Exhibit 13
MISSION STATEMENT
COMMERCE BANK WILL BE THE PREFERRED PROVIDER OF
TARGETED FINANCIAL SERVICES IN OUR COMMUNITIES BASED
ON STRONG CUSTOMER RELATIONSHIPS.
WE WILL STRENGTHEN THESE RELATIONSHIPS BY PROVIDING
THE RIGHT SOLUTIONS THAT COMBINE OUR TECHNOLOGY,
EXPERTISE AND FINANCIAL STRENGTH.
OUR GOAL IS TO CREATE CUSTOMER LOYALTY,
SHAREHOLDER VALUE AND EMPLOYEE SATISFACTION.
Be accessible. Offer solutions. Build relationships.
CONTENTS ANNUAL MEETING
Chairman's Letter Page 2 The annual meeting of Shareholders
will be held Wednesday, April 15,
Management Report Page 11 1998 at 10:00 a.m. in The Plaza,
Ritz-Carlton, 100 Carondelet
Management's Discussion and Plaza, Clayton, Missouri 63105
Analysis of Consolidated
Financial Condition and TRANSFER AGENT, REGISTRAR
Results of Operations Page 22 AND DIVIDEND DISBURSING AGENT
First Chicago Trust Company of
Financial Statements of Commerce New York, P.O. Box 2500, Jersey
Bancshares, Inc. and City, New Jersey 07303-2500,
Subsidiaries Page 42 800-446-2617.
Notes to Financial NOTICE
Statements Page 46 Shareholders, analysts or
potential investors desiring
Independent Auditors' additional information may make
Report Page 60 their requests in writing to Mr.
Jeffery D. Aberdeen, Controller,
Directors and Officers Page 63 at the address of the Company.
DIVIDEND REINVESTMENT PROGRAM
Commerce Brokerage Services, Inc.* offers Equity Dividend Reinvestment for
securities held within a Commerce brokerage account. Our brokerage
customers may elect this option for more than 6,200 individual securities,
including the common stock of Commerce Bancshares, Inc. For information,
please contact any of our Regional Investment Specialists or one of our
main brokerage offices:
St. Louis 314-746-8777 Kansas City 816-234-2416
800-356-1606 800-772-SAVE
* An affiliate of Commerce Bancshares, Inc. and a registered broker-dealer.
FINANCIAL HIGHLIGHTS
(This page not included in the EDGARized exhibit.)
1
CHAIRMAN'S LETTER
(This section not included in the EDGARized exhibit.)
2 - 7
MANAGEMENT REPORT
(This section not included in the EDGARized exhibit.)
8 - 20
Commerce Bancshares, Inc.
CONTENTS
Pages
-----
Common Stock Data Below
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 22 through 41
Consolidated Financial Statements:
Balance Sheets 42
Statements of Income 43
Statements of Cash Flows 44
Statements of Stockholders' Equity 45
Notes to Financial Statements 46 through 60
Independent Auditors' Report 60
Statement of Management's Responsibility 61
Summary of Quarterly Statements of Income 62
================================================================================
COMMON STOCK DATA
Commerce Bancshares, Inc. (Parent)
The following table sets forth the high and low prices of actual transactions
for the Company's common stock (CBSH) and cash dividends paid for the periods
indicated (restated for the 1997 stock dividend).
Cash
1997 High Low Dividends
- --------------------------------------------------------------------------------
First Quarter $48.10 $42.26 $.195
Second Quarter 45.95 40.00 .195
Third Quarter 57.02 42.86 .195
Fourth Quarter 70.25 53.69 .195
1996
- --------------------------------------------------------------------------------
First Quarter $34.81 $31.52 $.172
Second Quarter 33.45 30.95 .172
Third Quarter 36.73 30.16 .172
Fourth Quarter 47.14 35.03 .172
1995
- --------------------------------------------------------------------------------
First Quarter $26.56 $23.32 $.155
Second Quarter 27.86 26.13 .155
Third Quarter 34.45 26.13 .155
Fourth Quarter 34.69 32.18 .155
Commerce Bancshares, Inc. common shares are publicly traded in the over-the-
counter market on the NASDAQ National Market System. The Company had 5,694
shareholders of record as of December 31, 1997.
21
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes. The historical trends
reflected in the restated financial information presented below are not
reflective of anticipated future results.
KEY RATIOS
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(Based on average balance sheets):
Return on total assets 1.37% 1.28% 1.21% 1.21% 1.14%
Return on stockholders' equity 14.08 13.40 12.72 13.05 12.99
Efficiency ratio 59.94 60.96 62.60 65.10 64.58
Loans to deposits 70.93 67.07 68.28 61.07 58.08
Net yield on interest earning assets (on a tax equivalent basis) 4.61 4.40 4.50 4.46 4.22
Non-interest bearing deposits to total deposits 21.35 19.65 19.81 19.60 19.72
Equity to total assets 9.74 9.53 9.48 9.30 8.75
Cash dividend payout ratio 23.24 23.28 24.07 22.07 21.28
=========================================================================================================================
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 397,774 $365,743 $355,745 $314,617 $284,524
Provision for loan losses 31,354 24,522 14,629 5,845 11,381
Non-interest income 180,092 159,162 133,150 121,028 121,423
Non-interest expense 344,450 317,954 305,484 282,078 257,316
Net income 132,702 119,512 107,640 96,111 86,894
Net income per share-basic* 3.40 2.99 2.60 2.48 2.28
Net income per shares-diluted* 3.36 2.97 2.59 2.46 2.26
Total assets 10,306,941 9,698,186 9,573,951 8,035,574 8,047,413
Loans 6,224,381 5,472,342 5,317,813 4,432,662 4,024,075
Investment securities 2,664,931 2,721,515 2,594,753 2,645,420 2,805,630
Deposits 8,700,578 8,166,429 8,193,092 6,990,430 6,839,470
Long-term debt 7,102 14,120 14,562 6,487 6,894
Stockholders' equity 980,784 924,271 883,783 728,198 712,620
Cash dividends per common share* .781 .689 .622 .543 .480
=========================================================================================================================
*Restated for 5% stock dividend distributed in December 1997 and adoption of
SFAS No. 128
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
$ Change % Change
(Dollars in thousands) '97-'96 '96-'95' '97-'96 '96-'95
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $32,031 $ 9,998 8.8% 2.8%
Provision for loan losses 6,832 9,893 27.9 67.6
Non-interest income 20,930 26,012 13.2 19.5
Non-interest expense 26,496 12,470 8.3 4.1
Income taxes 6,443 1,775 10.2 2.9
- -------------------------------------------------------------------------------------------------------------------------
Net income $13,190 $11,872 11.0% 11.0%
=========================================================================================================================
Consolidated net income for 1997 was $132.7 million, an 11.0% increase over 1996
net income. Diluted earnings per share increased 13.1% to $3.36 in 1997
compared to $2.97 in 1996. The return on assets was 1.37% in 1997, compared to
1.28% in 1996, while the return on equity increased to 14.08%. The increase in
net income was mainly due to strong growth in the net interest margin, mainly as
a result of growth in loans, coupled with a 13.2% growth in non-interest
income, but offset by a higher provision for loan losses and higher non-interest
expense. The improvement in non-interest income resulted from an increase in
credit card, trust and other money management fee income, while growth in non-
interest expense occurred due to increases in incentive compensation and higher
data processing costs.
Net income was $119.5 million in 1996 compared to $107.6 million in 1995, with a
14.7% increase in diluted earnings per share. The $11.9 million increase over
1995 included significant growth in non-interest income, mainly due to increases
in fees from deposit accounts, credit cards and trust services, combined with
gains on
22
investment securities. The change in non-interest expense included lower federal
deposit insurance expense, coupled with relatively flat costs for marketing and
data processing.
Over the past several years, the Company has focused on improving internal
efficiency and profitability. Through a series of internal mergers, the number
of bank charters was reduced from 16 in 1995 to 6 in 1996. The Company has
continued this process in 1997 by merging its two large banks, thereby reducing
its existing charters by one. This merger should further streamline and improve
operations and result in enhancements for customers.
In 1997, two Kansas banks with assets of $295 million were acquired at a cost of
$53.2 million in treasury stock and $4.3 million in cash. In 1995, banks with
assets totaling $1.2 billion were acquired at a cost of $12.0 million in
treasury stock, $75.7 million in newly issued common stock and $94.1 million in
cash. Certain of these transactions have been recorded using the pooling of
interests method of accounting. However, prior year financial results have not
been restated for these poolings because those restated amounts do not differ
materially from the Company's historical operating results.
The Company has signed a definitive agreement to merge with Pittsburg
Bancshares, Inc., a one-bank Kansas holding company with four locations and
approximately $120 million in assets. The merger is expected to be completed in
the first quarter of 1998, subject to regulatory and stockholder approval. It
is not expected to have a material effect on the financial statements of
the Company.
The Board of Directors declared a fourth annual consecutive 5% stock dividend on
October 3, 1997, payable on December 12, 1997. All per share and average share
data in this report has been restated to reflect the 1997 stock dividend.
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.
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Change due to Change due to
Average Average Average Average
(In thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME, FULLY TAXABLE EQUIVALENT BASIS
Loans $ 41,682 $ 2,674 $ 44,356 $18,857 $(15,762) $ 3,095
Investment securities:
U.S. government & federal agency securities (10,067) 1,511 (8,556) 3,553 (318) 3,235
State & municipal securities (1,237) (48) (1,285) (632) 115 (517)
Other securities 13,174 (1,506) 11,668 (4,656) 2,022 (2,634)
Federal funds sold and securities purchased
under agreements to resell (11,962) 275 (11,687) 15,362 (2,103) 13,259
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 31,590 2,906 34,496 32,484 (16,046) 16,438
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings 48 97 145 (332) (457) (789)
Interest bearing demand 7,351 (1,999) 5,352 17,014 (8,376) 8,638
Time open & C.D.'s of less than $100,000 (1,332) (1,236) (2,568) (353) 1,452 1,099
Time open & C.D.'s of $100,000 and over (594) 268 (326) 555 (379) 176
Federal funds purchased and securities
sold under agreements to repurchase 6 769 775 24 (2,389) (2,365)
Long-term debt and other borrowings (224) 21 (203) (106) 14 (92)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,255 (2,080) 3,175 16,802 (10,135) 6,667
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income, fully taxable equivalent basis $ 26,335 $ 4,986 $ 31,321 $15,682 $ (5,911) $ 9,771
===========================================================================================================================
23
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations [Cont.]
Net interest income was $397.8 million in 1997, $365.7 million in 1996 and
$355.7 million in 1995. Compared to the prior year, net interest income
increased $32.0 million, or 8.8%, in 1997 and increased $10.0 million, or 2.8%,
in 1996. The increase in 1997 was the result of strong growth in average loans
which increased by 9.3%, coupled with slightly higher earning asset rates and
relatively stable deposit costs. The increase in net interest income in 1996
resulted from average loan growth of $160.0 million, but was partially offset by
higher deposit costs and slightly lower rates on earning assets. The net yield
on earning assets was 4.61% in 1997, 4.40% in 1996 and 4.50% in 1995. The net
yield on earning assets increased 21 basis points in 1997 compared to 1996.
Average interest earning assets increased 3.5% in 1997 over 1996, compared to
5.0% in 1996 over 1995. Average interest bearing liabilities increased 1.0% in
1997 compared to 4.9% in 1996. A portion of the 1996 increase over 1995 was due
to acquisitions in 1995 of banks with assets of $1.2 billion.
Tax equivalent interest income was $687.0 million in 1997, $652.5 million in
1996 and $636.0 million in 1995; and represents an increase of $34.5 million,
or 5.3%, in 1997 and an increase of $16.4 million, or 2.6%, in 1996. The
increased interest income in 1997 was due mainly to growth in average loans of
$493.6 million, or 9.3%, partially offset by a $220.7 million decrease in
average balances invested in short-term federal funds sold and securities
purchased under agreements to resell. Average loan yields improved slightly.
Loans represented 67% of average interest earning assets in 1997, investment
securities represented 30% and short-term federal funds sold and securities
purchased under agreement to resell represented 3%. Average balances and rates
earned on investment securities in total increased slightly; during the year
investments in U.S. government and federal agencies were shifted to CMO's and
other marketable securities. The increase in interest income in 1996 compared
to 1995 was due to increases in average balances on loans and federal funds
sold/resell agreements, partially offset by lower rates earned on
these categories.
Total interest expense was $285.1 million in 1997, $281.9 million in 1996 and
$275.3 million in 1995. The $3.2 million increase in 1997 interest expense
compared to 1996 was due mainly to increases in average interest bearing
deposits. Total average interest bearing deposits increased by $73.4 million in
1997, fueled mainly by growth in the Company's Premium Money Market deposit
accounts and long-term certificates of deposit, but partially offset by declines
in interest checking, investment savings and short-term certificates of deposit.
Overall deposit rates remained stable during the year in most categories but
reflected lower interest checking rates paid. Premium and other money market,
interest checking, savings and certificates of deposit represented 39%, 19%, 5%
and 37%, respectively, of total average interest bearing deposits. Interest
expense increased $6.6 million, or 2.4%, in 1996 over 1995. Again, growth in
Premium Money Market accounts contributed significantly to the increase in
interest expense over 1995. Partially offsetting was a decline of 6 basis points
in rates paid on total average deposits.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management records the provision for loan losses, on an individual bank basis,
in amounts sufficient to result in an allowance for loan losses that will cover
current net charge-offs and risks believed to be inherent in the loan portfolio
of each bank. Amounts charged against current income are based on such factors
as past loan loss experience, current loan portfolio mix, evaluation of actual
and potential losses in the loan portfolio, prevailing regional and national
economic conditions that might have an impact on the portfolio, regular reviews
and examinations of the loan portfolio conducted by internal loan reviewers
supervised by Commerce Bancshares, Inc. (the Parent), and reviews and
examinations by bank regulatory authorities. The balance in the allowance for
loan losses is reduced when a loan or part thereof is considered by management
to be uncollectible. Recoveries on loans previously charged off are added back
to the allowance. During periods of growth in the loan portfolio, a portion of
the provision may be taken to reflect management's
24
desire to maintain a satisfactory allowance to protect the Company from those
losses which occur as a natural part of doing business.
As with any financial institution, weak economic conditions, higher inflation,
interest rates, or unemployment may lead to increased losses in the loan
portfolio. Conversely, improvements in economic conditions tend to reduce the
amounts charged against the allowance. Management has established various
controls in order to limit future losses at the lending affiliates, such as: 1)
a "watch list" of possible problem loans, 2) specific loan retention limits in
relation to the size of each affiliate and market, 3) documented policies
concerning loan administration (loan file documentation, disclosures,
approvals, etc.) and 4) a loan review staff employed by the Parent which travels
to subsidiary bank markets to audit for adherence to established Company
controls and to review the quality and anticipated collectibility of the
portfolio. Management determines which loans are possibly uncollectible or
represent a greater risk of loss and makes additional provision to expense, if
necessary, to maintain the allowance at a satisfactory level on an individual
bank basis.
The allowance for loan losses at December 31, 1997, was 1.70% of loans
outstanding compared to 1.79% at year end 1996. The allowance for loan losses at
year end covered non-performing assets (defined as non-accrual loans, loans 90
days delinquent and still accruing interest, and foreclosed real estate) by
217%. Net charge-offs totaled $27.9 million in 1997 compared to $24.8 million in
1996. The ratio of net charge-offs to average loans outstanding in 1997 was
.48% compared to .47% in 1996 and .31% in 1995. The increase in net charge-offs
in 1997 compared to 1996 was mainly attributable to higher net credit card
losses coupled with improved loss experience in other consumer lending areas
and continued favorable commercial lending experience. The provision for loan
losses was $31.4 million, exceeding 1997 net charge-offs by $3.4 million,
compared to a provision of $24.5 million in 1996 and $14.6 million in 1995.
A subsidiary bank is an issuer of Visa and MasterCard credit cards. Credit card
loans outstanding at year end 1997 amounted to $548.9 million, or 8.8% of total
loans. The percentage of consumer loans outstanding which are generated through
revolving credit balances and cash advances is significantly higher for Commerce
than it is for a banking group that does not issue credit cards. Because credit
card loans traditionally have a higher than average ratio of net charge-offs to
loans outstanding when compared with other portfolio segments, management
requires that a separate allowance for loan losses on credit card loans be
maintained which, on a consolidated basis, was $16.1 million or 2.93% of credit
card loans outstanding at December 31, 1997. Net charge-offs amounted to 3.81%
of average credit card loans in 1997 compared to 2.92% in 1996. During 1997, the
banking industry experienced increasing credit losses on these loans primarily
due to high levels of consumer installment and revolving debt, rising
delinquency, and decade-high levels of personal bankruptcies. Net charge-offs at
major banks this year have ranged from 4% to over 7% of credit card loans. The
Company has also experienced an increase in losses on credit card loans due to
these same factors. However, its net charge-off experience has been
significantly lower than industry averages.
Other than as previously noted, management is not aware of any significant risks
in the current loan portfolio mix that would result from concentrations of loans
within any particular market, industry, or portfolio segment. Other than for the
credit card risk mentioned above, management does not allocate the allowance
for loan losses. It is deemed to be a general reserve available for all types
of loan losses. The allowance at year end 1997 represented a 3.79 times multiple
of net loan losses for the year just ended.
Based on current economic conditions, management considers the December 31, 1997
allowance adequate to cover the possible risk of loss in the loan portfolio at
the present time. Various appraisals and estimates of current value influence
the calculation of the required allowance at any point in time. If economic
conditions in the region deteriorate significantly, it is possible that
additional assets would be classified as non-performing, and accordingly,
additional provision for possible losses would be required. Such an event and
its duration cannot be predicted at this time.
25
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations [Cont.]
The schedule which follows summarizes the relationship between loan balances
and activity in the allowance for loan losses:
Years Ended December 31
--------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------------------------
Net loans outstanding at end of period (A) $ 6,224,381 $ 5,472,342 $ 5,317,813 $ 4,432,662 $ 4,024,075
==========================================================================================================================
Average loans outstanding (A) $ 5,815,192 $ 5,321,584 $ 5,161,552 $ 4,180,065 $ 3,835,834
==========================================================================================================================
Allowance for loan losses:
Balance at beginning of period $ 98,223 $ 98,537 $ 87,179 $ 85,830 $ 77,149
--------------------------------------------------------------------------------------------------------------------------
Additions to allowance through
charges to expense 31,354 24,522 14,629 5,845 11,381
--------------------------------------------------------------------------------------------------------------------------
Allowances of acquired banks 4,275 -- 12,932 2,953 3,661
--------------------------------------------------------------------------------------------------------------------------
Recovery of loans previously charged off:
Business 2,992 1,739 1,632 2,540 3,690
Construction 340 -- -- 3 508
Business real estate 500 416 542 663 562
Personal real estate 70 123 99 226 141
Personal banking 3,420 2,628 2,633 2,259 2,528
Credit card 2,927 2,172 2,163 2,015 1,947
--------------------------------------------------------------------------------------------------------------------------
Total recoveries 10,249 7,078 7,069 7,706 9,376
--------------------------------------------------------------------------------------------------------------------------
Loans charged off:
Business 5,734 4,912 3,422 2,511 3,858
Construction 300 -- -- -- 12
Business real estate 113 205 391 1,243 418
Personal real estate 401 341 208 196 395
Personal banking 8,472 9,327 7,413 3,442 3,897
Credit card 23,163 17,129 11,838 7,763 7,157
--------------------------------------------------------------------------------------------------------------------------
Total loans charged off 38,183 31,914 23,272 15,155 15,737
--------------------------------------------------------------------------------------------------------------------------
Net loans charged off 27,934 24,836 16,203 7,449 6,361
--------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 105,918 $ 98,223 $ 98,537 $ 87,179 $ 85,830
==========================================================================================================================
Ratio of net charge-offs to average
loans outstanding .48% .47% .31% .18% .17%
Ratio of allowance to loans at end of period 1.70% 1.79% 1.85% 1.97% 2.13%
Ratio of provision to average loans outstanding .54% .46% .28% .14% .30%
==========================================================================================================================
(A) Net of unearned income; before deducting allowance for loan losses
NON-INTEREST INCOME
----------------------------------------------------------------------------------------------------------------------------
% Change
(Dollars in thousands) 1997 1996 1995 '97-'96 '96-'95
----------------------------------------------------------------------------------------------------------------------------
Trust fees $ 41,224 $ 35,536 $ 32,378 16.0% 9.8%
Deposit account charges and other fees 57,223 54,506 44,658 5.0 22.1
Credit card transaction fees 30,703 26,586 23,341 15.5 13.9
Trading account profits and commissions 7,420 5,982 5,158 24.0 16.0
Net gains on securities transactions 3,253 3,293 897 (1.2) 267.1
Other 40,269 33,259 26,718 21.1 24.5
----------------------------------------------------------------------------------------------------------------------------
Total non-interest income $180,092 $159,162 $133,150 13.2% 19.5%
============================================================================================================================
As a % of operating income (net interest income
plus non-interest income) 31.2% 30.3% 27.2%
Operating income per full-time equivalent employee $ 115.9 $ 108.1 $ 100.0
============================================================================================================================
Non-interest income totaled $180.1 million in 1997, $159.2 million in 1996 and
$133.2 million in 1995. The increase in non-interest income in 1997 of 13.2%
resulted mainly from double digit growth in credit card transaction fees, trust
fees, and other money management areas including bond, brokerage and mutual fund
activities. The growth in credit card fees, which totaled $4.1 million, resulted
from increased sales from both merchant and cardholder customers. Trust fee
income grew $5.7 million as a result of new account growth and improved market
conditions. Included in the other income category are gains on sales of student
loans
26
and leveraged leases, which increased $3.1 million in 1997 over 1996. Also
included in other income are various types of fee income, such as other money
management, non-customer ATM and international transaction fees. These fees
increased $5.0 million compared to the prior year.
In 1996 compared to 1995, deposit account charges increased $9.8 million,
partially due to fee restructuring and added cash management fees. Trust fees
increased $3.2 million, reflecting increased new business coupled with
improvement in market value of assets upon which some fees are based. Credit
card transaction fees grew by $3.2 million. Included in other income were gains
on sales of branches and fixed assets, which totaled $3.1 million more than in
1995.
In 1997, the Parent and a venture capital subsidiary contributed net gains on
equity securities transactions of $3.5 million. Banking subsidiaries contributed
net gains of $2.2 million and $480 thousand in 1996 and 1995, respectively, on
portfolio investment securities, with the remaining net gains attributable to
sales of equity securities by the Parent and a venture capital subsidiary.
NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------------------------------------
% Change
(Dollars in thousands) 1997 1996 1995 '97-'96 '96-'95
- --------------------------------------------------------------------------------------------------------------
Salaries $156,497 $141,328 $136,646 10.7% 3.4%
Employee benefits 22,598 23,963 21,207 (5.7) 13.0
Net occupancy 21,570 21,456 20,294 .5 5.7
Equipment 16,492 15,185 14,256 8.6 6.5
Supplies and communication 25,838 24,697 24,139 4.6 2.3
Data processing 24,628 20,778 20,997 18.5 (1.0)
Federal deposit insurance 1,120 2,124 8,807 (47.3) (75.9)
Marketing 12,757 11,698 11,611 9.1 .7
Goodwill and core deposit premium amortization 9,778 11,448 11,094 (14.6) 3.2
Foreclosed property expense, net 1,114 2,406 164 (53.7) NM
Other 52,058 42,871 36,269 21.4 18.2
- --------------------------------------------------------------------------------------------------------------
Total non-interest expense $344,450 $317,954 $305,484 8.3% 4.1%
==============================================================================================================
Efficiency ratio (non-interest expense as a % of operating
income excluding net gains on securities transactions) 59.9% 61.0% 62.6%
Salaries and benefits as a % of total non-interest expense 52.0% 52.0% 51.7%
Number of full-time equivalent employees 4,985 4,854 4,890
==============================================================================================================
Non-interest expense totaled $344.5 million in 1997, $318.0 million in 1996 and
$305.5 million in 1995. In 1997 compared to 1996, salaries increased $15.2
million, or 10.7%, which includes increased payroll costs for incentive pay on
new business, while employee benefits decreased $1.4 million, or 5.7%. Equipment
expense includes an increase in data processing equipment depreciation of $813
thousand. Data processing expense increased $3.9 million, partially because of
increases in fee related credit card transaction volumes and higher charges by
other information service providers. Goodwill and core deposit premium
amortization decreased because of the effect of accelerated amortization
methods, partially offset by additional goodwill recorded in a September 1997
purchase acquisition. Other expense above includes increases in professional
fees of $1.9 million and software expenses of $1.9 million.
In 1996 compared to 1995, salaries increased $4.7 million, or 3.4%, which
reflected an overall reduction in full-time equivalent employees, partially
offset by higher benefit costs, mainly in the health care area. Federal deposit
insurance expense decreased $6.7 million due to a decrease in the assessment
rate which began in mid 1995. Included in 1996 federal deposit insurance expense
was a $1.3 million one-time charge in connection with the recapitalization of
the Savings Association Insurance Fund.
Since 1996, the Company has undertaken steps to address the issues and exposures
related to the Year 2000 which may affect key financial, operational and
information
27
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (Cont.)
systems. During this period, assessments of key financial, operational and
information systems were completed. System modifications are underway for all
major financial, operational and information systems. Plans to test system
modifications as well as modifications to other operational systems will
continue into 1998. The Company expects to substantially complete all Year 2000
conversion projects by the end of 1998. These costs, which are expensed as
incurred, have not been material to date and are not expected to have a material
impact on the Company's earnings in the future.
INCOME TAXES
Income tax expense was $69.4 million, $62.9 million and $61.1 million in 1997,
1996 and 1995, respectively. The effective tax rate on income from operations
was 34.3%, 34.5% and 36.2% in 1997, 1996 and 1995, respectively. The difference
between these effective tax rates and the federal statutory rate of 35% was
mainly due to state and local income taxes and non-deductible goodwill
amortization, offset by tax exempt interest income on state and municipal
obligations. The lower effective tax rates in 1997 and 1996 were due to lower
state income taxes and in 1996, the contribution of an appreciated asset.
FINANCIAL CONDITION
LOAN PORTFOLIO ANALYSIS
A breakdown of average balances invested in each category of loans appears on
page 38. Classifications of consolidated loans by major category at December 31
for each of the past five years are as follows:
Balance at December 31
- ------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
Business $2,056,862 $1,700,678 $1,716,080 $1,393,979 $1,380,452
Real estate--construction 233,209 182,474 168,031 127,948 90,102
Real estate--business 926,107 758,650 695,558 586,769 533,467
Real estate--personal 1,148,236 1,010,572 983,249 813,134 734,771
Personal banking 1,311,081 1,256,684 1,258,809 1,120,366 917,683
Credit card 548,886 563,284 496,086 390,466 367,600
- ------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $6,224,381 $5,472,342 $5,317,813 $4,432,662 $4,024,075
======================================================================================================
The contractual maturities of loan categories at December 31, 1997, and a
breakdown of those loans between predetermined rate and floating rate loans are
as follows:
Principal Payments Due
- ------------------------------------------------------------------------------------------------------
In After One After
One Year Year Through Five
(In thousands) or Less Five Years Years Total
- ------------------------------------------------------------------------------------------------------
Business $1,315,811 $ 702,430 $ 38,621 2,056,862
Real estate--construction 161,898 65,030 6,281 233,209
Real estate--business 299,815 533,090 93,202 926,107
Real estate--personal 105,749 215,646 826,841 1,148,236
- ------------------------------------------------------------------------------------------------------
Total $1,883,273 $1,516,196 $964,945 4,364,414
======================================================================================================
Personal banking (1) 1,311,081
Credit card (2) 548,886
- ------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $6,224,381
======================================================================================================
Loans with predetermined rate $ 762,020 $ 773,332 $224,844 $1,760,196
Loans with floating rate 1,121,253 742,864 740,101 2,604,218
- ------------------------------------------------------------------------------------------------------
Total $1,883,273 $1,516,196 $964,945 $4,364,414
======================================================================================================
(1) Personal banking loans with floating rate totaled $461,847,000.
(2) Credit card loans with floating rate totaled $481,570,000.
28
Total loans grew $752.0 million, or 13.7%, during 1997 compared to growth of
$154.5 million, or 2.9%, during 1996. The growth in 1997 came principally from
business, business real estate and construction loans, which grew 20.9%, 22.1%
and 27.8%, respectively. This growth in 1997 was partly reflective of the
effects of two bank acquisitions during the year in which the Company acquired
loans of approximately $150 million, plus the effects of a strong economy
throughout many of the markets the Company serves. Additionally, other banking
consolidations in a number of the markets have provided the Company an
opportunity to establish new customer relationships.
The Company currently generates approximately 29% of its loan portfolio in the
St. Louis regional market and 23% in the Kansas City regional market. The
portfolio is diversified from a commercial and retail standpoint, with 51.6% in
loans to business and 48.4% in loans to individual consumers. Such a balanced
approach to loan portfolio management and an aversion toward credit
concentrations, from an industry, geographic and product perspective, have
enabled the Company to avoid problem loan levels and loan losses that
characterized the banking industry in the early 1990s.
Loans by type as a percentage of total loans follows:
- ------------------------------------------------------------------------------
December 31
1997 1996
- ------------------------------------------------------------------------------
Business 33.0% 31.1%
Real estate--construction 3.7 3.3
Real estate--business 14.9 13.9
Real estate--personal 18.5 18.4
Personal banking 21.1 23.0
Credit card 8.8 10.3
- ------------------------------------------------------------------------------
Total loans 100.0% 100.0%
==============================================================================
BUSINESS LOANS
Total business loans amounted to $2.06 billion at December 31, 1997, compared to
$1.70 billion at December 31, 1996, an increase of $356.2 million, or 20.9%.
Approximately $25 million of the growth resulted from the acquisition of two
banks during 1997, while the remaining growth came predominately from growth in
the Kansas City and St. Louis markets.
This group of loans is comprised primarily of loans to customers in the regional
trade area of the bank subsidiaries in the central Midwest, encompassing the
states of Missouri, Kansas, Illinois and adjacent Midwestern markets. The bank
subsidiaries generally do not participate in credits of large, publicly traded
companies unless operations are maintained in the local communities or regional
markets. The portfolio is diversified from an industry standpoint and includes
businesses engaged in manufacturing, wholesaling, retailing, agribusiness,
insurance, financial services, public utilities, and other service businesses.
Emphasis is upon middle-market and community businesses with known local
management and financial stability. Consistent with management's strategy and
emphasis upon relationship banking, most borrowing customers also maintain
deposit accounts and utilize other banking services. There were net loan charge-
offs in this category of $2.7 million in 1997 compared to $3.2 million in 1996.
Non-accrual business loans increased to $15.1 million (.7% of business loans) at
December 31, 1997, compared to $7.0 million (.4% of business loans) at December
31, 1996. Continued growth in business loans will be based upon strong
solicitation efforts in a highly competitive market environment for quality
loans. Asset quality is, in part, a function of management's consistent
application of conservative underwriting standards. Therefore, portfolio growth
in 1998 is dependent upon the strength of the economy, the actions of the
Federal Reserve with regard to targets for economic growth and inflationary
tendencies, and the competitive environment as previously described.
REAL ESTATE--CONSTRUCTION
The portfolio of loans in this category amounted to $233.2 million at December
31, 1997, compared to $182.5 million at year end 1996, reflecting growth of
$50.7 million, or 27.8%. Over 60% of this growth was the result of bank
acquisitions in which $37 million in construction loans were acquired. Non-
accrual loans in this category were $1.9 million at year end 1997 compared to
$552 thousand at year end 1996. The portfolio consists of
29
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (Cont.)
residential construction, commercial construction and land development loans,
predominantly in the local markets of the Company's banking subsidiaries.
Commercial construction loans are for small and medium-sized office and medical
buildings, manufacturing and warehouse facilities, strip shopping centers, and
other commercial properties. Exposure to larger speculative office and rental
space is minimal. Residential construction and land development loans are
primarily located in the Kansas City and St. Louis metropolitan areas. The
Company experienced $40 thousand net recoveries in 1997 and no loan losses in
1996. Management is not aware of any significant adverse exposure in this
category.
REAL ESTATE--BUSINESS
Total business real estate loans were $926.1 million at December 31, 1997,
reflecting growth of $167.5 million, or 22.1%. Again, bank acquisitions
contributed $35 million to this loan growth, while the remainder of the growth
came from the Company's major markets in Missouri, Kansas and Illinois. Non-
accrual balances have decreased at December 31, 1997 to $4.3 million, or .5% of
the loans in this category, compared to $4.4 million at year end 1996. The
Company experienced net recoveries of $387 thousand in 1997 and $211 thousand in
1996. This category includes mortgage loans secured by commercial properties
which are primarily located in the local and regional trade territories of the
customers of the affiliate banks. The economic conditions in local markets are
generally strong, positively impacting debt service capabilities and collateral
values for both owner-occupied and investment real estate. Significant
deterioration is not anticipated in 1998, provided that the economy performs at
or near the Federal Reserve's target level for growth.
REAL ESTATE--PERSONAL
The mortgage loans in this category are extended, predominantly, for owner-
occupied residential properties. At December 31, 1997, there were $1.15 billion
in loans outstanding compared to $1.01 billion at December 31, 1996, reflecting
growth of $137.7 million, or 13.6%. This growth is partly attributable to loans
of $33 million acquired in bank mergers in 1997. The Company has not experienced
significant problem credits in this category recently as there were net charge-
offs of $331 thousand in 1997 compared to $218 thousand in 1996. The non-accrual
balances of loans in this category were $1.9 million, or .2% of the category, at
December 31, 1997 and 1996. The five year history of net charge-offs on the real
estatepersonal loan category reflects nominal losses and credit quality is
considered to be above average.
PERSONAL BANKING
Total personal banking loans were $1.31 billion at December 31, 1997, and
reflected growth of $54.4 million, or 4.3% over the previous year. Net charge-
offs were $5.1 million in 1997 compared to $6.7 million in 1996. The majority of
personal banking loan losses were related to indirect paper purchases generally
secured by automobiles. This consumer loan portfolio consists of both secured
and unsecured loans to individuals for various personal reasons such as
automobile financing, securities purchases, home improvements, recreational and
educational purposes. This category also includes $180.1 million of home equity
loan balances at December 31, 1997, with an additional $303.0 million in unused
lines of credit that can be drawn at the discretion of the borrower. These home
equity lines are secured by first or second mortgages on residential property of
the borrower. The underwriting terms for the home equity line product permit
borrowing availability, in the aggregate, generally up to 80% of the appraised
value of the collateral property. Given reasonably stable real estate values
over time, the collateral margin improves with the regular amortization of prior
mortgage loans. Approximately 35% of the loans in the personal banking category
are extended on a floating interest rate basis.
CREDIT CARD
Total credit card loans amounted to $548.9 million at December 31, 1997,
compared to $563.3 million at December 31, 1996, representing a $14.4 million
decline. The credit card portfolio is concentrated within regional markets
served by the Company. Approximately 57.4% of the households in Missouri that
own a Commerce
30
credit card product also maintain a deposit relationship with a subsidiary bank.
The Company has a variety of credit card products, which offer ATM access to
either advances against the credit card account or transactions against related
deposit accounts. Approximately 88% of the outstanding credit card loans have a
floating interest rate. Net charge-offs amounted to $20.2 million in 1997, which
was a $5.3 million increase over 1996. Such losses were attributable to higher
delinquencies and bankruptcies and were noted as part of national trends
throughout the industry. The net charge-off ratios of 3.8% in 1997 and 2.9% in
1996 continue, however, to be well below national averages. Future growth in
this portfolio is anticipated through targeted marketing and product design to
segmented groups. During 1998, it is anticipated that new products will continue
to be introduced or extended to affiliate bank markets to fill in product line
gaps for consumers, along with products aimed at the corporate and small
business markets. The Company refrains from national pre-approved mailing
techniques which have caused some of the credit card problems experienced by
other banking companies. Current delinquency ratios are in line with past
charge-off results. Significant changes in loss trends, when compared to the
fourth quarter of 1997 results, are not currently anticipated by management.
RISK ELEMENTS OF LOAN PORTFOLIO
Management reviews the loan portfolio continuously for evidence of problem
loans. During the ordinary course of business, management becomes aware of
borrowers that may not be able to meet the contractual requirements of loan
agreements. Such loans are placed under close supervision with consideration
given to placing the loan on non-accrual status, the need for additional
allowance for loan loss, and (if appropriate) partial or full charge-off. Those
loans on which management does not expect to collect payments consistent with
acceptable and agreed upon terms of repayment (generally, loans that are 90 days
past due as to principal and/or interest payments) are placed on non-accrual
status. After a loan is placed on non-accrual status, any interest previously
accrued but not yet collected is reversed against current income. Interest is
included in income subsequent to the date the loan is placed on non-accrual
status only as interest is received and so long as management is satisfied there
is no impairment of collateral values. The loan is returned to accrual status
only when the borrower has brought all past due principal and interest payments
current and, in the opinion of management, the borrower has demonstrated the
ability to make future payments of principal and interest as scheduled.
A schedule of non-performing assets according to risk category follows:
December 31
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
=======================================================================================================================
Non-accrual $23,382 $13,945 $16,234 $11,385 $14,328
Past due 90 days and still accruing interest 24,383 24,806 15,690 13,090 7,289
- -----------------------------------------------------------------------------------------------------------------------
Total impaired loans 47,765 38,751 31,924 24,475 21,617
Real estate acquired in foreclosure 994 1,136 1,955 7,290 10,057
- -----------------------------------------------------------------------------------------------------------------------
Total non-performing assets $48,759 $39,887 $33,879 $31,765 $31,674
=======================================================================================================================
Non-performing assets
as a percentage of total loans .78% .73% .64% .72% .79%
=======================================================================================================================
Non-performing assets
as a percentage of total assets .47% .41% .35% .40% .39%
=======================================================================================================================
The effect of non-accruing loans on interest income for 1997 is presented below:
(In thousands)
- ----------------------------------------------------------------
Gross amount of interest that would have been recorded
at original rate $2,782
Interest that was reflected in income 980
- ----------------------------------------------------------------
Interest income not recognized $1,802
================================================================
Non-accrual loans increased $9.4 million over 1996, mainly in the business
category. Loans past due 90 days and still accruing interest decreased $423
thousand at December 31, 1997 compared to December 31, 1996. Loans past due 90
days and still accruing interest increased $9.1 million at December 31, 1996
compared
31
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations (Cont.)
to December 31, 1995. Approximately 50% of the 1996 increase was related to the
credit card portfolio, discussed above.
At December 31, 1997, the Company's mortgage banking subsidiary held residential
real estate loans of approximately $22.4 million at lower of cost or market,
which are to be resold to secondary markets within approximately three months.
The Parent and a venture capital and investment banking subsidiary had debt and
equity investments with a carrying value of $8.1 million in 10 companies or
partnerships at December 31, 1997. A $30 million limited partnership venture
fund was organized by the Company in 1993 with 49% outside participation, which
is managed by a subsidiary. The Company's investment in this partnership was
approximately $9.2 million at December 31, 1997. Management believes the
potential for long-term gains in this type of investment activity outweighs the
potential risk of losses.
There were no loan concentrations of multiple borrowers in similar activities at
December 31, 1997 which exceeded 5% of total loans. The Company's aggregate
legal lending limit to any single or related borrowing entities is in excess of
$100 million. The largest such exposures generally do not exceed $50 million.
INVESTMENT SECURITIES PORTFOLIO ANALYSIS
At December 31, 1997, available for sale securities totaled $2.61 billion, which
included a net unrealized gain in fair value of $47.0 million. The amount of the
related after tax unrealized gain reported in stockholders' equity was $29.1
million. Non-marketable equity securities, which are carried at cost (less
allowances for other than temporary declines in value) are generally held by the
Parent and non-banking subsidiaries due to regulatory restrictions, except for
Federal Reserve Bank stock held by banking subsidiaries.
During 1997, the total investment securities portfolio decreased $74.1 million
to $2.62 billion (excluding unrealized gains/losses) compared to $2.69 billion
at the previous year end. This decrease was generally the result of regular
maturities of investment securities which proceeds were used to fund added loan
growth realized during the year. Partly offsetting this decline was an
additional $110.7 million in investment securities from bank acquisitions. The
average tax equivalent yield was 6.29% in 1997 and 6.28% in 1996.
Investment securities (excluding trading securities) at year end for the past
two years are shown as follows:
December 31
- ------------------------------------------------------------------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
Amortized Cost
U.S. government and
federal agency obligations $1,448,402 $1,705,869
State and municipal obligations 91,906 98,886
CMO's and asset-backed securities 832,211 705,848
Other debt securities 174,031 108,453
Equity securities 64,857 61,693
- ------------------------------------------------------------------------------
Total $2,611,407 $2,680,749
==============================================================================
Fair Value
U.S. government and
federal agency obligations $1,461,593 $1,717,945
State and municipal obligations 94,115 101,293
CMO's and asset-backed securities 837,056 703,515
Other debt securities 173,972 108,442
Equity securities 91,718 79,055
- ------------------------------------------------------------------------------
Total $2,658,454 $2,710,250
==============================================================================
A summary of maturities by category of investment securities and the weighted
average yield for each range of maturities as of December 31, 1997, is presented
in the financial statements note on Investment Securities on page 49. U.S.
government and federal agency securities comprise 55% of the investment
portfolio at December 31, 1997, with a weighted average yield of 6.25% and an
estimated average maturity of 2.5 years; CMO's and asset-backed securities
comprise 31% with a weighted average yield of 6.31% and an estimated average
maturity of 3.2 years.
Other debt and equity securities above include Federal Reserve Bank stock and
other bonds, notes, corporate stock (held primarily by non-banking entities) and
debentures. The tax equivalent yield on these securities in 1997 computed on
average balances invested was approximately 5.51%.
32
DEPOSITS AND BORROWINGS
Deposits are the primary funding source for the Company's banks, and are
acquired from a broad base of local markets, including both individual and
corporate customers. Total deposits were $8.70 billion at year end 1997 and
$8.17 billion at year end 1996, reflecting growth of $534.1 million, or 6.5%.
Bank acquisitions during 1997 added $253.0 million of this total growth. At year
end 1997, 24% of total deposits were in non-interest bearing demand, 48% in
savings and interest bearing demand and 25% in time open and C.D.'s under
$100,000. At year end 1996, total deposits were comprised of 22% in non-interest
bearing demand, 49% in savings and interest bearing demand and 26% in time open
and C.D.'s under $100,000. Core deposits (defined as all non-interest and
interest bearing deposits, excluding short-term C.D.'s of $100,000 and over)
supported 93% of average earning assets in 1997 and 1996. Average balances by
major deposit category for the last six years appear on pages 38 and 39. The
maturity schedule of time deposits of $100,000 and over outstanding at December
31, 1997 appears in the financial statements note on Fair Value of Financial
Instruments.
Short-term borrowings consist mainly of federal funds purchased and securities
sold under agreements to repurchase. Balances outstanding at year end 1997 were
$512.6 million, a $14.2 million decrease from $526.8 million outstanding at year
end 1996. The Company's long-term debt, which was approximately $7 million at
year end 1997, consists mainly of mortgages and borrowings from the Federal Home
Loan Bank.
LIQUIDITY AND CAPITAL RESOURCES
The liquid assets of the Parent consist primarily of available for sale
securities, which include readily marketable equity securities and commercial
paper, and securities purchased under agreements to resell. Total investment
securities and repurchase agreements were $71.7 million at cost and $92.4
million at fair value at December 31, 1997 ($10.0 million of which is pledged
under a self-insured officer and director liability program) compared to $94.4
million at cost and $108.9 million at fair value at December 31, 1996. Total
liabilities of the Parent at December 31, 1997 decreased to $10.6 million
compared to $12.6 million at December 31, 1996. The Parent had no third-party
short-term borrowings or long-term debt at December 31, 1997. Primary sources of
funds for the Parent are dividends and management fees from its subsidiary
banks, which were $103.8 million and $16.8 million, respectively, in 1997. The
Parent also collected $27.6 million from subsidiary banks to reimburse data
processing costs paid by the Parent. The subsidiary banks may distribute
dividends without prior regulatory approval that do not exceed the sum of net
income for the current year and retained net income for the preceding two years,
subject to maintenance of minimum capital requirements. The Parent's commercial
paper, which management believes is readily marketable, has a P1 rating from
Moody's and an A1 rating from Standard & Poor's. No commercial paper was
outstanding during the past three years. The Company is also rated A by Thomson
BankWatch with a corresponding short-term rating of TBW-1. This credit
availability, along with available secured short-term borrowings from an
affiliate bank, should provide adequate funds to meet any outstanding or future
commitments of the Parent. Management is not aware of any factors that would
cause these ratings to be adversely impacted.
The liquid assets held by bank subsidiaries include available for sale
securities, which consist mainly of investments in U.S. government and federal
agency securities and mortgage-backed securities. The available for sale bank
portfolio totaled $2.52 billion at December 31, 1997, including an unrealized
net gain of $20.0 million. Investment securities maturing in 1998 and 1999 total
approximately $447 million and $351 million, respectively.
The Company (on a consolidated basis) continues to maintain a sound equity to
assets ratio of 9.74%, based on 1997 average balances. At December 31, 1997, the
Company and each of its banking subsidiaries met minimum risk based capital
requirements. Consolidated
33
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations (Cont.)
Tier I and Total capital ratios were 12.10% and 13.22%, respectively, and the
leverage ratio was 8.81%.
The cash flows from the operating, investing and financing activities of the
Company resulted in a net increase in cash and due from banks of $145.0 million
in 1997. The cash generated by operating activities, which amounted to $216.4
million in 1997, provides a high degree of liquidity. Most of the Company's
investing activities arise from customer lending and the investment of funds in
available for sale securities and short-term federal funds sold and repurchase
agreements. The net cash required by investing activities was $210.3 million in
1997. The liquidity needs arising from these activities are largely satisfied by
maturities of the same in addition to a major financing item, the customer
deposit base, and short-term borrowings of federal funds purchased. Future
short-term liquidity needs for daily operations are not expected to vary
significantly and the Company maintains adequate liquidity to meet that cash
flow. The Company's sound equity base, along with its low debt level, common and
preferred stock availability, and excellent debt ratings, provide several
alternatives for future financing. Future acquisitions may utilize partial
funding through one or more of these options.
Cash and stock requirements for acquisitions, funding of various employee
benefit programs and dividends were as follows:
- ----------------------------------------------------------
(In millions) 1997 1996 1995
- ----------------------------------------------------------
Cash used in acquisitions $ 4.3 $ -- $94.1
Acquisition-related issuance of
treasury stock 53.2 -- 12.0
Acquisition-related issuance of
new stock -- -- 75.7
Purchases of treasury stock 94.1 78.4 40.0
Exercise of stock options, sales to
affiliate non-employee directors
and restricted stock awards (2.6) (4.0) (4.1)
Cash dividends 30.4 27.5 26.0
==========================================================
In February 1997, the Board of Directors authorized the Company to purchase up
to 2,000,000 shares of common stock, in either the open market or privately
negotiated transactions, to be used for employee benefit programs and stock
dividends. At December 31, 1997, the Company had acquired approximately
1,645,000 shares under the 1997 authorization.
Various commitments and contingent liabilities arise in the normal course of
business which are properly not recorded on the balance sheet. The most
significant of these are loan commitments totaling $2.52 billion (excluding
approximately $2.03 billion in unused approved lines of credit related to credit
card loan agreements) and standby letters of credit, net of participations to
non-affiliated companies, totaling $169.4 million at December 31, 1997. The
Company has various other financial instruments with off-balance-sheet risk,
such as commercial letters of credit, foreign exchange contracts to purchase and
sell foreign currency, and interest rate swap agreements. Management does not
anticipate any material losses arising from commitments and contingent
liabilities and believes there are no material commitments to extend credit that
represent risks of an unusual nature.
INTEREST RATE SENSITIVITY
The Company's Asset/Liability Management Committee monitors the interest rate
sensitivity of the Company's balance sheet on a monthly basis. The Company's
policy is to minimize the impact of changing rates on net interest income by
maintaining a reasonable balance of rate sensitive assets and liabilities. The
Company continually reviews the repricing characteristics of its assets and
liabilities and the rates paid and charged for deposits and loans. Deposit rates
are reviewed at least weekly and loan rates are monitored closely, particularly
on larger commercial relationships.
Interest rate risk is evaluated using various tools, including interest
sensitivity analysis and simulation techniques. The following schedule presents
the Company's interest sensitivity analysis as of December 31, 1997 and
identifies the repricing characteristics of the balance sheet and resulting
difference between assets and liabilities repricing within selected time
intervals. In this analysis the interest sensitivity position is balanced when
an equal amount of assets and liabilities reprice during a given time interval.
Excess
34
assets or liabilities repricing in a given time period result in the "Interest
sensitivity GAP" shown in the following schedule. A positive gap indicates that
more assets than liabilities will reprice in a given time period, while a
negative gap indicates that more liabilities will reprice.
The schedule indicates that the Company is liability sensitive in time intervals
of less than one year and means that interest bearing liabilities can reprice
faster than earning assets. This is supported by the fact that 73% of the
Company's deposits are of the non-maturity type. This would indicate that the
net interest margin should improve when interest rates decline and decline when
interest rates increase.
While this interest sensitivity analysis is a widely used measure of interest
rate risk, it provides an incomplete picture of the sensitivity position of the
Company and should be used only in conjunction with other factors of financial
performance. In addition to changes in market interest rates, the Company's net
interest margin is also impacted by changes in funding demands. When these
demands increase, deposit rates can also increase, and in a declining interest
rate environment, the result could be a decrease in the net interest margin. In
the same way, it is possible for the net interest margin to increase in a rising
interest rate environment, which could happen if funding demands are low and
allow a slower increase in the rates paid on deposits. Accordingly, even though
the interest sensitivity analysis may be used as an indication of interest
margin direction and interest rate risk, it does not factor in all the variables
necessary to evaluate true interest rate risk.
For these reasons, the Company also evaluates its interest rate risk position
using simulation models and other evaluation tools to monitor and manage its
balance sheet and related earnings potential. Such models are prepared regularly
during the year using a variety of assumptions, including rates of loan and
deposit growth, product pricing and elasticity, and various interest rate
scenarios based on outside market rate projections that the Company purchases
from a national vendor. The Company has set policy limits of interest rate risk
to be assumed in the normal course of business and continually monitors such
limits through its simulation process. The Company has been successful in
meeting the interest rate sensitivity objectives set forth in its policy and has
been well within the policy limits all year.
While the overall conclusions drawn by this simulation process have remained
fairly consistent over time, changes in market factors and the Company's overall
position generally cause variations in the specific results with each cycle of
iterations. At December 31, 1997, the simulation results showed that the
interest rate risk position of the Company was relatively neutral, as the impact
of a gradual parallel 100 basis point rise or fall in interest rates over the
next 12 months was calculated to be approximately 1% of net interest income.
The Company does not use any off-balance-sheet derivative products to a
significant degree, but rather uses traditional methods of managing its assets
and liabilities while maintaining its normal high credit standards. Management
believes the Company is appropriately positioned for future interest rate
movements.
35
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations [Cont.]
The following is an analysis of sensitivity gaps of interest earning assets and
interest bearing liabilities:
REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1997
1-3 4-6 7-12 2-5 Over 5
(In thousands) Months Months Months Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans, net of unearned income $ 2,984,873 $ 203,370 $1,288,089 $1,511,286 $236,763 $6,224,381
Investment securities 223,955 28,890 282,796 1,933,828 195,462 2,664,931
Federal funds sold and securities
purchased under agreements to resell 132,980 -- -- -- -- 132,980
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 3,341,808 232,260 1,570,885 3,445,114 432,225 9,022,292
- ----------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Time open & C.D.'s of less than $100,000 528,816 438,183 496,189 672,158 15,373 2,150,719
Time open & C.D.'s of $100,000 & over 71,096 36,090 54,659 53,312 733 215,890
Savings and interest bearing demand 4,209,141 -- -- -- -- 4,209,141
Federal funds purchased and securities
sold under agreements to repurchase 512,558 -- -- -- -- 512,558
Long-term debt and other borrowings 268 3,109 242 2,262 1,326 7,207
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 5,321,879 477,382 551,090 727,732 17,432 7,095,515
- ----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity GAP $(1,980,071) $(245,122) $1,019,795 $2,717,382 $414,793 $1,926,777
============================================================================================================================
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", for the provisions that became effective at
that date. This SFAS provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
The adoption did not have a material effect on the Company's financial
statements. The Financial Accounting Standards Board also issued SFAS No. 127,
"Deferral of the Provisions of FASB Statement 125", which deferred to January 1,
1998 certain provisions of SFAS No. 125. The adoption of SFAS No. 127 is not
expected to have a material effect on the Company's financial statements.
SFAS No. 130, "Reporting Comprehensive Income", requires the reporting of
comprehensive income and its components in the 1998 financial statements.
Comprehensive income is defined as the change in equity from transactions and
other events and circumstances from non-owner sources, and excludes investments
by and distributions to owners. Comprehensive income includes net income and
other items of comprehensive income meeting the above criteria. The Company's
most significant component of other comprehensive income is the unrealized
holding gains and losses on available for sale securities.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires reporting about operating segments, products and
services, geographic areas, and major customers. Its objective is to provide
information about the different types of business activities and economic
environments in which businesses operate. The first disclosures will be required
in the 1998 Annual Report.
EFFECTS OF INFLATION
The impact of inflation on financial institutions differs significantly from
that exerted on industrial entities. Financial institutions are not heavily
involved in large capital expenditures used in the production, acquisition or
sale of products. Virtually all assets and liabilities of financial institutions
are monetary in nature and represent obligations to pay or receive fixed and
determinable amounts not affected by future changes in prices. Changes in
interest rates have a significant effect on the earnings of financial
institutions. Higher interest rates generally follow the rising demand of
borrowers
36
and the corresponding increased funding requirements of financial institutions.
Although interest rates are viewed as the price of borrowing funds, the behavior
of interest rates differs significantly from the behavior of the prices of goods
and services. Prices of goods and services may be directly related to that of
other goods and services while the price of borrowing relates more closely to
the inflation rate in the prices of those goods and services. As a result, when
the rate of inflation slows, interest rates tend to decline while absolute
prices for goods and services remain at higher levels. Interest rates are also
subject to restrictions imposed through monetary policy, usury laws and other
artificial constraints. The rate of inflation has been relatively low over the
past few years.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected.
37
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations [Cont.]
AVERAGE BALANCE SHEETS AVERAGE RATES AND YIELDS
Years Ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
(Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans: (A)
Business (B) $1,835,546 $146,304 7.97% $1,670,328 $131,652 7.88%
Construction and development 247,530 21,458 8.67 168,220 14,670 8.72
Real estate - business 824,356 70,539 8.56 719,377 61,845 8.60
Real estate - personal 1,068,668 84,255 7.88 990,069 77,568 7.83
Personal banking 1,308,293 112,572 8.60 1,262,166 109,065 8.64
Credit card 530,799 71,521 13.47 511,424 67,493 13.20
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 5,815,192 506,649 8.71 5,321,584 462,293 8.69
- --------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,599,452 99,895 6.25 1,763,146 108,451 6.15
State & municipal obligations (B) 99,328 7,775 7.83 115,021 9,060 7.88
CMO's and asset-backed securities 789,039 50,030 6.34 653,301 40,913 6.26
Trading account securities 8,358 444 5.32 6,500 345 5.30
Other marketable securities (B) 111,140 6,624 5.96 51,320 3,529 6.88
Other non-marketable securities 43,529 1,899 4.36 36,820 2,542 6.90
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,650,846 166,667 6.29 2,626,108 164,840 6.28
- --------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 246,361 13,647 5.54 467,103 25,334 5.42
- --------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,712,399 686,963 7.88 8,414,795 652,467 7.75
- --------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (102,145) (98,312)
Unrealized gain (loss) on investment
securities 25,903 21,675
Cash and due from banks 635,444 623,523
Land, buildings and equipment-net 213,087 208,967
Other assets 187,513 194,278
- ------------------------------------------------------------ ----------
Total assets $9,672,201 $9,364,926
============================================================ ==========
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 301,010 7,310 2.43 $ 299,018 7,165 2.40
Interest bearing demand 3,776,101 126,719 3.36 3,656,476 121,367 3.32
Time open & C.D.'s of less than $100,000 2,160,892 116,798 5.41 2,195,628 119,366 5.44
Time open & C.D.'s of $100,000 and over 210,283 11,280 5.36 223,723 11,606 5.19
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 6,448,286 262,107 4.06 6,374,845 259,504 4.07
- --------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 450,439 22,202 4.93 449,831 21,427 4.76
Long-term debt and other borrowings (C) 11,565 851 7.37 14,690 1,054 7.17
- --------------------------------------------------------------------------------------------------------------------------------
Total borrowings 462,004 23,053 4.99 464,521 22,481 4.84
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 6,910,290 285,160 4.13% 6,839,366 281,985 4.12%
- --------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,750,171 1,559,157
Other liabilities 69,539 74,374
Stockholders' equity 942,201 892,029
- ------------------------------------------------------------ -----------
Total liabilities and equity $9,672,201 $9,364,926
============================================================ ==========
Net interest margin (T/E) $401,803 $370,482
================================================================================================================================
Net yield on interest earning assets 4.61% 4.40%
================================================================================================================================
Percentage increase in net interest
margin (T/E) over the prior year 8.45% 2.71%
================================================================================================================================
- --------------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------------
Average
Interest Rates
(Dollars in thousands) Average Income/ Earned/
Balance Expense Paid
- --------------------------------------------------------------------------------------
ASSETS
Loans: (A)
Business (B) $1,703,933 $141,872 8.33%
Construction and development 130,346 12,227 9.38
Real estate - business 693,539 61,958 8.93
Real estate - personal 954,956 74,571 7.81
Personal banking 1,258,729 110,202 8.76
Credit card 420,049 58,368 13.90
- --------------------------------------------------------------------------------------
Total loans 5,161,552 459,198 8.90
- --------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,705,562 105,216 6.17
State & municipal obligations (B) 123,152 9,577 7.78
CMO's and asset-backed securities 719,747 44,928 6.24
Trading account securities 3,975 240 6.03
Other marketable securities (B) 66,368 4,110 6.19
Other non-marketable securities 26,407 685 2.59
- --------------------------------------------------------------------------------------
Total investment securities 2,645,211 164,756 6.23
- --------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 205,547 12,075 5.87
- --------------------------------------------------------------------------------------
Total interest earning assets 8,012,310 636,029 7.94
- --------------------------------------------------------------------------------------
Less allowance for loan losses (95,884)
Unrealized gain (loss) on investment
securities (13,983)
Cash and due from banks 607,656
Land, buildings and equipment-net 205,702
Other assets 209,168
- ------------------------------------------------------------
Total assets $8,924,969
============================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 312,049 7,954 2.55
Interest bearing demand 3,329,272 112,729 3.39
Time open & C.D.'s of less than $100,000 2,206,655 118,267 5.36
Time open & C.D.'s of $100,000 and over 213,950 11,430 5.34
- --------------------------------------------------------------------------------------
Total interest bearing deposits 6,061,926 250,380 4.13
- --------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 442,413 23,792 5.38
Long-term debt and other borrowings (C) 16,195 1,146 7.08
- --------------------------------------------------------------------------------------
Total borrowings 458,608 24,938 5.44
- --------------------------------------------------------------------------------------
Total interest bearing liabilities 6,520,534 275,318 4.22%
- --------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,497,474
Other liabilities 60,527
Stockholders' equity 846,434
- --------------------------------------------------------------------------------------
Total liabilities and equity $8,924,969
======================================================================================
Net interest margin (T/E) $360,711
======================================================================================
Net yield on interest earning assets 4.50%
======================================================================================
Percentage increase in net interest
margin (T/E) over the prior year 13.58%
======================================================================================
(A) Loans on non-accrual status are included in the computation of average
balances. Included in interest income above are loan fees and late charges, net
of amortization of deferred loan origination costs, which are immaterial. Credit
card income from merchant discounts and net interchange fees are not included in
loan income.
(B) Interest income and yields are presented on a fully-taxable equivalent basis
using the Federal statutory income tax rate. Business loan interest income
includes tax free loan income of $3,144,000 in 1997, $3,934,000 in 1996,
$4,259,000 in 1995, $3,916,000 in 1994 and $4,281,000 in 1993, including tax
equivalent adjustments of $1,045,000 in 1997, $1,323,000 in 1996, $1,438,000 in
1995, $1,378,000 in 1994 and $1,517,000 in 1993. State and municipal interest
income includes tax equivalent adjustments of $2,583,000 in 1997, $2,956,000 in
38
Years Ended December 31
- ----------------------------------------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------------------- Average
Average Average Average Balance
Interest Rates Interest Rates Interest Rates Five Year
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Compound
Balance Expense Paid Balance Expense Paid Balance Expense Paid Growth Rate
- ------------------------------------------------------------------------------------------------------------------
$1,392,650 $ 99,111 7.12% $1,281,458 $ 81,416 6.35% $1,160,801 $ 78,418 6.76% 9.60%
115,628 9,372 8.11 102,825 7,746 7.53 115,019 8,692 7.56 16.57
538,793 43,256 8.03 493,503 37,505 7.60 401,444 33,219 8.27 15.48
759,338 53,473 7.04 716,273 53,428 7.46 624,071 54,124 8.67 11.36
1,013,462 80,513 7.94 920,157 75,080 8.16 876,678 77,931 8.89 8.34
360,194 47,082 13.07 321,618 44,141 13.72 296,272 44,726 15.10 12.37
- ------------------------------------------------------------------------------------------------------------------
4,180,065 332,807 7.96 3,835,834 299,316 7.80 3,474,285 297,110 8.55 10.85
- ------------------------------------------------------------------------------------------------------------------
2,076,150 121,339 5.84 2,497,041 143,395 5.74 2,094,399 130,918 6.25 (5.25)
46,602 3,549 7.62 41,141 3,181 7.73 26,566 2,246 8.45 30.18
586,935 35,132 5.99 60,425 3,552 5.88 -- -- -- NA
4,168 159 3.82 4,731 220 4.66 7,420 477 6.43 2.41
69,870 4,191 6.00 70,837 3,933 5.55 122,476 6,069 4.96 (1.92)
20,424 631 3.09 21,024 924 4.39 17,996 959 5.33 19.32
- ------------------------------------------------------------------------------------------------------------------
2,804,149 165,001 5.88 2,695,199 155,205 5.76 2,268,857 140,669 6.20 3.16
- ------------------------------------------------------------------------------------------------------------------
132,672 5,457 4.11 282,625 8,735 3.09 422,732 15,379 3.64 (10.24)
- ------------------------------------------------------------------------------------------------------------------
7,116,886 503,265 7.07 6,813,658 463,256 6.80 6,165,874 453,158 7.35 7.16
- ------------------------------------------------------------------------------------------------------------------
(86,664) (83,767) (68,344) 8.37
(15,424) -- -- NA
555,171 573,494 508,594 4.55
194,159 196,809 183,109 3.08
149,568 149,909 132,021 7.27
- ---------- ---------- ---------- ----------
$7,913,696 $7,650,103 $6,921,254 6.92%
========== ========== ========== ==========
$ 273,032 6,618 2.42 $ 248,681 6,012 2.42 $ 188,332 5,979 3.17 9.83%
3,247,965 84,037 2.59 3,124,098 78,995 2.53 2,788,635 88,330 3.17 6.25
1,826,661 77,884 4.26 1,790,418 77,165 4.31 1,786,175 93,752 5.25 3.88
155,813 6,213 3.99 138,271 5,038 3.64 135,805 5,826 4.29 9.14
- ------------------------------------------------------------------------------------------------------------------
5,503,471 174,752 3.18 5,301,468 167,210 3.15 4,898,947 193,887 3.96 5.65
- ------------------------------------------------------------------------------------------------------------------
287,642 10,384 3.61 318,951 8,141 2.55 271,181 8,071 2.98 10.68
7,129 542 7.60 7,118 554 7.79 12,566 1,021 8.13 (1.65)
- ------------------------------------------------------------------------------------------------------------------
294,771 10,926 3.71 326,069 8,695 2.67 283,747 9,092 3.20 10.24
- ------------------------------------------------------------------------------------------------------------------
5,798,242 185,678 3.20% 5,627,537 175,905 3.13% 5,182,694 202,979 3.92% 5.92
- ------------------------------------------------------------------------------------------------------------------
1,341,721 1,302,634 1,121,481 9.31
37,515 50,902 60,619 2.78
736,218 669,030 556,460 11.11
- ---------- ---------- ---------- ----------
$7,913,696 $7,650,103 $6,921,254 6.92%
==================================================================================================================
$317,587 $287,351 $250,179
==================================================================================================================
4.46% 4.22% 4.06%
==================================================================================================================
10.52% 14.86% 11.12%
==================================================================================================================
1996, $3,075,000 in 1995, $1,097,000 in 1994 and $944,000 in 1993. Interest
income on other marketable securities includes tax equivalent adjustments of
$459,000 in 1997, $585,000 in 1996, $513,000 in 1995, $509,000 in 1994 and
$382,000 in 1993.
(C) Interest expense of $58,000, $125,000, $60,000, $14,000 and $17,000 which
was capitalized on construction projects in 1997, 1996, 1995, 1994 and 1993,
respectively, is not deducted from the interest expense shown above.
39
Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations [Cont.]
QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
Year Ended December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Rates Rates Rates Rates
(Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/
Balance Paid Balance Paid Balance Paid Balance Paid
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Business (A) $1,992 8.06% $1,870 7.93% $1,779 8.04% $1,698 7.84%
Construction and development 261 8.83 304 8.63 231 8.64 192 8.54
Real estate--business 888 8.53 842 8.54 803 8.62 764 8.54
Real estate--personal 1,136 7.86 1,078 7.87 1,050 7.91 1,009 7.90
Personal banking 1,355 8.58 1,324 8.55 1,287 8.64 1,265 8.64
Credit card 527 13.81 526 13.55 525 13.17 546 13.36
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 6,159 8.73 5,944 8.68 5,675 8.73 5,474 8.71
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,474 6.22 1,590 6.25 1,652 6.25 1,686 6.26
State & municipal obligations (A) 98 7.77 101 7.64 100 8.07 98 7.83
CMO's and asset-backed securities 838 6.40 824 6.29 777 6.33 716 6.34
Trading account securities 10 5.14 10 5.58 7 6.03 6 4.34
Other marketable securities (A) 112 5.83 101 5.89 116 6.00 116 6.11
Other non-marketable securities 44 (.03) 43 5.67 43 6.40 43 5.62
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,576 6.21 2,669 6.29 2,695 6.33 2,665 6.31
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 229 5.62 166 5.74 231 5.61 362 5.35
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,964 7.93 8,779 7.90 8,601 7.90 8,501 7.82
- -----------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (105) (104) (102) (98)
Unrealized gain on investment securities 44 33 3 24
Cash and due from banks 677 661 606 595
Land, buildings and equipment--net 213 215 214 210
Other assets 194 183 191 182
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $9,987 $9,767 $9,513 $9,414
===================================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 303 2.44 $ 308 2.43 $ 306 2.43 $ 286 2.40
Interest bearing demand 3,841 3.35 3,747 3.38 3,768 3.35 3,748 3.35
Time open & C.D.'s under $100,000 2,169 5.44 2,185 5.40 2,163 5.40 2,126 5.38
Time open & C.D.'s $100,000 & over 220 5.44 212 5.45 205 5.34 204 5.22
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 6,533 4.07 6,452 4.09 6,442 4.06 6,364 4.05
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 468 5.00 485 4.92 401 5.02 448 4.78
Long-term debt and other borrowings 9 7.46 10 7.31 13 7.33 14 7.35
- -----------------------------------------------------------------------------------------------------------------------------------
Total borrowings 477 5.05 495 4.97 414 5.09 462 4.86
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 7,010 4.14% 6,947 4.15% 6,856 4.12% 6,826 4.10%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,903 1,804 1,689 1,600
Other liabilities 94 67 49 67
Stockholders' equity 980 949 919 921
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $9,987 $9,767 $9,513 $9,414
===================================================================================================================================
Net interest margin (T/E) $ 106 $ 102 $ 99 $ 95
===================================================================================================================================
Net yield on interest earning assets 4.69% 4.61% 4.62% 4.52%
===================================================================================================================================
(A) Includes tax equivalent calculations.
40
Year Ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Rates Rates Rates Rates
(Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/
Balance Paid Balance Paid Balance Paid Balance Paid
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Business (A) $1,644 7.82% $1,670 7.89% $1,686 7.84% $1,682 7.97%
Construction and development 168 8.64 164 8.63 169 8.71 171 8.89
Real estate--business 750 8.53 723 8.58 703 8.65 701 8.63
Real estate--personal 1,003 7.77 985 7.73 991 7.83 981 8.01
Personal banking 1,287 8.53 1,244 8.61 1,254 8.69 1,265 8.74
Credit card 531 13.12 517 13.10 503 12.99 494 13.60
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 5,383 8.63 5,303 8.66 5,306 8.66 5,294 8.80
- -----------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,753 6.18 1,796 6.13 1,789 6.14 1,714 6.16
State & municipal obligations (A) 107 7.91 115 7.72 118 8.02 120 7.87
CMO's and asset-backed securities 669 6.22 664 6.21 633 6.32 648 6.31
Trading account securities 8 7.16 4 .77 8 5.78 7 5.09
Other marketable securities (A) 69 7.34 53 6.35 45 6.47 37 7.27
Other non-marketable securities 40 16.95 39 5.95 34 2.05 34 .95
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,646 6.46 2,671 6.21 2,627 6.22 2,560 6.22
- -----------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 451 5.42 386 5.41 454 5.38 579 5.47
- -----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,480 7.78 8,360 7.73 8,387 7.72 8,433 7.79
- -----------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (98) (98) (99) (98)
Unrealized gain on investment securities 20 -- 14 52
Cash and due from banks 597 624 616 657
Land, buildings and equipment--net 209 208 208 210
Other assets 184 189 197 208
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $9,392 $9,283 $9,323 $9,462
=============================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 288 2.41 $ 296 2.41 $ 306 2.35 $ 306 2.41
Interest bearing demand 3,673 3.32 3,651 3.29 3,665 3.30 3,638 3.37
Time open & C.D.'s under $100,000 2,150 5.38 2,174 5.38 2,213 5.39 2,246 5.58
Time open & C.D.'s $100,000 & over 208 5.19 220 5.14 234 5.13 232 5.30
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 6,319 4.04 6,341 4.03 6,418 4.04 6,422 4.17
- -----------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 464 4.70 425 4.78 429 4.75 481 4.83
Long-term debt and other borrowings 15 7.21 15 7.16 15 7.32 15 7.02
- -----------------------------------------------------------------------------------------------------------------------------
Total borrowings 479 4.77 440 4.86 444 4.83 496 4.90
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 6,798 4.09% 6,781 4.09% 6,862 4.09% 6,918 4.22%
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,626 1,556 1,507 1,546
Other liabilities 64 66 71 96
Stockholders' equity 904 880 883 902
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $9,392 $9,283 $9,323 $9,462
=============================================================================================================================
Net interest margin (T/E) $ 96 $ 92 $ 91 $ 91
=============================================================================================================================
Net yield on interest earning assets 4.50% 4.41% 4.37% 4.33%
=============================================================================================================================
(A) Includes tax equivalent calculations.
41
Consolidated Balance Sheets
Commerce Bancshares, Inc. and Subsidiaries
December 31
- ----------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------
(In thousands)
ASSETS
Loans, net of unearned income $6,224,381 $5,472,342
Allowance for loan losses (105,918) (98,223)
- ----------------------------------------------------------------------------------------------
Net loans 6,118,463 5,374,119
- ----------------------------------------------------------------------------------------------
Investment securities:
Available for sale 2,614,040 2,670,420
Trading account 6,477 11,265
Other non-marketable 44,414 39,830
- ----------------------------------------------------------------------------------------------
Total investment securities 2,664,931 2,721,515
- ----------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 132,980 368,690
Cash and due from banks 978,239 833,260
Land, buildings and equipment - net 214,209 209,777
Goodwill and core deposit premium - net 85,377 87,928
Customers' acceptance liability 900 1,259
Other assets 111,842 101,638
- ----------------------------------------------------------------------------------------------
Total assets $10,306,941 $9,698,186
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand $ 2,124,828 $1,800,684
Savings and interest bearing demand 4,209,141 4,021,376
Time open and C.D.'s of less than $100,000 2,150,719 2,138,206
Time open and C.D.'s of $100,000 and over 215,890 206,163
- ----------------------------------------------------------------------------------------------
Total deposits 8,700,578 8,166,429
- ----------------------------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 512,558 526,807
Long-term debt and other borrowings 7,207 14,120
Other liabilities 104,914 65,300
Acceptances outstanding 900 1,259
- ----------------------------------------------------------------------------------------------
Total liabilities 9,326,157 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 38,857,209
shares in 1997 and 37,565,369 shares in 1996 194,286 187,827
Capital surplus 145,847 104,292
Retained earnings 626,387 621,689
Treasury stock of 210,596 shares in 1997
and 187,977 shares in 1996, at cost (14,252) (7,422)
Unearned employee benefits (601) (340)
Unrealized securities gain - net of tax 29,117 18,225
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 980,784 924,271
==============================================================================================
Total liabilities and stockholders' equity $10,306,941 $9,698,186
==============================================================================================
See accompanying notes to financial statements.
42
Consolidated Statements of Income
Commerce Bancshares, Inc. and Subsidiaries
For the Years Ended December 31
- ---------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $505,604 $460,970 $457,760
Interest on investment securities 163,625 161,299 161,168
Interest on federal funds sold and securities
purchased under agreements to resell 13,647 25,334 12,075
- ---------------------------------------------------------------------------------------------------
Total interest income 682,876 647,603 631,003
- ---------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Savings and interest bearing demand 134,029 128,532 120,683
Time open and C.D.'s of less than $100,000 116,798 119,366 118,267
Time open and C.D.'s of $100,000 and over 11,280 11,606 11,430
Interest on federal funds purchased and securities
sold under agreements to repurchase 22,202 21,427 23,792
Interest on long-term debt and other borrowings 793 929 1,086
- ---------------------------------------------------------------------------------------------------
Total interest expense 285,102 281,860 275,258
- ---------------------------------------------------------------------------------------------------
Net interest income 397,774 365,743 355,745
Provision for loan losses 31,354 24,522 14,629
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 366,420 341,221 341,116
- ---------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust fees 41,224 35,536 32,378
Deposit account charges and other fees 57,223 54,506 44,658
Credit card transaction fees 30,703 26,586 23,341
Trading account profits and commissions 7,420 5,982 5,158
Net gains on securities transactions 3,253 3,293 897
Other 40,269 33,259 26,718
- ---------------------------------------------------------------------------------------------------
Total non-interest income 180,092 159,162 133,150
- ---------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 179,095 165,291 157,853
Net occupancy 21,570 21,456 20,294
Equipment 16,492 15,185 14,256
Supplies and communication 25,838 24,697 24,139
Data processing 24,628 20,778 20,997
Marketing 12,757 11,698 11,611
Goodwill and core deposit 9,778 11,448 11,094
Other 54,292 47,401 45,240
- ---------------------------------------------------------------------------------------------------
Total non-interest expense 344,450 317,954 305,484
- ---------------------------------------------------------------------------------------------------
Income before income taxes 202,062 182,429 168,782
Less income taxes 69,360 62,917 61,142
- ---------------------------------------------------------------------------------------------------
Net income $132,702 $119,512 $107,640
===================================================================================================
Net income per share-basic $ 3.40 $ 2.99 $ 2.60
Net income per share-diluted $ 3.36 $ 2.97 $ 2.59
===================================================================================================
Cash dividends per common share $ .781 $ .689 $ .622
===================================================================================================
See accompanying notes to financial statements.
43
Consolidated Statements of Cash Flows
Commerce Bancshares, Inc. and Subsidiaries
For the Years Ended December 31
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 132,702 $ 119,512 $ 107,640
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 31,354 24,522 14,629
Provision for depreciation and amortization 30,433 31,134 31,173
Accretion of investment security discounts (5,681) (5,630) (5,656)
Amortization of investment security premiums 9,140 20,194 24,596
Provision for deferred income taxes 16,731 3,303 3,549
Net gains on securities transactions (3,253) (3,293) (897)
Net (increase) decrease in trading account securities 1,412 (1,230) (4,859)
Decrease in interest receivable 6,750 10,190 19
Increase (decrease) in interest payable 1,622 (1,214) 10,863
Other changes, net (4,771) 17,194 14,204
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 216,439 214,682 195,261
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net cash received (paid) in acquisitions 6,200 -- (33,226)
Cash paid in sales of branches -- (38,134) --
Proceeds from sales of available for sale securities 534,452 704,120 917,063
Proceeds from maturities of available for sale securities 904,695 496,928 535,722
Purchases of available for sale securities (1,258,881) (1,351,654) (930,080)
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell 244,235 154,612 (424,202)
Net increase in loans (621,438) (188,731) (222,684)
Purchases of premises and equipment (27,621) (26,436) (25,798)
Sales of premises and equipment 8,085 7,000 8,673
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (210,273) (242,295) (174,532)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in non-interest bearing demand,
savings and interest bearing demand deposits 350,260 131,861 265,672
Net increase (decrease) in time open and C.D.s (68,346) (107,418) 53,208
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase (14,249) 163,904 (59,843)
Repayment of long-term debt (6,952) (495) (8,805)
Purchases of treasury stock (94,067) (78,408) (40,024)
Issuance under stock purchase, option and benefit plans 2,599 4,039 4,149
Cash dividends paid on common stock (30,432) (27,462) (26,039)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 138,813 86,021 188,318
- ---------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 144,979 58,408 209,047
Cash and cash equivalents at beginning of year 833,260 774,852 565,805
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 978,239 $ 833,260 $ 774,852
===========================================================================================================================
See accompanying notes to financial statements.
44
Statements of Stockholders' Equity
Commerce Bancshares, Inc. and Subsidiaries
Unearned Net
Common Capital Retained Treasury Employee Unrealized
(In thousands) Stock Surplus Earnings Stock Benefits Gain (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $169,851 $ 54,575 $ 576,331 $(12,148) $(295) $(60,116) $728,198
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 107,640 107,640
Change in unrealized gain (loss) on
available for sale securities 86,927 86,927
Purchase of treasury stock (71,368) 33 (71,335)
Cash dividends paid ($.622 per share) (26,039) (26,039)
Issuance under stock purchase,
option and award plans, net (2,797) 8,241 (454) 4,990
Purchase acquisitions (435) 5,315 4,880
Pooling acquisition, net 13,371 (4,872) 32,360 7,625 38 48,522
5% stock dividend, net 4,605 37,944 (71,904) 29,355 --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 187,827 84,415 618,388 (32,980) (716) 26,849 883,783
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 119,512 119,512
Change in unrealized gain (loss) on
available for sale securities (8,624) (8,624)
Purchase of treasury stock (47,844) 24 (47,820)
Cash dividends paid ($.689 per share) (27,462) (27,462)
Issuance under stock purchase,
option and award plans, net (3,217) 7,747 352 4,882
5% stock dividend, net 23,094 (88,749) 65,655 --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 187,827 104,292 621,689 (7,422) (340) 18,225 924,271
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 132,702 132,702
Change in unrealized gain (loss) on
available for sale securities 10,892 10,892
Purchase of treasury stock (96,296) (96,296)
Cash dividends paid ($.781 per share) (30,432) (30,432)
Issuance under stock purchase,
option and award plans, net (2,953) 9,458 (261) 6,244
Purchase acquisition 1,383 9,256 10,639
Pooling acquisition (37,200) 17,612 42,352 22,764
5% stock dividend, net 6,459 80,325 (115,184) 28,400 --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $194,286 $145,847 $ 626,387 $(14,252) $(601) $ 29,117 $980,784
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
45
Notes to Financial Statements
Commerce Bancshares, Inc. and Subsidiaries
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company follows generally accepted accounting principles (GAAP) and
reporting practices applicable to the banking industry. The preparation of
financial statements under GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
notes. While the financial statements reflect management's best estimates and
judgment, actual results could differ from those estimates. The consolidated
financial statements include the accounts of the Company and its substantially
wholly-owned subsidiaries (after elimination of all material intercompany
balances and transactions). Certain amounts for prior years have been
reclassified to conform to the current year presentation.
ACQUISITIONS/INTANGIBLE ASSETS
The Company amortizes the cost in excess of the fair value of net assets
acquired in purchase business combinations (goodwill) using the straight-line
method over periods of 15-20 years. When facts and circumstances indicate
potential impairment, the Company evaluates the recoverability of asset carrying
values, including goodwill, using estimates of undiscounted future cash flows
over remaining asset lives. Any impairment loss is measured by the excess of
carrying values over fair values. Core deposit intangibles are amortized over a
maximum of 10 years using accelerated methods. Results of operations of
companies acquired in purchase business combinations are included from the date
of acquisition.
LOANS
Interest on loans is accrued based upon the principal amount outstanding. The
accrual of interest on loans is discontinued when, in management's judgment, the
collectibility of interest or principal in the normal course of business is
doubtful. Loan and commitment fees are deferred and recognized as income over
the life of the loan or commitment as an adjustment of yield.
ALLOWANCE/PROVISION
FOR LOAN LOSSES
The provision for loan losses is based upon management's estimate of the amount
required to maintain an adequate allowance for losses, reflective of the risks
in the loan portfolio. This estimate is based upon reviews of the portfolio,
past loan loss experience, current economic conditions and such other factors,
which in management's judgment, deserve current recognition. Impaired loans
include all non-accrual loans and loans 90 days delinquent and still accruing
interest.
INVESTMENTS IN DEBT
AND EQUITY SECURITIES
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Premiums and discounts are amortized to interest income
over the estimated lives of the securities. Gains and losses are calculated
using the specific identification method. Trading account securities are carried
at fair value with unrealized gains and losses recorded as non-interest income.
Investments in equity securities without readily determinable fair values are
stated at cost, less allowances for other than temporary declines in value.
PROPERTY AND EQUIPMENT
Land is stated at cost, and buildings and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using straight-line and
accelerated methods. Maintenance and repairs are charged to expense as incurred.
INCOME TAXES
The Company and its eligible subsidiaries file consolidated income tax returns.
Deferred income taxes are provided on temporary differences between the
financial reporting bases and income tax bases of the Company's assets and
liabilities.
46
DERIVATIVES
The Company is exposed to market risk, including changes in interest rates,
currency exchange rates, and certain commodity prices. To manage the volatility
relating to these exposures, the Company's risk management policies permit its
use of derivative products. The Company uses derivatives on a limited basis, but
more often manages normal asset and liability positions by altering the products
it offers and by selling portions of specific loan or investment portfolios as
necessary. The Company does not trade in derivative financial instruments for
speculative purposes. Management believes the Company has and will be able to
continue to position itself to handle these risks satisfactorily, without
significant use of derivatives.
TREASURY STOCK
Purchases of the Company's common stock are recorded at cost. Upon reissuance,
treasury stock is reduced based upon the average cost basis of shares held.
INCOME PER SHARE
Basic income per share is computed using the weighted average number of common
shares outstanding during each year. Diluted income per share includes the
effect of all dilutive potential common shares (primarily stock options)
outstanding during each year. All per share data has been restated to reflect
the 5% stock dividend distributed on December 12, 1997 and the adoption of SFAS
No. 128.
ACQUISITIONS
The Company has signed a definitive agreement to acquire City National Bank of
Pittsburg, Kansas, with assets of $120 million. The merger will be recorded as a
stock transaction accounted for as a pooling of interests. Subject to regulatory
and stockholder approvals, completion of the acquisition is anticipated in the
first quarter of 1998. It is not expected to have a material impact on the
financial statements of the Company.
In May 1997, the Company acquired Shawnee State Bank, located in the Kansas City
metropolitan area, with assets of $202 million. The acquisition was recorded as
pooling of interests. The Citizens National Bank in Independence, Kansas, was
acquired in September 1997 in a purchase transaction. The Citizens National Bank
had assets of $93 million at acquisition date. Total consideration paid in these
two transactions was cash of $4.3 million and treasury stock valued at $53.2
million. Goodwill of $7.2 million was recorded by the Company in the Citizens
purchase transaction.
During 1995, the Company acquired four banks with an aggregate purchase price of
$181.8 million. Three of the acquisitions were accounted for under the purchase
method of accounting and one was accounted for as a pooling of interests. The
Company issued common stock valued at $82.8 million in its acquisition of The
Peoples Bank of Bloomington, Illinois, in March 1995 in a transaction recorded
under the pooling of interests method of accounting. The Peoples Bank had assets
of $444 million at the date of acquisition. Union National Bank of Wichita,
Kansas, was acquired for cash of $86.7 million in April 1995 in a transaction
accounted for under the purchase method of accounting. Union National Bank had
assets of $673 million at the acquisition date. In March and May 1995, the
Company acquired the Cotton Exchange Bank in Kennett, Missouri, and the
Chillicothe State Bank in Chillicothe, Illinois. Aggregate consideration paid in
these two transactions, which were accounted for using the purchase method,
consisted of cash of $7.4 million and treasury stock valued at $4.9 million.
Total goodwill and core deposit intangible assets recorded by the Company in
connection with the three purchase acquisitions was $64.9 million.
Financial statements for periods prior to the consummation of acquisitions
accounted for as poolings have not been restated because such restated amounts
do not differ materially from the Company's historical financial statements. The
following schedule summarizes pro forma consolidated financial data as
47
Notes to Financial Statements [Cont.]
Commerce Bancshares, Inc. and Subsidiaries
if the 1997 acquisitions had been consummated on January 1, 1996:
(In thousands, except per share data) 1997 1996
- -------------------------------------------------------------
Net interest income
plus non-interest income $583,892 $539,394
Net income 133,978 123,065
Net income per share -- diluted 3.35 2.97
=============================================================
LOANS AND ALLOWANCE FOR LOSSES
Major classifications of loans at December 31, 1997 and 1996 are as follows:
(In thousands) 1997 1996
- ------------------------------------------------------------
Business $2,056,862 $1,700,678
Real estate -- construction 233,209 182,474
Real estate -- business 926,107 758,650
Real estate -- personal 1,148,236 1,010,572
Personal banking 1,311,081 1,256,684
Credit card 548,886 563,284
- ------------------------------------------------------------
Total loans $6,224,381 $5,472,342
============================================================
Loans to directors and executive officers of the Parent and its significant
subsidiaries and to their associates are summarized as follows:
(In thousands)
- ----------------------------------------
Balance at January 1, 1997 $ 58,192
- ----------------------------------------
Additions 83,957
Amounts collected 100,936
Amounts written off --
- ----------------------------------------
Balance at December 31, 1997 $ 41,213
========================================
Management believes all loans to directors and executive officers have been made
in the ordinary course of business with normal credit terms, including interest
rate and collateralization, and do not represent more than a normal risk of
collection. There were no outstanding loans at December 31, 1997, to principal
holders of the Company's common stock.
The Company's lending activity is generally centered in Missouri and its
contiguous states. The Company maintains a diversified portfolio with no
significant industry concentrations of credit risk. Loans and loan commitments
are extended under the Company's normal credit standards, controls, and
monitoring features. Most credit commitments are short term in nature, and
maturities generally do not exceed five years. Credit terms typically provide
for floating rates of interest, and fixed rates are generally not set for more
than three to five years. Collateral is commonly required and would include such
assets as marketable securities and cash equivalent assets, accounts receivable
and inventory, equipment, other forms of personal property, and real estate. At
December 31, 1997, unfunded loan commitments totaled $2,520,944,000 (excluding
$2,034,191,000 in unused approved lines of credit related to credit card loan
agreements) which could be drawn by customers subject to certain review and
terms of agreement.
A summary of the allowance for loan losses is as follows:
Years Ended December 31
- ---------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Balance, January 1 $ 98,223 $98,537 $87,179
- ---------------------------------------------------------------------
Additions:
Provision for loan losses 31,354 24,522 14,629
Allowances of
acquired banks 4,275 -- 12,932
- ---------------------------------------------------------------------
Total additions 35,629 24,522 27,561
- ---------------------------------------------------------------------
Deductions:
Loan losses 38,183 31,914 23,272
Less recoveries 10,249 7,078 7,069
- ---------------------------------------------------------------------
Net loan losses 27,934 24,836 16,203
- ---------------------------------------------------------------------
Balance, December 31 $105,918 $98,223 $98,537
=====================================================================
Impaired loans include all non-accrual loans and loans 90 days delinquent and
still accruing interest. The net amount of interest income recorded on such
loans during their impairment period was not significant. The Company ceased
recognition of interest income on loans with a book value of $23,382,000 and
$13,945,000 at December 31, 1997 and 1996, respectively. The interest income not
recognized on non-accrual loans was $1,802,000, $1,617,000 and $1,868,000 during
1997, 1996 and 1995, respectively. Loans 90 days delinquent and still accruing
interest amounted to $24,383,000 and $24,806,000 at December 31, 1997 and 1996,
respectively. Real estate and other assets acquired in foreclosure amounted to
approximately $3,600,000 and $2,600,000 at December 31, 1997 and 1996,
respectively.
48
INVESTMENT SECURITIES
A summary of the available for sale investment securities by maturity groupings
as of December 31, 1997 follows below. The weighted average yield for each range
of maturities was calculated using the yield on each security within that range
weighted by the amortized cost of each security at December 31, 1997. Yields on
tax exempt securities have not been adjusted for tax exempt status.
Weighted
Amortized Fair Average
(Dollars in thousands) Cost Value Yield
- -------------------------------------------------------------------------------------------------
U.S. government and federal agency obligations:
Within 1 year $ 251,266 $ 251,637 6.47%
After 1 but within 5 years 1,194,777 1,207,479 6.20
After 5 but within 10 years 2,036 2,077 7.13
After 10 years 323 400 5.21
- -------------------------------------------------------------------------------------------------
Total U.S. government and federal agency obligations 1,448,402 1,461,593 6.25
=================================================================================================
State and municipal obligations:
Within 1 year 17,754 17,856 5.19
After 1 but within 5 years 55,721 57,079 5.26
After 5 but within 10 years 16,361 17,026 5.44
After 10 years 2,070 2,154 5.77
- -------------------------------------------------------------------------------------------------
Total state and municipal obligations 91,906 94,115 5.29
=================================================================================================
CMO's and asset-backed securities 832,211 837,056 6.31
=================================================================================================
Other debt securities:
Within 1 year 173,914 173,855
After 1 but within 5 years 110 110
After 5 but within 10 years 7 7
- -------------------------------------------------------------------------------------------------
Total other debt securities 174,031 173,972
=================================================================================================
Equity securities 20,443 47,304
=================================================================================================
Total available for sale investment securities $2,566,993 $2,614,040
=================================================================================================
The unrealized gains and losses by type are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
December 31, 1997
U.S. government and federal agency obligations $1,448,402 $ 14,001 $ 810 $1,461,593
State and municipal obligations 91,906 2,271 62 94,115
CMO's and asset-backed securities 832,211 7,284 2,439 837,056
Other debt securities 174,031 17 76 173,972
Equity securities 20,443 27,661 800 47,304
- -----------------------------------------------------------------------------------------------------------------
Total $2,566,993 $ 51,234 $ 4,187 $2,614,040
=================================================================================================================
December 31, 1996
U.S. government and federal agency obligations $1,705,869 $ 16,838 $ 4,762 $1,717,945
State and municipal obligations 98,886 2,478 71 101,293
CMO's and asset-backed securities 705,848 3,815 6,148 703,515
Other debt securities 108,453 -- 11 108,442
Equity securities 21,863 17,952 590 39,225
- -----------------------------------------------------------------------------------------------------------------
Total $2,640,919 $ 41,083 $11,582 $2,670,420
=================================================================================================================
The following table presents proceeds from sales of securities and the
components of net securities gains.
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
Proceeds from sales $534,452 $704,120 $917,063
===================================================================================
Realized gains $ 4,564 $ 4,600 $ 3,188
Realized losses 1,311 1,307 2,291
- -----------------------------------------------------------------------------------
Net realized gains $ 3,253 $ 3,293 $ 897
===================================================================================
Investment securities with a par value of $897,023,000 and $1,021,998,000 were
pledged at December 31, 1997 and 1996, respectively, to secure public deposits
and for other purposes as required by law. Except for U.S. government and
federal agency obligations, no investment in a single issuer exceeds 10% of
stockholders' equity.
49
Notes to Financial Statements [Cont.]
Commerce Bancshares, Inc. and Subsidiaries
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment consist of the following at December 31, 1997 and
1996:
(In thousands) 1997 1996
- ---------------------------------------------------
Land $ 52,616 $ 51,676
Buildings and improvements 256,167 247,949
Equipment 146,143 130,657
- ---------------------------------------------------
Total 454,926 430,282
- ---------------------------------------------------
Less accumulated depreciation
and amortization 240,717 220,505
- ---------------------------------------------------
Net land, buildings and
equipment $214,209 $209,777
===================================================
Depreciation expense of $19,678,000, $19,183,000 and $19,578,000 for 1997, 1996
and 1995, respectively, was included in net occupancy expense, equipment expense
and other expense in the Consolidated Statements of Income. Repairs and
maintenance expense of $14,016,000, $13,082,000 and $11,182,000 for 1997, 1996
and 1995, respectively, was included in net occupancy expense, equipment expense
and other expense.
BORROWINGS
Short-term borrowings of the Company consisted primarily of federal funds
purchased and securities sold under agreements to repurchase by subsidiary
banks. The following presents balance and interest rate information on these
borrowings.
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------
Balance:
Average $450,439 $449,831 $442,413
Year end 512,558 526,807 362,903
Maximum month-end
during year 549,907 526,807 589,270
- ------------------------------------------------------
Interest rate:
Average 4.9% 4.8% 5.4%
Year end 5.2% 5.0% 4.8%
======================================================
Long-term debt of the Company was $7,102,000 at December 31, 1997, including
$3,000,000 which will be repaid in 1998.
None of the Company's borrowings have any related compensating balance
requirements which restrict the usage of Company assets. However, regulations of
the Federal Reserve System require reserves to be maintained by all banking
institutions according to the types and amounts of certain deposit liabilities.
These requirements restrict usage of a portion of the amounts shown as
consolidated "Cash and due from banks" from everyday usage in operation of the
banks. The minimum reserve requirements for the subsidiary banks at December 31,
1997 totaled $148,108,000.
Cash payments for interest on deposits and borrowings during 1997, 1996 and 1995
on a consolidated basis amounted to $283,281,000, $282,792,000 and $264,503,000,
respectively.
INCOME TAXES
Total income taxes for 1997, 1996 and 1995 were allocated as shown in the
following tables.
Income tax expense from operations for the years ended December 31, 1997, 1996
and 1995 consists of:
(In thousands) Current Deferred Total
- -----------------------------------------------------------
Year ended December 31, 1997:
U.S. federal $50,573 $15,917 $66,490
State and local 2,056 814 2,870
- -----------------------------------------------------------
$52,629 $16,731 $69,360
===========================================================
Year ended December 31, 1996:
U.S. federal $54,550 $ 3,303 $57,853
State and local 5,064 -- 5,064
- -----------------------------------------------------------
$59,614 $ 3,303 $62,917
===========================================================
Year ended December 31, 1995:
U.S. federal $52,639 $ 3,549 $56,188
State and local 4,954 -- 4,954
- -----------------------------------------------------------
$57,593 $ 3,549 $61,142
===========================================================
Income tax expense (benefits) allocated directly to stockholders' equity for the
years ended December 31, 1997, 1996 and 1995 consists of:
(In thousands) 1997 1996 1995
- ----------------------------------------------------------
Unrealized gain (loss) on
securities available for
sale $ 6,546 $(5,284) $53,447
Compensation expense for
tax purposes in excess of
amounts recognized for
financial reporting purposes (1,470) (292) (324)
- ----------------------------------------------------------
Income tax expense
(benefits) allocated to
stockholders' equity $ 5,076 $(5,576) $53,123
==========================================================
50
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are presented below:
(In thousands) 1997 1996
- ----------------------------------------------------------
Deferred tax assets:
Loans, principally due to
allowance for loan losses $ 47,216 $41,766
Unearned fee income, due to
earlier recognition for
tax purposes 1,030 1,269
Deferred compensation,
principally due to accrual for
financial reporting purposes 1,870 1,269
Accrued expenses, principally
due to accrual for
financial reporting purposes 1,164 2,342
Net operating loss carryforwards
of acquired companies 191 252
Other 327 732
- ----------------------------------------------------------
Total gross deferred tax assets 51,798 47,630
- ----------------------------------------------------------
Deferred tax liabilities:
Investment securities,
principally due to
discount accretion 4,135 3,393
Capitalized interest 909 1,002
Unrealized gain on
securities available for sale 17,822 11,276
Land, buildings and equipment,
principally due to write-up in
value in purchase accounting
entries for finanical reporting 22,711 22,249
Core deposit intangible, principally
due to purchase accounting entries
for financial reporting 6,150 8,100
Pension benefit obligation, due to
recognition of the excess pension
asset for financial reporting
purposes 2,098 2,451
Realignment of corporate entities 21,167 --
Other 2,862 5
- ----------------------------------------------------------
Total gross deferred tax liabilities 77,854 48,476
- ----------------------------------------------------------
Net deferred tax liability $(26,056) $ (846)
==========================================================
Actual income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 35% as a result of the following:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------
Computed "expected"
tax expense $70,722 $63,850 $59,073
Increase (reduction) in
income taxes resulting from:
Amortization of
goodwill 1,628 1,499 1,444
Tax exempt income (2,240) (2,625) (2,829)
Tax deductible
dividends on
allocated shares held by
the Company's ESOP (720) (678) (665)
State and local income
taxes, net of federal
income tax benefit 1,866 3,601 3,631
Other, net (1,896) (2,730) 488
- -------------------------------------------------------------
Total income tax expense $69,360 $62,917 $61,142
=============================================================
Cash payments of income taxes, net of refunds and interest received, amounted to
$36,335,000, $64,860,000 and $52,268,000 on a consolidated basis during 1997,
1996 and 1995, respectively. The Parent had net receipts of $846,000,
$1,644,000, and $3,010,000 during 1997, 1996 and 1995, respectively, from tax
benefits.
EMPLOYEE BENEFIT PLANS
Employee benefits charged to operating expenses aggregated $22,598,000,
$23,963,000 and $21,207,000 for 1997, 1996 and 1995, respectively. Substantially
all of the Company's employees are covered by a noncontributory defined benefit
pension plan. Participants are fully vested after five years of service and the
benefits are based on years of participation and average annualized earnings.
The Company's funding policy is to contribute funds to a trust as necessary to
51
Notes to Financial Statements [Cont.]
Commerce Bancshares, Inc. and Subsidiaries
provide for current service and for any unfunded accrued actuarial liabilities
over a reasonable period. To the extent that these requirements are fully
covered by assets in the trust, a contribution may not be made in a particular
year. The following items are components of the net pension cost for the years
ended December 31, 1997, 1996 and 1995:
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------
Service cost--benefits
earned during the year $ 2,731 $ 2,647 $ 2,311
Interest cost on projected
benefit obligation 3,767 3,343 3,152
Actual plan assets value
(increase) decrease (11,816) (5,578) (8,219)
Net amortization and deferral 6,323 429 3,695
- ---------------------------------------------------------------
Net periodic pension cost $ 1,005 $ 841 $ 939
===============================================================
The following table sets forth the pension plan's funded status, using a
valuation date of September 30, 1997 and 1996:
1997 1996
- --------------------------------------------------------------------
(In thousands)
Actuarial present value of benefit obligation:
Accumulated benefit obligation,
including vested benefits of
$47,071,000 in 1997 and
$41,693,000 in 1996 $(48,816) $(42,635)
Additional benefits based on
estimated future salary levels (8,745) (7,367)
- --------------------------------------------------------------------
Projected benefit obligation (57,561) (50,002)
Plan assets at fair value 62,774 55,078
- --------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 5,213 5,076
Unrecognized net loss from past
experience different from that assumed
and effects of change in assumptions 5,456 7,403
Prior service benefit not yet recognized
in net pension cost (1,634) (1,800)
Unrecognized net transition asset
being recognized over 15 years (3,191) (3,830)
- --------------------------------------------------------------------
Prepaid pension cost included in
other assets $ 5,844 $ 6,849
====================================================================
Assumptions used in computing the plan's funded status were:
1997 1996 1995
- -------------------------------------------------
Discount rate 7.25% 7.75% 7.25%
Rate of increase in future
compensation levels 5.00% 5.00% 5.00%
Long-term rate of return
on assets 9.00% 8.50% 8.00%
=================================================
At December 31, 1997, approximately 83% of plan assets were invested in U.S.
government bonds and corporate bonds and equities.
In addition to the pension plan, substantially all of the Company's employees
are covered by a contributory defined contribution plan (401K), the
Participating Investment Plan. Under the plan, the Company makes matching
contributions, which aggregated $2,466,000 in 1997, $2,320,000 in 1996 and
$2,352,000 in 1995. The Company formed an employee stock ownership plan (ESOP)
in 1987 and borrowed funds from an unaffiliated lender to acquire shares for the
ESOP. The final principal payment was made in December 1994 and the ESOP assets
were merged into the Participating Investment Plan. The Company's final
contribution to the ESOP, which was charged to salaries and benefits, was
$368,000 in 1995.
STOCK OPTION PLANS,
RESTRICTED STOCK AWARDS AND
DIRECTORS STOCK PURCHASE PLAN*
The Company has reserved 5,874,947 shares of its common stock for issuance under
various stock option plans offered to certain key employees of the Company and
its subsidiaries. Options are granted, by action of the Board of Directors, to
acquire stock at fair market value at the date of the grant, for a term of 10
years.
52
At December 31, 1997, 2,794,490 shares remain available for option grants under
these programs. The following tables summarize option activity over the last
three years and current options outstanding.
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Option Price Shares Option Price Shares Option Price
- -------------------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 1,271,113 $26.06 1,185,433 $22.97 1,133,065 $20.61
- -------------------------------------------------------------------------------------------------------------------
Granted 299,368 44.71 295,675 32.23 325,651 25.13
Cancelled (6,821) 37.37 (19,577) 28.33 (26,019) 25.73
Exercised (157,415) 24.83 (190,418) 16.14 (247,264) 14.70
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,406,245 $30.12 1,271,113 $26.06 1,185,433 $22.97
===================================================================================================================
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31 Contractual Exercise December 31 Exercise
Exercise Prices 1997 Life Price 1997 Price
- --------------------------------------------------------------------------------------------------------
$19.20-$25.05 423,834 6.0 years $22.84 356,369 $22.43
$25.06-$26.46 417,858 5.7 years 26.04 416,409 26.04
$26.47-$44.61 561,141 8.6 years 38.49 205,333 36.38
$44.62-$55.71 3,412 9.8 years 55.58 854 55.58
- --------------------------------------------------------------------------------------------------------
$19.20-$55.71 1,406,245 6.9 years $30.12 978,965 $26.92
========================================================================================================
The Company has a restricted stock award plan under which 182,325 shares of
common stock are reserved, and 118,271 shares remain available for grant at
December 31, 1997. The plan allows for awards to key employees, by action of the
Board of Directors, with restrictions as to transferability, sale, pledging, or
assigning, among others, prior to the end of the restriction period. The
restriction period may not exceed 10 years. The Company issued awards totaling
9,976 shares in 1997, 8,102 shares in 1996 and 24,180 shares in 1995, resulting
in deferred compensation amounts of $461,000, $257,000 and $632,000,
respectively. Approximately $165,000, $189,000 and $178,000 was amortized to
salaries expense in 1997, 1996 and 1995, respectively. Unamortized deferred
compensation of $601,000, $340,000 and $716,000 has been recorded as a reduction
of stockholders' equity at December 31, 1997, 1996 and 1995, respectively.
The Company has a directors stock purchase plan whereby outside directors of the
Company and its subsidiaries may elect to use their directors' fees to purchase
Company stock at market value each month-end. Remaining shares reserved for this
plan total 134,635 at December 31, 1997. In 1997, 17,251 shares were purchased
at an average price of $49.91 and in 1996, 24,771 shares were purchased at an
average price of $34.56.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock and performance-based
awards. Had compensation cost for the Company's other stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the
Company's net income and diluted earnings per share would have been reduced by
approximately $1,636,000, or $.04 per share in 1997 and $1,423,000, or $.04 per
share in 1996.
53
Notes to Financial Statements [Cont.]
Commerce Bancshares, Inc. and Subsidiaries
Following is a summary of the fair values of options granted using the Black-
Scholes option-pricing model.
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------
Fair value at grant date $3,534 $3,228
Assumptions:
Dividend yield 2.0% 2.0%
Volatility 21.0% 24.0%
Risk-free interest rate 5.8% 6.1%
Expected life 7.8 years 7.6 years
========================================================================
*All share and per share amounts in this note have been restated for the 5%
stock dividend distributed on the $5 par common stock in December 1997 and the
adoption of SFAS No. 128.
COMMON STOCK
Statement of Financial Accounting Standards No. 128 required the reporting of
two measurements of performance over the reporting periods. Basic income per
share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the year. Diluted
income per share gives effect to all dilutive potential common shares that were
outstanding during the year. The shares used in the calculation of basic and
diluted income per share, which have been restated for the annual 5% stock
dividends, are shown below.
For the Years Ended December 31
- -------------------------------------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------
Weighted average common
shares outstanding 38,994 39,917 41,391
Stock options 529 280 248
- -------------------------------------------------------------------
39,523 40,197 41,639
===================================================================
Under a Rights Agreement dated August 23, 1988, as amended in the amended and
restated rights agreement with Commerce Bank, N.A. as rights agent, dated as of
July 19, 1996, certain rights have attached to the common stock. Under certain
circumstances relating to the acquisition of, or tender offer for, a specified
percentage of the Company's outstanding common stock, holders of the common
stock may exercise the rights and purchase shares of Series A Preferred Stock
or, at a discount, common stock of the Company or an acquiring company.
In February 1997, the Board of Directors authorized the Company to purchase up
to 2,000,000 shares of common stock, in either the open market or privately
negotiated transactions, in order to provide future funding for employee benefit
programs and stock dividends. This action began after the completion of the
stock repurchase program authorized in 1996. Approximately 1,645,000 shares have
been acquired under the 1997 approval through December 31, 1997.
On December 12, 1997, the Company distributed its fourth consecutive 5% stock
dividend on the $5 par common stock. All per share data in this report has been
restated to reflect the stock dividend. The table below is a summary of share
activity in 1997.
- --------------------------------------------------------------------------------
Purchases of common stock 1,898,304
Issuance of stock:
Sales under employee and director plans 179,379
Purchase acquisition 197,488
Pooling acquisition 940,315
5% stock dividend 1,850,343
================================================================================
REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory actions by regulators that could have a direct
material effect on the Company's financial statements. The regulations require
the Company to meet specific capital adequacy guidelines that involve
quantitative measures of the Company's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Company's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Tier 1 capital to
total average assets (leverage ratio), and minimum ratios of Tier 1 and Total
capital to risk-weighted assets (as defined). The minimum required leverage
ratio is 4%, the minimum Tier 1 capital ratio is 4%, and the minimum Total
capital ratio is 8%.
54
The Company's actual capital amounts and ratios at the last two year ends are as
follows:
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Risk-Weighted Assets $7,178,225 $6,283,359
Tier 1 Capital $ 868,535 $ 820,609
Total Capital $ 949,291 $ 892,177
Tier 1 Capital Ratio 12.10% 13.06%
Total Capital Ratio 13.22% 14.20%
Leverage Ratio 8.81% 8.84%
================================================================================
Management believes that, at December 31, 1997, the Company meets all capital
requirements to which it is subject.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of estimated fair values
for financial instruments held by the Company. Fair value estimates, methods and
assumptions are set forth below.
LOANS
Fair values are estimated for various groups of loans segregated by 1) type of
loan, 2) fixed/adjustable interest terms and 3) performing/non-performing
status.
The fair value of performing loans, except student and credit card loans, is
calculated by discounting scheduled cash flows through contractual maturity
using market rates that reflect credit and interest rate risk. The cash flows
through maturity for individual loans are aggregated for the Company's
asset/liability analysis. Rate forecasts are purchased from an outside company
specializing in rate forecasting. Discount rates are computed for each loan
category using these rate forecasts adjusted by the Company's interest spread
and other considerations management deems necessary. Student loans are valued
under the Company's current contract with SALLIE MAE. Fair value of non-accrual
loans approximates their carrying value, because such loans are recorded at the
appraised or estimated recoverable value of the collateral or the underlying
cash flow.
Estimated fair value of credit card loans approximates the existing balances
outstanding at year end because management believes the current credit card
yield is equal to the current market rate for similar instruments. This estimate
does not include the additional value that relates to future cash flows from new
loans generated from existing card holders over the estimated life of the
customer relationship.
The "Carrying Amount" of loans in the schedule below excludes deferred or
unamortized fees and costs related to the loan transaction.
INVESTMENT SECURITIES
The fair values of the debt and equity instruments in the available for sale and
trading sections of the investment security portfolio are estimated based on
prices published in financial newspapers or bid quotations received from
securities dealers. The fair value of those equity investments for which a
market source is not readily available is estimated at carrying value.
A breakdown of investment securities by category and maturity is provided in the
financial statements note on Investment Securities. Fair value estimates are
based on the value of one unit without regard to any premium or discount that
may result from concentrations of ownership, possible tax ramifications or
estimated transaction costs.
FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED UNDER
AGREEMENTS TO RESELL AND
CASH AND DUE FROM BANKS
The carrying amounts of federal funds sold and securities purchased under
agreements to resell and cash and due from banks approximate fair value. Federal
funds sold and securities purchased under agreements to resell generally mature
in 90 days or less and present little or no risk.
DEPOSITS
Statement 107 specifies that the fair value of deposits with no stated maturity
is equal to the amount payable
55
Notes to Financial Statements (Cont.)
Commerce Bancshares, Inc. and Subsidiaries
on demand. Such deposits include savings and interest and non-interest bearing
demand deposits. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rates are estimated
using like-term Treasury indices and yield curves supplied by an external
company specializing in rate forecasting. Discount rates are computed for each
deposit category using these rate forecasts adjusted by the Company's interest
spread and other considerations management deems necessary.
The fair value estimates do not include the benefit that results from the low-
cost funding provided by the deposit liabilities compared to the cost of
borrowing funds.
BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
mature or reprice within 90 days; therefore, their fair value approximates
carrying value. The fair value of long-term debt is estimated by discounting
contractual maturities using an estimate of the current market rate for similar
instruments.
The estimated fair values of the Company's financial instruments are as follows:
1997 1996
- -----------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Loans $6,237,039 $6,272,858 $5,454,627 $5,470,412
Available for sale investment securities 2,614,040 2,614,040 2,670,420 2,670,420
Trading account securities 6,477 6,477 11,265 11,265
Other non-marketable securities 44,414 44,414 39,830 39,830
Federal funds sold and securities purchased under
agreements to resell 132,980 132,980 368,690 368,690
Cash and due from banks 978,239 978,239 833,260 833,260
- -----------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Non-interest bearing demand deposits $2,124,828 $2,124,828 $1,800,684 $1,800,684
Savings and interest bearing demand deposits 4,209,141 4,209,141 4,021,376 4,021,376
Time open and C.D.'s:
Maturing in year 1 1,584,470 1,589,614 1,653,009 1,652,333
Maturing in year 2 523,248 525,733 387,005 385,191
Maturing in year 3 152,351 153,350 158,332 157,734
Maturing in year 4 47,775 48,122 92,995 93,603
Maturing in year 5 42,659 42,971 39,484 38,936
Maturing in over 5 years 16,106 16,313 13,544 13,452
Federal funds purchased and securities
sold under agreements to repurchase 512,558 512,558 526,807 526,807
Long-term debt and other borrowings 7,207 7,343 14,120 14,802
===========================================================================================================
56
OFF-BALANCE-SHEET
FINANCIAL INSTRUMENTS
The fair value of letters of credit and commitments to extend credit is based on
the fees currently charged to enter into similar agreements. The aggregate of
these fees is not material.
Foreign exchange contracts are generally executed at a customer's request and an
offsetting contract is executed, eliminating the Company's exposure. Interest
rate swap contracts are entered into by the Company to limit its interest rate
risk. The fair value of these contracts is determined by contacting appropriate
brokers for the current cost of selling, purchasing or closing out the various
contracts. The fair values of the foreign exchange contracts and interest rate
swaps are not material.
These instruments are also referenced in either the financial statements notes
on Financial Instruments with Off-Balance-Sheet Risk or Loans and Allowance for
Losses.
LIMITATIONS
Fair value estimates are made at a specific point in time based on relevant
market information. They do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for many of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, risk characteristics and economic
conditions. These estimates are subjective, involve uncertainties and cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
The Company engages in various transactions with off-balance-sheet risk in the
normal course of business to meet customer financing needs. The Company uses the
same credit policies in making the commitments and conditional obligations
described below as it does for on-balance-sheet instruments. Issuance of standby
and commercial letters of credit beneficially assist customers engaged in a wide
range of commercial enterprise and international trade. Standby letters of
credit serve as payment assurances to a third party in the event the bank's
customer fails to perform its financial and/or contractual obligations. Most
expire over the next 12 months and are secured by 1) a line of credit with, 2) a
certificate of deposit held by, 3) marketable securities held by, or 4) a deed
of trust held by a banking subsidiary. At December 31, 1997, standby letters of
credit outstanding of the banking subsidiaries amounted to $169,387,000, net of
$2,830,000 participated to non-affiliated companies. Commercial letters of
credit generally finance the purchase of imported goods and provide a payment
engagement against presentation of documents meeting the terms and conditions
set forth in the letter of credit instrument. There were $28,085,000 outstanding
commercial letters of credit at December 31, 1997. Transactions involving
securities described as "when-issued" are treated as conditional transactions in
a security authorized for issuance but not yet actually issued. Purchases and
sales of when-issued securities for which settlement date has not occurred are
not to be reflected in the financial statements until settlement date. At
December 31, 1997, the Company's commitments to purchase and sell when-issued
securities were not material.
The Company enters into foreign exchange contracts to purchase and sell foreign
currency. Most of the contracts offset each other and risk arises only if one of
the contracts is not performed and the currency must be bought or sold at the
prevailing market rate. The Company also enters into interest rate swaps and
other contracts to purchase securities to limit its interest rate risk. The
notional value of these contracts was $266,438,000 at December 31, 1997. The
current credit exposure (or replacement cost) across all off-balance-sheet
derivative contracts covered by the risk-based capital standards was $6,277,000
at December 31, 1997.
57
See financial statements note on Loans and Allowance for Losses for a discussion
of unfunded loan commitments.
COMMITMENTS AND CONTINGENCIES
The Company leases certain premises and equipment, all of which were classified
as operating leases. The rent expense under such arrangements amounted to
$2,401,000, $2,361,000 and $2,079,000 in 1997, 1996 and 1995, respectively. A
summary of minimum lease commitments follows:
(In thousands) Type of Property
- --------------------------------------------------------------------------------
Years Ended Real Total
December 31 Property Equipment Commitments
- --------------------------------------------------------------------------------
1998 $ 1,955 $246 $ 2,201
1999 1,809 39 1,848
2000 1,623 5 1,628
2001 1,606 4 1,610
2002 1,507 -- 1,507
After 18,480 -- 18,480
- --------------------------------------------------------------------------------
Total minimum
lease payments $27,274
================================================================================
All leases expire prior to 2055. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by leases on other
properties; thus, the future minimum lease commitments will not be less than the
amounts shown for 1998.
The Company incurred expense of $11,989,000 in 1997, $9,505,000 in 1996 and
$8,648,000 in 1995 under an agreement to outsource certain data processing
services. Future payments will adjust for inflation and transaction volume.
The Company owns approximately 51% interest in a venture capital partnership,
with an original commitment to fund $15,456,000 over the ten-year life of the
partnership. Contributions to the partnership were $2,273,000 in January 1998,
$3,030,000 in 1997, $1,515,000 in 1996 and $3,030,000 in 1995.
In the normal course of business, the Company had certain lawsuits pending at
December 31, 1997. In the opinion of management, after consultation with legal
counsel, none of these suits will have a significant effect on the financial
condition and results of operations of the Company.
PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are the condensed financial statements of Commerce Bancshares, Inc.
(Parent only) for the periods indicated:
CONDENSED BALANCE SHEETS
December 31
- ---------------------------------------------------------------------------------------------
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------------------
ASSETS
Investment in consolidated subsidiaries:
Banks $847,645 $783,014
Non-banks 29,104 25,081
Receivables from subsidiaries, net of borrowings 10,583 8,042
Cash 167 121
Securities purchased under agreements to resell 7,100 7,338
Investment securities:
Available for sale 73,339 90,845
Other non-marketable 11,968 10,728
Other assets 11,447 11,674
- ---------------------------------------------------------------------------------------------
Total assets $991,353 $936,843
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued taxes and other liabilities $ 10,569 $ 12,572
- ---------------------------------------------------------------------------------------------
Total liabilities 10,569 12,572
- ---------------------------------------------------------------------------------------------
Stockholders' equity 980,784 924,271
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $991,353 $936,843
=============================================================================================
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31
- ------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
INCOME
Dividends received:
Bank subsidiaries $103,626 $120,024 $124,129
Non-bank subsidiaries 200 250 --
Earnings of consolidated subsidiaries, net of dividends 28,628 (393) (13,057)
Interest on investment securities 4,326 3,886 2,992
Interest on securities purchased under agreements to resell 233 244 228
Management fees charged subsidiaries 16,842 13,951 13,024
Data processing fees charged subsidiaries 27,638 21,596 18,030
Net gains (losses) on securities transactions 1,967 (507) 226
Other 702 69 201
- ------------------------------------------------------------------------------------------------------------
Total income 184,162 159,120 145,773
============================================================================================================
EXPENSE
Salaries and employee benefits 28,525 21,981 19,992
Marketing 351 123 207
External data processing 11,552 9,041 8,658
Other 13,928 10,621 10,354
- ------------------------------------------------------------------------------------------------------------
Total expense 54,356 41,766 39,211
- ------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) (2,896) (2,158) (1,078)
- ------------------------------------------------------------------------------------------------------------
Net income $132,702 $119,512 $107,640
============================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
- ------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $132,702 $119,512 $107,640
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings of consolidated subsidiaries, net of dividends (28,628) 393 13,057
Other adjustments, net (3,824) (1,883) 3,521
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 100,250 118,022 124,218
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash paid in acquisitions -- -- (94,102)
(Increase) decrease in investment in subsidiaries, net 457 (438) (4,283)
(Increase) decrease in receivables from subsidiaries, net of borrowings (2,541) 456 (1,359)
Proceeds from sales of investment securities 2,538 627 12,943
Proceeds from maturities of investment securities 474,729 249,023 263,557
Purchases of investment securities (453,391) 298,241) 271,748)
Net decrease in securities purchased under agreements to resell 238 34,830 34,504
Net purchases of equipment (334) (2,723) (1,513)
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 21,696 (16,466) (62,001)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchases of treasury stock (94,067) (78,408) (40,024)
Sales of treasury stock 2,599 4,039 4,149
Cash dividends paid on common stock (30,432) (27,462) (26,039)
- ------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (121,900) (101,831) (61,914)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 46 (275) 303
Cash at beginning of year 121 396 93
- ------------------------------------------------------------------------------------------------------------
Cash at end of year $ 167 $ 121 $ 396
============================================================================================================
59
Notes to Financial Statements [Cont.]
Commerce Bancshares, Inc. and Subsidiaries
Dividends paid by the Parent were substantially provided from subsidiary
bank dividends. The subsidiary banks may distribute dividends without prior
regulatory approval that do not exceed the sum of net income for the
current year and retained net income for the preceding two years, subject
to maintenance of minimum capital requirements. The Parent charges fees to
its subsidiaries for management services provided, which are allocated to
the subsidiaries based primarily on total average assets. The Parent also
charges data processing fees, which are allocated to the subsidiaries based
on transaction volume. The Parent makes advances to non-banking
subsidiaries and subsidiary bank holding companies. Advances are made to
the Parent by subsidiary bank holding companies for investment in temporary
liquid securities. Interest on such advances is based on market rates.
At December 31, 1997, the Parent had lines of credit for general corporate
purposes of $20,000,000 with a subsidiary bank. At December 31, 1997, the
Parent had no borrowings from the subsidiary bank.
Investment securities held by the Parent, which consist primarily of common
stock and commercial paper, included an unrealized gain in fair value of
$20,702,000 at December 31, 1997. The corresponding net of tax unrealized
gain included in stockholders' equity was $12,886,000. Also included in
stockholders' equity was the unrealized net of tax gain in fair value of
investment securities held by subsidiaries, which amounted to $16,231,000
at December 31, 1997.
Under a security agreement related to self-insurance for officer and
director liability, $10,000,000 in market value of the Parent's investment
securities were pledged at December 31, 1997.
================================================================================
Independent Auditors' Report
The Board of Directors
Commerce Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Commerce
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Commerce Bancshares, Inc. and Subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
January 30, 1998
Kansas City, Missouri
60
Statement of Management's Responsibility
Commerce Bancshares, Inc. and Subsidiaries
FINANCIAL STATEMENTS
Commerce Bancshares, Inc. is responsible for the preparation, integrity,
and fair presentation of its published financial statements. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts
based on judgments and estimates of management.
INTERNAL CONTROL STRUCTURE
OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The system contains
monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control system can provide only reasonable assurance with respect
to financial statement preparation. Further, because of changes in
conditions over time, the effectiveness of an internal control system may
vary.
Management assessed its internal control structure over financial reporting
as of December 31, 1997. This assessment was based on criteria for
effective internal control over financial reporting described in "Internal
Control--Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment,
management believes that Commerce Bank, N.A. (Missouri), Commerce Bank,
N.A. (Illinois) and Commerce Bank, N.A. (Wichita, Kansas) maintained
effective internal control structures over financial reporting as of
December 31, 1997. Commerce Bank, N.A. (Kansas City, Missouri) and Commerce
Bank, N.A. (St. Louis, Missouri), prior year reporting banks, were merged
to form Commerce Bank, N.A. (Missouri) effective December 31, 1997.
COMPLIANCE WITH LAWS
AND REGULATIONS
Management is also responsible for compliance with the federal and state
laws and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders as designated by the FDIC as
safety and soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management
believes that Commerce Bank, N.A. (Missouri), Commerce Bank, N.A.
(Illinois) and Commerce Bank, N.A. (Wichita, Kansas), subsidiary insured
depository institutions of Commerce Bancshares, Inc., complied, in all
significant respects, with the designated laws and regulations related to
safety and soundness for the year ended December 31, 1997.
61
SUMMARY OF QUARTERLY STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
For the Quarter Ended
- ------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/97 9/30/97 6/30/97 3/31/97
- ------------------------------------------------------------------------------------------
Interest income $178,039 $173,686 $168,339 $162,812
Interest expense (73,054) (72,628) (70,395) (69,025)
- ------------------------------------------------------------------------------------------
Net interest income 104,985 101,058 97,944 93,787
Non-interest income 49,457 46,687 42,385 41,563
Salaries and employee benefits (46,571) (45,818) (43,708) (42,998)
Other expense (44,228) (41,826) (40,185) (39,116)
Provision for loan losses (8,716) (7,807) (7,293) (7,538)
- ------------------------------------------------------------------------------------------
Income before income taxes 54,927 52,294 49,143 45,698
Income taxes (18,179) (18,072) (16,810) (16,299)
- ------------------------------------------------------------------------------------------
Net income $ 36,748 $ 34,222 $ 32,333 $ 29,399
==========================================================================================
Net income per share basic* $ .94 $ .88 $ .83 $ .75
Net income per share diluted* $ .93 $ .87 $ .82 $ .74
==========================================================================================
Weighted average shares basic* 38,936 38,924 39,086 39,032
Weighted average shares diluted* 39,628 39,461 39,510 39,494
==========================================================================================
For the Quarter Ended
- ------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/96 9/30/96 6/30/96 3/31/96
- ------------------------------------------------------------------------------------------
Interest income $164,676 $161,147 $159,706 $162,074
Interest expense (69,891) (69,618) (69,791) (72,560)
- ------------------------------------------------------------------------------------------
Net interest income 94,785 91,529 89,915 89,514
Non-interest income 43,257 40,449 38,660 36,796
Salaries and employee benefits (42,009) (40,971) (41,154) (41,157)
Other expense (38,295) (39,106) (37,811) (37,451)
Provision for loan losses (7,459) (6,082) (5,428) (5,553)
- ------------------------------------------------------------------------------------------
Income before income taxes 50,279 45,819 44,182 42,149
Income taxes (17,823) (14,964) (15,264) (14,866)
- ------------------------------------------------------------------------------------------
Net income $ 32,456 $ 30,855 $ 28,918 $ 27,283
==========================================================================================
Net income per share basic* $ .82 $ .78 $ .72 $ .67
Net income per share diluted* $ .81 $ .77 $ .72 $ .67
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Weighted average shares basic* 39,389 39,598 40,124 40,568
Weighted average shares diluted* 39,818 39,817 40,336 40,823
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For the Quarter Ended
- ------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/95 9/30/95 6/30/95 3/31/95
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Interest income $164,672 $164,091 $160,644 $141,596
Interest expense (73,603) (73,590) (69,756) (58,309)
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Net interest income 91,069 90,501 90,888 83,287
Non-interest income 36,469 34,194 31,899 30,588
Salaries and employee benefits (39,901) (41,156) (39,650) (37,146)
Other expense (38,384) (35,849) (38,934) (34,464)
Provision for loan losses (5,939) (3,927) (1,930) (2,833)
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Income before income taxes 43,314 43,763 42,273 39,432
Income taxes (15,066) (16,153) (15,514) (14,409)
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Net income $ 28,248 $ 27,610 $ 26,759 $ 25,023
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Net income per share basic* $ .68 $ .66 $ .64 $ .62
Net income per share diluted* $ .68 $ .66 $ .63 $ .62
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Weighted average shares basic* 41,426 41,817 42,166 40,135
Weighted average shares diluted* 41,775 42,106 42,354 40,299
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* Restated for 5% stock dividend distributed in December 1997 and adoption of
SFAS No. 128
62
OFFICERS, DIRECTORS, COMMUNITY BANK DIRECTORS, FEATURED DIRECTORS
(These lists not included in EDGARized exhibit.)
63 through inside back cover