 4 '96-'95 '95-'94
- --------------------------------------------------------------------------------------------------------------------------------
Trust fees $ 36,622 $ 33,454 $ 28,180 9.5% 18.7%
Deposit account charges and other fees 54,506 44,658 39,971 22.1 11.7
Credit card transaction fees 26,586 23,341 19,318 13.9 20.8
Trading account profits and commissions 5,982 5,158 4,903 16.0 5.2
Net gains on securities transactions 3,293 897 2,354 267.1 (61.9)
Other 32,173 25,642 26,302 25.5 (2.5)
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Total non-interest income $ 159,162 $ 133,150 $ 121,028 19.5% 10.0%
- --------------------------------------------------------------------------------------------------------------------------------
As a % of operating income
(net interest income plus non-interest income) 30.3% 27.2% 27.8%
Operating income per full-time
equivalent employee $ 108.1 $ 100.0 $ 94.2
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25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Non-interest income totaled $159.2 million in 1996, $133.2 million in 1995 and
$121.0 million in 1994. The increase of $9.8 million in deposit account charges
and other fees in 1996 compared to 1995 was partially due to fee restructuring
and added cash management fees. Trust fees increased $3.2 million, or 9.5%, in
1996 compared to 1995, and was reflective of increased new business coupled with
improvement in market value of assets upon which some fees are based. The
increase in credit card fees was reflective of increased merchant and cardholder
sales upon which transaction fee income is based. Included in the other income
category were gains on sales of branches and fixed assets which totaled $3.1
million more than in the previous year. Other income includes various types of
fee income, such as letter of credit fees, loan servicing fees, annuity and
mutual fund fees and other brokerage-related commissions. In 1995 compared to
1994, trust fees increased $5.3 million, deposit account charges and other fees
increased $4.7 million and credit card transaction fees increased $4.0 million.
Net gains on securities transactions included net gains by bank subsidiaries of
$2.2 million, $480 thousand and $1.4 million in 1996, 1995 and 1994,
respectively, with the remainder attributable to sales of equity securities by
the Parent and a venture capital subsidiary.
NON-INTEREST EXPENSE
- ----------------------------------------------------------------------------------------
% change
(Dollars in thousands) 1996 1995 1994 '96-'95 '95-'94
- ----------------------------------------------------------------------------------------
Salaries $141,328 $136,646 $123,979 3.4% 10.2%
Employee benefits 23,963 21,207 20,036 13.0 5.8
Net occupancy 21,456 20,294 18,017 5.7 12.6
Equipment 15,185 14,256 13,159 6.5 8.3
Supplies and communication 24,697 24,139 19,633 2.3 23.0
Data processing 20,778 20,997 16,837 (1.0) 24.7
Federal deposit insurance 2,124 8,807 15,349 (75.9) (42.6)
Marketing 11,698 11,611 10,833 .7 7.2
Goodwill and core deposit premium
amortization 11,448 11,094 5,472 3.2 102.7
Foreclosed property expense, net 2,406 164 1,138 NM (85.6)
Charitable contributions 1,821 1,265 4,294 44.0 (70.5)
Other 41,050 35,004 33,331 17.3 5.0
- ----------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $317,954 $305,484 $282,078 4.1% 8.3%
- ----------------------------------------------------------------------------------------
Efficiency ratio (non-interest
expense as a % of operating
income excluding net gains on
securities transactions) 61.0% 62.6% 65.1%
Salaries and benefits as a % of
total non-interest expense 52.0% 51.7% 51.1%
Number of full-time equivalent
employees 4,854 4,890 4,626
========================================================================================
Non-interest expense totaled $318.0 million in 1996, $305.5 million in 1995 and
$282.1 million in 1994. In 1996 compared to 1995, salaries increased $4.7
million, or 3.4%, and reflects an overall reduction in full-time equivalent
employees as a result of a number of initiatives to centralize operations.
Employee benefits increased $2.8 million, or 13.0%, mainly due to added health
insurance costs. Federal deposit insurance expense decreased $6.7 million due to
a decrease in the assessment rate which began in mid 1995. Included in 1996
federal deposit insurance expense was a $1.3 million one-time charge in
connection with the recapitalization of the Savings Association Insurance Fund.
The $23.4 million increase in non-interest expense in 1995 over 1994 was mainly
due to a $13.8 million increase in salaries and employee benefits. Goodwill and
core deposit premium amortization increased $5.6 million due to purchase
accounting adjustments relating to 1995 bank acquisitions. Partially offsetting
these increases was a $6.5 million decrease in federal deposit insurance expense
due to decreased rates and a $3.0 million decrease in charitable contributions.
26
INCOME TAXES
Income tax expense was $62.9 million, $61.1 million and $51.6 million in 1996,
1995 and 1994, respectively. The effective tax rate on income from operations
was 34.5%, 36.2% and 34.9% in 1996, 1995 and 1994, respectively. The difference
between these effective tax rates and the statutory rate of 35% was mainly due
to state and local income taxes and non-deductible goodwill amortization, offset
by tax exempt interest income on state and political subdivision securities. The
1996 effective tax rate was reduced by lower state income taxes and the
contribution of an appreciated asset. The 1994 effective tax rate was also
reduced by certain non-recurring state tax credits and the contribution of an
appreciated asset.
FINANCIAL CONDITION
LOAN PORTFOLIO ANALYSIS
A breakdown of average balances invested in each category of loans appears on
page 36. Classifications of consolidated loans by major category at December 31
for each of the past five years are as follows:
Balance at December 31
- -------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
Business $1,700,678 $1,716,080 $1,393,979 $1,380,452 $1,221,525
Real estate - construction 182,474 168,031 127,948 90,102 123,955
Real estate - business 758,650 695,558 586,769 533,467 453,226
Real estate - personal 1,010,572 983,249 813,134 734,771 666,074
Personal banking 1,256,684 1,258,809 1,120,366 917,683 885,998
Credit card 563,284 496,086 390,466 367,600 336,637
- -------------------------------------------------------------------------------------------------
Total loans, net of unearned income $5,472,342 $5,317,813 $4,432,662 $4,024,075 $3,687,415
- -------------------------------------------------------------------------------------------------
The contractual maturities of loan categories at December 31, 1996, and a
breakdown of those loans between predetermined rate and floating rate loans are
as follows:
Principal Payments Due
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In After One After
(In thousands) One Year Year Through Five
or Less Five Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Business $1,104,029 $ 556,292 $ 40,357 $1,700,678
Real estate - construction 101,063 59,458 21,953 182,474
Real estate - business 252,388 433,957 72,305 758,650
Real estate - personal 99,208 215,788 695,576 1,010,572
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,556,688 $1,265,495 $ 830,191 $3,652,374
- ------------------------------------------------------------------------------------------------------------------------------------
Personal banking (1) 1,256,684
Credit card (2) 563,284
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $5,472,342
- ------------------------------------------------------------------------------------------------------------------------------------
Loans with predetermined rate $ 685,646 $ 572,829 $ 209,103 $1,467,578
Loans with floating rate 871,042 692,666 621,088 2,184,796
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,556,688 $1,265,495 $ 830,191 $3,652,374
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Personal banking loans with floating rate totaled $484,960,000.
(2) Credit card loans with floating rate totaled $466,107,000.
Average loans outstanding to total deposits was 67.1% in 1996 compared to 68.3%
in 1995. Loans constituted 63.9% of total earning assets at December 31, 1996.
While it is management's goal to deploy a larger portion of deposits in higher
yielding loan assets, this strategy is tempered in the current economic and
competitive environment. Modest economic growth and business loan demand in
recent years, coupled with improved earnings and capitalization of the banking
industry, has led to intense competition for loan assets. Consolidations within
the banking industry, coupled with excess lending capacity and the demand for
greater earnings, continue to encourage less stringent underwriting standards,
lower interest rate spreads and longer term fixed rate pricing options, and more
liberal offering terms and conditions. Given
27
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (CONT.)
management's longer term commitment to asset quality and its strategy to
minimize the impact of changes in interest rate levels on net interest income,
the loan portfolio has exhibited a modest level of internal growth in 1996.
The Company currently generates approximately 31.8% of its loan portfolio in
the St. Louis regional market and 22.3% in the Kansas City regional market.
The portfolio is diversified from a commercial and retail standpoint, with
48.3% in loans to business and 51.7% in loans to individual consumers. Such
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 avoid problem loan levels and loan losses that
characterized the banking industry in the early 1990s.
Loans by type as a percentage of total loans:
- ------------------------------------------------
December 31
1996 1995
- ------------------------------------------------
Business 31.1% 32.3%
Real estate - construction 3.3 3.1
Real estate - business 13.9 13.1
Real estate - personal 18.4 18.5
Personal banking 23.0 23.7
Credit card 10.3 9.3
- ------------------------------------------------
Total loan 100.0% 100.0%
- ------------------------------------------------
Business Loans
This group of loans, totaling $1.70 billion, 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 bank subsidiaries generally do not participate in
credits of large, publicly traded companies unless operations are maintained in
the local communities or regional 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.
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, as shown on
page 25, of $3.2 million in 1996 compared to $1.8 million in 1995. Continued
growth in business loans will be based upon strong solicitation efforts in a
highly competitive market environment for quality loans. Asset quality is, in
part, a function of management's consistent application of conservative
underwriting standards. Therefore, portfolio growth in 1997 is dependent upon
the strength of the economy, the actions of the Federal Reserve with regard to
targets for economic growth and inflationary tendencies, and the competitive
environment as previously described.
On the basis of average balances, business loans for 1996 decreased 2.0% from
1995 levels, which increased 22.4% over 1994 levels. A portion of the growth in
1995 was attributable to bank acquisitions in Illinois and Kansas. Non-accrual
business loans decreased to $7.0 million (.4% of business loans) at December 31,
1996, from $9.9 million (.6% of business loans) at December 31, 1995.
Real Estate -- Construction
The portfolio of loans in this category amounted to $182.5 million at December
31, 1996, compared to $168.0 million at year end 1995. Non-accrual loans in this
category were $552 thousand at year end 1996 compared to $304 thousand at year
end 1995. Management continues to maintain relatively low exposure in this
category. 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 is minimal. Residential construction
and land development loans are primarily located in the Kansas City and St.
Louis metropolitan areas. The Company experienced no loan losses in this
category during 1996 and 1995. Management is not aware of any significant
adverse exposure in this category.
28
Real Estate -- Business
This category includes mortgage loans secured by commercial properties which are
primarily located in the local and regional trade territories of the customers
of the affiliate banks. At December 31, 1996, there were $758.7 million in
balances outstanding secured by commercial properties. Non-accrual balances have
increased at December 31, 1996 to $4.4 million, or .6% of the loans in this
category, compared to $3.4 million at year end 1995. The Company experienced net
recoveries of $211 thousand in 1996 and $151 thousand in 1995. The economic
conditions in local markets are generally strong, positively impacting debt
service capabilities and collateral values for both owner-occupied and
investment real estate. Significant deterioration is not anticipated in 1997,
provided that the economy performs at or near the Federal Reserve's target level
for growth of 2.5%.
Real Estate -- Personal
The mortgage loans in this category are extended, predominantly, for owner-
occupied residential properties. At December 31, 1996, there were $1.01 billion
in loans outstanding. The Company has not experienced significant problem
credits in this category recently as there were net charge-offs of $218 thousand
in 1996 compared to $109 thousand in 1995. The non-accrual balances of loans in
this category were $1.9 million at December 31, 1996, or .2% of the category,
compared with $2.4 million at December 31, 1995. The five year history of net
charge-offs on the real estate-personal loan category reflects nominal losses
and credit quality is considered to be above average.
Personal Banking
This consumer loan portfolio consists of both secured and unsecured loans to
individuals for various personal reasons such as automobile financing,
securities purchases, home improvements, recreational and educational purposes.
This category also includes $157.7 million of home equity loan balances at
December 31, 1996, with an additional $275.3 million in unused lines of credit
that 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, up to 80% 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 prior mortgage
loans. Approximately 39% of the loans in the personal banking category are
extended on a floating interest rate basis. Total average loan balances for 1996
and 1995 were $1.26 billion. Net charge-offs were $6.7 million in 1996 compared
to $4.8 million in 1995. The majority of personal banking loan losses were
related to indirect paper purchases, generally secured by automobiles.
Credit Card
The credit card portfolio is concentrated within our regional market.
Approximately 55.6% of the households in Missouri that own a Commerce Special
Connections credit card product also maintain a deposit relationship with a
subsidiary bank. Net charge-offs amounted to $15.0 million in 1996, which was a
$5.3 million increase over 1995. Such losses were attributable to higher
delinquencies and bankruptcies and were noted as part of national trends
throughout the industry. The net charge-off ratios of 2.9% in 1996 and 2.3% in
1995 are well below national averages. The net charge-off ratio increased to
3.3% for the fourth quarter of 1996. The average balance in credit card loans
for 1996 was $511.4 million compared to $420.0 million in 1995. Approximately
83% of the outstanding credit card loans have a floating interest rate. The
Company has a variety of credit card products, all of which offer ATM access to
either advances against the credit card account or transactions against related
deposit accounts. Continued growth is anticipated through targeted marketing and
product design to segmented groups. During 1997, a number of new products will
continue to be introduced or extended to affiliate bank markets to fill in
product line gaps for consumers, along with products aimed at the corporate and
small business markets. The Company refrains from national pre-approved mailing
techniques which have caused some of the credit card problems experienced by
other
29
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (CONT.)
banking companies. Current delinquency ratios are in line with past charge-off
results. Significant changes in loss trends, when compared with the fourth
quarter 1996 results and with the results of other industry providers, are not
anticipated by management.
RISK ELEMENTS OF LOAN PORTFOLIO
Management reviews the loan portfolio continuously for evidence of problem
loans. During the ordinary course of business, management becomes aware of
borrowers that may not be able to meet the contractual requirements of loan
agreements. Such loans are placed under close supervision with consideration
given to placing the loan on non-accrual status, the need for additional
allowance for loan loss, and (if appropriate) partial or full charge-off. Those
loans on which management does not expect to collect payments consistent with
acceptable and agreed upon terms of repayment (generally, loans that are 90 days
past due as to principal and/or interest payments) are placed on non-accrual
status. After a loan is placed on non-accrual status, any interest previously
accrued but not yet collected is reversed against current income. Interest is
included in income subsequent to the date the loan is placed on non-accrual
status only as interest is received and so long as management is satisfied there
is no impairment of collateral values. The loan is returned to accrual status
only when the borrower has brought all past due principal and interest payments
current and, in the opinion of management, the borrower has demonstrated the
ability to make future payments of principal and interest as scheduled.
A schedule of non-performing assets according to risk category follows:
December 31
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Non-accrual $13,945 $16,234 $11,385 $14,328 $19,370
Past due 90 days and still accruing interest 24,806 15,690 13,090 7,289 8,293
- ----------------------------------------------------------------------------------------------------------------------------------
Total impaired loans 38,751 31,924 24,475 21,617 27,663
Real estate acquired in foreclosure 1,136 1,955 7,290 10,057 12,366
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $39,887 $33,879 $31,765 $31,674 $40,029
- ----------------------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of total loans .73% .64% .72% .79% 1.09%
- ----------------------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of total assets .41% .35% .40% .39% .53%
- ----------------------------------------------------------------------------------------------------------------------------------
The effect of non-accruing loans on interest income
for 1996 is presented below:
(In thousands)
- ------------------------------------------------------------------------------------------
Gross amount of interest that would have
been recorded at original rate $ 2,178
Interest that was reflected in income 561
- ------------------------------------------------------------------------------------------
Interest income not recognized $ 1,617
- ------------------------------------------------------------------------------------------
Loans past due 90 days and still accruing interest increased $9.1 million at
December 31, 1996 compared to December 31, 1995. Approximately 50% of this
increase was related to the credit card portfolio, discussed above.
At December 31, 1996, the Company's mortgage banking subsidiary held residential
real estate loans of approximately $16.8 million at lower of cost or market,
which are to be resold to secondary markets within approximately three months.
The Parent and a venture capital subsidiary had debt and equity investments with
a carrying value of $4.9 million in 13 companies or partnerships at December 31,
1996. A $30 million limited partnership venture fund was organized by the
Company in 1993 with 49% outside participation, which is managed by a
subsidiary. The Company's investment in this partnership was approximately $7.2
million at December 31, 1996. Management believes the potential for long-term
gains in this type of investment activity outweighs the potential risk of
losses.
There were no loan concentrations of multiple borrowers in similar activities at
December 31, 1996 which exceeded 5% of total loans. The Company's aggregate
legal lending limit to any single or related borrowing entities is in excess of
$100 million. The largest exposures generally do not exceed $50 million.
30
INVESTMENT SECURITIES
PORTFOLIO ANALYSIS
At December 31, 1996, available for sale securities totaled $2.67 billion, which
included a net unrealized gain in fair value of $29.5 million. The amount of the
related after tax unrealized gain reported in stockholders' equity was $18.2
million. Non-marketable equity securities, which are carried at cost (less
allowances for other than temporary declines in value) are generally held by the
Parent and non-banking subsidiaries due to regulatory restrictions, except for
Federal Reserve Bank stock held by banking subsidiaries.
The average balances of investment securities (excluding the unrealized
gain/loss) were $2.63 billion in 1996 compared to $2.65 billion in 1995 and
$2.80 billion in 1994. The average tax equivalent yield was 6.28% in 1996, 6.23%
in 1995 and 5.88% in 1994. There was little change in tax equivalent interest
income earned on investment securities in 1996 compared to 1995 and 1994. Tax
equivalent interest income increased slightly in 1996 compared to 1995, mainly
due to a $57.6 million increase in the average balances invested in U.S.
government and federal agency securities, partially offset by a $66.4 million
decrease in investments in CMO's and asset-backed securities. Tax equivalent
interest income decreased $245 thousand in 1995 compared to 1994, mainly due to
a decrease of $370.6 million in average balances invested in U.S. government and
agency securities, partially offset by increases in average balances invested in
CMO's and asset-backed securities and state and municipal obligations, and an
increase of 33 basis points earned on U.S. government and federal agency
securities.
The 1996 fair values below include gross unrealized gains of $41.1 million which
are partially offset by gross unrealized losses of $11.6 million. Included are
net unrealized gains of $14.6 million on the investment portfolio of the Parent,
which consists primarily of equity securities, with gross unrealized gains of
$15.1 million partially offset by gross unrealized losses of $590 thousand.
Investment securities (excluding trading securities) at year end for the past
two years are shown as follows:
December 31
- -----------------------------------------------------------
(In thousands) 1996 1995
- -----------------------------------------------------------
Amortized Cost:
U.S. government and
federal agency obligations $1,705,869 $1,684,679
State and municipal obligations 98,886 124,352
CMO's and asset-backed securities 705,848 666,334
Other debt securities 108,453 11,011
Equity securities 61,693 55,599
- -----------------------------------------------------------
Total $2,680,749 $2,541,975
- -----------------------------------------------------------
Fair Value:
U.S. government and
federal agency obligations $1,717,945 $1,707,111
State and municipal obligations 101,293 128,043
CMO's and asset-backed securities 703,515 670,522
Other debt securities 108,442 10,982
Equity securities 79,055 68,726
- -----------------------------------------------------------
Total $2,710,250 $2,585,384
- -----------------------------------------------------------
A summary of maturities by category of investment securities and the weighted
average yield for each range of maturities as of December 31, 1996, is presented
in the financial statements note on Investment Securities. U.S. government and
federal agency securities comprise 63% of the investment portfolio at December
31, 1996, with a weighted average yield of 6.20% and an estimated average
maturity of 2.6 years; CMO's and asset-backed securities comprise 26% with a
weighted average yield of 6.22% and an estimated average maturity of 3.9 years.
Other debt and equity securities above include Federal Reserve Bank stock and
other bonds, notes, corporate stock (held primarily by non-banking entities)
and debentures. The tax equivalent yield on these securities in 1996 computed on
average balances invested was approximately 6.89%.
DEPOSITS AND BORROWINGS
Deposits are the primary funding source for the Company's banks, and are
acquired from a broad base of local markets, including both individual and
corporate customers. Total deposits have remained largely unchanged, totaling
$8.17 billion at year end 1996 and $8.19 billion at year end 1995. At year end
31
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (CONT.)
1996, 22% of total deposits were in non-interest bearing demand, 49% in savings
and interest bearing demand and 26% in time open and C.D.'s under $100,000. At
year end 1995, total deposits were comprised of 22% in non-interest bearing
demand, 48% in savings and interest bearing demand and 28% in time open and
C.D.'s under $100,000. Core deposits (defined as all non-interest and interest
bearing deposits, excluding short-term C.D.'s of $100,000 and over) supported
93% of average earning assets in 1996 and 1995. Average balances by major
deposit category for the last six years appear on pages 36 and 37. The maturity
schedule of time deposits of $100,000 and over outstanding at December 31, 1996,
appears in the financial statements note on Fair Value of Financial Instruments.
Short-term borrowings consist mainly of federal funds purchased, securities sold
under agreements to repurchase, and treasury tax and loan accounts. These
amounted to $526.8 million at year end 1996 and $362.9 million at year end 1995,
which was an increase of $163.9 million. This increase was the result of growth
in federal funds purchased and securities sold under agreements to repurchase.
The Company's long-term debt, which was approximately $14 million at year end
1996 and 1995, consists mainly of mortgages and borrowings from the Federal Home
Loan Bank.
LIQUIDITY AND CAPITAL RESOURCES
The liquid assets of the Parent consist primarily of available for sale
securities, which include readily marketable equity securities and commercial
paper, and securities purchased under agreements to resell. Total investment
securities and repurchase agreements were $94.4 million at cost and $108.9
million at fair value at December 31, 1996 ($10.0 million of which is pledged
under a self-insured officer and director liability program) compared to $79.1
million at cost and $90.1 million at fair value at December 31, 1995. Total
liabilities of the Parent at December 31, 1996 decreased to $12.6 million
compared to $44.3 million at December 31, 1995 mainly because of a $31.0 million
liability recorded at year end 1995 for a significant treasury stock purchase
settling in 1996. The Parent had no third-party short-term borrowings or long-
term debt at December 31, 1996. Primary sources of funds for the Parent are
dividends and management fees from its subsidiary banks, which were $120.3
million and $14.0 million, respectively, in 1996. The Parent also collected
$21.6 million from subsidiary banks to reimburse data processing costs paid by
the Parent. The subsidiary banks may distribute dividends without prior
regulatory approval that do not exceed the sum of net income for the current
year and retained net income for the preceding two years, subject to maintenance
of minimum capital requirements. The Parent's commercial paper, which management
believes is readily marketable, has a P1 rating from Moody's and an A1 rating
from Standard & Poor's. No commercial paper was outstanding during the past
three years. The Company is also rated A by Thomson BankWatch with a
corresponding short-term rating of TBW-1. This credit availability, along with
available secured short-term borrowings from affiliate banks, should provide
adequate funds to meet any outstanding or future commitments of the Parent.
Management is not aware of any factors that would cause these ratings to be
adversely impacted.
The liquid assets held by bank subsidiaries include available for sale
securities, which consist mainly of investments in U.S. government and federal
agency securities and mortgage-backed securities. The available for sale bank
portfolio totaled $2.57 billion at December 31, 1996, including an unrealized
net gain of $12.0 million.
The Company (on a consolidated basis) continues to maintain a sound equity to
asset ratio of 9.53%, based on 1996 average balances. At December 31, 1996, the
Company and each of its banking subsidiaries met minimum risk based capital
requirements. Consolidated Tier I and Total capital ratios were 13.06% and
14.20%, respectively, and the leverage ratio was 8.84%.
The cash flows from the operating, investing and financing activities of the
Company resulted in a net increase in cash and due from banks of $58.4 million
in 1996. The cash generated by operating
32
activities, which amounted to $214.7 million in 1996, provides a high degree of
liquidity. Most of the Company's investing activities arise from customer
lending and the investment of funds in available for sale securities and short-
term federal funds sold and repurchase agreements. The net cash required by
investing activities was $242.3 million in 1996. The liquidity needs arising
from these activities are largely satisfied by maturities of the same in
addition to a major financing item, the customer deposit base, and short-term
borrowings of federal funds purchased. Future short-term liquidity needs for
daily operations are not expected to vary significantly and the Company
maintains adequate liquidity to meet that cash flow. The Company's sound equity
base, along with its low debt level, common and preferred stock availability,
and excellent debt ratings, provide several alternatives for future financing.
Future acquisitions may utilize partial funding through one or more of these
options.
Cash and stock requirements for acquisitions, funding of various employee
benefit programs and dividends were as follows:
- -------------------------------------------------------------
(In thousands) 1996 1995 1994
- -------------------------------------------------------------
Cash used in acquisitions $ -- $94.1 $ 2.7
Acquisition-related issuance
of treasury stock -- 12.0 44.5
Acquisition-related issuance
of new stock -- 75.7 3.5
Other purchases of
treasury stock 78.4 40.0 52.8
Exercise of stock options, sales to
affiliate non-employee directors
and restricted stock awards (4.0) (4.1) (8.2)
Cash dividends 27.5 26.0 21.1
- -------------------------------------------------------------
In February 1996, the Board of Directors authorized the Company to purchase up
to 2,000,000 shares of common stock, in either the open market or privately
negotiated transactions, to be used for employee benefit programs and stock
dividends. At December 31, 1996, the Company had acquired approximately
1,288,000 shares under the 1996 authorization.
Various commitments and contingent liabilities arise in the normal course of
business which are properly not recorded on the balance sheet. The most
significant of these are loan commitments totaling $2.07 billion (excluding
approximately $1.97 billion in unused approved lines of credit related to credit
card loan agreements) and standby letters of credit, net of participations to
non-affiliated companies, totaling $145.4 million at December 31, 1996. The
Company has various other financial instruments with off-balance-sheet risk,
such as commercial letters of credit, foreign exchange contracts to purchase and
sell foreign currency, and interest rate swap agreements. 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.
INTEREST RATE SENSITIVITY
The Company's Asset/Liability Management Committee monitors the interest rate
sensitivity of the Company's balance sheet on a monthly basis. The Company's
policy is to minimize the impact of changing rates on net interest income by
maintaining a reasonable balance of rate sensitive assets and liabilities. The
Company continually reviews the repricing characteristics of its assets and
liabilities and the rates paid and charged for deposits and loans. Deposit rates
are reviewed at least weekly and loan rates are monitored closely, particularly
on larger commercial relationships.
Interest rate risk is evaluated using various tools, including interest
sensitivity analysis and simulation techniques. The following schedule presents
the Company's interest sensitivity analysis as of December 31, 1996 and
identifies the repricing characteristics of the balance sheet and resulting
difference between assets and liabilities repricing within selected time
intervals. In this analysis the interest sensitivity position is balanced when
an equal amount of assets and liabilities reprice during a given time interval.
Excess assets or liabilities repricing in a given time period result in the
"Interest sensitivity GAP" shown in the schedule below. A positive gap indicates
that more assets than liabilities will reprice in a given time period, while a
negative gap indicates that more liabilities will reprice.
33
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (CONT.)
The schedule indicates that the Company is liability sensitive in time intervals
of less than one year and means that interest bearing liabilities can reprice
faster than earning assets. This is supported by the fact that 71% of the
Company's deposits are of the non-maturity type. This would indicate that the
net interest margin should improve when interest rates decline and decline when
interest rates increase.
While this interest sensitivity analysis is a widely used measure of interest
rate risk, it provides an incomplete picture of the sensitivity position of the
Company and should be used only in conjunction with other factors of financial
performance. In addition to changes in market interest rates, the Company's net
interest margin is also impacted by changes in funding demands. When these
demands increase, deposit rates can also increase, and in a declining interest
rate environment, the result could be a decrease in the net interest margin. In
the same way, it is possible for the net interest margin to increase in a rising
interest rate environment, which could happen if funding demands are low and
allow a slower increase in the rates paid on deposits. Accordingly, even though
the interest sensitivity analysis may be used as an indication of interest
margin direction and interest rate risk, it does not factor in all the variables
necessary to evaluate true interest rate risk.
For these reasons, the Company also evaluates its interest rate risk position
using simulation models and other evaluation tools to monitor and manage its
balance sheet and related earnings potential. Such simulation models are
prepared regularly during the year using differing interest rate projections to
better understand the operating environment. The Company purchases outside
interest rate projections from a national vendor for use in these simulation
models. The Company has set policy limits of interest rate risk to be assumed in
the normal course of business and continually monitors such limits based on
simulation models. The Company has been successful in meeting the interest rate
sensitivity objectives set forth in its policy and has been well within the
policy limits all year.
The Company does not use any off-balance-sheet derivative products to a
significant degree, but rather uses traditional methods of managing its assets
and liabilities while maintaining its normal high credit standards. Management
believes the Company is appropriately positioned for future interest rate
movements.
The following is an analysis of sensitivity gaps of interest earning assets and
interest bearing liabilities:
REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1996
1-3 4-6 7-12 2-5 Over 5
(In thousands) Months Months Months Years Years Total
- --------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans, net of unearned income............. $ 2,660,193 $ 209,529 $1,015,988 $1,355,586 $231,046 $5,472,342
Investment securities..................... 152,247 11,211 227,531 2,151,343 179,183 2,721,515
Federal funds sold and securities
purchased under agreements to resell....... 368,690 -- -- -- -- 368,690
- --------------------------------------------------------------------------------------------------------------------
Total interest earning assets.............. 3,181,130 220,740 1,243,519 3,506,929 410,229 8,562,547
- --------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Time open & C.D.'s of less than $100,000.. 519,036 443,107 558,164 600,414 17,485 2,138,206
Time open & C.D.'s of $100,000 & over..... 65,573 42,924 54,469 42,642 555 206,163
Savings and interest bearing demand....... 4,021,376 -- -- -- -- 4,021,376
Federal funds purchased and securities
sold under agreements to repurchase........ 526,807 -- -- -- -- 526,807
Long-term debt and other borrowings....... 91 3,294 3,155 4,943 2,637 14,120
- --------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities......... 5,132,883 489,325 615,788 647,999 20,677 6,906,672
- --------------------------------------------------------------------------------------------------------------------
Interest sensitivity GAP................... $(1,951,753) $(268,585) $ 627,731 $2,858,930 $389,552 $1,655,875
====================================================================================================================
34
IMPACT OF RECENTLY ISSUED
ACCOUNTING STANDARDS
The Company adopted three new Statements of Financial Accounting Standards
(SFAS) in 1996: SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets"; SFAS No. 122, "Accounting for Mortgage Servicing Rights"; and SFAS No.
123, "Accounting for Stock-Based Compensation."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 122 requires that both purchased and internally
originated mortgage servicing rights be capitalized and amortized to income over
the estimated servicing period. The impact of adopting these two pronouncements
was immaterial to the consolidated financial statements.
The Company decided not to adopt the optional accounting treatment outlined by
SFAS No. 123 for stock-based compensation awards. Accordingly, the Company will
continue to account for stock compensation awards under the guidelines of
Accounting Principles Board Opinion No. 25. The Company has disclosed, in the
notes to the consolidated financial statements, the pro forma net income and net
income per share as if the optional accounting treatment under SFAS No. 123 was
adopted.
EFFECTS OF INFLATION
The impact of inflation on financial institutions differs significantly from
that exerted on industrial entities. Financial institutions are not heavily
involved in large capital expenditures used in the production, acquisition or
sale of products. Virtually all assets and liabilities of financial institutions
are monetary in nature and represent obligations to pay or receive fixed and
determinable amounts not affected by future changes in prices. Changes in
interest rates have a significant effect on the earnings of financial
institutions. Higher interest rates generally follow the rising demand of
borrowers and the corresponding increased funding requirements of financial
institutions. Although interest rates are viewed as the price of borrowing
funds, the behavior of interest rates differs significantly from the behavior of
the prices of goods and services. Prices of goods and services may be directly
related to that of other goods and services while the price of borrowing relates
more closely to the inflation rate in the prices of those goods and services. As
a result, when the rate of inflation slows, interest rates tend to decline while
absolute prices for goods and services remain at higher levels. Interest rates
are also subject to restrictions imposed through monetary policy, usury laws and
other artificial constraints. The rate of inflation has been relatively low over
the past few years.
35
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (Cont.)
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
Years Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
(Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans: (A)
Business (B) $1,670,328 $131,652 7.88% $1,703,933 $141,872 8.33% $1,392,650 $ 99,111 7.12%
Construction and development 168,220 14,670 8.72 130,346 12,227 9.38 115,628 9,372 8.11
Real estate -- business 719,377 61,845 8.60 693,539 61,958 8.93 538,793 43,256 8.03
Real estate -- personal 990,069 77,568 7.83 954,956 74,571 7.81 759,338 53,473 7.04
Personal banking 1,262,166 109,065 8.64 1,258,729 110,202 8.76 1,013,462 80,513 7.94
Credit card 511,424 67,493 13.20 420,049 58,368 13.90 360,194 47,082 13.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 5,321,584 462,293 8.69 5,161,552 459,198 8.90 4,180,065 332,807 7.96
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal
agency 1,763,146 108,451 6.15 1,705,562 105,216 6.17 2,076,150 121,339 5.84
State & municipal
obligations (B) 115,021 9,060 7.88 123,152 9,577 7.78 46,602 3,549 7.62
CMO's and asset-backed
securities 653,301 40,913 6.26 719,747 44,928 6.24 586,935 35,132 5.99
Trading account securities 6,500 345 5.30 3,975 240 6.03 4,168 159 3.82
Other marketable securities (B) 51,320 3,529 6.88 66,368 4,110 6.19 69,870 4,191 6.00
Other non-marketable
securities 36,820 2,542 6.90 26,407 685 2.59 20,424 631 3.09
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,626,108 164,840 6.28 2,645,211 164,756 6.23 2,804,149 165,001 5.88
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell 467,103 25,334 5.42 205,547 12,075 5.87 132,672 5,457 4.11
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,414,795 652,467 7.75 8,012,310 636,029 7.94 7,116,886 503,265 7.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (98,312) (95,884) (86,664)
Unrealized gain (loss) on
investment securities 21,675 (13,983) (15,424)
Cash and due from banks 623,523 607,656 555,171
Land, buildings and equipment
-- net 208,967 205,702 194,159
Other assets 194,278 209,168 149,568
- ------------------------------------------ ---------- ----------
Total assets $9,364,926 $8,924,969 $7,913,696
========================================== ========== ==========
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 299,018 7,165 2.40 $ 312,049 7,954 2.55 $ 273,032 6,618 2.42
Interest bearing demand 3,656,476 121,367 3.32 3,329,272 112,729 3.39 3,247,965 84,037 2.59
Time open & C.D.'s of less
than $100,000 2,195,628 119,366 5.44 2,206,655 118,267 5.36 1,826,661 77,884 4.26
Time open & C.D.'s of
$100,000 and over 223,723 11,606 5.19 213,950 11,430 5.34 155,813 6,213 3.99
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 6,374,845 259,504 4.07 6,061,926 250,380 4.13 5,503,471 174,752 3.18
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 449,831 21,427 4.76 442,413 23,792 5.38 287,642 10,384 3.61
Long-term debt and other
borrowings (C) 14,690 1,054 7.17 16,195 1,146 7.08 7,129 542 7.60
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowings 464,521 22,481 4.84 458,608 24,938 5.44 294,771 10,926 3.71
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 6,839,366 281,985 4.12% 6,520,534 275,318 4.22% 5,798,242 185,678 3.20%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits 1,559,157 1,497,474 1,341,721
Other liabilities 74,374 60,527 37,515
Stockholders' equity 892,029 846,434 736,218
- ------------------------------------------ ---------- ----------
Total liabilities and equity $9,364,926 $8,924,969 $7,913,696
====================================================================================================================================
Net interest margin (T/E) $370,482 $360,711 $317,587
====================================================================================================================================
Net yield on interest earning
assets 4.40% 4.50% 4.46%
====================================================================================================================================
Percentage increase in net
interest margin (T/E) over
the prior year 2.71% 13.58% 10.52%
====================================================================================================================================
(A) Loans on non-accrual status are included in the computation of average
balances. Included in interest income above are loan fees and late charges, net
of amortization of deferred loan origination costs, which are immaterial. Credit
card income from merchant discounts and net interchange fees are not included in
loan income.
(B) Interest income and yields are presented on a fully-taxable equivalent basis
using the Federal statutory income tax rate. Business loan interest income
includes tax free loan income of $3,934,000 in 1996, $4,259,000 in 1995,
$3,916,000 in 1994, $4,281,000 in 1993 and $4,722,000 in 1992, including tax
equivalent adjustments of $1,323,000 in 1996, $1,438,000
36
Years Ended December 31
- ----------------------------------------------------------------------------------------------------------------
1993 1992
- ----------------------------------------------------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
(Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
- --------------------------------------------------------------------------------------------------------------
ASSETS
Loans: (A)
Business (B) $1,281,458 $ 81,416 6.35% $1,160,801 $ 78,418 6.76%
Construction and development 102,825 7,746 7.53 115,019 8,692 7.56
Real estate -- business 493,503 37,505 7.60 401,444 33,219 8.27
Real estate -- personal 716,273 53,428 7.46 624,071 54,124 8.67
Personal banking 920,157 75,080 8.16 876,678 77,931 8.89
Credit card 321,618 44,141 13.72 296,272 44,726 15.10
- --------------------------------------------------------------------------------------------------------------
Total loans 3,835,834 299,316 7.80 3,474,285 297,110 8.55
- --------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal
agency 2,497,041 143,395 5.74 2,094,399 130,918 6.25
State & municipal
obligations (B) 41,141 3,181 7.73 26,566 2,246 8.45
CMO's and asset-backed
securities 60,425 3,552 5.88 - - -
Trading account securities 4,731 220 4.66 7,420 477 6.43
Other marketable securities (B) 70,837 3,933 5.55 122,476 6,069 4.96
Other non-marketable
securities 21,024 924 4.39 17,996 959 5.33
- --------------------------------------------------------------------------------------------------------------
Total investment securities 2,695,199 155,205 5.76 2,268,857 140,669 6.20
- --------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell 282,625 8,735 3.09 422,732 15,379 3.64
- --------------------------------------------------------------------------------------------------------------
Total interest earning assets 6,813,658 463,256 6.80 6,165,874 453,158 7.35
- --------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (83,767) (68,344)
Unrealized gain (loss) on - -
investment securities
Cash and due from banks 573,494 508,594
Land, buildings and equipment
-- net 196,809 183,109
Other assets 149,909 132,021
- --------------------------------------------------------------------------------------------------------------
Total assets $7,650,103 $6,921,254
==============================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 248,681 6,012 2.42 $ 188,332 5,979 3.17
Interest bearing demand 3,124,098 78,995 2.53 2,788,635 88,330 3.17
Time open & C.D.'s of less
than $100,000 1,790,418 77,165 4.31 1,786,175 93,752 5.25
Time open & C.D.'s of
$100,000 and over 138,271 5,038 3.64 135,805 5,826 4.29
- --------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 5,301,468 167,210 3.15 4,898,947 193,887 3.96
- --------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 318,951 8,141 2.55 271,181 8,071 2.98
Long-term debt and other
borrowings (C) 7,118 554 7.79 12,566 1,021 8.13
- --------------------------------------------------------------------------------------------------------------
Total borrowings 326,069 8,695 2.67 283,747 9,092 3.20
- --------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 5,627,537 175,905 3.13% 5,182,694 202,979 3.92%
- --------------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits 1,302,634 1,121,481
Other liabilities 50,902 60,619
Stockholders' equity 669,030 556,460
- --------------------------------------------------------------------------------------------------------------
Total liabilities and equity $7,650,103 $6,921,254
==============================================================================================================
Net interest margin (T/E) $ 287,351 $250,179
==============================================================================================================
Net yield on interest earning
assets 4.22% 4.06%
==============================================================================================================
Percentage increase in net
interest margin (T/E) over
the prior year 14.86% 11.12%
==============================================================================================================
- -----------------------------------------------------------------------
1991
- -----------------------------------------------------------------------
Average
Average Balance
Interest Rates Five Year
(Dollars in thousands) Average Income/ Earned/ Compound
Balance Expense Paid Growth Rate
- ------------------------------------------------------------------------------------------
ASSETS
Loans: (A)
Business (B) $1,056,376 $ 92,112 8.72% 9.60%
Construction and development 108,478 10,202 9.40 9.17
Real estate -- business 390,611 38,190 9.78 12.99
Real estate -- personal 570,654 56,996 9.99 11.65
Personal banking 869,369 89,039 10.24 7.74
Credit card 263,731 43,288 16.41 14.16
- ------------------------------------------------------------------------------------------
Total loans 3,259,219 329,827 10.12 10.30
- ------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal
agency 1,654,517 131,738 7.96 1.28
State & municipal
obligations (B) 13,395 1,702 12.71 53.73
CMO's and asset-backed
securities - - - NA
Trading account securities 5,433 357 6.57 3.65
Other marketable securities (B) 294,895 18,784 6.37 (29.51)
Other non-marketable
securities 16,647 611 3.67 17.21
- ------------------------------------------------------------------------------------------
Total investment securities 1,984,887 153,192 7.72 5.76
- ------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell 489,869 28,434 5.80 (.95)
- ------------------------------------------------------------------------------------------
Total interest earning assets 5,733,975 511,453 8.92 7.97
- ------------------------------------------------------------------------------------------
Less allowance for loan losses (59,441) 10.59
Unrealized gain (loss) on - NA
investment securities
Cash and due from banks 447,756 6.85
Land, buildings and equipment
-- net 177,984 3.26
Other assets 117,905 10.50
- ------------------------------------------------------------------------------------------
Total assets $6,418,179 7.85%
==========================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 148,972 7,260 4.87 14.95%
Interest bearing demand 2,379,299 120,358 5.06 8.97
Time open & C.D.'s of less
than $100,000 1,840,020 127,949 6.95 3.60
Time open & C.D.'s of
$100,000 and over 198,130 12,212 6.16 2.46
- ------------------------------------------------------------------------------------------
Total interest bearing
deposits 4,566,421 267,779 5.86 6.90
- ------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 293,986 15,016 5.11 8.88
Long-term debt and other
borrowings (C) 38,711 3,522 9.10 (17.62)
- ------------------------------------------------------------------------------------------
Total borrowings 332,697 18,538 5.57 6.90
- ------------------------------------------------------------------------------------------
Total interest bearing
liabilities 4,899,118 286,317 5.84% 6.90
- ------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits 968,123 10.00
Other liabilities 69,951 1.23
Stockholders' equity 480,987 13.15
- ------------------------------------------------------------------------------------------
Total liabilities and equity $6,418,179 7.85%
==========================================================================================
Net interest margin (T/E) $225,136
==========================================================================================
Net yield on interest earning
assets 3.93%
==========================================================================================
Percentage increase in net
interest margin (T/E) over
the prior year 4.74%
==========================================================================================
in 1995, $1,378,000 in
1994, $1,517,000 in 1993 and $1,644,000 in 1992. State and municipal interest
income includes tax equivalent adjustments of $2,956,000 in 1996, $3,075,000 in
1995, $1,097,000 in 1994, $944,000 in 1993 and $641,000 in 1992. Interest income
on other marketable securities includes tax equivalent adjustments of $585,000
in 1996, $513,000 in 1995, $509,000 in 1994, $382,000 in 1993 and $252,000 in
1992.
(C) Interest expense of $125,000, $60,000, $14,000, $17,000 and $66,000 which
was capitalized on construction projects in 1996, 1995, 1994, 1993 and 1992,
respectively, is not deducted from the interest expense shown above.
37
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (Cont.)
QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- ----------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Rates Rates Rates Rates
(Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/
Balance Paid Balance Paid Balance Paid Balance Paid
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Business (A) $1,644 7.82% $1,670 7.89% $1,686 7.84% $1,682 7.97%
Construction and development 168 8.64 164 8.63 169 8.71 171 8.89
Real estate -- business 750 8.53 723 8.58 703 8.65 701 8.63
Real estate -- personal 1,003 7.77 985 7.73 991 7.83 981 8.01
Personal banking 1,287 8.53 1,244 8.61 1,254 8.69 1,265 8.74
Credit card 531 13.12 517 13.10 503 12.99 494 13.60
- ----------------------------------------------------------------------------------------------------------------------
Total loans 5,383 8.63 5,303 8.66 5,306 8.66 5,294 8.80
- ----------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,753 6.18 1,796 6.13 1,789 6.14 1,714 6.16
State & municipal obligations (A) 107 7.91 115 7.72 118 8.02 120 7.87
CMO's and asset-backed securities 669 6.22 664 6.21 633 6.32 648 6.31
Trading account securities 8 7.16 4 .77 8 5.78 7 5.09
Other marketable securities (A) 69 7.34 53 6.35 45 6.47 37 7.27
Other non-marketable securities 40 16.95 39 5.95 34 2.05 34 .95
- ----------------------------------------------------------------------------------------------------------------------
Total investment securities 2,646 6.46 2,671 6.21 2,627 6.22 2,560 6.22
- ----------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 451 5.42 386 5.41 454 5.38 579 5.47
- ----------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,480 7.78 8,360 7.73 8,387 7.72 8,433 7.79
- ----------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (98) (98) (99) (98)
Unrealized gain on investment securities 20 - 14 52
Cash and due from banks 597 624 616 657
Land, buildings and equipment -- net 209 208 208 210
Other assets 184 189 197 208
- ----------------------------------------------------------------------------------------------------------------------
Total assets $9,392 $9,283 $9,323 $9,462
======================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 288 2.41 $ 296 2.41 $ 306 2.35 $ 306 2.41
Interest bearing demand 3,673 3.32 3,651 3.29 3,665 3.30 3,638 3.37
Time open & C.D.'s under $100,000 2,150 5.38 2,174 5.38 2,213 5.39 2,246 5.58
Time open & C.D.'s $100,000 & over 208 5.19 220 5.14 234 5.13 232 5.30
- ----------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 6,319 4.04 6,341 4.03 6,418 4.04 6,422 4.17
- ----------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 464 4.70 425 4.78 429 4.75 481 4.83
Long-term debt and other borrowings 15 7.21 15 7.16 15 7.32 15 7.02
- ----------------------------------------------------------------------------------------------------------------------
Total borrowings 479 4.77 440 4.86 444 4.83 496 4.90
- ----------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 6,798 4.09% 6,781 4.09% 6,862 4.09% 6,918 4.22%
- ----------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,626 1,556 1,507 1,546
Other liabilities 64 66 71 96
Stockholders' equity 904 880 883 902
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $9,392 $9,283 $9,323 $9,462
======================================================================================================================
Net interest margin (T/E) $ 96 $ 92 $ 91 $ 91
======================================================================================================================
Net yield on interest earning assets 4.50% 4.41% 4.37% 4.33%
======================================================================================================================
(A) Includes tax equivalent calculations
38
Year Ended December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- -------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Rates Rates Rates Rates
(Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/
Balance Paid Balance Paid Balance Paid Balance Paid
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Business (A) $1,761 8.24% $1,802 8.24% $1,765 8.50% $1,485 8.32%
Construction and development 139 9.19 129 9.23 125 9.48 130 9.64
Real estate -- business 713 8.84 728 8.83 716 9.14 615 8.91
Real estate -- personal 990 7.93 996 7.94 984 7.76 848 7.57
Personal banking 1,306 8.82 1,312 8.86 1,282 8.78 1,132 8.52
Credit card 457 13.77 426 13.99 405 14.19 390 13.64
- -------------------------------------------------------------------------------------------------------------------------------
Total loans 5,366 8.90 5,393 8.89 5,277 8.98 4,600 8.80
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,669 6.17 1,632 6.20 1,722 6.19 1,803 6.12
State & municipal obligations (A) 133 8.00 144 7.77 141 7.94 73 7.07
CMO's and asset-backed securities 681 6.22 689 6.14 761 6.27 749 6.33
Trading account securities 5 5.83 4 5.49 3 7.45 3 5.65
Other marketable securities (A) 46 6.76 55 5.79 75 6.00 89 6.31
Other non-marketable securities 33 1.39 26 4.15 25 3.00 22 2.08
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,567 6.23 2,550 6.24 2,727 6.27 2,739 6.18
- -------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 366 5.81 301 5.80 86 6.20 65 6.14
- -------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,299 7.94 8,244 7.96 8,090 8.04 7,404 7.80
- -------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (98) (98) (98) (88)
Unrealized gain (loss) on investment
securities 28 17 (19) (84)
Cash and due from banks 645 640 589 555
Land, buildings and equipment -- net 210 210 209 194
Other assets 224 224 221 166
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $9,308 $9,237 $8,992 $8,147
================================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 312 2.52 $ 323 2.54 $ 330 2.56 $ 283 2.58
Interest bearing demand 3,505 3.47 3,403 3.48 3,289 3.38 3,115 3.20
Time open & C.D.'s under $100,000 2,261 5.59 2,302 5.53 2,267 5.34 1,993 4.92
Time open & C.D.'s $100,000 & over 230 5.47 224 5.53 217 5.44 184 4.84
- -------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 6,308 4.25 6,252 4.26 6,103 4.13 5,575 3.84
- -------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 430 5.30 461 5.37 475 5.52 403 5.30
Long-term debt and other borrowings 15 7.41 16 7.27 18 7.42 16 6.14
- -------------------------------------------------------------------------------------------------------------------------------
Total borrowings 445 5.37 477 5.43 493 5.59 419 5.34
- -------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 6,753 4.33% 6,729 4.34% 6,596 4.24% 5,994 3.95%
- -------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,569 1,559 1,494 1,365
Other liabilities 93 66 54 29
Stockholders' equity 893 883 848 759
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $9,308 $9,237 $8,992 $8,147
===============================================================================================================================
Net interest margin (T/E) $ 93 $ 92 $ 92 $ 84
===============================================================================================================================
Net yield on interest earning assets 4.42% 4.42% 4.58% 4.61%
===============================================================================================================================
(A) Includes tax equivalent calculations.
39
CONSOLIDATED BALANCE SHEETS
Commerce Bancshares, Inc. and Subsidiaries
December 31
- ------------------------------------------------------------------------------
(In thousands)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ASSETS
Loans, net of unearned income $5,472,342 $5,317,813
Allowance for loan losses (98,223) (98,537)
- ------------------------------------------------------------------------------
Net loans 5,374,119 5,219,276
- ------------------------------------------------------------------------------
Investment securities:
Available for sale 2,670,420 2,552,264
Trading account 11,265 9,369
Other non-marketable 39,830 33,120
- ------------------------------------------------------------------------------
Total investment securities 2,721,515 2,594,753
- ------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 368,690 523,302
Cash and due from banks 833,260 774,852
Land, buildings and equipment -- net 209,777 210,033
Goodwill and core deposit premium -- net 87,928 101,184
Customers' acceptance liability 1,259 9,435
Other assets 101,638 141,116
- ------------------------------------------------------------------------------
Total assets $9,698,186 $9,573,951
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand $1,800,684 $1,828,950
Savings and interest bearing demand 4,021,376 3,891,801
Time open and C.D.'s of less than $100,000 2,138,206 2,253,390
Time open and C.D.'s of $100,000 and over 206,163 218,951
- ------------------------------------------------------------------------------
Total deposits 8,166,429 8,193,092
- ------------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 526,807 362,903
Long-term debt and other borrowings 14,120 14,562
Other liabilities 65,300 110,176
Acceptances outstanding 1,259 9,435
- ------------------------------------------------------------------------------
Total liabilities 8,773,915 8,690,168
- ------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized and unissued 2,000,000 shares - -
Common stock, $5 par value
Authorized 80,000,000 shares;
issued 37,565,369 shares in 1996 and 1995 187,827 187,827
Capital surplus 104,292 84,415
Retained earnings 621,689 618,388
Treasury stock of 187,977 shares in 1996
and 861,951 shares in 1995, at cost (7,422) (32,980)
Unearned employee benefits (340) (716)
Unrealized securities gain -- net of tax 18,225 26,849
- ------------------------------------------------------------------------------
Total stockholders' equity 924,271 883,783
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $9,698,186 $9,573,951
==============================================================================
See accompanying notes to financial statements
40
CONSOLIDATED STATEMENTS OF INCOME
Commerce Bancshares, Inc. and Subsidiaries
For the Years Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $460,970 $457,760 $331,429
Interest on investment securities 161,299 161,168 163,395
Interest on federal funds sold and securities purchased under
agreements to resell 25,334 12,075 5,457
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 647,603 631,003 500,281
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Savings and interest bearing demand 128,532 120,683 90,655
Time open and C.D.'s of less than $100,000 119,366 118,267 77,884
Time open and C.D.'s of $100,000 and over 11,606 11,430 6,213
Interest on federal funds purchased and securities sold under
agreements to repurchase 21,427 23,792 10,384
Interest on long-term debt and other borrowings 929 1,086 528
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 281,860 275,258 185,664
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 365,743 355,745 314,617
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 24,522 14,629 5,845
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 341,221 341,116 308,772
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust fees 36,622 33,454 28,180
Deposit account charges and other fees 54,506 44,658 39,971
Credit card transaction fees 26,586 23,341 19,318
Trading account profits and commissions 5,982 5,158 4,903
Net gains on securities transactions 3,293 897 2,354
Other 32,173 25,642 26,302
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 159,162 133,150 121,028
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 165,291 157,853 144,015
Net occupancy 21,456 20,294 18,017
Equipment 15,185 14,256 13,159
Supplies and communication 24,697 24,139 19,633
Data processing 20,778 20,997 16,837
Federal deposit insurance 2,124 8,807 15,349
Marketing 11,698 11,611 10,833
Other 56,725 47,527 44,235
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 317,954 305,484 282,078
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 182,429 168,782 147,722
Less income taxes 62,917 61,142 51,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $119,512 $107,640 $ 96,111
- -----------------------------------------------------------------------------------------------------------------------------------
Net income per common and common equivalent share $ 3.11 $ 2.71 $ 2.59
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares outstanding 38,450 39,693 37,167
Cash dividends per common share $ .724 $ .653 $ .570
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
Commerce Bancshares, Inc. and Subsidiaries
For the Years Ended December 31
- ------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 119,512 $ 107,640 $ 96,111
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 24,522 14,629 5,845
Provision for depreciation and amortization 31,134 31,173 25,741
Accretion of investment security discounts (5,630) (5,656) (1,704)
Amortization of investment security premiums 20,194 24,596 32,057
Provision for deferred income taxes 3,303 3,549 (6,651)
Net gains on securities transactions (3,293) (897) (2,354)
Net (increase) decrease in trading account securities (1,230) (4,859) 2,182
(Increase) decrease in interest receivable 10,190 19 (10,309)
Increase (decrease) in interest payable (1,214) 10,863 5,033
Other changes, net 17,194 14,204 (9,203)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 214,682 195,261 136,748
- ------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net cash received (paid) in acquisitions -- (33,226) 13,031
Cash paid in sales of branches (38,134) -- --
Proceeds from sales of available for sale securities 704,120 917,063 808,253
Proceeds from maturities of available for sale securities 496,928 535,722 230,303
Purchases of available for sale securities (1,351,654) (930,080) (821,250)
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell 154,612 (424,202) 299,393
Net increase in loans (188,731) (222,684) (278,953)
Purchases of premises and equipment (26,436) (25,798) (19,057)
Sales of premises and equipment 7,000 8,673 8,789
- ------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (242,295) (174,532) 240,509
- ------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing demand,
savings and interest bearing demand deposits 131,861 265,672 (252,099)
Net increase (decrease) in time open and C.D.'s (107,418) 53,208 91,804
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 163,904 (59,843) (119,777)
Repayment of long-term debt (495) (8,805) (438)
Purchases of treasury stock (78,408) (40,024) (52,755)
Issuance under stock purchase, option and benefit plans 4,039 4,149 8,152
Cash dividends paid on common stock (27,462) (26,039) (21,124)
- ------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 86,021 188,318 (346,237)
- ------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 58,408 209,047 31,020
Cash and cash equivalents at beginning of year 774,852 565,805 534,785
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 833,260 $ 774,852 $ 565,805
================================================================================================
See accompanying notes to financial statements.
42
STATEMENTS OF STOCKHOLDERS' EQUITY
Commerce Bancshares, Inc. and Subsidiaries
Unearned Net
Common Capital Retained Treasury Employee Unrealized
(In thousands) Stock Surplus Earnings Stock Benefits Gain (Loss) Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $161,192 $ 17,051 $545,424 $ (8,982) $(2,065) $ - $712,620
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 96,111 96,111
1/1/94 adoption of SFAS 115 --
net unrealized gain on available for
sale securities 47,116 47,116
Change in unrealized gain (loss) on
available for sale securities (107,232) (107,232)
Purchase of treasury stock (52,793) (52,793)
Cash dividends paid ($.570 per share) (21,124) (21,124)
Issuance under stock purchase, option,
award and benefit plans, net (1,023) 9,420 20 8,417
Purchase acquisitions 571 2,519 40,207 43,297
5% stock dividend 8,088 35,992 (44,080) -
ESOP benefit earned 36 1,750 1,786
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 169,851 54,575 576,331 (12,148) (295) (60,116) 728,198
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 107,640 107,640
Change in unrealized gain (loss) on
available for sale securities 86,927 86,927
Purchase of treasury stock (71,368) 33 (71,335)
Cash dividends paid ($.653 per share) (26,039) (26,039)
Issuance under stock purchase, option
and award plans, net (2,797) 8,241 (454) 4,990
Purchase acquisitions (435) 5,315 4,880
Pooling acquisition, net 13,371 (4,872) 32,360 7,625 38 48,522
5% stock dividend, net 4,605 37,944 (71,904) 29,355 -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 187,827 84,415 618,388 (32,980) (716) 26,849 883,783
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 119,512 119,512
Change in unrealized gain (loss) on
available for sale securities (8,624) (8,624)
Purchase of treasury stock (47,844) 24 (47,820)
Cash dividends paid ($.724 per share) (27,462) (27,462)
Issuance under stock purchase, option
and award plans, net (3,217) 7,747 352 4,882
5% stock dividend, net 23,094 (88,749) 65,655 -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $187,827 $104,292 $621,689 $ (7,422) $ (340) $ 18,225 $924,271
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
43
Notes to Financial Statements
Commerce Bancshares, Inc. and Subsidiaries
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company follows generally accepted accounting principles (GAAP) and
reporting practices applicable to the banking industry. The preparation of
financial statements under GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
notes. While the financial statements reflect management's best estimates and
judgment, actual results could differ from those estimates. The consolidated
financial statements include the accounts of the Company and its substantially
wholly-owned subsidiaries (after elimination of all material intercompany
balances and transactions). Certain amounts for prior years have been
reclassified to conform to the current year presentation.
ACQUISITIONS/INTANGIBLE ASSETS
The Company amortizes the cost in excess of the fair value of net assets
acquired in purchase business combinations (goodwill) using the straight-line
method over periods of 15-20 years. When facts and circumstances indicate
potential impairment, the Company evaluates the recoverability of asset carrying
values, including goodwill, using estimates of undiscounted future cash flows
over remaining asset lives. Any impairment loss is measured by the excess of
carrying values over fair values. Core deposit intangibles are amortized over a
maximum of 10 years using accelerated methods. Results of operations of
companies acquired in purchase business combinations are included from the date
of acquisition.
LOANS
Interest on loans is accrued based upon the principal amount outstanding. The
accrual of interest on loans is discontinued when, in management's judgment, the
collectibility of interest or principal in the normal course of business is
doubtful. Loan and commitment fees are deferred and recognized as income over
the life of the loan or commitment as an adjustment of yield.
ALLOWANCE/PROVISION
FOR LOAN LOSSES
The provision for loan losses is based upon management's estimate of the amount
required to maintain an adequate allowance for losses, reflective of the risks
in the loan portfolio. This estimate is based upon reviews of the portfolio,
past loan loss experience, current economic conditions and such other factors,
which in management's judgment, deserve current recognition. Impaired loans
include all non-accrual loans and loans 90 days delinquent and still accruing
interest.
INVESTMENTS IN DEBT AND
EQUITY SECURITIES
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Premiums and discounts are amortized to interest income
over the estimated lives of the securities. Gains and losses are calculated
using the specific identification method. Trading account securities are carried
at fair value with unrealized gains and losses recorded as non-interest income.
Investments in equity securities without readily determinable fair values are
stated at cost, less allowances for other than temporary declines in value.
PROPERTY AND EQUIPMENT
Land is stated at cost, and buildings and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using straight-line and
accelerated methods. Maintenance and repairs are charged to expense as incurred.
INCOME TAXES
The Company and its eligible subsidiaries file consolidated income tax returns.
Deferred income taxes are provided on temporary differences between the
financial reporting bases and income tax bases of the Company's assets and
liabilities.
TREASURY STOCK
Purchases of the Company's common stock are recorded at cost. Upon reissuance,
treasury stock is reduced based upon the average cost basis of shares held.
44
INCOME PER SHARE
Income per share data is based on the weighted average number of common shares
and common equivalent shares outstanding during each year. All per share data
has been restated to reflect the 5% stock dividend distributed on December 13,
1996.
ACQUISITIONS
The Company has signed a definitive agreement to merge with Shawnee Bank Shares,
Inc., a one-bank holding company in the metropolitan Kansas City area with
assets of $205 million. The merger will be recorded as a stock transaction
accounted for as a pooling of interests. Completion of this acquisition is
anticipated during the second quarter of 1997; it is not expected to have a
material impact on the financial statements of the Company.
During 1995, the Company acquired four banks with an aggregate purchase price of
$181.8 million. Three of the acquisitions were accounted for under the purchase
method of accounting and one was accounted for as a pooling of interests. The
Company issued common stock valued at $82.8 million in its acquisition of The
Peoples Bank of Bloomington, Illinois, in March 1995 in a transaction recorded
under the pooling of interests method of accounting. The Peoples Bank had assets
of $444 million at the date of acquisition. Union National Bank of Wichita,
Kansas, was acquired for cash of $86.7 million in April 1995 in a transaction
accounted for under the purchase method of accounting. Union National Bank had
assets of $673 million at the acquisition date. In March and May 1995, the
Company acquired the Cotton Exchange Bank in Kennett, Missouri, and the
Chillicothe State Bank in Chillicothe, Illinois. Aggregate consideration paid in
these two transactions, which were accounted for using the purchase method,
consisted of cash of $7.4 million and treasury stock valued at $4.9 million.
Total goodwill and core deposit intangible assets recorded by the Company in
connection with the three purchase acquisitions was $64.9 million.
During 1994, the Company acquired five banks in transactions which were all
accounted for as purchases. The aggregate purchase price of these acquisitions
was $50.7 million, and included treasury stock valued at $44.5 million, new
common stock valued at $3.5 million, and $2.7 million of cash. Total assets of
acquired banks aggregated $376 million. Goodwill and core deposit intangible
assets recorded as a result of these acquisitions was $11.6 million.
Financial statements for periods prior to the consummation of acquisitions
accounted for as poolings have not been restated because such restated amounts
do not differ materially from the Company's historical financial statements.
The following schedule summarizes pro forma consolidated financial data as if
the 1994 and 1995 acquisitions had been consummated on January 1, 1994:
(In thousands, except per share data) 1995 1994
- --------------------------------------------------------------------------------
Net interest income plus non-interest income $497,653 $497,697
Net income 103,909 101,737
Net income per share 2.58 2.46
================================================================================
LOANS AND ALLOWANCE FOR LOSSES
Major classifications of loans at December 31, 1996 and 1995 are as follows:
- --------------------------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Business $1,700,678 $1,716,080
Real estate -- construction 182,474 168,031
Real estate -- business 758,650 695,558
Real estate -- personal 1,010,572 983,249
Personal banking 1,256,684 1,258,809
Credit card 563,284 496,086
- --------------------------------------------------------------------------------
Total loans $5,472,342 $5,317,813
================================================================================
Loans to directors and executive officers of the Parent and its significant
subsidiaries and to their associates are summarized as follows:
(In thousands)
- --------------------------------------------------------------------------------
Balance at January 1, 1996 $ 152,246
- --------------------------------------------------------------------------------
Additions 199,261
Amounts collected 177,753
Amounts written off -
- --------------------------------------------------------------------------------
Balance at December 31, 1996 $ 173,754
- --------------------------------------------------------------------------------
Management believes all loans to directors and executive officers have been
made in the ordinary course of business with normal credit terms, including
interest rate and collateralization, and do not represent more than a normal
risk of collection. There were no
45
outstanding loans at December 31, 1996, to principal holders of the Company's
common stock.
The Company's lending activity is generally centered in Missouri and its
contiguous states. The Company maintains a diversified portfolio with no
significant industry concentrations of credit risk. Loans and loan commitments
are extended under the Company's normal credit standards, controls, and
monitoring features. Most credit commitments are short term in nature, and
maturities generally do not exceed five years. Credit terms typically provide
for floating rates of interest, and fixed rates are generally not set for more
than three to five years. Collateral is commonly required and would include such
assets as marketable securities and cash equivalent assets, accounts receivable
and inventory, equipment, other forms of personal property, and real estate. At
December 31, 1996, unfunded loan commitments totaled $2,073,614,000 (excluding
$1,967,388,000 in unused approved lines of credit related to credit card loan
agreements) which could be drawn by customers subject to certain review and
terms of agreement.
A summary of the allowance for loan losses is as follows:
Years Ended December 31
- -------------------------------------------------------
(In thousands) 1996 1995 1994
- -------------------------------------------------------
Balance, January 1 $98,537 $87,179 $85,830
- -------------------------------------------------------
Additions:
Provision for loan losses 24,522 14,629 5,845
Allowances of
acquired banks - 12,932 2,953
- -------------------------------------------------------
Total additions 24,522 27,561 8,798
- -------------------------------------------------------
Deductions:
Loan losses 31,914 23,272 15,155
Less recoveries 7,078 7,069 7,706
- -------------------------------------------------------
Net loan losses 24,836 16,203 7,449
=======================================================
Balance, December 31 $98,223 $98,537 $87,179
=======================================================
Impaired loans include all non-accrual loans and loans 90 days delinquent and
still accruing interest. The net amount of interest income recorded on such
loans during their impairment period was not significant. The Company ceased
recognition of interest income on loans with a book value of $13,945,000 and
$16,234,000 at December 31, 1996 and 1995, respectively. The interest income
not recognized on non-accrual loans was $1,617,000, $1,868,000 and $2,051,000
during 1996, 1995 and 1994, respectively. Loans 90 days delinquent and still
accruing interest amounted to $24,806,000 and $15,690,000 at December 31, 1996
and 1995, respectively. Real estate and other assets acquired in foreclosure
amounted to approximately $2,600,000 and $3,900,000 at December 31, 1996 and
1995, respectively.
INVESTMENT SECURITIES
A summary of the available for sale investment securities by maturity groupings
as of December 31, 1996 follows below. The weighted average yield for each range
of maturities was calculated using the yield on each security within that range
weighted by the amortized cost of each security at December 31, 1996. Yields on
tax exempt securities have not been adjusted for tax exempt status.
Weighted
Amortized Fair Average
(Dollars in thousands) Cost Value Yield
- ------------------------------------------------------------------
U.S. government and federal agency obligations:
Within 1 year $ 240,885 $ 243,535 5.82%
After 1 but within 5 years 1,463,188 1,472,575 6.26
After 5 but within 10 years 1,264 1,254 5.07
After 10 years 532 581 5.36
- ------------------------------------------------------------------
Total U.S. government
and federal agency
obligations 1,705,869 1,717,945 6.20
==================================================================
State and municipal obligations:
Within 1 year 18,332 18,348 5.30
After 1 but within 5 years 54,927 56,367 5.38
After 5 but within 10 years 22,777 23,634 5.47
After 10 years 2,850 2,944 5.69
- ------------------------------------------------------------------
Total state and
municipal obligations 98,886 101,293 5.39
==================================================================
CMO's and asset-
backed securities 705,848 703,515 6.22
==================================================================
Other debt securities:
Within 1 year 108,032 108,022
After 1 but within 5 years 412 411
After 10 years 9 9
- ------------------------------------------------------------------
Total other
debt securities 108,453 108,442
==================================================================
Equity securities 21,863 39,225
==================================================================
Total available for
sale investment
securities $2,640,919 $2,670,420
==================================================================
46
The unrealized gains and losses by type are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
December 31, 1996
U.S. government and
federal agency
obligations $1,705,869 $ 16,838 $ 4,762 $1,717,945
State and municipal
obligations 98,886 2,478 71 101,293
CMO's and asset-backed
securities 705,848 3,815 6,148 703,515
Other debt securities 108,453 - 11 108,442
Equity securities 21,863 17,952 590 39,225
- ----------------------------------------------------------------------------------------------------------
Total $2,640,919 $41,083 $ 11,582 $2,670,420
- ----------------------------------------------------------------------------------------------------------
December 31, 1995
U.S. government and
federal agency
obligations $1,684,679 $24,172 $ 1,740 $1,707,111
State and municipal
obligations 124,352 3,735 44 128,043
CMO's and asset-backed
securities 666,334 7,119 2,931 670,522
Other debt securities 11,011 5 34 10,982
Equity securities 22,479 14,901 1,774 35,606
- ----------------------------------------------------------------------------------------------------------
Total $2,508,855 $49,932 $ 6,523 $2,552,264
- ----------------------------------------------------------------------------------------------------------
The following table presents proceeds from sales of securities and the
components of net securities gains.
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Proceeds from sales $704,120 $917,063 $808,253
- -----------------------------------------------------------------------------------------------------------
Realized gains $ 4,600 $ 3,188 $ 2,742
Realized losses 1,307 2,291 388
- -----------------------------------------------------------------------------------------------------------
Net realized gains $ 3,293 $ 897 $ 2,354
- -----------------------------------------------------------------------------------------------------------
Investment securities with a par value of $1,021,998,000 and $1,081,509,000 were
pledged at December 31, 1996 and 1995, respectively, to secure public deposits
and for other purposes as required by law. Except for U.S. government and
federal agency obligations, no investment in a single issuer exceeds 10% of
stockholders' equity.
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment consist of the following at December 31, 1996 and
1995:
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------
Land $ 51,676 $ 52,146
Buildings and improvements 247,949 244,413
Equipment 130,657 119,366
- ----------------------------------------------------------------------------------------------------------
Total 430,282 415,925
- ----------------------------------------------------------------------------------------------------------
Less accumulated depreciation
and amortization 220,505 205,892
- ----------------------------------------------------------------------------------------------------------
Net land, buildings and
equipment $209,777 $210,033
- ----------------------------------------------------------------------------------------------------------
Depreciation expense of $19,183,000, $19,578,000 and $18,243,000 for 1996, 1995
and 1994, respectively, was included in net occupancy expense,
equipment expense and other expense in the Consolidated Statements of
Income. Repairs and maintenance expense of $13,082,000, $11,182,000 and
$9,945,000 for 1996, 1995 and 1994, respectively, was included in net occupancy
expense, equipment expense and other expense.
BORROWINGS
Short-term borrowings of the Company consisted of federal funds purchased and
securities sold under agreements to repurchase by subsidiary banks of the
following:
(Dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------
Balance:
Average $449,831 $ 42,413
Year end 526,807 362,903
Maximum month-end
during year 526,807 589,270
- ---------------------------------------------------------------------------------------------------
Interest rate:
Average 4.8% 5.4%
Year end 5.0% 4.8%
- ---------------------------------------------------------------------------------------------------
Long-term debt of the Company was $14,120,000 at December 31, 1996, including
$9,200,000 borrowed from the Federal Home Loan Bank by a subsidiary bank
acquired in 1995. Such borrowings carry an average rate of 6.4%, and require
payments of $6,200,000 and $3,000,000 in 1997 and 1998, respectively.
None of the Company's borrowings have any related compensating balance
requirements which restrict the usage of Company assets. However, regulations of
the Federal Reserve System require reserves to be maintained by all banking
institutions according to the types and amounts of certain deposit liabilities.
These requirements restrict usage of a portion of the amounts shown as
consolidated "Cash and due from banks" from everyday usage in operation of the
banks. The minimum reserve requirements for the subsidiary banks at December 31,
1996 totaled $112,137,000.
Cash payments for interest on deposits and borrowings during 1996, 1995 and 1994
on a consolidated basis amounted to $282,792,000, $264,503,000 and $180,645,000,
respectively.
47
Notes to Financial Statements
Commerce Bancshares, Inc. and Subsidiaries (CONT.)
INCOME TAXES
Total income taxes for 1996, 1995 and 1994 were allocated as shown in the
following tables.
Income tax expense from operations for the years ended December 31, 1996, 1995
and 1994 consists of:
(In thousands) Current Deferred Total
- ------------------------------------------------------------
Year ended December 31, 1996:
U.S. Federal $54,550 $ 3,303 $57,853
State and local 5,064 - 5,064
- ------------------------------------------------------------
$59,614 $ 3,303 $62,917
============================================================
Year ended December 31, 1995:
U.S. Federal $52,639 $ 3,549 $56,188
State and local 4,954 - 4,954
- ------------------------------------------------------------
$57,593 $ 3,549 $61,142
============================================================
Year ended December 31, 1994:
U.S. Federal $54,113 $(6,651) $47,462
State and local 4,149 - 4,149
- ------------------------------------------------------------
$58,262 $(6,651) $51,611
============================================================
Income tax expense (benefits) allocated directly to stockholders' equity for the
years ended December 31, 1996, 1995 and 1994 consists of:
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------
Unrealized gain (loss) on securities
available for sale $(5,284) $53,447 $(36,887)
Compensation expense for tax
purposes in excess of amounts
recognized for financial
reporting purposes (292) (324) (114)
Deductible dividends paid on
unallocated shares held by the ESOP - - (36)
- --------------------------------------------------------------------
Income tax expense (benefits)
allocated to stockholders' equity $(5,576) $53,123 $(37,037)
====================================================================
Actual income tax expense differs from the amounts computed by applying the U.S.
Federal income tax rate of 35% as a result of the following:
(In thousands) 1996 1995 1994
- --------------------------------------------------------------
Computed "expected" tax expense $63,850 $59,073 $51,703
Increase (reduction) in income
taxes resulting from:
Amortization of goodwill 1,499 1,444 724
Tax exempt income (2,625) (2,829) (1,392)
Tax deductible dividends on
allocated shares held by
the Company's ESOP (678) (665) (567)
State and local income taxes,
net of Federal income
tax benefit 3,601 3,631 2,159
Other, net (2,730) 488 (1,016)
- --------------------------------------------------------------
Total income tax expense $62,917 $61,142 $51,611
==============================================================
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented below:
(In thousands) 1996 1995
- ------------------------------------------------------------------
Deferred tax assets:
Loans, principally due to allowance
for loan losses $41,766 $41,956
Foreclosed property, due to writedowns
for financial reporting purposes 283 629
Unearned fee income, due to earlier
recognition for tax purposes 1,269 1,630
Deferred compensation, principally due to
accrual for financial reporting purposes 1,269 930
Accrued expenses, principally due to
accrual for financial reporting purposes 2,342 2,645
Net operating loss carryforwards of
acquired companies 252 572
Other 449 503
- -----------------------------------------------------------------
Total gross deferred tax assets 47,630 48,865
- -----------------------------------------------------------------
Deferred tax liabilities:
Investment securities, principally
due to discount accretion 3,393 2,338
Capitalized interest 1,002 952
Unrealized gain on securities
available for sale 11,276 16,560
Land, buildings and equipment, principally
due to write-up in value in purchase
accounting entries for financial reporting 22,249 19,426
Core deposit intangible, principally due
to purchase accounting entries for
financial reporting 8,100 9,979
Pension benefit obligation, due to
recognition of the excess pension
asset for financial reporting purposes 2,451 2,725
Other 5 4
- -----------------------------------------------------------------
Total gross deferred tax liabilities 48,476 51,984
- -----------------------------------------------------------------
Net deferred tax liability $ (846) $(3,119)
=================================================================
Cash payments of income taxes, net of refunds and interest received, amounted to
$64,860,000, $52,268,000 and $56,887,000 on a consolidated basis during 1996,
1995 and 1994, respectively. The Parent had net receipts of $1,644,000,
$3,010,000, and $4,170,000 during 1996, 1995 and 1994, respectively, from tax
benefits.
EMPLOYEE BENEFIT PLANS
Employee benefits charged to operating expenses aggregated $23,963,000,
$21,207,000 and $20,036,000 for 1996, 1995 and 1994, respectively.
Substantially all of the Company's employees are
48
covered by a noncontributory defined benefit pension plan. Participants are
fully vested after five years of service and the benefits are based on years of
participation and average annualized earnings. The Company's funding policy is
to contribute funds to a trust as necessary to provide for current service and
for any unfunded accrued actuarial liabilities over a reasonable period. To the
extent that these requirements are fully covered by assets in the trust, a
contribution may not be made in a particular year. The following items are
components of the net pension cost for the years ended December 31, 1996, 1995
and 1994:
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost-benefits
earned during the year $ 2,647 $ 2,311 $ 2,183
Interest cost on projected
benefit obligation 3,343 3,152 3,080
Actual plan assets value
(increase) decrease (5,578) (8,219) 1,287
Net amortization and deferral 429 3,695 (5,732)
- --------------------------------------------------------------------------------
Net periodic pension cost $ 841 $ 939 $ 818
================================================================================
The following table sets forth the pension plan's funded status, using a
valuation date of September 30, 1996 and 1995:
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $41,693,000 in 1996 and
$36,186,000 in 1995 $(42,635) $(36,495)
Additional benefits based on estimated future salary
levels (7,367) (11,499)
- --------------------------------------------------------------------------------
Projected benefit obligation (50,002) (47,994)
- --------------------------------------------------------------------------------
Plan assets at fair value 55,078 54,642
Plan assets in excess of projected benefit obligation 5,076 6,648
Unrecognized net loss from past experience different from
that assumed and effects of change in assumptions 7,403 7,475
Prior service benefit not yet recognized in net pension
cost (1,800) (1,965)
Unrecognized net transition asset being recognized over
15 years (3,830) (4,468)
- --------------------------------------------------------------------------------
Prepaid pension cost included in other assets $ 6,849 $ 7,690
================================================================================
Assumptions used in computing the funded status were:
1996 1995 1994
- --------------------------------------------------------------------------------
Discount rate 7.25% 7.75% 7.00%
Rate of increase in future compensation levels 5.00% 5.00% 5.00%
Long-term rate of return on assets 8.50% 8.00% 8.00%
================================================================================
At December 31, 1996, approximately 87% of plan assets were invested in U.S.
government bonds and corporate bonds and equities.
In addition to the pension plan, substantially all of the Company's employees
are covered by a contributory defined contribution plan, the Participating
Investment Plan. Under the plan, the Company makes matching contributions,
which aggregated $2,320,000 in 1996, $2,352,000 in 1995 and $838,000 in 1994.
The Company formed an employee stock ownership plan (ESOP) in 1987 and borrowed
funds from an unaffiliated lender to acquire shares for the ESOP. The final
principal payment was made in December 1994 and the ESOP assets were merged into
the Participating Investment Plan. The Company's contributions to the ESOP
charged to salaries and benefits aggregated $368,000 and $1,359,000 in 1995 and
1994, respectively. No contribution was made to the ESOP in 1996.
STOCK OPTION PLANS,
RESTRICTED STOCK AWARDS AND
DIRECTORS STOCK PURCHASE PLAN*
The Company has reserved 5,595,187 shares of its common stock for issuance under
various stock option plans offered to certain key employees of the Company and
its subsidiaries. Options are granted, by action of the Board of Directors, to
acquire stock at fair market value at the date of the grant, for a term of 5 to
10 years. At December 31, 1996, 2,940,891 shares remain available for option
grants under these programs. The following table summarizes option activity
over the last three years and current options outstanding.
49
NOTES TO FINANCIAL STATEMENTS
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES (CONT.)
Number of Option Price
Shares Per Share
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1993 962,592 $18.85
Granted 265,543 26.99
Canceled (5,613) 26.33
Exercised (142,882) 12.61
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1994 1,079,640 $21.64
Granted 310,144 26.39
Canceled (24,780) 27.02
Exercised (235,490) 15.43
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1995 1,129,514 $24.12
Granted 281,595 33.84
Canceled (18,645) 29.75
Exercised (181,350) 16.95
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1996 1,211,114 $27.37
================================================================================
The options expire as follows: 206,284 in 2002; 221,348 in 2003; 234,589 in
2004; 275,775 in 2005 and 273,118 in 2006. Options outstanding at December 31,
1996 were exercisable at prices ranging from $20.16 to $33.93.
The Company has a restricted stock award plan under which 173,643 shares of
common stock are reserved at December 31, 1996. The plan allows for awards to
key employees, by action of the Board of Directors, with restrictions as to
transferability, sale, pledging, or assigning, among others, prior to the end of
the restriction period. The restriction period may not exceed 10 years. The
Company issued awards totaling 7,716 shares in 1996, 23,029 shares in 1995 and
3,183 shares in 1994, resulting in deferred compensation amounts of $257,000,
$632,000 and $86,000, respectively. Approximately $189,000, $178,000 and
$106,000 was amortized to salaries expense in 1996, 1995 and 1994, respectively.
Unamortized deferred compensation of $340,000, $716,000 and $295,000 has been
recorded as a reduction of stockholders' equity at December 31, 1996, 1995 and
1994, respectively.
The Company has a directors stock purchase plan whereby outside directors of the
Company and its subsidiaries may elect to use their directors' fees to purchase
Company stock at market value each month-end. Remaining shares reserved for
this plan total 144,647 at December 31, 1996. In 1996, 23,591 shares were
purchased at an average price of $36.29 and in 1995, 27,947 shares were
purchased at an average price of $30.62.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock and performance-based
awards. Had compensation cost for the Company's other stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced by
approximately $1,423,000, or $.04 per share in 1996 and $845,000, or $.02 per
share in 1995. The fair value of the options granted during 1996 is estimated
as $3,228,000 on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 2.0%, volatility of 24.0%,
risk-free interest rate of 6.1%, and an expected life of 7.6 years. Pro forma
net income reflects only options granted in 1996 and 1995. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period of 4 years and 3
years for the 1996 and 1995 options, respectively. Compensation cost for options
granted prior to January 1, 1995 is not considered.
*All share and per share amounts in this note have been restated for the 5%
stock dividend distributed on the $5 par common stock in December 1996.
COMMON STOCK
Under a Rights Agreement dated August 23, 1988, as amended in the amended and
restated rights agreement with Commerce Bank, N.A., as rights agent, dated as of
July 19, 1996, certain rights have attached to the common stock. Under certain
circumstances relating to the acquisition of, or tender offer for, a specified
percentage of the Company's outstanding
50
common stock, holders of the common stock may exercise the rights and purchase
shares of Series A Preferred Stock or, at a discount, common stock of the
Company or an acquiring company.
In February 1996, the Board of Directors authorized the Company to purchase up
to 2,000,000 shares of common stock, in either the open market or privately
negotiated transactions, in order to provide future funding for employee benefit
programs and stock dividends. This action began after the completion of the
stock repurchase program authorized in 1995. Approximately 1,288,000 shares have
been acquired under the 1996 approval through December 31, 1996.
On December 13, 1996, the Company distributed its third consecutive 5% stock
dividend on the $5 par common stock. All per share data in this report has been
restated to reflect the stock dividend. The table below is a summary of share
activity in 1996.
Issued Treasury
Shares Shares
- ---------------------------------------------------------------
December 31, 1995 37,565,369 861,951
Purchases of treasury stock - 1,313,761
Sales under employee
and director plans - (204,994)
5% stock dividend - (1,782,741)
- ---------------------------------------------------------------
December 31, 1996 37,565,369 187,977
===============================================================
REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory actions by regulators that could have a direct
material effect on the Company's financial statements. The regulations require
the Company to meet specific capital adequacy guidelines that involve
quantitative measures of the Company's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Company's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Tier I capital to
total average assets (leverage ratio), and minimum ratios of Tier I and Total
capital to risk-weighted assets (as defined). The minimum required leverage
ratio is 4%, the minimum Tier I capital ratio is 4%, and the minimum Total
capital ratio is 8%. The Company's actual capital amounts and ratios at the last
two year ends are as follows:
(In thousands) 1996 1995
- ---------------------------------------------------------------
Risk-Weighted Assets $6,283,359 $6,045,112
Tier I Capital $ 820,609 $ 756,452
Total Capital $ 892,177 $ 829,784
Tier I Capital Ratio 13.06% 12.51%
Total Capital Ratio 14.20% 13.73%
Leverage Ratio 8.24% 8.27%
- ---------------------------------------------------------------
Management believes that, at December 31, 1996, the Company meets all capital
requirements to which it is subject.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of estimated fair values
for financial instruments held by the Company. Fair value estimates, methods and
assumptions 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, except student, home equity and credit card
loans, is calculated by discounting scheduled cash flows through contractual
maturity using market rates that reflect credit and interest rate risk. The cash
flows through maturity for individual loans are aggregated for the Company's
asset/liability analysis. Rate forecasts are purchased from an outside company
specializing in rate forecasting. Discount rates are computed for each loan
category using these rate forecasts adjusted by the Company's interest spread
and other considerations management deems necessary. Student loans are valued
under the Company's current contract with SALLIE MAE. Home equity loans reprice
monthly and their fair value approximates carrying value. Fair value of non-
accrual 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.
51
Notes to Financial Statements
Commerce Bancshares, Inc. and Subsidiaries (CONT.)
Estimated fair value of credit card loans approximates the existing balances
outstanding at year end because management believes the current credit card
yield is equal to the current market rate for similar instruments. This
estimate does not include the additional value that relates to future cash flows
from new loans generated from existing card holders over the estimated life of
the customer relationship.
The "Carrying Amount" of loans in the schedule below excludes deferred or
unamortized fees and costs related to the loan transaction.
INVESTMENT SECURITIES
The fair values of the debt and equity instruments in the available for sale and
trading sections of the investment security portfolio are estimated based on
prices published in financial newspapers or bid quotations received from
securities dealers. The fair value of those equity investments for which a
market source is not readily available is estimated at carrying value.
A breakdown of investment securities by category and maturity is provided in the
financial statements note 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 AND CASH
AND DUE FROM BANKS
The carrying amounts of federal funds sold and securities purchased under
agreements to resell 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 and present little or no risk.
DEPOSITS
Statement 107 specifies that 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. The fair value of
certificates of deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the three-month Treasury indices
and yield curves supplied by an external company specializing in rate
forecasting. Discount rates are computed for each deposit category using these
rate forecasts adjusted by the Company's interest spread and other
considerations management deems necessary.
The fair value estimates do not include the benefit that results from the low-
cost funding provided by the deposit liabilities compared to the cost of
borrowing funds.
BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
mature or reprice within 90 days; therefore, their fair value approximates
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.
52
The estimated fair values of the Company's financial instruments are as follows:
1996 1995
- -------------------------------------------------------------------------------------------------------------
(In thousands) Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Loans $5,454,627 $5,470,412 $5,304,975 $5,320,033
Available for sale investment securities 2,670,420 2,670,420 2,552,264 2,552,264
Trading account securities 11,265 11,265 9,369 9,369
Other non-marketable securities 39,830 39,830 33,120 33,120
Federal funds sold and securities purchased under
agreements to resell 368,690 368,690 523,302 523,302
Cash and due from banks 833,260 833,260 774,852 774,852
- -------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Non-interest bearing demand deposits $1,800,684 $1,800,684 $1,828,950 $1,828,950
Savings and interest bearing demand deposits 4,021,376 4,021,376 3,891,801 3,891,801
Time open and C.D.'s:
Maturing in year 1 1,653,009 1,652,333 1,775,924 1,779,138
Maturing in year 2 387,005 385,191 324,239 326,457
Maturing in year 3 158,332 157,734 155,160 156,587
Maturing in year 4 92,995 93,603 120,396 122,758
Maturing in year 5 39,484 38,936 75,076 78,222
Maturing in over 5 years 13,544 13,452 21,546 22,635
Federal funds purchased and securities sold under
agreements to repurchase 526,807 526,807 362,903 362,903
Long-term debt and other borrowings 14,120 14,802 14,562 15,533
- -------------------------------------------------------------------------------------------------------------
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.
Foreign exchange contracts are generally executed at a customer's request and an
offsetting contract is executed, eliminating the Company's exposure. Interest
rate swap contracts are entered into by the Company to limit its interest rate
risk. The fair value of these contracts is determined by contacting appropriate
brokers for the current cost of selling, purchasing or closing out the various
contracts. The fair values of the foreign exchange contracts and interest rate
swaps are not material.
These instruments are also referenced in either the financial statements notes
on Financial Instruments with Off-Balance-Sheet Risk or Loans and Allowance for
Losses.
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.
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
The Company engages in various transactions with off-balance-sheet risk in the
normal course of business to meet customer financing needs. The Company uses
the same credit policies in making the commitments and conditional obligations
described below as it does for on-balance-sheet instruments. Issuance of standby
and
53
NOTES TO FINANCIAL STATEMENTS
Commerce Bancshares, Inc. and Subsidiaries (CONT.)
commercial letters of credit beneficially assist customers engaged in a wide
range of commercial enterprise and international trade. Standby letters of
credit serve as payment assurances to a third party in the event the bank's
customer fails to perform its financial and/or contractual obligations. Most
expire over the next 12 months and are secured by 1) a line of credit with, 2) a
certificate of deposit held by, 3) marketable securities held by, or 4) a deed
of trust held by a banking subsidiary. At December 31, 1996, standby letters of
credit outstanding of the banking subsidiaries amounted to $145,376,000, net of
$3,426,000 participated to non-affiliated companies. Commercial letters of
credit generally finance the purchase of imported goods and provide a payment
engagement against presentation of documents meeting the terms and conditions
set forth in the letter of credit instrument. There were $37,022,000 outstanding
commercial letters of credit at December 31, 1996. Transactions involving
securities described as "when-issued" are treated as conditional transactions
in a security authorized for issuance but not yet actually issued. Purchases and
sales of when-issued securities for which settlement date has not occurred are
not to be reflected in the financial statements until settlement date. At
December 31, 1996, the Company had commitments to purchase and sell when-issued
securities of $19,632,000 and $28,229,000, respectively. Losses arising from
these transactions have not been and are not expected to be material.
The Company enters into foreign exchange contracts to purchase and sell foreign
currency. Most of the contracts offset each other and risk arises only if one of
the contracts is not performed and the currency must be bought or sold at the
prevailing market rate. The Company also enters into interest rate swap
contracts to limit its interest rate risk. The notional value of these contracts
was $102,399,000 at December 31, 1996. The current credit exposure (or
replacement cost) across all off-balance-sheet derivative contracts covered by
the risk-based capital standards was $2,713,000 at December 31, 1996.
See financial statements note on Loans and Allowance for Losses for a discussion
of unfunded loan commitments.
COMMITMENTS AND CONTINGENCIES
The Company leases certain premises and equipment, all of which were classified
as operating leases. The rent expense under such arrangements amounted to
$2,361,000, $2,079,000 and $1,619,000 in 1996, 1995 and 1994, respectively. A
summary of minimum lease commitments follows:
(In thousands) Type of Property
- ---------------------------------------------------------------------
Real Total
Years Ended December 31 Property Equipment Commitments
- ---------------------------------------------------------------------
1997 $ 1,900 $286 $ 2,186
1998 1,824 137 1,961
1999 1,672 5 1,677
2000 1,513 5 1,518
2001 1,544 4 1,548
After 19,829 - 19,829
- ---------------------------------------------------------------------
Total minimum lease payments $28,719
=====================================================================
All leases expire prior to 2055. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by leases on other
properties; thus, the future minimum lease commitments will not be less than the
amounts shown for 1997.
The Company incurred expense of $9,505,000 in 1996, $8,648,000 in 1995 and
$7,139,000 in 1994 under an agreement to outsource certain data processing
services. Future payments will adjust for inflation and transaction volume.
The Company owns approximately 51% interest in a venture capital partnership,
with an original commitment to fund $15,456,000 over the ten-year life of the
partnership. Contributions to the partnership were $3,030,000 in January 1997,
$1,515,000 in 1996, $3,030,000 in 1995 and $1,515,000 in 1994.
In the normal course of business, the Company had certain lawsuits pending at
December 31, 1996. In the opinion of management, after consultation with legal
counsel, none of these suits will have a significant effect on the financial
condition and results of operations of the Company.
54
PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are the condensed financial statements of Commerce Bancshares, Inc.
(Parent only) for the periods indicated:
CONDENSED BALANCE SHEETS
December 31
- ----------------------------------------------------------------------------------------------
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
ASSETS
Investment in consolidated subsidiaries:
Banks $783,014 $794,826
Non-banks 25,081 24,081
Receivables from subsidiaries, net of borrowings 8,042 8,498
Cash 121 396
Securities purchased under agreements to resell 7,338 42,168
Investment securities:
Available for sale 90,845 39,872
Other non-marketable 10,728 8,019
Other assets 11,674 10,255
- ----------------------------------------------------------------------------------------------
Total assets $936,843 $928,115
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued taxes and other liabilities $ 12,572 $ 44,332
- ----------------------------------------------------------------------------------------------
Total liabilities 12,572 44,332
- ----------------------------------------------------------------------------------------------
Stockholders' equity 924,271 883,783
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $936,843 $928,115
==============================================================================================
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31
- ----------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
INCOME
Dividends received:
Bank subsidiaries $120,024 $124,129 $129,104
Non-bank subsidiaries 250 - 3,795
Earnings of consolidated subsidiaries, net of dividends (393) (13,057) (34,827)
Interest on investment securities 3,886 2,992 1,871
Interest on securities purchased under agreements to resell 244 228 565
Management fees charged subsidiaries 13,951 13,024 12,867
Data processing fees charged subsidiaries 21,596 18,030 16,817
Net gains (losses) on securities transactions (507) 226 442
Other 69 201 23
- ----------------------------------------------------------------------------------------------
Total income 159,120 145,773 130,657
==============================================================================================
EXPENSE
Salaries and employee benefits 21,981 19,992 19,118
Marketing 123 207 440
External data processing 9,041 8,658 7,143
Other 10,621 10,354 10,876
- ----------------------------------------------------------------------------------------------
Total expense 41,766 39,211 37,577
- ----------------------------------------------------------------------------------------------
Income tax expense (benefit) (2,158) (1,078) (3,031)
- ----------------------------------------------------------------------------------------------
Net income $119,512 $107,640 $ 96,111
==============================================================================================
55
Notes to Financial Statements (Cont.)
Commerce Bancshares, Inc. and Subsidiaries
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
- --------------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 119,512 $ 107,640 $ 96,111
Adjustments to reconcile net income to net cash provided
by operating activities:
Earnings of consolidated subsidiaries, net of dividends 393 13,057 34,827
Other adjustments, net (1,883) 3,521 1,441
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 118,022 124,218 132,379
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash paid in acquisitions - (94,102) -
Increase in investment in subsidiaries, net (438) (4,283) (433)
(Increase) decrease in receivables from subsidiaries, net of borrowings 456 (1,359) (6,753)
Proceeds from sales of investment securities 627 12,943 3,634
Proceeds from maturities of investment securities 249,023 263,557 58,503
Purchases of investment securities (298,241) (271,748) (65,423)
Net (increase) decrease in securities purchased under agreements to resell 34,830 34,504 (56,363)
Net (purchases) sales of equipment (2,723) (1,513) 79
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (16,466) (62,001) (66,756)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchases of treasury stock (78,408) (40,024) (52,755)
Sales of treasury stock 4,039 4,149 8,152
Cash dividends paid on common stock (27,462) (26,039) (21,124)
- --------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (101,831) (61,914) (65,727)
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (275) 303 (104)
Cash at beginning of year 396 93 197
- --------------------------------------------------------------------------------------------------------------
Cash at end of year $ 121 $ 396 $ 93
==============================================================================================================
Dividends paid by the Parent were substantially provided from subsidiary bank
dividends. The subsidiary banks may distribute dividends without prior
regulatory approval that do not exceed the sum of net income for the current
year and retained net income for the preceding two years, subject to maintenance
of minimum capital requirements. The Parent charges fees to its subsidiaries
for management services provided, which are allocated to the subsidiaries based
primarily on total average assets. The Parent also charges data processing
fees, which are allocated to the subsidiaries based on transaction volume. The
Parent makes advances to certain non-banking subsidiaries and subsidiary bank
holding companies. Advances are made to the Parent by certain subsidiary bank
holding companies for investment in temporary liquid securities. Interest on
such advances is based on market rates.
At December 31, 1996, the Parent had lines of credit for general corporate
purposes of $20,000,000 with subsidiary banks. At December 31, 1996, the Parent
had no borrowings from the subsidiary banks. Investment securities held by the
Parent, which consist primarily of common stock and commercial paper, included
an unrealized gain in fair value of $14,553,000 at December 31, 1996. The
corresponding net of tax unrealized gain included in stockholders' equity was
$9,074,000. Also included in stockholders' equity was the unrealized net of tax
gain in fair value of investment securities held by subsidiaries, which amounted
to $9,151,000 at December 31, 1996.
Under a security agreement related to self-insurance for officer and director
liability, $10,000,000 in market value of the Parent's investment securities
were pledged at December 31, 1996.
56
Independent Auditors' Report
The Board of Directors
Commerce Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Commerce
Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commerce Bancshares,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 31, 1997
Kansas City, Missouri
- --------------------------------------------------------------------------------
Statement of Management's Responsibility
Commerce Bancshares, Inc. and Subsidiaries
FINANCIAL STATEMENTS
Commerce Bancshares, Inc. is responsible for the preparation, integrity, and
fair presentation of its published financial statements. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on judgments and
estimates of management.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions over time, the
effectiveness of an internal control system may vary.
Management assessed its internal control structure over financial reporting as
of December 31, 1996. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control-
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that Commerce
Bank, N.A. (St. Louis), Commerce Bank, N.A. (Kansas City), Commerce Bank, N.A.
(Wichita), and Commerce Bank, N.A. (Illinois) maintained an effective internal
control structure over financial reporting as of December 31, 1996.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders as designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that Commerce Bank, N.A. (St. Louis), Commerce Bank, N.A. (Kansas City),
Commerce Bank, N.A. (Wichita), and Commerce Bank, N.A. (Illinois), subsidiary
insured depository institutions of Commerce Bancshares, Inc., complied, in all
significant respects, with the designated laws and regulations related to safety
and soundness for the year ended December 31, 1996.
57
Notes to Financial Statements
Commerce Bancshares, Inc. and Subsidiaries (CONT.)
SUMMARY OF QUARTERLY STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
For the Quarter Ended
- ------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/96 9/30/96 6/30/96 3/31/96
- ------------------------------------------------------------------------------------------------------
Interest income $ 164,676 $161,147 $159,706 $162,074
Interest expense (69,891) (69,618) (69,791) (72,560)
- ------------------------------------------------------------------------------------------------------
Net interest income 94,785 91,529 89,915 89,514
Non-interest income 43,257 40,449 38,660 36,796
Salaries and employee benefits (42,009) (40,971) (41,154) (41,157)
Other expense (38,295) (39,106) (37,811) (37,451)
Provision for loan losses (7,459) (6,082) (5,428) (5,553)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 50,279 45,819 44,182 42,149
Income taxes (17,823) (14,964) (15,264) (14,866)
- ------------------------------------------------------------------------------------------------------
Net income $ 32,456 $ 30,855 $ 28,918 $ 27,283
- ------------------------------------------------------------------------------------------------------
Net income per common and common equivalent share* $ .85 $ .81 $ .75 $ .70
- ------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares outstanding* 38,382 38,129 38,415 38,879
- ------------------------------------------------------------------------------------------------------
For the Quarter Ended
- ------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/95 9/30/95 6/30/95 3/31/95
- ------------------------------------------------------------------------------------------------------
Interest income $ 164,672 $164,091 $160,644 $141,596
Interest expense (73,603) (73,590) (69,756) (58,309)
- ------------------------------------------------------------------------------------------------------
Net interest income 91,069 90,501 90,888 83,287
Non-interest income 36,469 34,194 31,899 30,588
Salaries and employee benefits (39,901) (41,156) (39,650) (37,146)
Other expense (38,384) (35,849) (38,934) (34,464)
Provision for loan losses (5,939) (3,927) (1,930) (2,833)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 43,314 43,763 42,273 39,432
Income taxes (15,066) (16,153) (15,514) (14,409)
- ------------------------------------------------------------------------------------------------------
Net income $ 28,248 $ 27,610 $ 26,759 $ 25,023
- ------------------------------------------------------------------------------------------------------
Net income per common and common equivalent share* $ .71 $ .69 $ .66 $ .65
- ------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares outstanding* 39,808 40,189 40,347 38,405
- ------------------------------------------------------------------------------------------------------
For the Quarter Ended
- ------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/94 9/30/94 6/30/94 3/31/94
- ------------------------------------------------------------------------------------------------------
Interest income $ 134,878 $127,860 $121,491 $116,052
Interest expense (52,400) (47,274) (43,731) (42,259)
- ------------------------------------------------------------------------------------------------------
Net interest income 82,478 80,586 77,760 73,793
Non-interest income 30,431 30,101 32,550 27,946
Salaries and employee benefits (35,280) (35,489) (37,239) (36,007)
Other expense (37,709) (34,498) (35,208) (30,648)
Provision for loan losses (2,051) (276) (2,063) (1,455)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 37,869 40,424 35,800 33,629
Income taxes (13,597) (15,215) (11,216) (11,583)
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Net income $ 24,272 $ 25,209 $ 24,584 $ 22,046
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Net income per common and common equivalent share* $ .65 $ .68 $ .66 $ .60
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Weighted average common and common equivalent
shares outstanding* 37,163 37,065 37,383 37,058
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* Restated for stock dividend distributed December 1996
58
OFFICERS AND DIRECTORS
(List not included in EDGARized exhibit.)
Inside Back Cover