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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-2989
COMMERCE BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-0889454
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION
NO.)
1000 WALNUT, KANSAS CITY, MO 64106
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(816) 234-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X
Yes------- No -------
As of May 7, 1997, the registrant had outstanding 37,354,549 shares of its $5
par value common stock, registrant's only class of common stock.
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PART I: FINANCIAL INFORMATION
In the opinion of management, the consolidated financial statements of
Commerce Bancshares, Inc. and Subsidiaries as of March 31, 1997 and December
31, 1996 and the related notes include all material adjustments which were
regularly recurring in nature and necessary for fair presentation of the
financial condition and the results of operations for the periods shown.
The consolidated financial statements of Commerce Bancshares, Inc. and
Subsidiaries and management's discussion and analysis of financial condition
and results of operations are presented in the schedules as follows:
Schedule 1: Consolidated Balance Sheets
Schedule 2: Consolidated Statements of Income
Schedule 3: Statements of Changes in Stockholders' Equity
Schedule 4: Consolidated Statements of Cash Flows
Schedule 5: Notes to Consolidated Financial Statements
Schedule 6: Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Commerce Bancshares, Inc.
/s/ J. Daniel Stinnett
By __________________________________
J. Daniel Stinnett
Vice President & Secretary
Date: May 12, 1997
/s/ Jeffery D. Aberdeen
By __________________________________
Jeffery D. Aberdeen
Controller
(Chief Accounting Officer)
Date: May 12, 1997
2
SCHEDULE 1
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31 December
1997 31 1996
----------- ----------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Loans, net of unearned income.......................... $5,525,701 $5,472,342
Allowance for loan losses.............................. (99,906) (98,223)
---------- ----------
NET LOANS.......................................... 5,425,795 5,374,119
---------- ----------
Investment securities:
Available for sale................................... 2,616,241 2,670,420
Trading account...................................... 4,957 11,265
Other non-marketable................................. 41,558 39,830
---------- ----------
TOTAL INVESTMENT SECURITIES........................ 2,662,756 2,721,515
---------- ----------
Federal funds sold and securities purchased under
agreements to resell.................................. 436,275 368,690
Cash and due from banks................................ 747,323 833,260
Land, buildings and equipment--net..................... 211,174 209,777
Goodwill and core deposit--net......................... 85,513 87,928
Customers' acceptance liability........................ 1,917 1,259
Other assets........................................... 78,080 101,638
---------- ----------
TOTAL ASSETS....................................... $9,648,833 $9,698,186
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand.......................... $1,813,703 $1,800,684
Savings and interest bearing demand.................. 4,073,412 4,021,376
Time open and C.D.'s of less than $100,000........... 2,121,073 2,138,206
Time open and C.D.'s of $100,000 and over............ 211,473 206,163
---------- ----------
TOTAL DEPOSITS..................................... 8,219,661 8,166,429
Federal funds purchased and securities sold under
agreements to repurchase.............................. 422,247 526,807
Long-term debt and other borrowings.................... 13,591 14,120
Accrued interest, taxes and other liabilities.......... 82,372 65,300
Acceptances outstanding................................ 1,917 1,259
---------- ----------
TOTAL LIABILITIES.................................. 8,739,788 8,773,915
---------- ----------
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.............................................. 187,827 187,827
Capital surplus...................................... 104,174 104,292
Retained earnings.................................... 643,482 621,689
Treasury stock of 593,488 shares in 1997 and 187,977
shares in 1996, at cost............................. (26,844) (7,422)
Unearned employee benefits........................... (593) (340)
Unrealized securities gain--net of tax............... 999 18,225
---------- ----------
TOTAL STOCKHOLDERS' EQUITY......................... 909,045 924,271
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $9,648,833 $9,698,186
========== ==========
See accompanying notes to financial statements.
3
SCHEDULE 2
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31
---------------------
1997 1996
---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans............................... $ 117,314 $ 115,516
Interest on investment securities........................ 40,721 38,676
Interest on federal funds sold and securities purchased
under agreements to resell.............................. 4,777 7,882
---------- ----------
TOTAL INTEREST INCOME................................ 162,812 162,074
---------- ----------
INTEREST EXPENSE
Interest on deposits:
Savings and interest bearing demand.................... 32,668 32,311
Time open and C.D.'s of less than $100,000............. 28,211 31,184
Time open and C.D.'s of $100,000 and over.............. 2,632 3,061
Interest on federal funds purchased and securities sold
under agreements to repurchase.......................... 5,279 5,781
Interest on long-term debt and other borrowings.......... 235 223
---------- ----------
TOTAL INTEREST EXPENSE............................... 69,025 72,560
---------- ----------
NET INTEREST INCOME.................................. 93,787 89,514
---------- ----------
Provision for loan losses................................ 7,538 5,553
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.. 86,249 83,961
---------- ----------
NON-INTEREST INCOME
Trust fees............................................... 9,813 9,093
Deposit account charges and other fees................... 13,300 12,412
Credit card transaction fees............................. 6,283 5,767
Trading account profits and commissions.................. 1,866 1,726
Net gains on securities transactions..................... 146 1,224
Other.................................................... 10,155 6,574
---------- ----------
TOTAL NON-INTEREST INCOME............................ 41,563 36,796
---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits........................... 42,998 41,157
Net occupancy............................................ 5,478 5,392
Equipment................................................ 3,954 3,553
Supplies and communication............................... 6,383 6,054
Data processing.......................................... 5,539 4,931
Marketing................................................ 2,530 3,596
Goodwill and core deposit................................ 2,414 2,924
Other.................................................... 12,818 11,001
---------- ----------
TOTAL NON-INTEREST EXPENSE........................... 82,114 78,608
---------- ----------
Income before income taxes............................... 45,698 42,149
Less income taxes........................................ 16,299 14,866
---------- ----------
NET INCOME........................................... $ 29,399 $ 27,283
========== ==========
Net income per common and common equivalent share........ $ .78 $ .70
========== ==========
Weighted average common and common equivalent shares
outstanding.............................................. 37,613 38,879
========== ==========
Cash dividends per common share.......................... $ .205 $ .181
========== ==========
See accompanying notes to financial statements.
4
SCHEDULE 3
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NUMBER OF UNEARNED NET
SHARES COMMON CAPITAL RETAINED TREASURY EMPLOYEE UNREALIZED
ISSUED STOCK SURPLUS EARNINGS STOCK BENEFITS GAIN (LOSS) TOTAL
---------- -------- -------- -------- -------- -------- ----------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
BALANCE JANUARY 1, 1997. 37,565,369 $187,827 $104,292 $621,689 $ (7,422) $(340) $ 18,225 $924,271
Net income............. 29,399 29,399
Year-to-date change in
fair value of
investment securities. (17,226) (17,226)
Purchase of treasury
stock................. (20,175) (20,175)
Sales under option and
benefit plans......... (139) 482 343
Issuance of stock under
restricted stock award
plan.................. 21 271 (292) --
Restricted stock award
amortization.......... 39 39
Cash dividends paid
($.205 per share)..... (7,606) (7,606)
---------- -------- -------- -------- -------- ----- -------- --------
BALANCE MARCH 31, 1997.. 37,565,369 $187,827 $104,174 $643,482 $(26,844) $(593) $ 999 $909,045
========== ======== ======== ======== ======== ===== ======== ========
Balance January 1, 1996. 37,565,369 $187,827 $ 84,415 $618,388 $(32,980) $(716) $ 26,849 $883,783
Net income............. 27,283 27,283
Year-to-date change in
fair value of
investment securities. (12,642) (12,642)
Purchase of treasury
stock................. (9,683) (9,683)
Sales under option and
benefit plans......... (2,889) 5,216 2,327
Issuance of stock under
restricted stock award
plan.................. (9) 134 (125) --
Restricted stock award
amortization.......... 51 51
Cash dividends paid
($.181 per share)..... (6,997) (6,997)
---------- -------- -------- -------- -------- ----- -------- --------
Balance March 31, 1996.. 37,565,369 $187,827 $ 81,517 $638,674 $(37,313) $(790) $ 14,207 $884,122
========== ======== ======== ======== ======== ===== ======== ========
See accompanying notes to financial statements.
5
SCHEDULE 4
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE
MONTHS ENDED
MARCH 31
------------------
1997 1996
-------- --------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income................................................. $ 29,399 $ 27,283
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................ 7,538 5,553
Provision for depreciation and amortization.............. 7,382 7,560
Accretion of investment security discounts............... (1,327) (1,348)
Amortization of investment security premiums............. 2,462 4,892
Net gains on sales of investment securities (A).......... (146) (1,224)
Net (increase) decrease in trading account securities.... 4,509 (1,746)
Decrease in interest receivable.......................... 3,183 6,695
Decrease in interest payable............................. (737) (1,720)
Other changes, net....................................... 47,124 19,182
-------- --------
Net cash provided by operating activities.............. 99,387 65,127
-------- --------
INVESTING ACTIVITIES:
Cash paid in sale of branch................................ -- (13,595)
Proceeds from sales of investment securities (A)........... 105,753 192,048
Proceeds from maturities of investment securities (A)...... 216,957 103,394
Purchases of investment securities (A)..................... (298,939) (334,278)
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell........... (67,585) 7,878
Net (increase) decrease in loans........................... (57,254) 11,610
Purchases of premises and equipment........................ (8,297) (4,179)
Sales of premises and equipment............................ 3,463 477
-------- --------
Net cash used by investing activities.................. (105,902) (36,645)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing demand,
savings and interest bearing demand deposits.............. 65,055 (106,464)
Net increase (decrease) in time open and C.D.'s............ (11,863) 8,724
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase............ (104,560) 85,903
Repayment of long-term debt................................ (542) (120)
Purchases of treasury stock................................ (20,175) (40,438)
Exercise of stock options by employees..................... 269 1,935
Cash dividends paid on common stock........................ (7,606) (6,997)
-------- --------
Net cash used by financing activities.................. (79,422) (57,457)
-------- --------
Decrease in cash and cash equivalents.................. (85,937) (28,975)
Cash and cash equivalents at beginning of year............. 833,260 774,852
-------- --------
Cash and cash equivalents at March 31.................. $747,323 $745,877
======== ========
- --------
(A) Available for sale and other non-marketable securities, excluding trading
account securities.
Net cash refunds of income taxes for the three month period were $474,000 in
1997 compared to cash payments of $1,218,000 in 1996. Interest paid on
deposits and borrowings for the three month period was $69,709,000 in 1997 and
$74,214,000 in 1996.
See accompanying notes to financial statements.
6
SCHEDULE 5
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of
Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated.
Certain reclassifications were made to 1996 data to conform to current year
presentation.
The significant accounting policies followed in the preparation of the
quarterly financial statements are the same as those disclosed in the 1996
Annual Report to stockholders to which reference is made.
2. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the allowance for loan losses for the three
months ended March 31, 1997 and 1996 (in thousands):
1997 1996
------- -------
Balance, January 1........................................ $98,223 $98,537
------- -------
Additions:
Provision for loan losses............................... 7,538 5,553
Deductions:
Loan losses............................................. 7,968 7,317
Less recoveries on loans................................ 2,113 1,893
------- -------
Net loan losses......................................... 5,855 5,424
------- -------
Balance, March 31......................................... $99,906 $98,666
======= =======
At March 31, 1997, non-performing assets were $37,563,000, which was .68% of
total loans and .39% of total assets. This balance consisted of $13,035,000 in
loans not accruing interest, $23,467,000 in loans past due 90 days and still
accruing interest, and $1,061,000 in foreclosed real estate.
3. INVESTMENT SECURITIES
Investment securities, at fair value, consist of the following at March 31,
1997 and December 31, 1996 (in thousands):
MARCH 31, December 31,
1997 1996
---------- ------------
Available for sale:
U.S. government and
federal agency
obligations.............. $1,632,634 $1,717,945
State and municipal
obligations.............. 97,877 101,293
CMO's and asset-backed
securities............... 737,411 703,515
Other debt securities..... 112,316 108,442
Equity securities......... 36,003 39,225
Trading account securities.. 4,957 11,265
Other non-marketable
securities................. 41,558 39,830
---------- ----------
Total investment
securities............. $2,662,756 $2,721,515
========== ==========
7
4. ACQUISITION ACTIVITY
On May 1, 1997, the Company acquired Shawnee Bank Shares, Inc., a one-bank
holding company in the metropolitan Kansas City area with assets of $202
million. The acquisition was recorded as a stock transaction accounted for as
a pooling of interests. It is not expected to have a material impact on the
financial statements of the Company.
8
SCHEDULE 6
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1997
(UNAUDITED)
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the
Company's 1996 Annual Report on Form 10-K. Results of operations for the three
month period ended March 31, 1997 are not necessarily indicative of results to
be attained for any other period.
THREE
MONTHS
ENDED
MARCH 31
------------
1997 1996
----- -----
PER SHARE DATA
Net income................................................ $ .78 $ .70
Market price.............................................. 45.63 33.10
Book value................................................ 24.59 23.02
Cash dividends............................................ .205 .181
SELECTED RATIOS
(Based on average balance sheets):
Loans to deposits......................................... 68.73% 66.44%
Non-interest bearing deposits to total deposits........... 20.09 19.40
Equity to loans........................................... 16.83 17.03
Equity to deposits........................................ 11.56 11.32
Equity to total assets.................................... 9.78 9.53
Return on total assets.................................... 1.27 1.16
Return on realized stockholders' equity................... 13.17 12.63
Return on total stockholders' equity...................... 12.95 12.17
(Based on end-of-period data):
Tier I capital ratio...................................... 13.22 12.97
Total capital ratio....................................... 14.33 14.15
Leverage ratio............................................ 8.86 8.33
Efficiency ratio.......................................... 60.73 62.84
SUMMARY
The Company's consolidated net income for the first three months of 1997
totaled $29.4 million; a $2.1 million or 7.8% increase over the same period in
1996. Earnings per share increased 11.4% to $.78 in the first three months of
1997 compared to $.70 in the first three months of 1996. Net interest income
increased $4.3 million and non-interest income increased $4.8 million,
partially offset by increases of $3.5 million in non-interest expense and $2.0
million in the provision for loan losses. Initiatives taken over the past two
years have yielded added sources of core non-interest income, as well as
enhancing the net interest margin with improvements in mix and interest rate.
Non-interest expense grew at a moderate rate of 4.5% compared to the first
three months of 1996.
Return on average assets for the first three months of 1997 was 1.27%
compared to 1.16% in the first three months of 1996. Return on average
realized stockholders' equity for the first three months of 1997 was 13.17%
compared to 12.63% for the first three months of 1996. The Company's
efficiency ratio (other expense/net
9
interest income plus non-interest income excluding net gains on securities
transactions) was 60.73% for the first three months of 1997 compared to 62.84%
for the first three months of 1996.
On May 1, 1997, the Company acquired Shawnee Bank Shares, Inc., a one-bank
holding company with locations in the Kansas City metropolitan area and assets
of approximately $202 million. The acquisition was recorded as a pooling of
interests and is not expected to have a material impact on the financial
statements of the Company.
NET INTEREST INCOME
Net interest income 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
taxable equivalent basis, by major category of interest earning assets and
interest bearing liabilities, identifying changes related to volumes and
rates. Changes not solely due to volume or rate changes are allocated to rate.
Management believes this allocation method, applied on a consistent basis,
provides meaningful comparisons between the respective periods.
CHANGE DUE TO
----------------
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997 AVERAGE AVERAGE
COMPARED TO THE SAME PERIOD IN PREVIOUS YEAR VOLUME RATE TOTAL
------- ------- ------
(IN THOUSANDS)
INTEREST INCOME, FULLY TAXABLE EQUIVALENT BASIS:
Loans............................................ $4,315 $(2,623) $1,692
Investment securities:
U.S. government and federal agency securities.. (429) 192 (237)
State and municipal obligations................ (446) (28) (474)
Other securities............................... 2,490 112 2,602
Federal funds sold and securities purchased under
agreements to resell............................ (2,921) (184) (3,105)
------ ------- ------
Total interest income........................ 3,009 (2,531) 478
------ ------- ------
INTEREST EXPENSE:
Savings.......................................... (120) (22) (142)
Interest bearing demand.......................... 1,994 (1,495) 499
Time open & C.D.'s of less than $100,000......... (1,563) (1,410) (2,973)
Time open & C.D.'s of $100,000 and over.......... (340) (89) (429)
Federal funds purchased and securities sold under
agreements to repurchase........................ (410) (92) (502)
Long-term debt and other borrowings.............. (16) 8 (8)
------ ------- ------
Total interest expense....................... (455) (3,100) (3,555)
------ ------- ------
NET INTEREST INCOME, FULLY TAXABLE EQUIVALENT
BASIS....................................... $3,464 $ 569 $4,033
====== ======= ======
Net interest income for the first three months of 1997 was $93.8 million, a
4.8% increase over the first three months of 1996. Increases in average
earning asset levels and decreases in average tax equivalent rates earned and
paid resulted in a 4.52% net interest rate margin in the first three months of
1997 compared to 4.33% for the same period in 1996.
Total interest income increased $738 thousand over the first three months of
1996 mainly due to an increase of $67.7 million in average earning asset
balances, partly offset by a decrease of 3 basis points in average tax
10
equivalent rates earned. The average tax equivalent yield was 7.82% for the
first three months of 1997 and 7.79% for the first three months of 1996.
Loans were 64% of average earning assets and yielded an average tax
equivalent rate of 8.71% for the first three months of 1997. Loan interest
income increased $1.8 million, or 1.6%, over the first three months of 1996.
This increase was mainly due to increases in the average balances of credit
card and business real estate loans, partially offset by a decline of 9 basis
points in average tax equivalent rates earned. Interest income on investment
securities increased $2.0 million over the first three months of 1996 mainly
due to an increase in average balances invested in CMO's and asset-backed
securities and other marketable securities. Interest income on federal funds
sold and securities purchased under agreements to resell decreased $3.1
million compared to the first three months of 1996 mainly due to a decrease of
$217.2 million in average balances invested.
Total interest expense (net of capitalized interest) decreased $3.5 million,
or 4.9%, compared to the first three months of 1996 due mainly to lower
average balances in short-term certificates of deposit under $100,000 and
lower rates paid on deposits, partially offset by higher average balances in
the Company's premium money market deposit accounts. The average cost of funds
was 4.10% for the first three months of 1997 and 4.22% for the first three
months of 1996. Average core deposits (deposits excluding short-term
certificates of deposit over $100,000) for the first three months of 1997 were
unchanged compared to the same period last year. Core deposits supported 93%
of average earning assets in 1997. Interest expense on federal funds purchased
and securities sold under agreements to repurchase decreased $502 thousand
compared to the first three months of 1996, mainly due to lower balances
borrowed.
Summaries of average assets and liabilities and the corresponding average
rates earned/paid appear on page 15.
RISK ELEMENTS OF LOAN PORTFOLIO
Non-performing assets include impaired loans (non-accrual loans and loans 90
days delinquent and still accruing interest) and foreclosed real estate. Loans
are placed on non-accrual status when management does not expect to collect
payments consistent with acceptable and agreed upon terms of repayment
(generally, loans that are 90 days past due as to principal and/or interest
payments). These loans were made primarily to borrowers in Missouri, Kansas
and Illinois. The following table presents non-performing assets.
MARCH 31, December 31,
1997 1996
--------- ------------
(IN THOUSANDS)
Non-accrual loans.................................. $13,035 $13,945
Past due 90 days and still accruing interest....... 23,467 24,806
------- -------
Total impaired loans............................... 36,502 38,751
Foreclosed real estate............................. 1,061 1,136
------- -------
Total non-performing assets.................... $37,563 $39,887
======= =======
Non-performing assets to total loans............... .68% .73%
Non-performing assets to total assets.............. .39% .41%
The level of non-performing assets improved slightly from year end 1996
totals. Non-accrual loans at March 31, 1997 consisted mainly of business loans
($6.8 million) and business real estate loans ($3.9 million). Loans which were
90 or more days past due included credit card loans of $7.7 million and
business loans of $5.1 million.
11
The subsidiary banks issue Visa and MasterCard credit cards, and the balance
of these consumer loans generated through credit card sales drafts and cash
advances was $527.8 million at March 31, 1997. Because credit card loans
traditionally have a higher than average ratio of net charge-offs to loans
outstanding, management requires that a specific allowance for losses on
credit card loans be maintained, which was $16.1 million, or 3.1% of credit
card loans at March 31, 1997. The risk presented by the above loans and
foreclosed real estate is not considered by management to be materially
adverse in relation to normal credit risks generally taken by lenders.
PROVISION/ALLOWANCE FOR LOAN LOSSES
Management records the provision for loan losses, on an individual bank
basis, in amounts that result in an allowance for loan losses sufficient to
cover current net charge-offs and risks believed to be inherent in the loan
portfolio of each bank. Management's evaluation includes 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. As a result of these factors,
the provision for loan losses increased $2.0 million compared to the first
quarter of 1996 and $79 thousand compared to the fourth quarter of 1996. The
allowance for loan losses as a percentage of loans outstanding was 1.81% at
March 31, 1997, compared to 1.80% at year-end 1996 and 1.86% at March 31,
1996. The allowance at March 31, 1997 was 266% of non-performing assets.
Management believes that the allowance for loan losses, which is a general
reserve, is adequate to cover actual and potential losses in the loan
portfolio under current conditions. Other than as previously noted, management
is not aware of any significant risks in the current loan portfolio due to
concentrations of loans within any particular industry, nor of any separate
types of loans within a particular category of non-performing loans that are
unusually significant as to possible loan losses when compared to the entire
loan portfolio. Net charge-offs on loans totaled $5.9 million for the first
quarter of 1997 compared to $5.4 million for the first quarter of 1996 and
$7.6 million for the fourth quarter of 1996. Net annualized charge-offs were
.43% of average loans for the first quarter of 1997 compared to .41% for the
first quarter of 1996 and .47% for the entire year of 1996.
NON-INTEREST INCOME
THREE MONTHS INCREASE
ENDED MARCH 31 (DECREASE)
---------------- ----------------
1997 1996 AMOUNT PERCENT
------- ------- ------- -------
(IN THOUSANDS)
Trust fees.................................. $ 9,813 $ 9,093 $ 720 7.9%
Deposit account charges and other fees...... 13,300 12,412 888 7.2
Credit card transaction fees................ 6,283 5,767 516 8.9
Trading account profits and commissions..... 1,866 1,726 140 8.1
Net gains on securities transactions........ 146 1,224 (1,078) (88.1)
Other....................................... 10,155 6,574 3,581 54.5
------- ------- -------
TOTAL NON-INTEREST INCOME............... $41,563 $36,796 $ 4,767 13.0
======= ======= =======
As a percent of operating income (net
interest income plus non-interest income).. 30.7% 29.1%
======= =======
The increase in deposit account charges and other fees in the first three
months of 1997 compared with 1996 was due primarily to increases in overdraft
and return item fees. Credit card fee growth occurred because of increases in
both merchant income and cardholder volume. The decrease in gains on
securities transactions was partially due to a decrease of $382 thousand in
gains on equity securities recognized by the Parent and a venture capital
subsidiary. Other income for the first three months of 1997 included a $1.3
million gain on the
12
sale of an Illinois banking facility and $1.8 million in gains on loan sales
(which represented a $1.5 million increase over 1996).
NON-INTEREST EXPENSE
THREE MONTHS INCREASE
ENDED MARCH 31 (DECREASE)
--------------- ---------------
1997 1996 AMOUNT PERCENT
------- ------- ------ -------
(IN THOUSANDS)
Salaries and employee benefits.................. $42,998 $41,157 $1,841 4.5%
Net occupancy................................... 5,478 5,392 86 1.6
Equipment....................................... 3,954 3,553 401 11.3
Supplies and communications..................... 6,383 6,054 329 5.4
Data processing................................. 5,539 4,931 608 12.3
Marketing....................................... 2,530 3,596 (1,066) (29.6)
Goodwill and core deposit....................... 2,414 2,924 (510) (17.4)
Other........................................... 12,818 11,001 1,817 16.5
------- ------- ------
TOTAL NON-INTEREST EXPENSE.................. $82,114 $78,608 $3,506 4.5
======= ======= ======
Salaries expense increased $2.4 million in the first three months of 1997
compared with 1996, partly due to an increase in incentive compensation from
various employee award plans. A $537 thousand decrease in employee benefit
expenses partially offset salary increases. Data processing increased mainly
in the area of credit card processing. Increases in other expense included
$669 thousand in professional fees and $358 thousand in software expense and
amortization. The efficiency ratio improved to 60.73% in the first quarter of
1997 compared to 62.84% in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The liquid assets of the Parent consist primarily of commercial paper,
overnight repurchase agreements and equity securities, most of which are
readily marketable. The fair value of these investments was $107.9 million at
March 31, 1997 compared to $108.9 million at December 31, 1996. Included in
the fair values were unrealized net gains of $14.5 million at March 31, 1997
and $14.6 million at December 31, 1996. The Parent's liabilities totaled $22.0
million at March 31, 1997, compared to $12.6 million at December 31, 1996.
Liabilities at March 31, 1997 included $11.2 million advanced mainly from
subsidiary bank holding companies in order to combine resources for short-term
investment in liquid assets. The Parent had no short-term borrowings from
affiliate banks or long-term debt during 1997. 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
should provide adequate funds to meet any outstanding or future commitments of
the Parent.
The liquid assets held by bank subsidiaries include federal funds sold and
securities purchased under agreements to resell and available for sale
investment securities. These liquid assets had a fair value of $2.95 billion
at March 31, 1997 and $2.94 billion at December 31, 1996. The available for
sale bank portfolio included an unrealized net loss in fair value of $15.4
million at March 31, 1997 compared to an unrealized net gain of $12.0 million
at December 31, 1996. U.S. government and federal agency securities comprised
65% and CMO's and asset-backed securities comprised 29% of the banking
subsidiaries' available for sale portfolio at March 31, 1997.
In February 1997, the Board of Directors announced a reauthorization of its
two million share repurchase program. At May 7, 1997, the Company had acquired
769,009 shares under the new authorization.
13
The Company had an equity to asset ratio of 9.78% based on 1997 average
balances. As shown in the following table, the Company's capital exceeded the
minimum risk-based capital and leverage requirements of the regulatory
agencies.
MARCH 31, December 31,
1997 1996
---------- ------------
(DOLLARS IN THOUSANDS)
Risk-Adjusted Assets............................. $6,241,471 $6,283,359
Tier I Capital................................... 824,905 820,609
Total Capital.................................... 894,355 892,177
Tier I Capital Ratio............................. 13.22% 13.06%
Total Capital Ratio.............................. 14.33% 14.20%
Leverage Ratio................................... 8.86% 8.84%
The Company's cash and cash equivalents (defined as "Cash and due from
banks") were $747.3 million at March 31, 1997, a decrease of $85.9 million
from December 31, 1996. Contributing to the net cash outflow were a net
decrease of $104.6 million in short-term borrowings of federal funds purchased
and repurchase agreements, a net increase of $67.6 million in short-term
investments in federal funds sold and resell agreements, and a $57.3 million
increase in loans, net of repayments. Partially offsetting these net outflows
were a $65.1 million net increase in demand deposits and $99.4 million
generated from operating activities. Total assets decreased slightly, $49.4
million, compared to December 31, 1996. Core deposits increased $47.8 million
compared to December 31, 1996.
The Company has various commitments and contingent liabilities which are
properly not reflected on the balance sheet. Loan commitments (excluding lines
of credit related to credit card loan agreements) totaled approximately $2.16
billion, standby letters of credit totaled $145.4 million, and commercial
letters of credit totaled $31.3 million at March 31, 1997. The Company has
little risk exposure in off-balance-sheet derivative contracts. The notional
value of these contracts (interest rate and foreign exchange rate contracts)
was $253.2 million at March 31, 1997. The current credit exposure (or
replacement cost) across all off-balance-sheet derivative contracts covered by
the risk-based capital standards was $4.6 million at March 31, 1997.
Management does not anticipate any material losses to arise from these
contingent items and believes there are no material commitments to extend
credit that represent risks of an unusual nature.
IMPACT OF ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which revises the calculation and presentation
provisions of Accounting Principles Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the Company's fiscal year
ending December 31, 1997. Retroactive application will be required. The
Company believes the adoption of Statement No. 128 will not have a significant
effect on its reported earnings per share.
14
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
FIRST QUARTER 1997 FIRST QUARTER 1996
------------------------------- -------------------------------
INTEREST AVG. RATES INTEREST AVG. RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
---------- -------- ---------- ---------- -------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS:
Loans:
Business (A)........... $1,698,281 $32,839 7.84% $1,681,661 $33,342 7.97%
Construction and
development........... 192,228 4,048 8.54 171,320 3,788 8.89
Real estate--business.. 763,652 16,084 8.54 700,920 15,041 8.63
Real estate--personal.. 1,008,643 19,641 7.90 980,732 19,530 8.01
Personal banking....... 1,265,423 26,973 8.64 1,264,519 27,463 8.74
Credit card............ 545,713 17,979 13.36 494,270 16,708 13.60
---------- ------- ----- ---------- ------- -----
Total loans.......... 5,473,940 117,564 8.71 5,293,422 115,872 8.80
---------- ------- ----- ---------- ------- -----
Investment securities:
U.S. government &
federal agency........ 1,685,465 25,996 6.26 1,713,686 26,233 6.16
State & municipal
obligations (A)....... 97,579 1,883 7.83 120,529 2,357 7.87
CMO's and asset-backed
securities............ 715,539 11,181 6.34 647,684 10,163 6.31
Trading account
securities............ 6,381 68 4.34 6,917 88 5.09
Other marketable
securities (A)........ 116,036 1,748 6.11 36,799 665 7.27
Other non-marketable
securities............ 43,417 602 5.62 34,416 81 .95
---------- ------- ----- ---------- ------- -----
Total investment
securities.......... 2,664,417 41,478 6.31 2,560,031 39,587 6.22
---------- ------- ----- ---------- ------- -----
Federal funds sold and
securities purchased
under
agreements to resell... 362,234 4,777 5.35 579,395 7,882 5.47
---------- ------- ----- ---------- ------- -----
Total interest
earning assets...... 8,500,591 163,819 7.82 8,432,848 163,341 7.79
------- ----- ------- -----
Less allowance for loan
losses................. (98,023) (98,222)
Unrealized gain on
investment securities.. 23,817 52,388
Cash and due from banks. 595,210 657,504
Land, buildings and
equipment--net......... 210,205 209,980
Other assets............ 182,122 207,532
---------- ----------
Total assets......... $9,413,922 $9,462,030
========== ==========
LIABILITIES AND EQUITY:
Interest bearing
deposits:
Savings................ $ 285,652 1,692 2.40 $ 305,825 1,834 2.41
Interest bearing
demand................ 3,747,836 30,976 3.35 3,637,771 30,477 3.37
Time open & C.D.'s of
less than $100,000.... 2,126,407 28,211 5.38 2,245,800 31,184 5.58
Time open & C.D.'s of
$100,000 and over..... 204,613 2,632 5.22 232,420 3,061 5.30
---------- ------- ----- ---------- ------- -----
Total interest
bearing deposits.... 6,364,508 63,511 4.05 6,421,816 66,556 4.17
---------- ------- ----- ---------- ------- -----
Borrowings:.............
Federal funds
purchased and
securities sold under
agreements to
repurchase............ 447,905 5,279 4.78 481,349 5,781 4.83
Long-term debt and
other borrowings...... 13,807 250 7.35 14,760 258 7.02
---------- ------- ----- ---------- ------- -----
Total borrowings..... 461,712 5,529 4.86 496,109 6,039 4.90
---------- ------- ----- ---------- ------- -----
Total interest
bearing liabilities. 6,826,220 69,040 4.10% 6,917,925 72,595 4.22%
------- ----- ------- -----
Non-interest bearing
demand deposits........ 1,599,971 1,545,844
Other liabilities....... 66,722 96,541
Stockholders' equity.... 921,009 901,720
---------- ----------
Total liabilities and
equity.............. $9,413,922 $9,462,030
========== ==========
Net interest margin
(T/E).................. $94,779 $90,746
======= =======
Net yield on interest
earning assets......... 4.52% 4.33%
===== =====
- --------
(A) Stated on a tax equivalent basis using a federal income tax rate of 35%.
15