- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-2989
COMMERCE BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-0889454
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
1000 WALNUT, KANSAS CITY, MO 64106
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(816) 234-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X
Yes------- No -------
As of May 6, 1998, the registrant had outstanding 58,538,539 shares of its $5
par value common stock, registrant's only class of common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
In the opinion of management, the consolidated financial statements of
Commerce Bancshares, Inc. and Subsidiaries as of March 31, 1998 and December
31, 1997 and the related notes include all material adjustments which were
regularly recurring in nature and necessary for fair presentation of the
financial condition and the results of operations for the periods shown.
The consolidated financial statements of Commerce Bancshares, Inc. and
Subsidiaries and management's discussion and analysis of financial condition
and results of operations are presented in the schedules as follows:
Schedule 1: Consolidated Balance Sheets
Schedule 2: Consolidated Statements of Income
Schedule 3: Statements of Changes in Stockholders' Equity
Schedule 4: Consolidated Statements of Cash Flows
Schedule 5: Notes to Consolidated Financial Statements
Schedule 6: Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCE BANCSHARES, INC.
/s/ J. Daniel Stinnett
By __________________________________
J. Daniel Stinnett
Vice President & Secretary
Date: May 11, 1998
/s/ Jeffery D. Aberdeen
By __________________________________
Jeffery D. Aberdeen
Controller
(Chief Accounting Officer)
Date: May 11, 1998
2
SCHEDULE 1
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31 December 31
1998 1997
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Loans, net of unearned income........................ $ 6,424,884 $ 6,224,381
Allowance for loan losses............................ (108,569) (105,918)
----------- -----------
NET LOANS........................................ 6,316,315 6,118,463
----------- -----------
Investment securities:
Available for sale................................. 2,610,903 2,614,040
Trading account.................................... 11,147 6,477
Other non-marketable............................... 28,869 44,414
----------- -----------
TOTAL INVESTMENT SECURITIES...................... 2,650,919 2,664,931
----------- -----------
Federal funds sold and securities purchased under
agreements to resell................................ 179,696 132,980
Cash and due from banks.............................. 740,392 978,239
Land, buildings and equipment, net................... 216,513 214,209
Goodwill and core deposit premium, net............... 83,082 85,377
Customers' acceptance liability...................... 817 900
Other assets......................................... 179,384 111,842
----------- -----------
TOTAL ASSETS..................................... $10,367,118 $10,306,941
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand........................ $ 1,946,549 $ 2,124,828
Savings and interest bearing demand................ 4,322,128 4,209,141
Time open and C.D.'s of less than $100,000......... 2,187,871 2,150,719
Time open and C.D.'s of $100,000 and over.......... 243,117 215,890
----------- -----------
TOTAL DEPOSITS................................... 8,699,665 8,700,578
Federal funds purchased and securities sold under
agreements to repurchase............................ 505,071 512,558
Long-term debt and other borrowings.................. 6,996 7,207
Accrued interest, taxes and other liabilities........ 128,973 104,914
Acceptances outstanding.............................. 817 900
----------- -----------
TOTAL LIABILITIES................................ 9,341,522 9,326,157
----------- -----------
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 58,645,813
shares in 1998 and 58,285,813 shares in 1997...... 293,229 291,429
Capital surplus.................................... 36,359 48,704
Retained earnings.................................. 660,029 626,387
Treasury stock of 155,897 shares in 1998
and 315,894 shares in 1997, at cost............... (6,973) (14,252)
Unearned employee benefits......................... (1,044) (601)
Unrealized securities gains, net................... 43,996 29,117
----------- -----------
TOTAL STOCKHOLDERS' EQUITY....................... 1,025,596 980,784
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $10,367,118 $10,306,941
=========== ===========
See accompanying notes to financial statements.
3
SCHEDULE 2
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE
MONTHS ENDED
MARCH 31
-----------------
1998 1997
-------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
INTEREST INCOME
Interest and fees on loans........................... $134,320 $117,314
Interest on investment securities.................... 39,188 40,721
Interest on federal funds sold and securities
purchased under agreements to resell................ 4,045 4,777
-------- --------
TOTAL INTEREST INCOME............................ 177,553 162,812
-------- --------
INTEREST EXPENSE
Interest on deposits:
Savings and interest bearing demand................ 34,823 32,668
Time open and C.D.'s of less than $100,000......... 28,979 28,211
Time open and C.D.'s of $100,000 and over.......... 3,106 2,632
Interest on federal funds purchased and securities
sold under agreements to repurchase................. 6,464 5,279
Interest on long-term debt and other borrowings...... 107 235
-------- --------
TOTAL INTEREST EXPENSE........................... 73,479 69,025
-------- --------
NET INTEREST INCOME.............................. 104,074 93,787
Provision for loan losses............................ 10,716 7,538
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES.......................................... 93,358 86,249
-------- --------
NON-INTEREST INCOME
Trust fees........................................... 11,653 9,552
Deposit account charges and other fees............... 14,389 13,300
Credit card transaction fees......................... 7,095 6,283
Trading account profits and commissions.............. 2,281 1,866
Net gains on securities transactions................. 1,421 146
Other................................................ 13,120 10,416
-------- --------
TOTAL NON-INTEREST INCOME........................ 49,959 41,563
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits....................... 48,506 42,998
Net occupancy........................................ 5,293 5,478
Equipment............................................ 4,266 3,954
Supplies and communication........................... 7,098 6,383
Data processing...................................... 6,937 5,539
Marketing............................................ 2,759 2,530
Goodwill and core deposit............................ 2,296 2,414
Other................................................ 13,266 12,818
-------- --------
TOTAL NON-INTEREST EXPENSE....................... 90,421 82,114
-------- --------
Income before income taxes........................... 52,896 45,698
Less income taxes.................................... 18,413 16,299
-------- --------
NET INCOME....................................... $ 34,483 $ 29,399
======== ========
Net income per share--basic.......................... $ .59 $ .50
======== ========
Net income per share--diluted........................ $ .58 $ .50
======== ========
Cash dividends per common share...................... $ .145 $ .130
======== ========
See accompanying notes to financial statements.
4
SCHEDULE 3
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NUMBER OF UNEARNED UNREALIZED
SHARES COMMON CAPITAL RETAINED TREASURY EMPLOYEE SECURITIES
ISSUED STOCK SURPLUS EARNINGS STOCK BENEFITS GAINS, NET TOTAL
---------- -------- -------- -------- -------- -------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
BALANCE JANUARY 1, 1998
....................... 58,285,813 $291,429 $ 48,704 $626,387 $(14,252) $ (601) $ 29,117 $ 980,784
Net income............. 34,483 34,483
Change in unrealized
securities gains, net. 14,740 14,740
Pooling acquisition.... 360,000 1,800 (11,346) 7,639 16,101 139 14,333
Purchase of treasury
stock................. (11,504) (11,504)
Sales under option and
benefit plans......... (1,010) 2,190 1,180
Issuance of stock under
restricted stock award
plan.................. 11 492 (503) --
Restricted stock award
amortization.......... 60 60
Cash dividends paid
($.145 per share)..... (8,480) (8,480)
---------- -------- -------- -------- -------- ------- -------- ----------
BALANCE MARCH 31, 1998.. 58,645,813 $293,229 $ 36,359 $660,029 $ (6,973) $(1,044) $ 43,996 $1,025,596
========== ======== ======== ======== ======== ======= ======== ==========
Balance January 1, 1997. 56,348,053 $281,740 $ 10,379 $621,689 $ (7,422) $ (340) $ 18,225 $ 924,271
Net income............. 29,399 29,399
Change in unrealized
securities gains, net. (17,226) (17,226)
Purchase of treasury
stock................. (20,175) (20,175)
Sales under option and
benefit plans......... (139) 482 343
Issuance of stock under
restricted stock award
plan.................. 21 271 (292) --
Restricted stock award
amortization.......... 39 39
Cash dividends paid
($.130 per share) .... (7,606) (7,606)
---------- -------- -------- -------- -------- ------- -------- ----------
Balance March 31, 1997.. 56,348,053 $281,740 $ 10,261 $643,482 $(26,844) $ (593) $ 999 $ 909,045
========== ======== ======== ======== ======== ======= ======== ==========
See accompanying notes to financial statements.
5
SCHEDULE 4
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31
----------------------
1998 1997
---------- ----------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income ........................................... $ 34,483 $ 29,399
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses .......................... 10,716 7,538
Provision for depreciation and amortization ........ 7,978 7,382
Accretion of investment security discounts ......... (1,298) (1,327)
Amortization of investment security premiums ....... 1,883 2,462
Net gains on sales of investment securities (A) .... (1,421) (146)
Net (increase) decrease in trading account securi-
ties............................................... (530) 4,509
Decrease in interest receivable .................... 1,685 3,183
Increase (decrease) in interest payable ............ 235 (737)
Other changes, net ................................. (46,779) 47,124
---------- ----------
Net cash provided by operating activities ........ 6,952 99,387
---------- ----------
INVESTING ACTIVITIES:
Net cash received in acquisition...................... 4,044 --
Proceeds from sales of investment securities (A)...... 96,351 105,753
Proceeds from maturities of investment securities (A). 337,145 216,957
Purchases of investment securities (A) ............... (354,018) (298,939)
Net increase in federal funds sold and securities
purchased under
agreements to resell ................................ (38,491) (67,585)
Net increase in loans................................. (151,051) (57,254)
Purchases of premises and equipment................... (5,800) (8,297)
Sales of premises and equipment....................... 682 3,463
---------- ----------
Net cash used by investing activities............. (111,138) (105,902)
---------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing
demand, savings,
and interest bearing demand deposits................. (111,288) 65,055
Net increase (decrease) in time open and C.D.'s....... 6,321 (11,863)
Net decrease in federal funds purchased and securities
sold
under agreements to repurchase ...................... (9,303) (104,560)
Repayment of long-term debt .......................... (215) (542)
Purchases of treasury stock .......................... (11,419) (20,175)
Exercise of stock options by employees ............... 723 269
Cash dividends paid on common stock .................. (8,480) (7,606)
---------- ----------
Net cash used by financing activities ............ (133,661) (79,422)
---------- ----------
Decrease in cash and cash equivalents............. (237,847) (85,937)
Cash and cash equivalents at beginning of year........ 978,239 833,260
---------- ----------
Cash and cash equivalents at March 31 ............ $ 740,392 $ 747,323
========== ==========
- --------
(A) Available for sale and other non-marketable securities, excluding trading
account securities.
Net cash payments of income taxes for the three month period were $12,100,000
in 1998 compared to net cash refunds of $474,000 in 1997. Interest paid on
deposits and borrowings for the three month period was $73,200,000 in 1998 and
$69,709,000 in 1997.
See accompanying notes to financial statements.
6
SCHEDULE 5
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of
Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated.
Certain reclassifications were made to 1997 data to conform to current year
presentation. Results of operations for the three month period ended March 31,
1998 are not necessarily indicative of results to be attained for any other
period.
The significant accounting policies followed in the preparation of the
quarterly financial statements are the same as those disclosed in the 1997
Annual Report to stockholders to which reference is made.
2. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the allowance for loan losses for the three
months ended March 31, 1998 and 1997.
1998 1997
-------- -------
(IN THOUSANDS)
Balance, January 1....................................... $105,918 $98,223
-------- -------
Additions:
Provision for loan losses.............................. 10,716 7,538
Allowance for loan losses of acquired bank............. 964 --
-------- -------
Total additions...................................... 11,680 7,538
-------- -------
Deductions:
Loan losses............................................ 10,991 7,968
Less recoveries on loans............................... 1,962 2,113
-------- -------
Net loan losses...................................... 9,029 5,855
-------- -------
Balance, March 31........................................ $108,569 $99,906
======== =======
At March 31, 1998, non-performing assets were $39,752,000, which was .62% of
total loans and .38% of total assets. This balance consisted of $17,106,000 in
loans not accruing interest, $21,032,000 in loans past due 90 days and still
accruing interest, and $1,614,000 in foreclosed real estate.
3. INVESTMENT SECURITIES
Investment securities, at fair value, consist of the following at March 31,
1998 and December 31, 1997.
MARCH 31 December 31
1998 1997
---------- -----------
(IN THOUSANDS)
Available for sale:
U.S. government and federal agency obligations... $1,458,888 $1,461,593
State and municipal obligations.................. 99,707 94,115
CMO's and asset-backed securities................ 886,879 837,056
Other debt securities............................ 107,096 173,972
Equity securities................................ 58,333 47,304
Trading account securities......................... 11,147 6,477
Other non-marketable securities.................... 28,869 44,414
---------- ----------
Total investment securities.................... $2,650,919 $2,664,931
========== ==========
7
4. ACQUISITION ACTIVITY
On March 1, 1998, the Company completed its acquisition of City National
Bank of Pittsburg, Kansas, with assets of $120 million. The transaction was
recorded as a pooling of interests. The acquisition did not have a material
impact on the financial statements of the Company and financial statements for
prior periods have not been restated because such restated amounts do not
differ materially from the Company's historical financial statements.
5. COMMON STOCK
The shares used in the calculation of basic and diluted income per share for
the three months ended March 31, 1998 and 1997 are shown below.
1998 1997
------ ------
(IN
THOUSANDS)
Weighted average common shares outstanding.................. 58,130 58,547
Stock options............................................... 1,042 693
------ ------
59,172 59,240
====== ======
On February 6, 1998, the Board of Directors declared a three for two stock
split, effected in the form of a stock dividend, on the Company's $5 par
common stock. Accordingly, the number of shares issued was increased from
39,097,209 to 58,645,813. All share and per share data in this report have
been restated to reflect the stock split.
6. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", in the
first quarter of 1998. SFAS No. 130 requires the reporting of comprehensive
income and its components. 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 only component of other
comprehensive income is the unrealized holding gains and losses on available
for sale securities.
FOR THE THREE MONTHS
ENDED MARCH 31
---------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Net income......................................... $ 34,483 $ 29,399
Change in unrealized gains (losses), net........... 14,879 (17,226)
---------- ----------
Comprehensive income............................... $ 49,362 $ 12,173
========== ==========
8
SCHEDULE 6
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1998
(UNAUDITED)
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the
Company's 1997 Annual Report on Form 10-K. Results of operations for the three
month period ended March 31, 1998 are not necessarily indicative of results to
be attained for any other period.
THREE MONTHS
ENDED MARCH
31
--------------
1998 1997
------ ------
PER SHARE DATA
Net income--basic....................................... $ .59 $ .50
Net income--diluted..................................... .58 .50
Cash dividends.......................................... .145 .130
Book value.............................................. 17.53 15.61
Market price............................................ 47.75 28.97
SELECTED RATIOS
(Based on average balance sheets)
Loans to deposits....................................... 74.10% 68.73%
Non-interest bearing deposits to total deposits......... 21.84 20.09
Equity to loans......................................... 15.83 16.83
Equity to deposits...................................... 11.73 11.56
Equity to total assets.................................. 9.84 9.78
Return on total assets.................................. 1.38 1.27
Return on realized stockholders' equity................. 14.52 13.17
Return on total stockholders' equity.................... 14.01 12.95
(Based on end-of-period data)
Efficiency ratio........................................ 59.25 60.73
Tier I capital ratio.................................... 12.32 13.22
Total capital ratio..................................... 13.42 14.33
Leverage ratio.......................................... 9.00 8.86
SUMMARY
Consolidated net income for the first three months of 1998 was $34.5
million; a $5.1 million or 17.3% increase over the first three months of 1997.
Diluted earnings per share increased 16.0% to $.58 compared to $.50 for the
same period in the prior year. The return on assets for the first quarter of
1998 was 1.38% versus 1.27% last year. The return on realized equity increased
to 14.52% compared to 13.17% in 1997.
Net interest income increased $10.3 million, or 11.0%, over the first three
months of 1997 primarily due to loan growth. Core fee revenue growth and gains
on loans and securities sales increased non-interest income $8.4 million.
Increases of $8.3 million in non-interest expense and $3.2 million in the
provision for loan losses partially offset this growth. Compared to the first
three months of 1997, non-interest income grew 20.2%, while non-interest
expense increased 10.1%.
A three for two stock split in the form of a 50% stock dividend was
distributed on March 30, 1998. All share and per share data in this report has
been restated to reflect the stock split.
9
The Company completed its acquisition of City National Bank of Pittsburg,
Kansas on March 1, 1998. The bank has four locations and approximately $120
million in assets. The acquisition was accounted for as a pooling of
interests, and stock valued at $34.3 million was exchanged in the transaction.
The acquisition did not have a material impact on the financial statements of
the Company.
NET INTEREST INCOME
The following table summarizes the changes in net interest income on a fully
taxable equivalent basis, by major category of interest earning assets and
interest bearing liabilities, identifying changes related to volumes and
rates. Changes not solely due to volume or rate changes are allocated to rate.
Management believes this allocation method, applied on a consistent basis,
provides meaningful comparisons between the respective periods.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
THREE MONTHS ENDED
MARCH 31, 1998 VS. 1997
-------------------------
CHANGE DUE TO
----------------
AVERAGE AVERAGE
VOLUME RATE TOTAL
------- ------- -------
(IN THOUSANDS)
INTEREST INCOME, FULLY TAXABLE EQUIVALENT BASIS:
Loans.............................................. $16,473 $ 566 $17,039
Investment securities:
U.S. government and federal agency securities.... (3,872) 204 (3,668)
State and municipal obligations.................. (102) 77 (25)
Other securities................................. 1,979 150 2,129
Federal funds sold and securities purchased under
agreements to resell.............................. (891) 159 (732)
------- ------ -------
Total interest income.......................... 13,587 1,156 14,743
------- ------ -------
INTEREST EXPENSE:
Deposits:
Savings.......................................... 125 18 143
Interest bearing demand.......................... 2,539 (527) 2,012
Time open & C.D.'s of less than $100,000......... 596 172 768
Time open & C.D.'s of $100,000 and over.......... 361 113 474
Federal funds purchased and securities sold under
agreements to repurchase.......................... 760 425 1,185
Long-term debt and other borrowings................ (122) 4 (118)
------- ------ -------
Total interest expense......................... 4,259 205 4,464
------- ------ -------
NET INTEREST INCOME, FULLY TAXABLE EQUIVALENT BASIS.. $ 9,328 $ 951 $10,279
======= ====== =======
Net interest income for the first quarter of 1998 was $104.1 million, an
11.0% increase over the first quarter of 1997. For the quarter, the net
interest rate margin was 4.66% compared with 4.52% last year.
Total interest income increased $14.7 million, or 9.1%, over the first
quarter of 1997, mainly due to an increase of $834.1 million in average loan
balances. This growth was partly reflective of the effects of bank
acquisitions in 1997 and March 1998, in which the Company acquired loans of
approximately $200 million, plus the effects of a strong economy in many of
the Company's markets. Partially offsetting this growth was a decline of
$250.8 million in average balances invested in U.S. government and federal
agency securities. The average tax equivalent yield on interest earning assets
was 7.93% in the first quarter of 1998 compared to 7.82% in the first quarter
of 1997.
10
Total interest expense (net of capitalized interest) increased $4.5 million,
or 6.5%, compared to the first quarter of 1997 due mainly to higher average
balances of interest bearing demand deposits and higher average borrowings of
federal funds purchased and repurchase agreements. Average rates paid on all
interest bearing liabilities increased from 4.10% in the first quarter of 1997
to 4.15% in the first quarter of 1998.
Summaries of average assets and liabilities and the corresponding average
rates earned/paid appear on page 14.
RISK ELEMENTS OF LOAN PORTFOLIO
Non-performing assets include impaired loans (non-accrual loans and loans 90
days delinquent and still accruing interest) and foreclosed real estate. Loans
are placed on non-accrual status when management does not expect to collect
payments consistent with acceptable and agreed upon terms of repayment
(generally, loans that are 90 days past due as to principal and/or interest
payments). These loans were made primarily to borrowers in Missouri, Kansas
and Illinois. The following table presents non-performing assets.
MARCH 31 DECEMBER 31
1998 1997
-------- -----------
(IN THOUSANDS)
Non-accrual loans................................... $17,106 $23,382
Past due 90 days and still accruing interest........ 21,032 24,383
------- -------
Total impaired loans................................ 38,138 47,765
Foreclosed real estate.............................. 1,614 994
------- -------
Total non-performing assets....................... $39,752 $48,759
======= =======
Non-performing assets to total loans................ .62% .78%
Non-performing assets to total assets............... .38% .47%
The level of non-performing assets decreased 18% from year end 1997 totals.
Non-accrual loans at March 31, 1998 consisted mainly of business loans ($4.3
million), business real estate loans ($4.0 million) and construction and land
development loans ($6.8 million). Loans which were 90 or more days past due
included credit card loans of $7.5 million and business loans of $4.7 million.
A subsidiary bank issues Visa and MasterCard credit cards, and credit card
loans outstanding amounted to $506.0 million at March 31, 1998. Because credit
card loans traditionally have a higher than average ratio of net charge-offs
to loans outstanding, management requires that a specific allowance for losses
on credit card loans be maintained, which was $15.5 million, or 3.1% of credit
card loans at March 31, 1998. The annualized net charge-off ratio for credit
card loans was 3.98% for the first three months of 1998 compared to 3.43% for
the first three months of 1997. The risk presented by the above loans and
foreclosed real estate is not considered by management to be materially
adverse in relation to normal credit risks generally taken by lenders.
PROVISION/ALLOWANCE FOR LOAN LOSSES
Management records the provision for loan losses, on an individual bank
basis, in amounts that result in an allowance for loan losses sufficient to
cover current net charge-offs and risks believed to be inherent in the loan
portfolio of each bank. Management's evaluation includes such factors as past
loan loss experience, current loan portfolio mix, evaluation of actual and
potential losses in the loan portfolio, prevailing regional and national
economic conditions that might have an impact on the portfolio, regular
reviews and examinations of the loan portfolio conducted by internal loan
reviewers supervised by Commerce Bancshares, Inc. (the Parent), and reviews
and examinations by bank regulatory authorities. As a result of these factors,
the provision for loan losses increased $3.2 million compared to the first
quarter of 1997 and increased $2.0 million compared to the fourth quarter of
1997. The allowance for loan losses as a percentage of loans outstanding was
1.69% at March 31, 1998, compared to 1.70% at year-end 1997 and 1.81% at March
31, 1997. The allowance at March 31, 1998 was 273% of non-performing assets.
Management believes that the allowance for loan losses, which is a general
11
reserve, is adequate to cover actual and potential losses in the loan
portfolio under current conditions. Other than as previously noted, management
is not aware of any significant risks in the current loan portfolio due to
concentrations of loans within any particular industry, nor of any separate
types of loans within a particular category of non-performing loans that are
unusually significant as to possible loan losses when compared to the entire
loan portfolio. Net charge-offs on loans totaled $9.0 million for the first
quarter of 1998 compared to $5.9 million for the first quarter of 1997 and
$8.3 million for the fourth quarter of 1997. Annualized net charge-offs were
.58% of average loans for the first quarter of 1998 compared to .43% for the
first quarter of 1997 and .53% for the fourth quarter of 1997.
NON-INTEREST INCOME
THREE MONTHS INCREASE
ENDED MARCH 31 (DECREASE)
---------------- --------------
1998 1997 AMOUNT PERCENT
------- ------- ------ -------
(DOLLARS IN THOUSANDS)
Trust fees.............................. $11,653 $ 9,552 $2,101 22.0%
Deposit account charges and other fees.. 14,389 13,300 1,089 8.2
Credit card transaction fees............ 7,095 6,283 812 12.9
Trading account profits and commissions. 2,281 1,866 415 22.2
Net gains on securities transactions.... 1,421 146 1,275 N/M
Other................................... 13,120 10,416 2,704 26.0
------- ------- ------
TOTAL NON-INTEREST INCOME............. $49,959 $41,563 $8,396 20.2
======= ======= ======
As a % of operating income (net interest
income plus non-interest income)....... 32.4% 30.7%
======= =======
Non-interest income rose 20.2% in the first quarter of 1998 compared to the
first quarter of 1997. Trust fees increased $2.1 million, mainly due to
account growth and increases in the value of assets managed. Sales of
securities by the parent and affiliate banks resulted in the quarterly
increase of $1.3 million in gains on securities transactions. Other income
increased $2.7 million over the first quarter of 1997 due to an increase in
gains on loan sales of $2.2 million and various types of fee income growth.
NON-INTEREST EXPENSE
THREE MONTHS INCREASE
ENDED MARCH 31 (DECREASE)
--------------- ---------------
1998 1997 AMOUNT PERCENT
------- ------- ------ -------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits............ $48,506 $42,998 $5,508 12.8%
Net occupancy............................. 5,293 5,478 (185) (3.4)
Equipment................................. 4,266 3,954 312 7.9
Supplies and communications............... 7,098 6,383 715 11.2
Data processing........................... 6,937 5,539 1,398 25.2
Marketing................................. 2,759 2,530 229 9.1
Goodwill and core deposit................. 2,296 2,414 (118) (4.9)
Other..................................... 13,266 12,818 448 3.5
------- ------- ------
TOTAL NON-INTEREST EXPENSE.............. $90,421 $82,114 $8,307 10.1
======= ======= ======
Non-interest expense rose 10.1% compared to the first quarter of 1997.
Salaries and employee benefits increased $5.5 million over the first quarter
of 1997. Incentive compensation on new business and additional full-time
equivalent employees contributed to the salary increases. Data processing
expense increased $1.4 million, partly because of higher charges by
information service providers. The efficiency ratio was 59.25% in the first
quarter of 1998 compared to 60.73% in the first quarter of 1997 and 59.00% in
the fourth quarter of 1997.
12
LIQUIDITY AND CAPITAL RESOURCES
The liquid assets of the Parent consist primarily of commercial paper,
overnight repurchase agreements and equity securities, most of which are
readily marketable. The fair value of these investments was $124.0 million at
March 31, 1998 compared to $92.4 million at December 31, 1997. Included in the
fair values were unrealized net gains of $32.2 million at March 31, 1998 and
$20.7 million at December 31, 1997. The Parent's liabilities totaled $54.6
million at March 31, 1998, compared to $10.6 million at December 31, 1997.
Liabilities at March 31, 1998 included $36.4 million advanced mainly from
subsidiary bank holding companies in order to combine resources for short-term
investment in liquid assets. The Parent had no short-term borrowings from
affiliate banks or long-term debt during 1998. The Parent's commercial paper,
which management believes is readily marketable, has a P1 rating from Moody's
and an A1 rating from Standard & Poor's. The Company is also rated A by
Thomson BankWatch with a corresponding short-term rating of TBW-1. This credit
availability should provide adequate funds to meet any outstanding or future
commitments of the Parent.
The liquid assets held by bank subsidiaries include federal funds sold and
securities purchased under agreements to resell and available for sale
investment securities. These liquid assets had a fair value of $2.66 billion
at March 31, 1998 and December 31, 1997. The available for sale bank portfolio
included an unrealized net gain in fair value of $27.0 million at March 31,
1998 compared to an unrealized net gain of $20.0 million at December 31, 1997.
U.S. government and federal agency securities comprised 59% and CMO's and
asset-backed securities comprised 36% of the banking subsidiaries' available
for sale portfolio at March 31, 1998.
The Company had an equity to asset ratio of 9.84% based on 1998 average
balances. As shown in the following table, the Company's capital exceeded the
minimum risk-based capital and leverage requirements of the regulatory
agencies.
MARCH 31 DECEMBER 31
1998 1997
---------- -----------
(DOLLARS IN THOUSANDS)
Risk-Adjusted Assets............................. $7,309,604 $7,178,225
Tier I Capital................................... 900,650 868,535
Total Capital.................................... 981,140 949,291
Tier I Capital Ratio............................. 12.32% 12.10%
Total Capital Ratio.............................. 13.42% 13.22%
Leverage Ratio................................... 9.00% 8.81%
The Company's cash and cash equivalents (defined as "Cash and due from
banks") were $740.4 million at March 31, 1998, a decrease of $237.8 million
from December 31, 1997. Contributing to the net cash outflow were an increase
of $151.1 million in loans, net of repayments, and a net decrease in demand
deposits of $111.3 million. Total assets and core deposits were relatively
unchanged from the 1997 year-end levels.
The Company has various commitments and contingent liabilities which are
properly not reflected on the balance sheet. Loan commitments (excluding lines
of credit related to credit card loan agreements) totaled approximately $2.66
billion, standby letters of credit totaled $173.0 million, and commercial
letters of credit totaled $30.0 million at March 31, 1998. The Company has
little risk exposure in off-balance-sheet derivative contracts. The notional
value of these contracts (interest rate and foreign exchange rate contracts)
was $311.3 million at March 31, 1998. The current credit exposure (or
replacement cost) across all off-balance-sheet derivative contracts covered by
the risk-based capital standards was $5.7 million at March 31, 1998.
Management does not anticipate any material losses to arise from these
contingent items and believes there are no material commitments to extend
credit that represent risks of an unusual nature.
IMPACT OF ACCOUNTING STANDARDS
In January 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 127, "Deferral of the Effective Date of Certain
Provisions of FAS Statement 125". SFAS No. 125 provided consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The adoption of SFAS No. 127 did not have a
material effect on the Company's financial statements.
13
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
FIRST QUARTER 1998 FIRST QUARTER 1997
--------------------------------------- --------------------------------------
AVERAGE INTEREST AVG. RATES AVERAGE INTEREST AVG. RATES
BALANCE INCOME/EXPENSE EARNED/PAID BALANCE INCOME/EXPENSE EARNED/PAID
----------- -------------- ----------- ---------- -------------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS:
Loans:
Business (A)........... $ 2,088,136 $ 40,636 7.89% $1,698,281 $32,839 7.84%
Construction and
development........... 234,308 4,907 8.49 192,228 4,048 8.54
Real estate--business.. 935,984 19,585 8.49 763,652 16,084 8.54
Real estate--personal.. 1,183,885 22,894 7.84 1,008,643 19,641 7.90
Personal banking....... 1,340,421 28,371 8.58 1,265,423 26,973 8.64
Credit card............ 525,270 18,210 14.06 545,713 17,979 13.36
----------- -------- ----- ---------- ------- -----
Total loans.......... 6,308,004 134,603 8.65 5,473,940 117,564 8.71
----------- -------- ----- ---------- ------- -----
Investment securities:
U.S. government &
federal agency........ 1,434,616 22,328 6.31 1,685,465 25,996 6.26
State & municipal
obligations (A)....... 92,305 1,858 8.16 97,579 1,883 7.83
CMO's and asset-backed
securities............ 853,530 13,448 6.39 715,539 11,181 6.34
Trading account
securities............ 8,642 128 6.00 6,381 68 4.34
Other marketable
securities (A)........ 113,754 1,567 5.59 116,036 1,748 6.11
Other non-marketable
securities............ 31,270 585 7.59 43,417 602 5.62
----------- -------- ----- ---------- ------- -----
Total investment
securities.......... 2,534,117 39,914 6.39 2,664,417 41,478 6.31
----------- -------- ----- ---------- ------- -----
Federal funds sold and
securities purchased
under agreements to
resell................ 293,383 4,045 5.59 362,234 4,777 5.35
----------- -------- ----- ---------- ------- -----
Total interest
earning assets...... 9,135,504 178,562 7.93 8,500,591 163,819 7.82
-------- ----- ------- -----
Less allowance for loan
losses................. (105,754) (98,023)
Unrealized gain on
investment securities.. 56,928 23,817
Cash and due from banks. 637,022 595,210
Land, buildings and
equipment, net......... 215,562 210,205
Other assets............ 208,626 182,122
----------- ----------
Total assets......... $10,147,888 $9,413,922
=========== ==========
LIABILITIES AND EQUITY:
Interest bearing
deposits:
Savings................ $ 306,819 1,835 2.43 $ 285,652 1,692 2.40
Interest bearing
demand................ 3,955,920 32,988 3.38 3,747,836 30,976 3.35
Time open & C.D.'s of
less than $100,000.... 2,161,456 28,979 5.44 2,126,407 28,211 5.38
Time open & C.D.'s of
$100,000 and over..... 229,098 3,106 5.50 204,613 2,632 5.22
----------- -------- ----- ---------- ------- -----
Total interest
bearing deposits.... 6,653,293 66,908 4.08 6,364,508 63,511 4.05
----------- -------- ----- ---------- ------- -----
Borrowings:
Federal funds
purchased and
securities sold under
agreements to
repurchase............ 514,430 6,464 5.10 447,905 5,279 4.78
Long-term debt and
other borrowings...... 7,087 132 7.53 13,807 250 7.35
----------- -------- ----- ---------- ------- -----
Total borrowings..... 521,517 6,596 5.13 461,712 5,529 4.86
----------- -------- ----- ---------- ------- -----
Total interest
bearing liabilities. 7,174,810 73,504 4.15% 6,826,220 69,040 4.10%
-------- ----- ------- -----
Non-interest bearing
demand deposits........ 1,859,514 1,599,971
Other liabilities....... 115,130 66,722
Stockholders' equity.... 998,434 921,009
----------- ----------
Total liabilities and
equity.............. $10,147,888 $9,413,922
=========== ==========
Net interest margin
(T/E).................. $105,058 $94,779
======== =======
Net yield on interest
earning assets......... 4.66% 4.52%
===== =====
- --------
(A) Stated on a tax equivalent basis using a federal income tax rate of 35%.
14