- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 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 OFFICES AND ZIP CODE)
(816) 234-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
As of November 3, 1997, the registrant had outstanding 37,097,987 shares of
its $5 par value common stock, registrant's only class of common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
In the opinion of management, the consolidated financial statements of
Commerce Bancshares, Inc. and Subsidiaries as of September 30, 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 September 30,
1997.
2
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: November 10, 1997
/s/ Jeffery D. Aberdeen
By __________________________________
Jeffery D. Aberdeen
Controller
(Chief Accounting Officer)
Date: November 10, 1997
3
SCHEDULE 1
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER December
30 1997 31 1996
----------- ----------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Loans, net of unearned income..................... $ 6,089,468 $5,472,342
Allowance for loan losses......................... (105,485) (98,223)
----------- ----------
NET LOANS..................................... 5,983,983 5,374,119
----------- ----------
Investment securities:
Available for sale.............................. 2,624,341 2,670,420
Trading account................................. 9,241 11,265
Other non-marketable............................ 41,463 39,830
----------- ----------
TOTAL INVESTMENT SECURITIES................... 2,675,045 2,721,515
----------- ----------
Federal funds sold and securities purchased under
agreements to resell............................. 135,120 368,690
Cash and due from banks........................... 802,314 833,260
Land, buildings and equipment--net................ 213,525 209,777
Goodwill and core deposit premium--net............ 87,882 87,928
Customers' acceptance liability................... 1,596 1,259
Other assets...................................... 114,782 101,638
----------- ----------
TOTAL ASSETS.................................. $10,014,247 $9,698,186
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand..................... $ 1,959,862 $1,800,684
Savings and interest bearing demand............. 4,078,744 4,021,376
Time open and C.D.'s of less than $100,000...... 2,187,493 2,138,206
Time open and C.D.'s of $100,000 and over....... 221,950 206,163
----------- ----------
TOTAL DEPOSITS................................ 8,448,049 8,166,429
Federal funds purchased and securities sold under
agreements to repurchase......................... 477,688 526,807
Long-term debt and other borrowings............... 10,200 14,120
Accrued interest, taxes and other liabilities..... 103,037 65,300
Acceptances outstanding........................... 1,596 1,259
----------- ----------
TOTAL LIABILITIES............................. 9,040,570 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................................. 67,577 104,292
Retained earnings............................... 712,405 621,689
Treasury stock of 440,364 shares in 1997
and 187,977 shares in 1996, at cost............ (20,759) (7,422)
Unearned employee benefits...................... (621) (340)
Unrealized securities gain--net of tax.......... 27,248 18,225
----------- ----------
TOTAL STOCKHOLDERS' EQUITY.................... 973,677 924,271
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $10,014,247 $9,698,186
=========== ==========
See accompanying notes to financial statements.
4
SCHEDULE 2
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------- -----------------
1997 1996 1997 1996
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
INTEREST INCOME
Interest and fees on loans................. $129,733 $115,074 $370,376 $344,500
Interest on investment securities.......... 41,555 40,827 124,051 119,235
Interest on federal funds sold and
securities purchased under agreements to
resell.................................... 2,398 5,246 10,410 19,192
-------- -------- -------- --------
TOTAL INTEREST INCOME.................. 173,686 161,147 504,837 482,927
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits:
Savings and interest bearing demand...... 33,782 32,025 99,758 96,161
Time open and C.D.'s of less than
$100,000................................ 29,743 29,411 87,083 90,277
Time open and C.D.'s of $100,000 and
over.................................... 2,915 2,848 8,269 8,893
Interest on federal funds purchased and
securities sold under agreements to
repurchase................................ 6,014 5,102 16,305 15,950
Interest on long-term debt and other
borrowings................................ 174 232 633 688
-------- -------- -------- --------
TOTAL INTEREST EXPENSE................. 72,628 69,618 212,048 211,969
-------- -------- -------- --------
NET INTEREST INCOME.................... 101,058 91,529 292,789 270,958
Provision for loan losses.................. 7,807 6,082 22,638 17,063
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES........................... 93,251 85,447 270,151 253,895
-------- -------- -------- --------
NON-INTEREST INCOME
Trust fees................................. 10,508 9,066 29,998 26,482
Deposit account charges and other fees..... 14,520 14,409 42,463 40,621
Credit card transaction fees............... 7,628 6,312 20,886 18,358
Trading account profits and commissions.... 1,808 1,316 5,395 4,474
Net gains on securities transactions....... 2,386 90 2,708 2,004
Other...................................... 9,837 9,256 29,185 23,966
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME.............. 46,687 40,449 130,635 115,905
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits............. 45,818 40,971 132,524 123,282
Net occupancy.............................. 5,742 5,619 16,185 16,272
Equipment.................................. 4,118 3,648 12,196 11,086
Supplies and communication................. 6,276 6,274 18,901 18,607
Data processing............................ 6,341 5,227 17,830 15,394
Marketing.................................. 3,559 3,415 9,539 9,469
Goodwill and core deposit.................. 2,444 2,846 7,273 8,602
Other...................................... 13,346 12,077 39,203 34,938
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE............. 87,644 80,077 253,651 237,650
-------- -------- -------- --------
Income before income taxes................. 52,294 45,819 147,135 132,150
Less income taxes.......................... 18,072 14,964 51,181 45,094
-------- -------- -------- --------
NET INCOME............................. $ 34,222 $ 30,855 $ 95,954 $ 87,056
-------- -------- -------- --------
Net income per common and common equivalent
share..................................... $ .91 $ .81 $ 2.55 $ 2.26
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding............. 37,582 38,129 37,608 38,473
======== ======== ======== ========
Cash dividends per common share............ $ .205 $ .181 $ .615 $ .543
======== ======== ======== ========
See accompanying notes to financial statements.
5
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 $924,271
Net income............. 95,954 95,954
Year-to-date change in
fair value of
investment securities. 9,023 9,023
Pooling acquisition.... (37,199) 17,612 42,352 22,765
Purchase acquisition... 1,383 9,256 10,639
Purchase of treasury
stock................. (68,288) (68,288)
Sales under option and
benefit plans......... (928) 2,971 2,043
Issuance of stock under
restricted stock award
plan.................. 29 372 (401) --
Restricted stock award
amortization.......... 120 120
Cash dividends paid
($.615 per share)..... (22,850) (22,850)
---------- -------- -------- -------- -------- ----- ------- --------
BALANCE SEPTEMBER 30,
1997................... 37,565,369 $187,827 $ 67,577 $712,405 $(20,759) $(621) $27,248 $973,677
========== ======== ======== ======== ======== ===== ======= ========
Balance January 1, 1996. 37,565,369 $187,827 $ 84,415 $618,388 $(32,980) $(716) $26,849 $883,783
Net income............. 87,056 87,056
Year-to-date change in
fair value of
investment securities. (24,928) (24,928)
Purchase of treasury
stock................. (39,746) 24 (39,722)
Sales under option and
benefit plans......... (3,138) 6,426 3,288
Issuance of stock under
restricted stock award
plan.................. (17) 274 (257) --
Restricted stock award
amortization.......... 147 147
Cash dividends paid
($.543 per share)..... (20,688) (20,688)
---------- -------- -------- -------- -------- ----- ------- --------
Balance September 30,
1996................... 37,565,369 $187,827 $ 81,260 $684,756 $(66,026) $(802) $ 1,921 $888,936
========== ======== ======== ======== ======== ===== ======= ========
See accompanying notes to financial statements.
6
SCHEDULE 4
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
--------------------
1997 1996
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income............................................... $ 95,954 $ 87,056
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................. 22,638 17,063
Provision for depreciation and amortization............ 22,688 23,085
Accretion of investment security discounts............. (4,298) (4,327)
Amortization of investment security premiums........... 7,109 17,162
Net gains on sales of investment securities (A)........ (2,708) (2,004)
Net decrease in trading account securities............. 1,152 4,791
Decrease in interest receivable........................ 4,280 7,431
(Increase) decrease in interest payable................ 180 (1,874)
Other changes, net..................................... 11,946 12,452
--------- ---------
Net cash provided by operating activities............ 158,941 160,835
--------- ---------
INVESTING ACTIVITIES:
Cash received in acquisitions............................ 6,200 --
Cash paid in sale of branches............................ -- (38,134)
Proceeds from sales of investment securities (A)......... 389,065 546,664
Proceeds from maturities of investment securities (A).... 698,430 292,541
Purchases of investment securities (A)................... (918,288) (964,682)
Net decrease in federal funds sold and securities
purchased under agreements to resell.................... 242,095 180,212
Net increase in loans.................................... (480,307) (99,820)
Purchases of premises and equipment...................... (21,161) (19,512)
Sales of premises and equipment.......................... 7,312 6,529
--------- ---------
Net cash used by investing activities................ (76,654) (96,202)
--------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing demand,
savings, and interest bearing demand deposits........... 54,897 (21,902)
Net decrease in time open and C.D.'s..................... (25,472) (80,182)
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase.......... (49,119) 51,952
Repayment of long-term debt.............................. (3,952) (369)
Purchases of treasury stock.............................. (67,323) (70,325)
Exercise of stock options by employees................... 586 2,661
Cash dividends paid on common stock...................... (22,850) (20,688)
--------- ---------
Net cash used by financing activities................ (113,233) (138,853)
--------- ---------
Decrease in cash and cash equivalents................ (30,946) (74,220)
Cash and cash equivalents at beginning of year........... 833,260 774,852
--------- ---------
Cash and cash equivalents at September 30............ $ 802,314 $ 700,632
========= =========
- --------
(A) Available for sale and other non-marketable securities, excluding trading
account securities.
Net cash payments of income taxes for the nine month period were $36,608,000
in 1997 and $50,398,000 in 1996. Interest paid on deposits and borrowings for
the nine month period was $211,715,000 in 1997 and $213,614,000 in 1996.
See accompanying notes to financial statements.
7
SCHEDULE 5
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 (in thousands):
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------- ----------------
1997 1996 1997 1996
-------- ------- -------- -------
Balance, beginning of period........... $103,730 $98,667 $ 98,223 $98,537
-------- ------- -------- -------
Additions:
Provision for loan losses............ 7,807 6,082 22,638 17,063
Allowance for loan losses of acquired
banks............................... 954 -- 4,275 --
-------- ------- -------- -------
Total additions.................... 8,761 6,082 26,913 17,063
-------- ------- -------- -------
Deductions:
Loan losses.......................... 9,101 8,032 26,031 22,629
Less recoveries on loans............. 2,095 1,649 6,380 5,395
-------- ------- -------- -------
Net loan losses.................... 7,006 6,383 19,651 17,234
-------- ------- -------- -------
Balance, September 30.................. $105,485 $98,366 $105,485 $98,366
======== ======= ======== =======
At September 30, 1997, non-performing assets were $47,613,000, which was
.78% of total loans and .48% of total assets. This balance consisted of
$13,260,000 in loans not accruing interest, $33,261,000 in loans past due 90
days and still accruing interest, and $1,092,000 in foreclosed real estate.
8
3. INVESTMENT SECURITIES
Investment securities, at fair value, consist of the following at September
30, 1997 and December 31, 1996 (in thousands):
SEPTEMBER 30 December 31
1997 1996
------------ -----------
Available for sale:
U.S. government and federal agency
obligations.................................. $1,536,829 $1,717,945
State and municipal obligations............... 104,747 101,293
CMO's and asset-backed securities............. 845,434 703,515
Other debt securities......................... 89,256 108,442
Equity securities............................. 48,075 39,225
Trading account securities...................... 9,241 11,265
Other non-marketable securities................. 41,463 39,830
---------- ----------
Total investment securities................. $2,675,045 $2,721,515
========== ==========
4. INCOME PER COMMON SHARE
Income per share data is based on the weighted average number of common
shares and common equivalent shares outstanding during the interim periods.
All per share data in this report has been restated to reflect the 5% stock
dividend distributed on December 13, 1996.
5. 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 and accounted for
as a pooling of interests. On September 1, 1997, the Company acquired CNB
Bancorp, Inc. a one-bank holding company located in Independence, Kansas with
$93 million in assets. The acquisition was a stock and cash transaction and
accounted for by the purchase accounting method. These acquisitions have not
had a material impact on the financial statements of the Company.
The Company has signed a definitive agreement to merge with Pittsburg
Bancshares, Inc., a one-bank holding company with assets of $120 million.
Subject to regulatory and stockholder approvals, completion of the acquisition
is expected in the first quarter of 1998. It is not expected to have a
material impact on the financial statements of the Company.
9
SCHEDULE 6
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 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 nine
month period ended September 30, 1997 are not necessarily indicative of
results to be attained for any other period.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
PER SHARE DATA
Net income................................... $ .91 $ .81 $ 2.55 $ 2.26
Cash dividends............................... .205 .181 .615 .543
Book value................................... 26.23 23.68
Market price................................. 58.88 37.14
SELECTED RATIOS
(Based on average balance sheets):
Loans to deposits............................ 72.00% 67.15% 70.20% 66.85%
Non-interest bearing deposits to total
deposits.................................... 21.85 19.71 20.92 19.38
Equity to loans.............................. 15.95 16.59 16.31 16.75
Equity to deposits........................... 11.49 11.14 11.45 11.20
Equity to total assets....................... 9.71 9.48 9.72 9.49
Return on total assets....................... 1.39 1.32 1.34 1.24
Return on realized stockholders' equity...... 14.62 13.95 13.99 13.30
Return on total stockholders' equity......... 14.32 13.95 13.80 13.09
(Based on end-of-period data):
Efficiency ratio............................. 60.29 60.72 60.29 61.75
Tier I capital ratio......................... 12.66 13.37
Total capital ratio.......................... 13.78 14.52
Leverage ratio............................... 8.92 8.69
SUMMARY
Consolidated net income for the first nine months of 1997 was $96.0 million;
an $8.9 million or 10.2% increase over the first nine months of 1996. Earnings
per share increased 12.8% to $2.55 for the first nine months of 1997 compared
to $2.26 for the first nine months of 1996. Net interest income increased
$21.8 million and non-interest income increased $14.7 million, partially
offset by increases of $16.0 million in non-interest expense and $5.6 million
in the provision for loan losses. Compared to the first nine months of 1996,
non-interest income increased 12.7%, while non-interest expense grew at a rate
of 6.7%.
Third quarter net income was $34.2 million, a 10.9% increase over the third
quarter of 1996. Earnings per share was $.91 for the third quarter of 1997, a
12.3% increase over $.81 earned in the third quarter of 1996. The third
quarter saw a continuation of strong revenue growth, up 11.9% over third
quarter 1996, which was fueled by strong loan demand, an increased net
interest margin and solid advances in core accounts and fee income. Non-
interest expense, which increased 9.5% over the third quarter of 1996,
included significant investment in new product and systems development as well
as higher incentive pay on new business. The return on assets was 1.39% and
the return on equity was 14.32% for the third quarter of 1997.
10
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. CNB Bancorp, Inc., a one-bank holding company in Independence,
Kansas, with approximately $93 million in assets, was acquired on September 1,
1997. It was recorded as a purchase transaction. Total consideration paid in
these two transactions were cash of $4.3 million and treasury stock valued at
$53.2 million. These acquisitions have not had a material impact on the
financial statements of the Company.
The Company has signed a definitive agreement to merge with Pittsburg
Bancshares, Inc., a one-bank Kansas holding company. The bank has four
locations and approximately $120 million in assets. Subject to regulatory and
stockholder approvals, completion of the acquisition is expected in the first
quarter of 1998. It is not expected to have a material impact on the financial
statements of the Company.
NET INTEREST INCOME
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.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1997 VS.
1996 1996
------------------------- -------------------------
CHANGE DUE TO CHANGE DUE TO
---------------- ----------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
INTEREST INCOME, FULLY
TAXABLE EQUIVALENT BASIS:
Loans................... $13,441 $1,143 $14,584 $25,713 $ (127) $25,586
Investment securities:
U.S. government and
federal agency
securities........... (3,199) 577 (2,622) (5,728) 1,307 (4,421)
State and municipal
obligations.......... (260) (12) (272) (1,055) (20) (1,075)
Other securities...... 3,349 175 3,524 9,332 624 9,956
Federal funds sold and
securities purchased
under agreements to
resell................. (2,996) 148 (2,848) (8,916) 134 (8,782)
------- ------ ------- ------- ------- -------
Total interest income... 10,335 2,031 12,366 19,346 1,918 21,264
------- ------ ------- ------- ------- -------
INTEREST EXPENSE:
Deposits:
Savings............... 74 27 101 (43) 70 27
Interest bearing
demand............... 799 857 1,656 5,190 (1,620) 3,570
Time open & C.D.'s of
less than $100,000... 139 193 332 (1,779) (1,415) (3,194)
Time open & C.D.'s of
$100,000 and over.... (105) 172 67 (772) 148 (624)
Federal funds purchased
and securities sold
under agreements to
repurchase............. 723 189 912 (126) 481 355
Long-term debt and other
borrowings............. (86) 5 (81) (132) 14 (118)
------- ------ ------- ------- ------- -------
Total interest expense.. 1,544 1,443 2,987 2,338 (2,322) 16
------- ------ ------- ------- ------- -------
NET INTEREST INCOME,
FULLY TAXABLE
EQUIVALENT BASIS....... $ 8,791 $ 588 $ 9,379 $17,008 $ 4,240 $21,248
======= ====== ======= ======= ======= =======
Net interest income for the third quarter of 1997 was $101.1 million, a
10.4% increase over the third quarter of 1996, and for the first nine months
was $292.8 million, an 8.1% increase over last year. For the quarter, the
11
net interest rate margin was 4.61% compared with 4.41% last year, while the
nine month margin was 4.58% in 1997 and 4.37% in 1996.
Total interest income increased $12.5 million, or 7.8%, over the third
quarter of 1996, mainly due to an increase of $640.8 million in average loan
balances. Partially offsetting this increase was a decline of $219.7 million
in average balances invested in short-term investments in federal funds sold
and resell agreements. Funds in the investment securities portfolio were
shifted from U.S. government and federal agencies to higher-yielding CMO's and
asset-backed securities. The average tax equivalent yield on interest earning
assets was 7.90% for the third quarter of 1997 compared to 7.73% last year.
Compared to the first nine months of 1996, total interest income increased
$21.9 million, or 4.5%. A $398.2 million increase in average loan balances
contributed $25.7 million of the increase. Other factors included an increase
in average balances invested in and rates earned on investment securities,
offset by a decrease in average balances invested in federal funds sold and
resell agreements.
Total interest expense (net of capitalized interest) increased $3.0 million,
or 4.3%, compared to the third quarter of 1996 due mainly to higher average
balances and rates paid on interest bearing demand deposits and higher average
borrowings of federal funds purchased and repurchase agreements. The average
cost of funds was 4.15% for the third quarter of 1997 and 4.09% for the third
quarter of 1996.
Total interest expense was virtually unchanged in the first nine months of
1997 compared to 1996. Higher average interest bearing demand deposits were
offset by lower certificates of deposit and lower rates paid. Average core
deposits (deposits excluding short-term certificates of deposit over $100,000)
for the first nine months of 1997 increased 2.5% compared to the same period
last year. Core deposits supported 93% of average earning assets in 1997.
Summaries of average assets and liabilities and the corresponding average
rates earned/paid appear on pages 16 and 17.
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.
SEPTEMBER 30 DECEMBER 31
1997 1996
------------ -----------
(IN THOUSANDS)
Non-accrual loans................................ $13,260 $13,945
Past due 90 days and still accruing interest..... 33,261 24,806
------- -------
Total impaired loans............................. 46,521 38,751
Foreclosed real estate........................... 1,092 1,136
------- -------
Total non-performing assets.................... $47,613 $39,887
======= =======
Non-performing assets to total loans............. .78% .73%
Non-performing assets to total assets............ .48% .41%
The level of non-performing assets increased 19% over year end 1996 totals.
Non-accrual loans at September 30, 1997 consisted mainly of business loans
($6.2 million), business real estate loans ($3.3 million) and construction and
land development loans ($2.3 million). Loans which were 90 or more days past
due included credit card loans of $7.0 million, business loans of $9.2 million
and business real estate loans of $8.2 million.
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 $522.8 million at September 30, 1997. Because credit card loans
traditionally have a higher than average ratio of net charge-offs to loans
outstanding,
12
management requires that a specific allowance for losses on credit card loans
be maintained, which was $16.5 million, or 3.1% of credit card loans at
September 30, 1997. The annualized charge-off ratio for credit card loans was
3.84% for the first nine months of 1997 compared to 2.78% for the first nine
months of 1996. 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 $5.6 million compared to the first
nine months of 1996, increased $1.7 million compared to the third quarter of
1996 and increased $514 thousand over the second quarter of 1997. The
allowance for loan losses as a percentage of loans outstanding was 1.73% at
September 30, 1997, compared to 1.79% at year-end 1996 and 1.82% at September
30, 1996. The allowance at September 30, 1997 was 222% 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 $19.7 million for the first
nine months of 1997 compared to $17.2 million for the first nine months of
1996. Net charge-offs were $7.0 million for the third quarter of 1997 compared
to $6.4 million for the third quarter of 1996 and $6.8 million for the second
quarter of 1997. Net annualized charge-offs were .47% of average loans for the
third quarter of 1997 compared to .48% for the second quarter of 1997 and .47%
for the entire year of 1996.
NON-INTEREST INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- ----------------------------
1997 1996 % CHANGE 1997 1996 % CHANGE
------- ------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Trust fees.............. $10,508 $ 9,066 15.9% $ 29,998 $ 26,482 13.3%
Deposit account charges
and other fees......... 14,520 14,409 .8 42,463 40,621 4.5
Credit card transaction
fees................... 7,628 6,312 20.8 20,886 18,358 13.8
Trading account profits
and commissions........ 1,808 1,316 37.4 5,395 4,474 20.6
Net gains on securities
transactions........... 2,386 90 N/M 2,708 2,004 35.1
Other................... 9,837 9,256 6.3 29,185 23,966 21.8
------- ------- -------- --------
TOTAL NON-INTEREST
INCOME............... $46,687 $40,449 15.4 $130,635 $115,905 12.7
======= ======= ======== ========
As a % of operating
income (net interest
income plus non-
interest income)....... 31.6% 30.6% 30.9% 30.0%
======= ======= ======== ========
Non-interest income rose 12.7% from last year and 15.4% from the third
quarter of last year. Trust fees increased $3.5 million over the nine months
of 1996 and $1.4 million over the third quarter of 1996, largely due to
increases in the value of assets managed. Credit card transaction fees
increased $2.5 million for the year and $1.3 million for the quarter due to
increases in both merchant income and cardholder volume. Sales of equity
securities by the Parent and a venture capital subsidiary resulted in the
quarterly increase of $2.3 million in gains on securities transactions. Other
income increased $5.2 million over the first nine months of 1996 due to an
increase in gains on loan sales of $2.7 million and various types of fee
income growth, including non-customer ATM fees, brokerage related commissions
and fees and cash management income.
13
NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ --------------------------
1997 1996 % CHANGE 1997 1996 % CHANGE
------- ------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee
benefits.................. $45,818 $40,971 11.8% $132,524 $123,282 7.5%
Net occupancy.............. 5,742 5,619 2.2 16,185 16,272 (.5)
Equipment.................. 4,118 3,648 12.9 12,196 11,086 10.0
Supplies and communication. 6,276 6,274 -- 18,901 18,607 1.6
Data processing............ 6,341 5,227 21.3 17,830 15,394 15.8
Marketing.................. 3,559 3,415 4.2 9,539 9,469 .7
Goodwill and core deposit.. 2,444 2,846 (14.1) 7,273 8,602 (15.4)
Other...................... 13,346 12,077 10.5 39,203 34,938 12.2
------- ------- -------- --------
TOTAL NON-INTEREST
EXPENSE................. $87,644 $80,077 9.4 $253,651 $237,650 6.7
======= ======= ======== ========
Non-interest expense rose $16.0 million, or 6.7%, from a year ago and $7.6
million, or 9.4%, compared to the third quarter of 1996. Salaries and employee
benefits increased $9.2 million over the first nine months of 1997 and
increased $4.8 million over the third quarter of 1996. Incentive compensation
on new business contributed to the salary increases. Additional service
contract expense and depreciation on data processing and ATM equipment
contributed to the increase in equipment expense. Purchases of data processing
and ATM equipment, net of sales and retirements, amounted to $10.3 million in
the twelve month period ending September 30, 1997. Data processing expense
increased mainly in the area of credit card processing. Goodwill and core
deposit premium amortization decreases resulted because accelerated
amortization methods expensed a greater proportionate amount in early periods
compared to later periods. The increases in other expense in 1997 compared to
the 1996 periods included increases in professional fees, software expense and
amortization, and provisions for non-marketable equity security losses. These
additional expenses were partially offset by decreases in FDIC insurance
expense and expenses relating to other real estate. The efficiency ratio was
60.29% in the third quarter of 1997 compared to 60.72% in the third quarter of
1996 and 59.86% in the second quarter of 1997.
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 $91.3 million at
September 30, 1997 compared to $108.9 million at December 31, 1996. Included
in the fair values were unrealized net gains of $20.2 million at September 30,
1997 and $14.6 million at December 31, 1996. The Parent's liabilities totaled
$33.4 million at September 30, 1997, compared to $12.6 million at December 31,
1996. Liabilities at September 30, 1997 included $19.3 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. 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 $2.66 billion
at September 30, 1997 and $2.94 billion at December 31, 1996. The available
for sale bank portfolio included an unrealized net gain in fair value of $16.3
million at September 30, 1997 compared to an unrealized net gain of $12.0
million at December 31, 1996. U.S. government and federal agency securities
comprised 61% and CMO's and asset-backed securities comprised 34% of the
banking subsidiaries' available for sale portfolio at September 30, 1997.
14
In February 1997, the Board of Directors announced a reauthorization of its
two million share repurchase program. At September 30, 1997, the Company had
acquired 1,229,904 shares under the new authorization. At its October meeting,
the Board of Directors declared the fourth consecutive annual 5 percent stock
dividend, to be distributed to shareholders on December 12, 1997.
The Company had an equity to asset ratio of 9.72% 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.
SEPTEMBER 30 DECEMBER 31
1997 1996
------------ -----------
(DOLLARS IN THOUSANDS)
Risk-Adjusted Assets......................... $6,797,499 $6,283,359
Tier I Capital............................... 860,796 820,609
Total Capital................................ 936,961 892,177
Tier I Capital Ratio......................... 12.66% 13.06%
Total Capital Ratio.......................... 13.78% 14.20%
Leverage Ratio............................... 8.92% 8.84%
The Company's cash and cash equivalents (defined as "Cash and due from
banks") were $802.3 million at September 30, 1997, a decrease of $30.9 million
from December 31, 1996. Contributing to the net cash outflow were a $480.3
million increase in loans, net of repayments, treasury stock purchases of
$67.3 million and cash dividends of $22.9 million. Partially offsetting these
net outflows were a $242.1 million net decrease in investments in federal
funds sold and resell agreements, $169.2 million in maturities and sales of
investment securities, net of purchases, and $158.9 million generated from
operating activities. Total assets increased $316.1 million and core deposits
increased $288.4 million over 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 $2.48
billion, standby letters of credit totaled $152.2 million, and commercial
letters of credit totaled $31.6 million at September 30, 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 $166.8 million at September 30, 1997. The current credit exposure (or
replacement cost) across all off-balance-sheet derivative contracts covered by
the risk-based capital standards was $4.0 million at September 30, 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 January 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" for the provisions that became effective
at that date. The adoption did not have a material effect on the Company's
financial statements. Also, in December 1996, the Financial Accounting
Standards Board issued Statement No. 127, "Deferral of the Effective Date of
Certain Provisions of FAS Statement 125", which deferred to January 1, 1998
certain provisions of Statement No. 125. The adoption of Statement No. 127 is
not expected to have a material effect on the Company's financial statements.
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.
15
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NINE MONTHS 1997 NINE MONTHS 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)........... $1,782,825 $105,850 7.94% $1,679,242 $ 99,356 7.90%
Construction and
development........... 242,912 15,643 8.61 168,404 11,027 8.75
Real estate--business.. 803,068 51,468 8.57 709,032 45,755 8.62
Real estate--personal.. 1,045,829 61,747 7.89 985,649 57,969 7.86
Personal banking....... 1,292,420 83,243 8.61 1,253,995 81,473 8.68
Credit card............ 532,202 53,183 13.36 504,691 49,968 13.23
---------- -------- ----- ---------- -------- -----
Total loans.......... 5,699,256 371,134 8.71 5,301,013 345,548 8.71
---------- -------- ----- ---------- -------- -----
Investment securities:
U.S. government &
federal agency........ 1,641,828 76,786 6.25 1,766,554 81,207 6.14
State & municipal
obligations (A)....... 99,752 5,854 7.85 117,649 6,929 7.87
CMO's and asset-backed
securities............ 772,528 36,513 6.32 648,127 30,462 6.28
Trading account
securities............ 7,843 316 5.38 6,125 208 4.54
Other marketable
securities (A)........ 110,901 4,981 6.00 45,299 2,252 6.64
Other non-marketable
securities............ 43,140 1,902 5.89 35,721 834 3.12
---------- -------- ----- ---------- -------- -----
Total investment
securities.......... 2,675,992 126,352 6.31 2,619,475 121,892 6.22
---------- -------- ----- ---------- -------- -----
Federal funds sold and
securities purchased
under agreements to
resell................. 252,418 10,410 5.51 472,554 19,192 5.42
---------- -------- ----- ---------- -------- -----
Total interest
earning assets ..... 8,627,666 507,896 7.87 8,393,042 486,632 7.75
-------- ----- -------- -----
Less allowance for loan
losses................. (101,152) (98,490)
Unrealized gain on
investment securities.. 19,925 22,239
Cash and due from banks. 621,282 632,272
Land, buildings and
equipment--net......... 212,912 208,819
Other assets............ 185,436 197,889
---------- ----------
Total assets......... $9,566,069 $9,355,771
========== ==========
LIABILITIES AND EQUITY:
Interest bearing
deposits:
Savings................ $ 300,177 5,442 2.42 $ 302,599 5,415 2.39
Interest bearing
demand................ 3,754,341 94,316 3.36 3,650,900 90,746 3.32
Time open & C.D.'s of
less than $100,000.... 2,158,266 87,083 5.39 2,211,055 90,277 5.45
Time open & C.D.'s of
$100,000 and over..... 207,169 8,269 5.34 228,950 8,893 5.19
---------- -------- ----- ---------- -------- -----
Total interest
bearing deposits ... 6,419,953 195,110 4.06 6,393,504 195,331 4.08
---------- -------- ----- ---------- -------- -----
Borrowings:
Federal funds
purchased and
securities sold under
agreements to
repurchase............ 444,607 16,305 4.90 445,091 15,950 4.79
Long-term debt and
other borrowings ..... 12,290 674 7.33 14,764 792 7.16
---------- -------- ----- ---------- -------- -----
Total borrowings..... 456,897 16,979 4.97 459,855 16,742 4.86
---------- -------- ----- ---------- -------- -----
Total interest
bearing liabilities. 6,876,850 212,089 4.12% 6,853,359 212,073 4.13%
-------- ----- -------- -----
Non-interest bearing
demand deposits........ 1,698,485 1,536,578
Other liabilities....... 61,198 77,752
Stockholders' equity.... 929,536 888,082
---------- ----------
Total liabilities and
equity.............. $9,566,069 $9,355,771
========== ==========
Net interest margin
(T/E).................. $295,807 $274,559
======== ========
Net yield on interest
earning assets......... 4.58% 4.37%
===== =====
- --------
(A) Stated on a tax equivalent basis using a federal income tax rate of 35%.
16
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
THIRD QUARTER 1997 THIRD 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)........... $1,869,426 $ 37,362 7.93% $1,669,718 $33,130 7.89%
Construction and
development........... 304,273 6,621 8.63 164,337 3,565 8.63
Real estate--business.. 841,965 18,126 8.54 723,412 15,607 8.58
Real estate--personal.. 1,078,175 21,388 7.87 985,396 19,152 7.73
Personal banking....... 1,324,392 28,539 8.55 1,243,795 26,934 8.61
Credit card............ 526,070 17,962 13.55 516,869 17,026 13.10
---------- -------- ----- ---------- ------- -----
Total loans.......... 5,944,301 129,998 8.68 5,303,527 115,414 8.66
---------- -------- ----- ---------- ------- -----
Investment securities:
U.S. government &
federal agency........ 1,589,310 25,041 6.25 1,796,376 27,663 6.13
State & municipal
obligations (A)....... 101,318 1,952 7.64 114,666 2,224 7.72
CMO's and asset-backed
securities............ 824,154 13,069 6.29 663,732 10,357 6.21
Trading account
securities............ 9,667 136 5.58 3,624 7 .77
Other marketable
securities (A)........ 100,974 1,500 5.89 53,414 853 6.35
Other non-marketable
securities............ 43,126 616 5.67 38,773 580 5.95
---------- -------- ----- ---------- ------- -----
Total investment
securities.......... 2,668,549 42,314 6.29 2,670,585 41,684 6.21
---------- -------- ----- ---------- ------- -----
Federal funds sold and
securities purchased
under agreements to
resell................. 165,849 2,398 5.74 385,594 5,246 5.41
---------- -------- ----- ---------- ------- -----
Total interest
earning assets...... 8,778,699 174,710 7.90 8,359,706 162,344 7.73
-------- ----- ------- -----
Less allowance for loan
losses................. (103,517) (98,197)
Unrealized gain on
investment securities.. 32,711 350
Cash and due from banks. 661,212 623,676
Land, buildings and
equipment--net......... 214,681 208,241
Other assets............ 183,429 189,337
---------- ----------
Total assets......... $9,767,215 $9,283,113
========== ==========
LIABILITIES AND EQUITY:
Interest bearing
deposits:
Savings................ $ 308,472 1,893 2.43 $ 296,312 1,792 2.41
Interest bearing
demand................ 3,746,843 31,889 3.38 3,650,512 30,233 3.29
Time open & C.D.'s of
less than $100,000.... 2,184,602 29,743 5.40 2,174,378 29,411 5.38
Time open & C.D.'s of
$100,000 and over..... 212,270 2,915 5.45 220,355 2,848 5.14
---------- -------- ----- ---------- ------- -----
Total interest
bearing deposits.... 6,452,187 66,440 4.09 6,341,557 64,284 4.03
---------- -------- ----- ---------- ------- -----
Borrowings:
Federal funds
purchased and
securities sold under
agreements to
repurchase............ 484,712 6,014 4.92 424,679 5,102 4.78
Long-term debt and
other borrowings...... 10,305 190 7.31 15,059 271 7.16
---------- -------- ----- ---------- ------- -----
Total borrowings..... 495,017 6,204 4.97 439,738 5,373 4.86
---------- -------- ----- ---------- ------- -----
Total interest
bearing liabilities. 6,947,204 72,644 4.15% 6,781,295 69,657 4.09%
-------- ----- ------- -----
Non-interest bearing
demand deposits........ 1,804,323 1,556,370
Other liabilities....... 67,308 65,481
Stockholders' equity.... 948,380 879,967
---------- ----------
Total liabilities and
equity................ $9,767,215 $9,283,113
========== ==========
Net interest margin
(T/E).................. $102,066 $92,687
======== =======
Net yield on interest
earning assets......... 4.61% 4.41%
===== =====
- --------
(A) Stated on a tax equivalent basis using a federal income tax rate of 35%.
17