Exhibit 13
THANKS TO INTEGRAL INVOLVEMENT IN OUR COMMUNITIES, COMMERCE BANCSHARES,
INC. has established and maintains a long-standing position of leadership.
This market-driven approach has provided us with the distinct competitive
ability to create value and generate growth.
Throughout this report, you will read of the innovative ways we
continually build and strengthen our communities. We develop specific
banking services that solve financial challenges for our customers.
We make mortgage loans to customers who might otherwise not be able to
enjoy the benefits of home ownership. Our employees are highly-involved
in community events and programs.
Our foundations award grants directly to worthy organizations. Intrinsic
to all of these activities is our approach to building our communities,
and our company, incorporated in our mission statement: Be accessible.
Offer solutions. Build relationships.
Commerce Bancshares, Inc. is the holding company for Commerce Bank, which
operates in 300 locations throughout Missouri, Kansas and Illinois. The
company offers a full line of banking services, including investment
management and securities brokerage. Operating subsidiaries are involved
in mortgage banking, credit-related insurance, venture capital, and real
estate activities.
CONTENTS ANNUAL MEETING
Chairman's Letter Page 2 The annual meeting of Shareholders will
be held Wednesday, April 21, 1999 at
Management Report Page 8 9:30 a.m. in the 18th Floor Board Room,
Commerce Bank Building, 1000 Walnut,
Management's Discussion Kansas City, Missouri.
and Analysis of Consolidated TRANSFER AGENT, REGISTRAR
Financial Condition and AND DIVIDEND DISBURSING AGENT
Results of Operations Page 27 First Chicago Trust Company of New York,
a division of EquiServe, P.O. Box 2500,
Financial Statements of Jersey City, New Jersey 07303-2500,
Commerce Bancshares, Inc. 800-317-4445.
and Subsidiaries Page 46
NOTICE
Notes to Financial Shareholders, analysts or potential
Statements Page 50 investors desiring additional
information may make their requests in
Independent Auditors' writing to Mr. Jeffery D. Aberdeen,
Report Page 64 Controller, at the address of the
Company.
Directors and Officers Page 67
DIVIDEND REINVESTMENT PROGRAM
Commerce Brokerage Services, Inc.* offers Equity Divident 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 1
(This page not included in the EDGARized exhibit.)
CHAIRMAN'S LETTER 2 - 7
(This section not included in the EDGARized exhibit.)
MANAGEMENT REPORT 8 - 24
(This section not included in the EDGARized exhibit.)
25
COMMERCE BANCSHARES, INC. 1998 FINANCIAL REVIEW
-----------------------------------------------
Common Stock Data
26
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
27
Consolidated Financial Statements:
Balance Sheets
46
Statements of Income
47
Statements of Cash Flows
48
Statements of Stockholders' Equity
49
Notes to Financial Statements
50
Independent Auditors' Report
64
Statement of Management's Responsibility
65
Summary of Quarterly Statements of Income
66
26
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 three for two stock split and 5% stock dividend
distributed in 1998).
Cash
1998 High Low Dividends
- ---------------------------------------------------------------------------
First Quarter $46.83 $39.36 $.138
Second Quarter 48.21 42.86 .138
Third Quarter 49.17 36.67 .138
Fourth Quarter 46.55 32.38 .138
1997
- ---------------------------------------------------------------------------
First Quarter $30.54 $26.83 $.124
Second Quarter 29.18 25.40 .124
Third Quarter 36.21 27.21 .124
Fourth Quarter 44.60 34.09 .124
1996
- ---------------------------------------------------------------------------
First Quarter $22.10 $20.01 $.109
Second Quarter 21.24 19.65 .109
Third Quarter 23.32 19.15 .109
Fourth Quarter 29.93 22.24 .109
Commerce Bancshares, Inc. common shares are publicly traded in the over-the-
counter market on the NASDAQ National Market System. The Company had 5,904
shareholders of record as of December 31, 1998.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes. The historical trends
reflected in the financial information presented below are not necessarily
reflective of anticipated future results.
KEY RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(Based on average balance sheets):
Return on total assets 1.43% 1.37% 1.28% 1.21% 1.21%
Return on stockholders' equity 14.58 14.08 13.40 12.72 13.05
Efficiency ratio 58.30 58.24 58.76 60.33 63.84
Loans to deposits 75.24 70.93 67.07 68.28 61.07
Net yield on interest earning assets (tax equivalent basis) 4.56 4.61 4.40 4.50 4.46
Non-interest bearing deposits to total deposits 18.50 21.35 19.65 19.81 19.60
Equity to total assets 9.83 9.74 9.53 9.48 9.30
Cash dividend payout ratio 22.81 23.24 23.28 24.07 22.07
====================================================================================================================================
SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 427,745 $ 397,774 $ 365,743 $ 355,745 $ 314,617
Provision for loan losses 36,874 31,354 24,522 14,629 5,845
Non-interest income 214,037 180,092 159,162 133,150 121,028
Non-interest expense 379,344 344,450 317,954 305,484 282,078
Net income 150,091 132,702 119,512 107,640 96,111
Net income per share-basic* 2.46 2.16 1.90 1.65 1.57
Net income per share-diluted* 2.42 2.13 1.89 1.64 1.56
Total assets 11,402,023 10,306,941 9,698,186 9,573,951 8,035,574
Loans 7,046,852 6,224,381 5,472,342 5,317,813 4,432,662
Investment securities 3,031,716 2,664,931 2,721,515 2,594,753 2,645,420
Deposits 9,530,197 8,700,578 8,166,429 8,193,092 6,990,430
Long-term debt 27,130 7,102 14,120 14,562 6,487
Stockholders' equity 1,080,785 980,784 924,271 883,783 728,198
Cash dividends per common share* .552 .496 .438 .395 .345
====================================================================================================================================
*Restated for the three for two stock split and 5% stock dividend distributed in
1998.
RESULTS OF OPERATIONS
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$ Change % Change
(Dollars in thousands) `98-`97 `97-`96 `98-`97 `97-`96
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $29,971 $32,031 7.5% 8.8%
Provision for loan losses 5,520 6,832 17.6 27.9
Non-interest income 33,945 20,930 18.8 13.2
Non-interest expense 34,894 26,496 10.1 8.3
Income taxes 6,113 6,443 8.8 10.2
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $17,389 $13,190 13.1% 11.0%
====================================================================================================================================
Consolidated net income for 1998 was $150.1 million, a 13.1% increase over 1997
income. Diluted earnings per share increased 13.6% to $2.42 in 1998 compared to
$2.13 in 1997. The return on assets was 1.43% in 1998, compared to 1.37% in
1997, while the return on equity increased to 14.58%. The increase in net income
of $17.4 million was mainly due to growth in net interest income of $30.0
million coupled with strong growth in non-interest income of $33.9 million, but
offset by higher non-interest expense which was up 10.1% over the previous year.
Also, the provision for loan losses increased over the previous year by $5.5
million. The growth in the net interest margin mainly resulted from loan growth
which improved the mix of higher earning assets. Additionally, growth in
non-interest bearing deposits helped to fund a higher level of earning assets.
Non-interest income grew mainly in the areas of trust, deposit account and
credit card fees, while non-interest expense increased mainly in the areas of
salaries and benefits and data processing costs.
Net income for 1997 was $132.7 million compared to $119.5 million in 1996, with
a 12.7% increase in diluted earnings per share. The $13.2 million increase in
net income over 1996 was mainly due to strong loan growth, which boosted net
interest income, coupled with 13.2% growth in non-interest income. Offsetting
these increases were 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.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [CONT.]
During 1998, the Company acquired four banks, all located in Kansas. City
National Bank of Pittsburg was acquired on March 1, 1998, and three additional
banks, Columbus State Bank, Fidelity State Bank in Garden City and Heritage Bank
of Olathe, were acquired on November 1, 1998. The combined acquisitions brought
assets of approximately $430 million at 15 new locations, and required the
issuance of stock valued at $84.0 million. These acquisitions were recorded
under the pooling of interests method of accounting. 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.
In 1997, two banks located in Kansas, with assets of $295 million, were acquired
at a cost of $53.2 million in treasury stock and $4.3 million in cash. The
effects of their acquisition were not material to the financial statements of
the Company.
The Board of Directors declared a three for two stock split in the form of a 50%
stock dividend, which was distributed on March 30, 1998. All share and per share
data in this report has been restated to reflect the stock split. The Company
distributed a 5% stock dividend for the fifth consecutive year on December 18,
1998. All per share and average share data in this report has been restated to
reflect the 1998 5% 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.
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 63,290 $(14,607) $ 48,683 $ 41,682 $ 2,674 $ 44,356
Investment securities:
U.S. government & federal agency securities (11,309) (1,237) (12,546) (10,067) 1,511 (8,556)
State & municipal securities (52) 186 134 (1,237) (48) (1,285)
Other securities 7,298 (16) 7,282 13,174 (1,506) 11,668
Federal funds sold and securities purchased
under agreements to resell 2,558 (424) 2,134 (11,962) 275 (11,687)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 61,785 (16,098) 45,687 31,590 2,906 34,496
====================================================================================================================================
INTEREST EXPENSE
- ----------------
Savings 409 (350) 59 48 97 145
Interest bearing demand 18,434 (10,380) 8,054 7,351 (1,999) 5,352
Time open & C.D.'s of less than $100,000 2,129 (346) 1,783 (1,332) (1,236) (2,568)
Time open & C.D.'s of $100,000 and over 2,385 48 2,433 (594) 268 (326)
Federal funds purchased and securities
sold under agreements to repurchase 4,032 (407) 3,625 6 769 775
Long-term debt and other borrowings 102 (459) (357) (224) 21 (203)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 27,491 (11,894) 15,597 5,255 (2,080) 3,175
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME, FULLY TAXABLE EQUIVALENT BASIS $ 34,294 $ (4,204) $ 30,090 $ 26,335 $ 4,986 $ 31,321
====================================================================================================================================
Net interest income was $427.7 million in 1998, $397.8 million in 1997 and
$365.7 million in 1996. Compared to the prior year, net interest income
increased $30.0 million, or 7.5%, in 1998 and increased $32.0 million, or 8.8%,
in 1997. The increase in 1998 resulted from average loan growth of 13.4%, which
improved the mix of higher earning assets. However, this was partially offset by
a 15.9% increase in average interest bearing demand deposits. While interest
earning assets experienced an overall rate decline of 15 basis points, rates
paid on interest bearing liabilities declined 22 basis points, which coupled
with the loan growth helped provide a relatively stable net yield on earning
assets. The net interest income increase in 1997 was the result of 9.3% growth
in average loans, slightly higher earning asset rates, and relatively stable
deposit costs. The net yield on earning assets was 4.56% in 1998, 4.61% in 1997
and 4.40% in 1996. Average interest earning assets increased 8.7% in 1998 over
1997, compared to 3.5% in 1997 over 1996. Average interest bearing liabilities
increased 11.3% in 1998 compared to 1.0% in 1997.
29
Tax equivalent interest income was $732.7 million in 1998, $687.0 million in
1997 and $652.5 million in 1996; and represents an increase of $45.7 million, or
6.7%, in 1998 and an increase of $34.5 million, or 5.3%, in 1997. Growth of
$781.6 million, or 13.4%, in average loan balances, plus a slight increase in
average overnight investments, provided most of the growth in interest income
compared to 1997. This growth was offset somewhat by a decrease of 29 basis
points in average loan rates earned, reflecting several downward adjustments to
the prime and federal funds rates occurring late in the year. Also, investment
securities (mainly in U.S. government and federal agency securities) decreased
$67.8 million as some maturing investment securities were used to fund loan
growth. Loans represented 70% of average interest earning assets in 1998,
investment securities represented 27% and short-term federal funds sold and
securities purchased under agreement to resell represented 3%. The increase in
1997 over 1996 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 overnight
investments. Average loan yields improved slightly compared to 1996.
Total interest expense was $300.7 million in 1998, $285.1 million in 1997 and
$281.9 million in 1996. Interest expense increased $15.6 million, or 5.5%, in
1998 over 1997. Interest on deposits increased $12.3 million due to growth of
$601.7 million in average interest bearing demand deposits (mainly Premium Money
Market accounts), which was partially offset by a decrease in rates paid on
these deposits of 28 basis points. Premium and other money market deposits
represented 57% of total average interest bearing deposits in 1998. 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 $73.4 million in 1997, mainly from growth in the Company's
Premium Money Market deposit accounts and long-term certificates of deposit.
This growth was partially offset by declines in interest checking, investment
savings and short-term certificates of deposit. Deposit rates remained stable
during the year in most categories but reflected lower rates paid on interest
checking accounts.
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 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, 1998, was 1.66% of loans
outstanding compared to 1.70% at year end 1997. 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
261%. Net charge-offs totaled $31.5 million in 1998 compared to $27.9 million in
1997. The ratio of net charge-offs to average loans outstanding in 1998 and 1997
was .48% compared to .47% in 1996. The provision for loan losses was $36.9
million, exceeding 1998 net charge-offs by $5.4 million, compared to a provision
of $31.4 million in 1997 and $24.5 million in 1996.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [CONT.]
A subsidiary bank is an issuer of Visa and MasterCard credit cards. Credit card
loans outstanding at year end 1998 amounted to $532.9 million, or 7.6% 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 $16.6 million or 3.11% of credit
card loans outstanding at December 31, 1998. Net charge-offs amounted to 3.87%
of average credit card loans in 1998 compared to 3.81% in 1997. During 1998, the
banking industry continued to experience significant credit losses on these
loans primarily due to high levels of consumer installment and revolving debt,
above normal delinquencies, and decade-high levels of personal bankruptcies. Net
charge-offs at major banks have recently ranged from 4% to over 7% of credit
card loans. The Company has also experienced losses on credit card loans that
are above historical levels 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 1998 represented a 3.72 times multiple of
net loan losses for the year just ended.
Based on current economic conditions, management considers the December 31, 1998
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.
31
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) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans outstanding at end of period (A) $7,046,852 $6,224,381 $5,472,342 $5,317,813 $4,432,662
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans outstanding (A) $6,596,831 $5,815,192 $5,321,584 $5,161,552 $4,180,065
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at beginning of period $ 105,918 $ 98,223 $ 98,537 $ 87,179 $ 85,830
- ------------------------------------------------------------------------------------------------------------------------------------
Additions to allowance through
charges to expense 36,874 31,354 24,522 14,629 5,845
- ------------------------------------------------------------------------------------------------------------------------------------
Allowances of acquired banks 5,808 4,275 - 12,932 2,953
- ------------------------------------------------------------------------------------------------------------------------------------
Recovery of loans previously charged off:
Business 2,578 2,992 1,739 1,632 2,540
Construction 402 340 - - 3
Business real estate 651 500 416 542 663
Personal real estate 83 70 123 99 226
Personal banking 3,533 3,420 2,628 2,633 2,259
Credit card 3,611 2,927 2,172 2,163 2,015
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 10,858 10,249 7,078 7,069 7,706
- ------------------------------------------------------------------------------------------------------------------------------------
Loans charged off:
Business 7,827 5,734 4,912 3,422 2,511
Construction 211 300 - - -
Business real estate 212 113 205 391 1,243
Personal real estate 279 401 341 208 196
Personal banking 10,372 8,472 9,327 7,413 3,442
Credit card 23,465 23,163 17,129 11,838 7,763
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans charged off 42,366 38,183 31,914 23,272 15,155
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 31,508 27,934 24,836 16,203 7,449
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 117,092 $ 105,918 $ 98,223 $ 98,537 $ 87,179
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding .48% .48% .47% .31% .18%
Ratio of allowance to loans at end of period 1.66% 1.70% 1.79% 1.85% 1.97%
Ratio of provision to average loans outstanding .56% .54% .46% .28% .14%
- ------------------------------------------------------------------------------------------------------------------------------------
(A) Net of unearned income; before deducting allowance for loan losses
NON-INTEREST INCOME
- -------------------
% Change
(DOLLARS IN THOUSANDS) 1998 1997 1996 `98-'97 `97-'96
- ------------------------------------------------------------------------------------------------------------------------------------
Trust fees $ 50,460 $ 41,224 $ 35,536 22.4% 16.0%
Deposit account charges and other fees 63,145 57,223 54,506 10.3 5.0
Credit card transaction fees 36,786 30,703 26,586 19.8 15.5
Trading account profits and commissions 8,733 7,420 5,982 17.7 24.0
Net gains on securities transactions 6,894 3,253 3,293 111.9 (1.2)
Other 48,019 40,269 33,259 19.2 21.1
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $ 214,037 $180,092 $159,162 18.8% 13.2%
- ------------------------------------------------------------------------------------------------------------------------------------
As a % of operating income (net interest income
plus non-interest income) 33.4% 31.2% 30.3%
Operating income per full-time equivalent employee $ 123.3 $ 115.9 $ 108.1
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest income totaled $214.0 million in 1998, and represented an increase
of $33.9 million, or 18.8%, over the previous year. The increase in non-interest
income was the result of strong growth in trust, deposit account and credit card
fees, all of which achieved double digit growth. The growth in trust fees was
the result of increases in fees from both the personal trust and employee
benefit areas. Deposit account fees increased mainly as a result of new account
growth coupled with improved procedures over fee collection. The growth in
credit card fees was a result of increased transaction volumes in both the
cardholder and merchant areas, in addition to growth in the Company's debit card
product. Other income included increases in fees for non-customer ATM usage,
official check float income and customer check income, which increased over $4
million in 1998 compared to 1997. This category also included gains on sales of
student loans, which amounted to $4.6 million in 1998 compared to $3.0 million
in 1997.
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations [CONT.]
32
Non-interest income increased $20.9 million, or 13.2% in 1997 compared to 1996.
Growth in credit card fees was $4.1 million, resulting 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 were gains on sales of student loans and leveraged leases,
which increased $3.1 million in 1997 over 1996. Also included in other income
were various types of fees, including other money management, non-customer ATM
and international transaction fees. These fees increased $5.0 million in 1997
compared to 1996.
The Parent and a venture capital subsidiary contributed net gains on equity
securities transactions of $5.3 million in 1998, $3.5 million in 1997 and $1.1
million in 1996. Banking subsidiaries contributed net gains of $1.6 million and
$2.2 million in 1998 and 1996, respectively, and net losses of $222 thousand in
1997, on portfolio investment securities.
Non-Interest Expense
- --------------------
% Change
(Dollars in thousands) 1998 1997 1996 `98-'97 `97-'96
- ---------------------------------------------------------------------------
Salaries $172,835 $156,497 $141,328 10.4% 10.7%
Employee benefits 25,255 22,598 23,963 11.8 (5.7)
Net occupancy 23,805 21,570 21,456 10.4 .5
Equipment 18,148 16,492 15,185 10.0 8.6
Supplies and communication 29,867 25,838 24,697 15.6 4.6
Data processing 30,654 24,628 20,778 24.5 18.5
Marketing 12,206 12,757 11,698 (4.3) 9.1
Goodwill and core deposit
premium 9,193 9,778 11,448 (6.0) (14.6)
Other 57,381 54,292 47,401 5.7 14.5
- ---------------------------------------------------------------------------
Total non-interest expense $379,344 $344,450 $317,954 10.1% 8.3%
===========================================================================
Efficiency ratio (non
-interest expense as a
% of operating
income, excluding net
gains on securities
transactions
and goodwill/core deposit
premium amortization) 58.3% 58.2% 58.8%
Salaries and benefits as
a % of total non-interest
expense 52.2% 52.0% 52.0%
Number of full-time
equivalent employees 5,206 4,985 4,854
- ---------------------------------------------------------------------------
Non-interest expense of $379.3 million in 1998 increased $34.9 million, or
10.1%, over the previous year. The increase was mainly the result of higher
salaries and benefits coupled with higher costs for data processing, supplies
and occupancy. Salaries expense increased $16.3 million, or 10.4%, mainly due to
additional staffing and incentive pay for new product sales. Increased health
care and employment taxes contributed to the $2.7 million increase in benefits
costs. Data processing costs increased $6.0 million due to higher charges by
information service providers, which are partly based on growth in the Company's
customers, products and services. Occupancy costs grew partly due to the
outsourcing of certain property management functions which were previously
salaried, while supplies and communication costs increased mainly in the areas
of telephone and general office supplies. Other expense included higher losses
in the check collection and clearing areas.
In 1997 compared to 1996, salaries increased $15.2 million, or 10.7%, which
included increased payroll costs for incentive pay, while employee benefits
decreased $1.4 million, or 5.7%. Equipment expense included 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
included increases in professional fees and software expenses.
The costs and status of the Year 2000 project are addressed in a following
separate discussion.
Income Taxes Income tax expense was $75.5 million, $69.4 million and $62.9
- ------------
million in 1998, 1997 and 1996, respectively. The effective tax rate on income
from operations was 33.5%, 34.3% and 34.5% in 1998, 1997 and 1996, respectively.
The effective tax rates were lower than the federal statutory rate of 35% mainly
due to tax initiatives undertaken by the Company and tax exempt interest on
state and municipal obligations. These factors were partly offset by state and
local income taxes and non-deductible goodwill amortization.
33
FINANCIAL CONDITION
Loan Portfolio Analysis A breakdown of average balances invested in each
- -----------------------
category of loans appears on page 42. 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) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Business $2,464,168 $ 2,056,862 $ 1,700,678 $ 1,716,080 $ 1,393,979
Real estate-construction 325,360 233,209 182,474 168,031 127,948
Real estate-business 1,000,380 926,107 758,650 695,558 586,769
Real estate-personal 1,315,041 1,148,236 1,010,572 983,249 813,134
Personal banking 1,409,022 1,311,081 1,256,684 1,258,809 1,120,366
Credit card 532,881 548,886 563,284 496,086 390,466
- --------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $7,046,852 $ 6,224,381 $ 5,472,342 $ 5,317,813 $ 4,432,662
================================================================================================================================
The contractual maturities of loan categories at December 31, 1998, and a
breakdown of those loans between predetermined rate and floating rate loans is
as follows:
Principal Payments Due
- ---------------------------------------------------------------------------------------------------
In After One After
One Year Year Through Five
(In thousands) or Less Five Years Years Total
- ---------------------------------------------------------------------------------------------------
Business $1,747,429 $ 653,565 $ 63,174 $ 2,464,168
Real estate-construction 197,212 114,908 13,240 325,360
Real estate-business 301,532 595,628 103,220 1,000,380
Real estate-personal 125,356 248,614 941,071 1,315,041
- ---------------------------------------------------------------------------------------------------
Total $2,371,529 $ 1,612,715 $1,120,705 5,104,949
===================================================================================================
Personal banking (1) 1,409,022
Credit card (2) 532,881
- ---------------------------------------------------------------------------------------------------
Total loans, net of unearned income $ 7,046,852
===================================================================================================
Loans with predetermined rate $1,129,598 $ 1,015,130 $ 404,145 $ 2,548,873
Loans with floating rate 1,241,931 597,585 716,560 2,556,076
- ---------------------------------------------------------------------------------------------------
Total $2,371,529 $ 1,612,715 $1,120,705 $ 5,104,949
===================================================================================================
(1) Personal banking loans with floating rate totaled $476,977,000.
(2) Credit card loans with floating rate totaled $465,035,000.
Total loans grew $822.5 million, or 13.2%, during 1998 compared to growth of
$752.0 million, or 13.7%, during 1997. The growth in 1998 came principally from
business, personal real estate and construction loans, which grew 19.8%, 14.5%
and 39.5%, respectively. This growth in 1998 included the effect of bank
acquisitions during the year in which the Company acquired loans of
approximately $238 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 continue to provide the Company an opportunity to
establish new customer relationships.
The Company currently generates approximately 25% of its loan portfolio in the
St. Louis regional market and 22% in the Kansas City regional market. The
portfolio is diversified from a business and retail standpoint, with 53.8% in
loans to business and 46.2% 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
1998 1997
- --------------------------------------------------------------
Business 35.0% 33.0%
Real estate-construction 4.6 3.7
Real estate-business 14.2 14.9
Real estate-personal 18.6 18.5
Personal banking 20.0 21.1
Credit card 7.6 8.8
- --------------------------------------------------------------
Total loans 100.0% 100.0%
==============================================================
Business Loans Total business loans amounted to $2.46 billion at December 31,
- --------------
1998, compared to $2.06 billion at December 31, 1997, an increase of $407.3
million, or 19.8%. Approximately $109 million of the growth resulted from the
acquisition of several banks during 1998, while the remaining growth came
predominately from growth in the Kansas City and St. Louis markets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [CONT.]
34
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 $5.2 million in 1998 compared to $2.7 million in
1997. Non-accrual business loans decreased to $6.6 million (.3% of business
loans) at December 31, 1998, compared to $15.1 million (.7% of business loans)
at December 31, 1997. 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 1999 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
- ------------------------
$325.4 million at December 31, 1998, compared to $233.2 million at year end
1997, reflecting growth of $92.2 million, or 39.5%. Non-accrual loans in this
category were $7.2 million at year end 1998 compared to $1.9 million at year end
1997. The 1998 non-accrual balance includes one $4.5 million loan. The portfolio
consists of residential construction, commercial construction and land
development loans, predominantly in the local markets of the Company's banking
subsidiaries. Commercial construction loans are for small and medium-sized
office and medical buildings, manufacturing and warehouse facilities, strip
shopping centers, and other commercial properties. Exposure to larger
speculative office and rental space remains low. Residential construction and
land development loans are primarily located in the Kansas City and St. Louis
metropolitan areas. The Company experienced $191 thousand net recoveries in 1998
and $40 thousand net recoveries in 1997. Management is not aware of any
significant adverse exposure in this category.
REAL ESTATE-BUSINESS Total business real estate loans were $1.00 billion at
- --------------------
December 31, 1998, reflecting growth of $74.3 million, or 8.0%. Again, bank
acquisitions contributed $58 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, 1998 to $2.8
million, or .3% of the loans in this category, compared to $4.3 million at year
end 1997. The Company experienced net recoveries of $439 thousand in 1998 and
$387 thousand in 1997. 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 1999,
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, 1998,
there were $1.32 billion in loans outstanding compared to $1.15 billion at
December 31, 1997, reflecting growth of $166.8 million, or 14.5%. This growth is
partly attributable to loans of $47 million acquired in bank mergers in 1998.
The Company has not experienced significant problem credits in this category
recently as there were net charge-offs of $196 thousand in 1998 compared to $331
thousand in 1997. The non-accrual balances of loans in this category were $947
thousand, or .1% of the category, at December 31, 1998, compared to $1.9 million
at year end 1997. The five year history of net charge-offs on the real
estate-personal loan category reflects nominal losses, and credit quality is
considered to be strong.
PERSONAL BANKING Total personal banking loans were $1.41 billion at December 31,
- ----------------
1998, and reflected growth of $97.9 million, or 7.5% over the previous year.
Approximately $24 million of this loan growth was due to bank acquisitions. Net
charge-offs were $6.8 million in 1998 compared to $5.1 million in 1997. 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 $181.2
million of home equity loan balances at December 31, 1998, with an additional
$313.6 million in unused lines of credit that can be drawn
35
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 34% of the loans in the personal banking category are extended on
a floating interest rate basis.
CREDIT CARD Total credit card loans amounted to $532.9 million at December 31,
- -----------
1998, compared to $548.9 million at December 31, 1997, representing a $16.0
million decline. The credit card portfolio is concentrated within regional
markets served by the Company. Approximately 58% of the households in Missouri
that own a Commerce 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 87% of the
outstanding credit card loans have a floating interest rate. Net charge-offs
amounted to $19.9 million in 1998, which was a $382 thousand decrease from 1997.
Such losses were attributable to continuing high delinquencies and bankruptcies
and were noted as part of national trends throughout the industry. The net
charge-off ratios of 3.9% in 1998 and 3.8% in 1997 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 1999, it is
anticipated that new products will continue to be introduced or extended to
affiliate bank markets, including newly acquired banking subsidiaries, 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 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) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Non-accrual $17,831 $23,382 $13,945 $16,234 $11,385
Past due 90 days and still accruing interest 24,529 24,383 24,806 15,690 13,090
- ---------------------------------------------------------------------------------------------------------------------
Total impaired loans 42,360 47,765 38,751 31,924 24,475
Real estate acquired in foreclosure 2,521 994 1,136 1,955 7,290
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $44,881 $48,759 $39,887 $33,879 $31,765
- ---------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of total loans .64% .78% .73% .64% .72%
- ---------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of total assets .39% .47% .41% .35% .40%
- ---------------------------------------------------------------------------------------------------------------------
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [CONT.]
The effect of non-accruing loans on interest income for 1998 is presented below:
(In thousands)
- ------------------------------------------------------------------------------
Gross amount of interest that would have been recorded
at original rate $2,519
Interest that was reflected in income 583
- ------------------------------------------------------------------------------
Interest income not recognized $1,936
==============================================================================
Non-accrual loans decreased $5.6 million from 1997. Non-accrual business loans
decreased $8.5 million, and non-accrual construction and land development loans
increased $5.2 million. Loans past due 90 days and still accruing interest
increased $146 thousand at December 31, 1998 compared to December 31, 1997. Real
estate which was acquired in foreclosure increased $1.5 million over year end
1997. Much of the increase was related to loans in recent bank acquisitions.
At December 31, 1998, the Company's mortgage banking subsidiary held residential
real estate loans of approximately $22.0 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 $6.7 million in 7 companies or
partnerships at December 31, 1998. The venture capital subsidiary was recently
designated a Missouri Certified Capital Company, which will expand its
investment parameters to include Missouri businesses with less than $4 million
in revenues. The Company organized a $30 million limited partnership venture
fund in 1993 with 49% outside participation, which is managed by a subsidiary.
At December 31, 1998, the Company's investment in this partnership was
approximately $10.7 million. 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, 1998 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 ANALYSIS During 1998, total investment securities
- ------------------------------
increased $328.1 million to $2.95 billion (excluding unrealized gains/losses)
compared to $2.62 billion at the previous year end. Bank acquisitions
contributed $135.8 million of the increase. Most of the remaining increase was
in purchases of commercial paper. The average tax equivalent yield was 6.25% in
1998 and 6.29% in 1997.
At December 31, 1998, available for sale securities totaled $2.99 billion, which
included a net unrealized gain in fair value of $85.8 million. The amount of the
related after tax unrealized gain reported in stockholders' equity was $53.1
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.
Investment securities at year end for the past two years are shown as follows:
December 31
- -----------------------------------------------------------------------------
(In thousands) 1998 1997
- -----------------------------------------------------------------------------
AMORTIZED COST
U.S. government and
federal agency obligations $1,408,279 $1,448,402
State and municipal obligations 98,426 91,906
CMO's and asset-backed securities 962,267 832,211
Other debt securities 419,259 174,031
Equity securities 43,499 64,857
Trading securities 14,210 6,477
- -----------------------------------------------------------------------------
TOTAL $2,945,940 $2,617,884
=============================================================================
FAIR VALUE
U.S. government and
federal agency obligations $1,448,547 $1,461,593
State and municipal obligations 101,785 94,115
CMO's and asset-backed securities 974,377 837,056
Other debt securities 419,413 173,972
Equity securities 73,384 91,718
Trading securities 14,210 6,477
- -----------------------------------------------------------------------------
TOTAL $3,031,716 $2,664,931
=============================================================================
A summary of maturities by category of investment securities and the weighted
average yield for each range of maturities as of December 31, 1998, is presented
in the Investment Securities note to the financial statements. U.S. government
and federal agency securities comprise 48% of the investment portfolio at
December 31, 1998, with a weighted average yield of 5.99% and an estimated
average maturity of 2.3 years; CMO's and asset-backed securities comprise 32%
with a weighted average yield of 6.29% and an estimated average maturity of 3.1
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 1998 computed on
average balances invested was approximately 5.85%.
DEPOSITS AND BORROWINGS Deposits are the primary funding source for the
- -----------------------
Company's banks, and are acquired
37
from a broad base of local markets, including both individual and corporate
customers. Total deposits were $9.53 billion at year end 1998 and $8.70 billion
at year end 1997, reflecting growth of $829.6 million, or 9.5%. Bank
acquisitions during 1998 added $363.8 million of this total growth. At year end
1998, 17% of total deposits were in non-interest bearing demand, 56% in savings
and interest bearing demand and 24% in time open and C.D.'s under $100,000. At
year end 1997, total deposits were comprised of 24% in non-interest bearing
demand, 48% in savings and interest bearing demand and 25% in time open and
C.D.'s under $100,000. The 7% decline in non-interest bearing demand deposits as
a percentage of total deposits was mainly due to internal changes made in
deposit classifications for operational purposes. Core deposits (defined as all
non-interest and interest bearing deposits, excluding short-term C.D.'s of
$100,000 and over) supported 92% of average earning assets in 1998 and 93% in
1997. Average balances by major deposit category for the last six years appear
on pages 42 and 43. The maturity schedule of time deposits of $100,000 and over
outstanding at December 31, 1998 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 1998 were
$617.8 million, a $105.3 million increase from $512.6 million outstanding at
year end 1997. The Company's long-term debt amounted to $27.1 million at year
end 1998, of which $10.7 million was borrowed from the Federal Home Loan Bank
and $12.4 million was borrowed from insurance companies to fund the Missouri
Certified Capital Company.
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 $92.4 million at cost and $119.0
million at fair value at December 31, 1998 compared to $60.4 million at cost and
$81.1 million at fair value at December 31, 1997. Total liabilities of the
Parent at December 31, 1998 increased to $14.2 million compared to $10.6 million
at December 31, 1997. The Parent had no third-party short-term borrowings or
long-term debt during 1998. Primary sources of funds for the Parent are
dividends and management fees from its subsidiary banks, which were $142.3
million and $20.7 million, respectively, in 1998. 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 $2.85 billion at December 31, 1998, including an unrealized
net gain of $55.2 million. Investment securities maturing in 1999 and 2000 total
approximately $730 million and $386 million, respectively.
The Company (on a consolidated basis) continues to maintain a sound equity to
assets ratio of 9.83%, based on 1998 average balances. At December 31, 1998, the
Company and each of its banking subsidiaries exceeded the minimum risk based
capital requirements. Consolidated Tier I and Total capital ratios were 11.30%
and 12.59%, respectively, and the leverage ratio was 8.80%. The minimum ratios
for well-capitalized banks are 6.00% for Tier I capital, 10.00% for Total
capital and 5.00% for the leverage ratio.
The cash flows from the operating, investing and financing activities of the
Company resulted in a net decrease in cash and due from banks of $239.6 million
in 1998. The net cash required by investing activities was $921.4 million, and
resulted in significant net increases in loans and investment securities. The
liquidity needs arising from these activities were partly satisfied by a $465.6
million increase in the customer deposit base. In addition, the cash generated
by operating activities, which amounted to $216.9 million in 1998, provides a
high degree of liquidity. 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
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [CONT.]
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) 1998 1997 1996
- ----------------------------------------------------------------------
USE OF CASH
Cash used in acquisitions $ .9 $ 4.3 $ -
Purchases of treasury stock 85.1 94.1 78.4
Exercise of stock options, sales to
affiliate non-employee directors
and restricted stock awards, net (3.7) (2.6) (4.0)
Cash dividends 33.7 30.4 27.5
USE OF STOCK
Acquisition-related issuance of
treasury stock 66.9 53.2 -
Acquisition-related issuance of new stock 17.1 - -
- ----------------------------------------------------------------------
In February 1998, the Board of Directors authorized the Company to purchase
additional shares of common stock, bringing the total purchase authorization to
3,000,000 shares. The Company has routinely used these reacquired shares to fund
stock dividends and employee benefit programs. At December 31, 1998, the Company
had acquired approximately 1,565,000 shares under the 1998 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 $2.88 billion (excluding
approximately $2.16 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 $238.7 million at December 31, 1998. 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 Asset/Liability Management Committee measures and manages the Company's
interest rate risk sensitivity on a monthly basis to maintain stability in
earnings throughout various rate environments. The Committee evaluates the
Company's risk position to determine whether the level of exposure is
significant enough to hedge a potential decline in earnings or whether the
Company can safely increase risk to enhance returns. Three main analytical tools
provide management insight into the Company's exposure to changing rates;
repricing or GAP reports, twelve month net interest income simulations, and
market value analyses. These measurement tools indicate that the Company is
currently well within acceptable risk guidelines as set by management and that
interest rate risk is low.
The repricing schedule which follows illustrates the repricing mismatch within
the Company's interest sensitive assets and liabilities. This schedule provides
management with a snapshot of the maturity or repricing timing of asset and
liability principal cash flows. The interest sensitivity gap portrays the timing
of net repricing risk within the Company's balance sheet. A negative sensitivity
gap would indicate that more liabilities will be repricing within that
particular time frame such that, if rates rise, liabilities will be repricing up
faster than assets. A positive gap would indicate the opposite. GAP reports can
be somewhat misleading in that they typically capture only the repricing timing
within the balance sheet, while they fail to capture other significant risks
such as basis risk and embedded options risk. Basis risk involves the potential
for the spread relationship between rates to change under different rate
environments, while embedded options risk addresses the potential for the
alteration of the level and/or timing of cash flows given changes in rates.
Quantifying these additional risks within a repricing context would make the gap
position in the first year more positive, as interest bearing demand deposits
would be spread out further to reflect lagged and partial repricing, and
appropriate loan volumes would move in to reflect unscheduled repayment of
principal due to prepayment optionality.
The Company's main interest rate measurement tool is income simulation, which
forecasts net interest income over the next twelve months under different rate
scenarios in order to quantify potential changes in short term accounting
income. Management has set policy limits specifying acceptable levels of risk
given certain rate movements; these rate movements, against which compliance is
measured, include a "most likely" rate forecast provided by an outside vendor,
as well as six "shock" scenarios, which are intended to capture interest rate
risk under extreme adverse conditions by immediately shifting rates up and down.
Simulation results indicate that the Company is well within these limits. The
annual impact of a graduated 100 bp rise or fall in rates is 1% of net interest
income. Income simulations are more informative than GAP reports because they
are able to
39
capture more of the dynamics within the balance sheet, such as basis risk and
embedded options risk.
Simulation results also illustrate that the Company's net interest income over
the next twelve months is more susceptible to declining rates than rising rates.
Even though the Company has more fixed rate assets than liabilities, a large
portion of the Company's deposits offer rates which are explicitly set by
management. The managed nature of these deposit products allows management to
limit increases in funding costs in rising rate environments, so that net
interest income increases as rates rise. In declining rate environments, net
interest income suffers to the extent that rates paid on the already very low
paying managed products do not keep up with declining asset yields.
While net interest income simulations do a good job of capturing rate related
risks to short term earnings, they do not capture risk within the current
balance sheet beyond twelve months. The Company uses market value analyses to
help identify longer term risk which may reside on the current balance sheet;
this is considered a secondary risk measurement tool by management. The market
value of equity is indicative of the present value of all future income streams
generated by the current balance sheet. The Company measures the market value of
equity as the net present value of all asset and liability cash flows discounted
at forward rates suggested by the current Treasury curve plus appropriate credit
spreads. It is the change in the market value of equity under different rate
environments which gives insight into the magnitude of risk to future earnings
due to rate changes. Management has set policy limits concerning potential
declines in the market value of equity within which it feels comfortable that
risk is relatively low. Current results show that the Company is well within
these limits. Market value analyses are also particularly important in that they
help management understand the price sensitivity characteristics of
non-marketable bank products under different rate environments.
Overall, although the Company does have some exposure to changing rates, the
interest rate risk management reports have identified the main sources of
exposure and indicate that overall interest rate risk is low. The Company's
balance sheet is well-diversified, exposure to volatile purchased funding is
low, credit quality is excellent, the use of off-balance-sheet derivative
products is insignificant, embedded options risk is low, and the Company's
strong deposit base acts as a natural hedge in periods of significant rate
volatility. Management believes that the Company is appropriately positioned to
protect and enhance earnings throughout various rate environments.
The following is an analysis of sensitivity gaps of interest earning assets and
interest bearing liabilities:
REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1998
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 $ 3,166,451 $ 268,842 $1,409,228 $1,788,784 $413,547 $ 7,046,852
Investment securities 512,446 72,491 322,864 1,874,020 249,895 3,031,716
Federal funds sold and securities
purchased under agreements to resell 261,535 - - - - 261,535
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 3,940,432 341,333 1,732,092 3,662,804 663,442 10,340,103
- ---------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Time open & C.D.'s of less than $100,000 553,914 533,616 609,552 557,392 15,361 2,269,835
Time open & C.D.'s of $100,000 & over 93,969 62,934 101,443 48,029 1,053 307,428
Savings and interest bearing demand 5,295,897 - - - - 5,295,897
Federal funds purchased and securities
sold under agreements to repurchase 617,830 - - - - 617,830
Long-term debt and other borrowings 269 197 355 3,632 22,677 27,130
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 6,561,879 596,747 711,350 609,053 39,091 8,518,120
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY GAP $(2,621,447) $ (255,414) $1,020,742 $3,053,751 $624,351 $ 1,821,983
- ---------------------------------------------------------------------------------------------------------------------------------
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [CONT.]
YEAR 2000 READINESS DISCLOSURE*
INTRODUCTION A comprehensive plan to attain Year 2000 compliance has been
- ------------
developed and the process of assessment, renovation, validation and
implementation is underway for all major financial, operational and information
systems. Year 2000 compliance generally means that computers and embedded
computer chips will distinguish between the year 1900 and the year 2000. The
plan encompasses two main areas of operation, the Information Services Project,
which includes centralized equipment and systems, and the Corporate Business
Unit Project, which includes decentralized systems such as elevators,
environmental systems, alarms, vaults, personal computers and related software
and systems. These projects have four general phases: (1) assessment, which
includes inventorying business processes and elements that must be modified,
identifying resource needs, establishing priorities and time frames, and
evaluating vendor and customer efforts; (2) renovation, which includes the
modification, replacement or elimination of items that are determined not to be
Year 2000 compliant; (3) validation, which is the testing of items by simulating
date and data conditions for the Year 2000; and (4) implementation, which
involves putting the renovated systems and equipment into operation. In
addition, the Company plans integrated implementation to ensure that validated
items operate correctly in relation with one another.
Year 2000 planning began in 1996 and has been an ongoing process. The Company
and its subsidiaries are subject to regulatory examinations by various external
regulatory agencies, including the Federal Reserve and the Office of the
Comptroller of the Currency. These regulatory agencies have adopted and
implemented regulations that require the Company to address, on a priority
basis, the Year 2000 problem. Regulatory examinations have included a review of
the Company's Year 2000 efforts. These regulatory agencies will continue to
perform frequent, periodic examinations to assess the Company's compliance with
regulatory requirements.
STATE OF READINESS Both the Information Services and the Corporate Business Unit
- ------------------
Projects have completed the assessment phase for both internal and
vendor-supplied items. The renovation, validation, and implementation phases are
currently in progress. Mission critical items (defined to be those programs and
processes that are essential to activities which present significant financial
risk or risk in reputation) have been identified in the assessment phase. At
December 31, 1998, approximately 14% of mission critical items in the two
projects were in the renovation phase, 27% of mission critical items were in the
validation phase, and 59% of mission critical items had been implemented. These
percentages refer to individual systems or hardware and are not necessarily
indicative of time or money spent. The Company has substantially completed the
renovation of internal mission critical systems, and currently expects
validation and implementation of these systems to be substantially completed by
April 30, 1999. The additional step of integrated implementation, running
related and interdependent programs in sequence, will begin as the individual
systems are implemented.
The Company interfaces with many third parties, including customers, supply
vendors, service providers, and counterparties. Some of its major systems are
provided by third parties. In 1996, the Company began its communication with
significant third parties to determine the extent to which the Company may be
affected by those third parties' failure to remediate their own Year 2000
issues. The Company will continue to monitor the progress of third party testing
and implementation procedures throughout 1999. The Company cannot at present
determine the financial effect if significant third party remediation efforts
fail.
COSTS TO ADDRESS YEAR 2000 ISSUES The total cost of the Company's Year 2000
- ---------------------------------
project is currently estimated to range between $4.5 and $5.5 million. Since
inception through December 31, 1998, the cost has totaled approximately $2.1
million. This cost does not include computer equipment and software that is
replaced within scheduled time frames in the normal course of business. A
significant portion of these costs are not likely to be incremental costs to the
Company, but rather will represent the redeployment of existing Company
resources. System renovation costs for the Company are relatively low because a
significant portion of the Company's software is vendor-supplied.
RISKS OF COMPANY'S YEAR 2000 ISSUES The Company's estimate of Year 2000 project
- -----------------------------------
costs and the dates set forth above by which certain phases of the project are
expected to be completed are based on management's best current estimates.
Actual results could differ from those anticipated. The failure to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations. Such failures could materially
and adversely affect the Company's results of
41
operations, liquidity and financial condition. The Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Company's results of operations, liquidity and
financial condition due to the general uncertainty inherent in the Year 2000
problem. The Company believes that, with the completion of the Year 2000 project
as scheduled, the possibility of significant interruptions and failures of
normal operations should be reduced.
YEAR 2000 CONTINGENCY PLANS The Company began contingency planning in mid-1997
- ---------------------------
to address the risk of a significant Year 2000 failure. At December 31, 1998,
contingency plans have been developed for mission critical items, and these
plans continue to be reevaluated and improved. Most of the contingency plans
involve development of manual procedures or use of alternate systems. Viable
contingency plans are difficult to develop for certain third party failures,
especially in the financial market and utility infrastructures.
Readers are cautioned that forward-looking statements contained in the Year 2000
discussion above should be read in conjunction with the Company's disclosures
under the heading: "Cautionary Statement Pursuant to Safe Harbor Provisions of
the Private Securities Litigation Reform Act of 1995".
* This statement is made pursuant to the Year 2000 Information and Readiness
Disclosure Act. This statement originated from the Company and concerns (1)
assessments, projections, or estimates of year 2000 processing capabilities; (2)
plans, objectives, or timetables for implementing or verifying year 2000
processing capabilities; (3) test plans, dates, or results; and/or (4) reviews
and comments concerning year 2000 processing capabilities as defined by the Act.
IMPACT OF RECENTLY
ISSUED 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 did not have a material effect on the Company's
financial statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" revised and standardized employers' disclosures about pension and
other postretirement benefit plans. It did not change the measurement or
recognition of those plans. The Company has adopted the disclosure requirements
of SFAS No. 132 in the 1998 financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
will be adopted by the Company on January 1, 2000. The Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. All derivatives must be recognized on the balance sheet at fair
value, with special accounting requirements for designated hedging activities.
Certain changes in fair value must be adjusted through income. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
EFFECTS OF INFLATION
The impact of inflation on financial institutions differs significantly from
that exerted on industrial entities. Financial institutions are not heavily
involved in large capital expenditures used in the production, acquisition or
sale of products. Virtually all assets and liabilities of financial institutions
are monetary in nature and represent obligations to pay or receive fixed and
determinable amounts not affected by future changes in prices. Changes in
interest rates have a significant effect on the earnings of financial
institutions. Higher interest rates generally follow the rising demand of
borrowers and the corresponding increased funding requirements of financial
institutions. Although interest rates are viewed as the price of borrowing
funds, the behavior of interest rates differs significantly from the behavior of
the prices of goods and services. Prices of goods and services may be directly
related to that of other goods and services while the price of borrowing relates
more closely to the inflation rate in the prices of those goods and services. As
a result, when the rate of inflation slows, interest rates tend to decline while
absolute prices for goods and services remain at higher levels. Interest rates
are also subject to restrictions imposed through monetary policy, usury laws and
other artificial constraints. The rate of inflation has been relatively low in
recent 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.
42
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
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
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) $ 2,211,936 $ 171,290 7.74% $1,835,546 $ 146,304 7.97%
Construction and development 257,920 21,123 8.19 247,530 21,458 8.67
Real estate - business 955,057 79,850 8.36 824,356 70,539 8.56
Real estate - personal 1,256,118 94,399 7.52 1,068,668 84,255 7.88
Personal banking 1,402,676 119,894 8.55 1,308,293 112,572 8.60
Credit card 513,124 68,776 13.40 530,799 71,521 13.47
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 6,596,831 555,332 8.42 5,815,192 506,649 8.71
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,418,501 87,349 6.16 1,599,452 99,895 6.25
State & municipal obligations (B) 98,664 7,909 8.02 99,328 7,775 7.83
CMO's and asset-backed securities 880,617 55,555 6.31 789,039 50,030 6.34
Trading account securities 11,302 554 4.90 8,358 444 5.32
Other marketable securities (B) 142,125 8,325 5.86 111,140 6,624 5.96
Other non-marketable securities 31,795 1,845 5.80 43,529 1,899 4.36
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 2,583,004 161,537 6.25 2,650,846 166,667 6.29
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to
resell 292,863 15,781 5.39 246,361 13,647 5.54
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 9,472,698 732,650 7.73 8,712,399 686,963 7.88
- ---------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (110,904) (102,145)
Unrealized gain (loss) on investment
securities 65,420 25,903
Cash and due from banks 608,981 635,444
Land, buildings and equipment-net 218,201 213,087
Other assets 215,227 187,513
- ----------------------------------------------------------- ----------
TOTAL ASSETS $10,469,623 $9,672,201
- ----------------------------------------------------------- ----------
LIABILITIES AND EQUITY
- ----------------------
Interest bearing deposits:
Savings $ 317,833 7,369 2.32 $ 301,010 7,310 2.43
Interest bearing demand 4,377,794 134,773 3.08 3,776,101 126,719 3.36
Time open & C.D.'s of less than
$100,000 2,197,549 118,581 5.40 2,160,892 116,798 5.41
Time open & C.D.'s of $100,000
and over 252,628 13,713 5.43 210,283 11,280 5.36
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING DEPOSITS 7,145,804 274,436 3.84 6,448,286 262,107 4.06
- ---------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 533,862 25,827 4.84 450,439 22,202 4.93
Long-term debt and other
borrowings (C) 12,953 494 3.82 11,565 851 7.37
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL BORROWINGS 546,815 26,321 4.81 462,004 23,053 4.99
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 7,692,619 300,757 3.91% 6,910,290 285,160 4.13%
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,622,429 1,750,171
Other liabilities 125,362 69,539
Stockholders' equity 1,029,213 942,201
- ----------------------------------------------------------- ----------
TOTAL LIABILITIES AND EQUITY $10,469,623 $9,672,201
===========================================================================================================================
NET INTEREST MARGIN (T/E) $ 431,893 $ 401,803
===========================================================================================================================
NET YIELD ON INTEREST EARNING ASSETS 4.56% 4.61%
===========================================================================================================================
PERCENTAGE INCREASE IN NET INTEREST
MARGIN (T/E) OVER THE PRIOR YEAR 7.49% 8.45%
===========================================================================================================================
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
Average
Interest Rate
(Dollars In Thousands) Average Income/ Earned/
Balance Expense Paid
- --------------------------------------------------------------------------------
ASSETS
- ------
Loans: (A)
Business (B) $1,670,328 $ 131,652 7.88%
Construction and development 168,220 14,670 8.72
Real estate - business 719,377 61,845 8.60
Real estate - personal 990,069 77,568 7.83
Personal banking 1,262,166 109,065 8.64
Credit card 511,424 67,493 13.20
- --------------------------------------------------------------------------------
TOTAL LOANS 5,321,584 462,293 8.69
- --------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,763,146 108,451 6.15
State & municipal obligations (B) 115,021 9,060 7.88
CMO's and asset-backed securities 653,301 40,913 6.26
Trading account securities 6,500 345 5.30
Other marketable securities (B) 51,320 3,529 6.88
Other non-marketable securities 36,820 2,542 6.90
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 2,626,108 164,480 6.28
- --------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to
resell 467,103 25,334 5.42
- --------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 8,414,795 652,467 7.75
- --------------------------------------------------------------------------------
Less allowance for loan losses (98,312)
Unrealized gain (loss) on investment
securities 21,675
Cash and due from banks 623,523
Land, buildings and equipment-net 208,967
Other assets 194,278
- ----------------------------------------------------
TOTAL ASSETS $9,364,926
- ----------------------------------------------------
LIABILITIES AND EQUITY
- ----------------------
Interest bearing deposits:
Savings $ 299,018 7,165 2.40
Interest bearing demand 3,656,476 121,367 3.32
Time open & C.D.'s of less
than $100,000 2,195,628 119,366 5.44
Time open & C.D.'s of
$100,000 and over 223,723 11,606 5.19
- --------------------------------------------------------------------------------
TOTAL INTEREST BEARING DEPOSITS 6,374,845 259,504 4.07
- --------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under agreements
to repurchase 449,831 21,427 4.76
Long-term debt and other
borrowings (C) 14,690 1,054 7.17
- --------------------------------------------------------------------------------
TOTAL BORROWINGS 464,521 22,481 4.84
- --------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 6,839,366 281,985 4.12%
- --------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,559,157
Other liabilities 74,374
Stockholders' equity 892,092
- ----------------------------------------------------
TOTAL LIABILITIES AND EQUITY $9,364,926
================================================================================
NET INTEREST MARGIN (T/E) $370,482
================================================================================
NET YIELD ON INTEREST EARNING ASSETS 4.40%
================================================================================
PERCENTAGE INCREASE IN NET INTEREST
MARGIN (T/E) OVER THE PRIOR YEAR 2.71%
================================================================================
(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 $3,499,000, in 1998, $3,144,000 in 1997,
$3,934,000 in 1996, $4,259,000 in 1995 and $3,916,000 in 1994, including tax
equivalent adjustments of $1,122,000 in 1998, $1,045,000 in 1997, $1,323,000 in
1996, $1,438,000 in 1995 and $1,378,000 in 1994. State and municipal interest
income includes tax equivalent adjustments of 2,641,000 in 1998, $2,583,000 in
1997, $2,956,000 in 1996, $3,075,000 in 1995 and $1,097,000 in 1994. Interest
income on other marketable securities includes tax equivalent adjustments of
$416,000 in 1998, $459,000 in 1997, $585,000 in 1996, $513,000 in 1995 and
$509,000 in 1994.
(C) Interest expense of $31,000, $58,000, $125,000, $60,000 and $14,000 which
was capitalized on construction projects in 1998, 1997, 1996, 1995 and 1994,
respectively,is not deducted from the interest expense shown above.
Years Ended December 31
- -------------------------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Average Average Balance
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
- -------------------------------------------------------------------------------------------------------------------------
Loans: (A)
Business (B) $1,703,933 $ 141,872 8.33% $1,392,650 $ 99,111 7.12%
Construction and development 130,346 12,227 9.38 115,628 9,372 8.11
Real estate - business 693,539 61,958 8.93 538,793 43,256 8.03
Real estate - personal 954,956 74,571 7.81 759,338 53,473 7.04
Personal banking 1,258,729 110,202 8.76 1,013,462 80,513 7.94
Credit card 420,049 58,368 13.90 360,194 47,082 13.07
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 5,161,552 459,198 8.90 4,180,065 332,807 7.96
- -------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,705,562 105,216 6.17 2,076,150 121,339 5.84
State & municipal obligations (B) 123,152 9,577 7.78 46,602 3,549 7.62
CMO's and asset-backed securities 719,747 44,928 6.24 586,935 35,132 5.99
Trading account securities 3,975 240 6.03 4,168 159 3.82
Other marketable securities (B) 66,368 4,110 6.19 69,870 4,191 6.00
Other non-marketable securities 26,407 685 2.59 20,424 631 3.09
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 2,645,211 164,756 6.23 2,804,149 165,001 5.88
- -------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to
resell 205,547 12,075 5.87 132,672 5,457 4.11
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 8,012,310 636,029 7.94 7,116,886 503,265 7.07
- -------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (95,884) (86,664)
Unrealized gain (loss) on investment
securities (13,983) (15,424)
Cash and due from banks 607,702 555,171
Land, buildings and equipment-net 205,702 194,159
Other assets 209,168 149,568
- --------------------------------------------------- ----------
TOTAL ASSETS $8,924,969 $7,913,696
=================================================== ==========
LIABILITIES AND EQUITY
- ----------------------
Interest bearing deposits:
Savings $ 312,049 7,954 2.55 $ 273,032 6,618 2.42
Interest bearing demand 3,329,272 112,729 3.39 3,247,965 84,037 2.59
Time open & C.D.'s of less than
$100,000 2,206,655 118,267 5.36 1,826,661 77,884 4.26
Time open & C.D.'s of $100,000 and
over 213,950 11,430 5.34 155,813 6,213 3.99
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING DEPOSITS 6,061,926 250,380 4.13 5,503,471 174,752 3.18
- -------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased an
securities sold under agreements
to repurchase 442,413 23,792 5.38 287,642 10,384 3.61
Long-term debt and other borrowings
(C) 16,195 1,146 7.08 7,129 542 7.60
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BORROWINGS 458,608 24,938 5.44 294,771 10,926 3.71
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 6,520,534 275,318 4.22% 5,798,242 185,678 3.20%
- -------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,497,474 1,341,721
Other liabilities 60,527 37,515
Stockholders' equity 864,434 736,218
- ------------------------------- ---------- ----------
TOTAL LIABILITIES AND EQUITY $8,924,969 $7,913,696
=========================================================================================================================
NET INTEREST MARGIN (T/E) $ 360,711 $ 317,587
=========================================================================================================================
NET YIELD ON INTEREST EARNING ASSETS 4.50% 4.46%
=========================================================================================================================
PERCENTAGE INCREASE IN NET INTEREST
MARGIN (T/E) OVER THE PRIOR YEAR 13.58% 10.52%
=========================================================================================================================
- -----------------------------------------------------------------------------
1993
- ----------------------------------------------------------------------------- Average
Balance
Average Five Year
Interest Rates Compound
Average Income/ Earned/ Balance
Balance Expense Paid Growth Rate
- ------------------------------------------------------------------------------------------
Loans: (A)
Business (B) $1,281,458 $ 81,416 6.35% 11.54%
Construction and development 102,825 7,746 7.53 20.19
Real estate - business 493,503 37,505 7.60 14.12
Real estate - personal 716,273 53,428 7.46 11.89
Personal banking 920,157 75,080 8.16 8.80
Credit card 321,618 44,141 13.72 9.79
- ------------------------------------------------------------------------------------------
TOTAL LOANS 3,835,834 299,316 7.80 11.45
- ------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 2,497,041 143,395 5.74 (10.69)
State & municipal obligations (B) 41,141 3,181 7.73 19.12
CMO's and asset-backed securities 60,425 3,552 5.88 70.89
Trading account securities 4,731 220 4.66 19.03
Other marketable securities (B) 70,837 3,933 5.55 14.94
Other non-marketable securities 21,024 924 4.39 8.62
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 2,695,199 155,205 5.76 (.85)
- ------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 282,625 8,735 3.09 .71
- ------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 6,813,658 463,256 6.80 6.81
- ------------------------------------------------------------------------------------------
Less allowance for loan losses (83,767) 5.77
Unrealized gain (loss) on investment
securities - N/A
Cash and due from banks 573,494 1.21
Land, buildings and equipment-net 196,809 2.09
Other assets 149,909 7.50
- -------------------------------------- ---------- -----------
TOTAL ASSETS $7,650,103 6.48%
====================================== ========== ===========
LIABILITIES AND EQUITY
- ----------------------
Interest bearing deposits:
Savings $ 248,681 6,012 2.42 5.03%
Interest bearing demand 3,124,098 78,995 2.53 6.98
Time open & C.D.'s of less than
$100,000 1,790,418 77,165 4.31 4.18
Time open & C.D.'s of $100,000
and over 138,271 5,038 3.64 12.81
- ------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING DEPOSITS 5,301,468 167,210 3.15 6.15
- ------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased an
securities sold under agreements
to repurchase 318,951 8,141 2.55 10.85
Long-term debt and other borrowings (C) 7,118 554 7.79 12.72
- ------------------------------------------------------------------------------------------
TOTAL BORROWINGS 326,069 8,695 2.67 10.89
- ------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 5,627,537 175,905 3.13% 6.45
- ------------------------------------------------------------------------------------------
Non-interest bearing demand deposits 1,302,634 4.49
Other liabilities 50,902 19.75
Stockholders' equity 669,030 9.00
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $7,650,103 6.48%
==========================================================================================
NET INTEREST MARGIN (T/E) $287,351
==========================================================================================
NET YIELD ON INTEREST EARNING ASSETS 4.22%
==========================================================================================
PERCENTAGE INCREASE IN NET INTEREST
MARGIN (T/E) OVER THE PRIOR YEAR 14.86%
==========================================================================================
(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 $3,499,000, in 1998, $3,144,000 in 1997,
$3,934,000 in 1996, $4,259,000 in 1995 and $3,916,000 in 1994, including tax
equivalent adjustments of $1,122,000 in 1998, $1,045,000 in 1997, $1,323,000 in
1996, $1,438,000 in 1995 and $1,378,000 in 1994. State and municipal interest
income includes tax equivalent adjustments of 2,641,000 in 1998, $2,583,000 in
1997, $2,956,000 in 1996, $3,075,000 in 1995 and $1,097,000 in 1994. Interest
income on other marketable securities includes tax equivalent adjustments of
$416,000 in 1998, $459,000 in 1997, $585,000 in 1996, $513,000 in 1995 and
$509,000 in 1994.
(C) Interest expense of $31,000, $58,000, $125,000, $60,000 and $14,000 which
was capitalized on construction projects in 1998, 1997, 1996, 1995 and 1994,
respectively,is not deducted from the interest expense shown above.
44
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, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
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) $ 2,301 7.46% $ 2,223 7.79% $ 2,233 7.85% $2,088 7.89%
Construction and development 307 7.82 249 8.24 242 8.32 234 8.49
Real estate business 980 8.26 955 8.30 949 8.40 936 8.49
Real estate personal 1,309 7.32 1,279 7.37 1,250 7.57 1,184 7.84
Personal banking 1,492 8.36 1,431 8.65 1,345 8.61 1,341 8.58
Credit card 514 12.88 508 13.21 505 13.47 525 14.06
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 6,903 8.16 6,645 8.40 6,524 8.48 6,308 8.65
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government &
federal agency 1,412 6.02 1,388 6.11 1,440 6.19 1,435 6.31
State & municipal
obligations (A) 100 8.12 102 7.92 100 7.87 92 8.16
CMO's and asset-backed
securities 944 6.26 856 6.25 868 6.33 853 6.39
Trading account securities 13 4.63 13 6.00 11 6.00 9 6.00
Other marketable
securities (A) 213 5.65 118 5.90 124 6.44 114 5.59
Other non-marketable securities 32 5.41 32 5.90 31 4.35 31 7.59
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 2,714 6.14 2,509 6.21 2,574 6.28 2,534 6.39
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell 345 4.99 326 5.53 207 5.55 294 5.59
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 9,962 7.50 9,480 7.72 9,305 7.81 9,136 7.93
- -----------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (116) (112) (110) (106)
Unrealized gain on
investment securities 86 59 60 57
Cash and due from banks 614 561 624 637
Land, buildings and
equipment net 222 218 217 215
Other assets 216 221 215 209
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,984 $10,427 $10,311 $10,148
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
- ----------------------
Interest bearing deposits:
Savings $ 325 2.07 $ 317 2.39 $ 322 2.40 $ 307 2.43
Interest bearing demand 4,868 2.69 4,660 2.98 4,015 3.37 3,956 3.38
Time open & C.D.'s
under $100,000 2,249 5.35 2,191 5.39 2,188 5.41 2,161 5.44
Time open & C.D.'s
$100,000 & over 286 5.28 249 5.48 245 5.48 229 5.50
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING DEPOSITS 7,728 3.53 7,417 3.75 6,770 4.06 6,653 4.08
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased
and securities
sold under agreements
to repurchase 587 4.37 531 4.93 503 5.03 515 5.10
Long-term debt and
other borrowings 24 2.76 14 7.53 6 7.53 7 7.53
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL BORROWINGS 611 4.31 545 4.85 509 5.06 522 5.13
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 8,339 3.59% 7,962 3.83% 7,279 4.13% 7,175 4.15%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits 1,427 1,317 1,894 1,860
Other liabilities 151 125 110 115
Stockholders' equity 1,067 1,023 1,028 998
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $10,984 $10,427 $10,311 $10,148
===================================================================================================================================
NET INTEREST MARGIN (T/E) $ 113 $ 108 $ 106 $ 105
===================================================================================================================================
NET YIELD ON INTEREST
EARNING ASSETS 4.50% 4.51% 4.58% 4.66%
===================================================================================================================================
(A) Includes tax equivalent calculations.
45
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.
46
CONSOLIDATED BALANCE SHEETS
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
December 31
- -------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------
(In Thousands)
ASSETS
- -------
Loans, net of unearned income $ 7,046,852 $ 6,224,381
Allowance for loan losses (117,092) (105,918)
- -------------------------------------------------------------------------------------------
NET LOANS 6,929,760 6,118,463
- -------------------------------------------------------------------------------------------
Investment securities:
Available for sale 2,988,230 2,614,040
Trading account 14,210 6,477
Other non-marketable 29,276 44,414
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 3,031,716 2,664,931
- -------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 261,535 132,980
Cash and due from banks 738,672 978,239
Land, buildings and equipment net 222,129 214,209
Goodwill and core deposit premium net 77,009 85,377
Customers' acceptance liability 808 900
Other assets 140,394 111,842
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $11,402,023 $10,306,941
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Deposits:
Non-interest bearing demand $ 1,657,037 $ 2,124,828
Savings and interest bearing demand 5,295,897 4,209,141
Time open and C.D.'s of less than $100,000 2,269,835 2,150,719
Time open and C.D.'s of $100,000 and over 307,428 215,890
- -------------------------------------------------------------------------------------------
TOTAL DEPOSITS 9,530,197 8,700,578
- -------------------------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 617,830 512,558
Long-term debt and other borrowings 27,130 7,207
Acceptances outstanding 808 900
Other liabilities 145,273 104,914
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 10,321,238 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 61,352,684
shares in 1998 and 58,285,813 shares in 1997 306,763 291,429
Capital surplus 106,159 48,704
Retained earnings 624,256 626,387
Treasury stock of 193,208 shares in 1998
and 315,894 shares in 1997, at cost (8,561) (14,252)
Unearned employee benefits (904) (601)
Accumulated other comprehensive income 53,072 29,117
- -------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,080,785 980,784
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,402,023 $10,306,941
===========================================================================================
See accompanying notes to financial statements.
47
CONSOLIDATED STATEMENTS OF INCOME
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
For the Years ended December 31
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
- ---------------
Interest and fees on loans $ 554,210 $ 505,604 $460,970
Interest on investment securities 158,480 163,625 161,299
Interest on federal funds sold and securities
purchased under agreements to resell 15,781 13,647 25,334
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 728,471 682,876 647,603
- --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
- ----------------
Interest on deposits:
Savings and interest bearing demand 142,142 134,029 128,532
Time open and C.D.'s of less than $100,000 118,581 116,798 119,366
Time open and C.D.'s of $100,000 and over 13,713 11,280 11,606
Interest on federal funds purchased and
securities sold under agreements to repurchase 25,827 22,202 21,427
Interest on long-term debt and other borrowings 463 793 929
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 300,726 285,102 281,860
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 427,745 397,774 365,743
Provision for loan losses 36,874 31,354 24,522
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 390,871 366,420 341,221
- --------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
- -------------------
Trust fees 50,460 41,224 35,536
Deposit account charges and other fees 63,145 57,223 54,506
Credit card transaction fees 36,786 30,703 26,586
Trading account profits and commissions 8,733 7,420 5,982
Net gains on securities transactions 6,894 3,253 3,293
Other 48,019 40,269 33,259
- --------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 214,037 180,092 159,162
- --------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
- --------------------
Salaries and employee benefits 198,090 179,095 165,291
Net occupancy 23,805 21,570 21,456
Equipment 18,148 16,492 15,185
Supplies and communication 29,867 25,838 24,697
Data processing 30,654 24,628 20,778
Marketing 12,206 12,757 11,698
Goodwill and core deposit 9,193 9,778 11,448
Other 57,381 54,292 47,401
- --------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 379,344 344,450 317,954
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 225,564 202,062 182,429
Less income taxes 75,473 69,360 62,917
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 150,091 $ 132,702 $119,512
- --------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $ 2.46 $ 2.16 $ 1.90
Net income per share - diluted $ 2.42 $ 2.13 $ 1.89
==========================================================================================================================
Cash dividends per common share $ .552 $ .496 $ .438
==========================================================================================================================
See accompanying notes to financial statements.
48
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
For the years ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- ---------------------
Net income $ 150,091 $ 132,702 $ 119,512
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 36,874 31,354 24,522
Provision for depreciation and amortization 32,188 30,433 31,134
Accretion of investment security discounts (3,978) (5,681) (5,630)
Amortization of investment security premiums 7,833 9,140 20,194
Provision for deferred income taxes 10,266 16,731 3,303
Net gains on securities transactions (6,894) (3,253) (3,293)
Net (increase) decrease in trading account securities (6,345) 1,412 (1,230)
Decrease in interest receivable 2,091 6,750 10,190
Increase (decrease) in interest payable 1,917 1,622 (1,214)
Other changes, net (7,111) (4,771) 17,194
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 216,932 216,439 214,682
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- ---------------------
Net cash received in acquisitions 15,113 6,200 -
Cash paid in sales of branches - - (38,134)
Proceeds from sales of available for sale securities 360,446 534,452 704,120
Proceeds from maturities of available for sale
securities 1,120,599 904,695 496,928
Purchases of available for sale securities (1,680,147) (1,258,881) (1,351,654)
Net (increase) decrease in federal
funds sold and securities purchased under
agreements to resell (108,420) 244,235 154,612
Net increase in loans (607,290) (621,438) (188,731)
Purchases of premises and equipment (30,258) (27,621) (26,436)
Sales of premises and equipment 8,543 8,085 7,000
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (921,414) (210,273) (242,295)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- ---------------------
Net increase in non-interest bearing
demand, savings and interest bearing demand deposits 440,001 350,260 131,861
Net increase (decrease) in time open and C.D.s 25,642 (68,346) (107,418)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 102,766 (14,249) 163,904
Repayment of long-term debt (3,602) (6,952) (495)
Additional borrowings 15,245 - -
Purchases of treasury stock (85,132) (94,067) (78,408)
Issuance under stock purchase, option and benefit
plans 3,737 2,599 4,039
Cash dividends paid on common stock (33,742) (30,432) (27,462)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 464,915 138,813 86,021
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (239,567) 144,979 58,408
Cash and cash equivalents at beginning of year 978,239 833,260 774,852
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 738,672 $ 978,239 $ 833,260
====================================================================================================================================
See accompanying notes to financial statements.
49
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
Accumulated
Unearned Other
Common Capital Retained Treasury Employee Comprehensive
(In Thousands, Except Per Share Data) Stock Surplus Earnings Stock Benefits Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $ 187,827 $ 84,415 $ 618,388 $ (32,980) $ (716) $ 26,849 $ 883,783
====================================================================================================================================
Restatement for 1998 stock split 93,913 (93,913) -
Net income 119,512 119,512
Change in unrealized gain (loss) on
available for sale securities (8,624) (8,624)
----------
Total comprehensive income 110,888
----------
Purchase of treasury stock (47,844) 24 (47,820)
Cash dividends paid ($.438 per share) (27,462) (27,462)
Issuance under stock purchase,
option and award plans, net (3,217) 7,747 352 4,882
5% stock dividend, net 23,094 (88,749) 65,655 -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 281,740 10,379 621,689 (7,422) (340) 18,225 924,271
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 132,702 132,702
Change in unrealized gain (loss) on
available for sale securities 10,892 10,892
----------
Total comprehensive income 143,594
----------
Purchase of treasury stock (96,296) (96,296)
Cash dividends paid ($.496 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 9,689 77,095 (115,184) 28,400 -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 291,429 48,704 626,387 (14,252) (601) 29,117 980,784
====================================================================================================================================
Net income 150,091 150,091
Change in unrealized gain (loss) on
available for sale securities 23,352 23,352
----------
Total comprehensive income 173,443
----------
Purchase of treasury stock (86,408) (86,408)
Cash dividends paid ($.552 per share) (33,742) (33,742)
Issuance under stock purchase,
option and award plans, net (5,464) 12,477 (303) 6,710
Pooling acquisitions 1,800 (43,316) 11,170 69,898 603 40,155
5% stock dividend, net 13,534 106,235 (129,650) 9,724 (157)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 306,763 $ 106,159 $ 624,256 $ (8,561) $ (904) $ 53,072 $1,080,785
====================================================================================================================================
See accompanying notes to financial statements.
50
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. Their related unrealized gains and losses, net
of tax, are reported in accumulated other comprehensive income, a 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.
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
51
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 three for two stock split and 5% stock dividend distributed in 1998.
ACQUISITIONS
In 1998, the Company acquired four Kansas banks. City National Bank of
Pittsburg, Kansas, with assets of $120 million, was acquired in March for stock
valued at $34.3 million. In November, the Company acquired Columbus State Bank,
Fidelity State Bank in Garden City, and Heritage Bank of Olathe. These banks had
combined assets of $310 million. Stock valued at $49.7 million was exchanged.
The 1998 acquisitions were accounted for as poolings of interests.
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.
Financial statements for periods prior to the consummation of acquisitions
accounted for as poolings have not been restated because such restated amounts
do not differ materially from the Company's historical financial statements. The
following schedule summarizes pro forma consolidated financial data as if the
1998 and 1997 acquisitions had been consummated on January 1, 1997.
(In thousands, except per share data) 1998 1997
- -----------------------------------------------------------------------------
Net interest income plus non-interest income $655,024 $603,513
Net income 153,403 138,974
Net income per share - diluted 2.43 2.14
=============================================================================
LOANS AND ALLOWANCE FOR LOSSES
Major classifications of loans at December 31, 1998 and 1997 are as follows:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------
Business $2,464,168 $2,056,862
Real estate - construction 325,360 233,209
Real estate - business 1,000,380 926,107
Real estate - personal 1,315,041 1,148,236
Personal banking 1,409,022 1,311,081
Credit card 532,881 548,886
- ------------------------------------------------------------------------------
TOTAL LOANS $7,046,852 $6,224,381
==============================================================================
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, 1998 $39,641
- ------------------------------------------------------------------------------
Additions 38,260
Amounts collected 46,069
Amounts written off -
- ------------------------------------------------------------------------------
Balance at December 31, 1998 $31,832
==============================================================================
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, 1998, 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 limited
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, 1998, unfunded loan commitments totaled $2,882,581,000 (excluding
$2,161,405,000 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) 1998 1997 1996
- ---------------------------------------------------------------------------
BALANCE, JANUARY 1 $105,918 $ 98,223 $98,537
- ---------------------------------------------------------------------------
Additions:
Provision for loan losses 36,874 31,354 24,522
Allowances of acquired banks 5,808 4,275 -
- ---------------------------------------------------------------------------
TOTAL ADDITIONS 42,682 35,629 24,522
- ---------------------------------------------------------------------------
Deductions:
Loan losses 42,366 38,183 31,914
Less recoveries 10,858 10,249 7,078
- ---------------------------------------------------------------------------
NET LOAN LOSSES 31,508 27,934 24,836
- ---------------------------------------------------------------------------
BALANCE, DECEMBER 31 $117,092 $105,918 $98,223
===========================================================================
52
NOTES TO FINANCIAL STATEMENTS [CONT.] COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
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 $17,831,000 and
$23,382,000 at December 31, 1998 and 1997, respectively. The interest income not
recognized on non-accrual loans was $1,936,000, $1,802,000 and $1,617,000 during
1998, 1997 and 1996, respectively. Loans 90 days delinquent and still accruing
interest amounted to $24,529,000 and $24,383,000 at December 31, 1998 and 1997,
respectively. Real estate and other assets acquired in foreclosure amounted to
$4,781,000 and $3,611,000 at December 31, 1998 and 1997, respectively.
INVESTMENT SECURITIES
A summary of the available for sale investment securities by maturity groupings
as of December 31, 1998 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, 1998. 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 $ 344,605 $ 347,855 5.54%
After 1 but within 5 years 1,034,882 1,071,050 6.15
After 5 but within 10 years 24,750 25,346 5.86
After 10 years 4,042 4,296 5.75
- ---------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND FEDERAL AGENCY OBLIGATIONS 1,408,279 1,448,547 5.99
===============================================================================================================
State and municipal obligations:
Within 1 year 19,472 19,643 5.03
After 1 but within 5 years 54,003 55,982 5.22
After 5 but within 10 years 18,940 19,981 5.68
After 10 years 6,011 6,179 6.01
- ---------------------------------------------------------------------------------------------------------------
TOTAL STATE AND MUNICIPAL OBLIGATIONS 98,426 101,785 5.32
===============================================================================================================
CMO'S AND ASSET-BACKED SECURITIES 962,267 974,377 6.29
===============================================================================================================
Other debt securities:
Within 1 year 407,445 407,455
After 1 but within 5 years 11,714 11,858
After 5 but within 10 years 100 100
- ---------------------------------------------------------------------------------------------------------------
TOTAL OTHER DEBT SECURITIES 419,259 419,413
===============================================================================================================
EQUITY SECURITIES 14,223 44,108
===============================================================================================================
TOTAL AVAILABLE FOR SALE INVESTMENT SECURITIES $2,902,454 $2,988,230
===============================================================================================================
The unrealized gains and losses by type are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
U.S. government and federal agency obligations $1,408,279 $40,342 $ 74 $1,448,547
State and municipal obligations 98,426 3,369 10 101,785
CMO's and asset-backed securities 962,267 12,686 576 974,377
Other debt securities 419,259 161 7 419,413
Equity securities 14,223 30,037 152 44,108
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $2,902,454 $86,595 $ 819 $2,988,230
========================================================================================================================
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
========================================================================================================================
53
The following table presents proceeds from sales of securities and the
components of net securities gains.
(In thousands) 1998 1997 1996
- ---------------------------------------------------
PROCEEDS FROM SALES $360,446 $534,452 $704,120
- ---------------------------------------------------
Realized gains $ 7,588 $ 4,564 $ 4,600
Realized losses 694 1,311 1,307
- ---------------------------------------------------
NET REALIZED GAINS $ 6,894 $ 3,253 $ 3,293
===================================================
Investment securities with a par value of $838,676,000 and $897,023,000 were
pledged at December 31, 1998 and 1997, respectively, to secure public deposits
and for other purposes as required by law. Except for U.S. government and
federal agency obligations, no investment in a single issuer exceeds 10% of
stockholders' equity.
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment consist of the following at December 31, 1998 and
1997:
(In thousands) 1998 1997
- -------------------------------------------------------
Land $ 54,364 $ 52,616
Buildings and improvements 269,320 256,167
Equipment 161,379 146,143
- -------------------------------------------------------
Total 485,063 454,926
- -------------------------------------------------------
Less accumulated depreciation
and amortization 262,934 240,717
- -------------------------------------------------------
NET LAND, BUILDINGS AND EQUIPMENT $222,129 $214,209
=======================================================
Depreciation expense of $21,018,000, $19,678,000 and $19,183,000 for 1998, 1997
and 1996, respectively, was included in net occupancy expense, equipment expense
and other expense in the Consolidated Statements of Income. Repairs and
maintenance expense of $14,841,000, $14,016,000 and $13,082,000 for 1998, 1997
and 1996, 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 table presents balance and interest rate information on
these borrowings.
(Dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------
Balance:
Average $533,862 $450,439 $449,831
Year end 617,830 512,558 526,807
Maximum month-end during year 617,830 549,907 526,807
- ---------------------------------------------------------------
Interest rate:
Average 4.8% 4.9% 4.8%
Year end 4.2% 5.2% 5.0%
===============================================================
Long-term debt of the Company was $27,130,000 at December 31, 1998. This amount
included $10,730,000 in borrowings from the Federal Home Loan Bank (FHLB), which
carry an average rate of 5.5% and have maturity dates ranging from 2008 to 2013.
Most of the borrowings from the FHLB were obligations of banks acquired in 1998.
Also included in long-term debt was $12,424,000 borrowed by a venture capital
subsidiary from third-party insurance companies. These borrowings will fund
investment activities by the subsidiary, which was recently designated a
Missouri Certified Capital Company. Because the insurance companies receive tax
credits, the borrowings do not bear interest. Discounted principal of $3,259,000
is due in 2007 and $7,515,000 in 2012.
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,
1998 totaled $110,451,000.
Cash payments for interest on deposits and borrowings during 1998, 1997 and 1996
on a consolidated basis amounted to $298,643,000, $283,281,000 and $282,792,000,
respectively.
INCOME TAXES
Total income taxes for 1998, 1997 and 1996 were allocated as shown in the
following tables.
Income tax expense from operations for the years ended December 31, 1998, 1997
and 1996 consists of:
(In thousands) Current Deferred Total
- ---------------------------------------------------------
Year ended December 31, 1998:
U.S. federal $61,550 $10,697 $72,247
State and local 3,657 (431) 3,226
- ----------------------------------------------------------
$65,207 $10,266 $75,473
==========================================================
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
==========================================================
54
NOTES TO FINANCIAL STATEMENTS [CONT.] COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
Income tax expense (benefits) allocated directly to stockholder's equity for the
years ended December 31, 1998, 1997 and 1996 consists of:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------
Unrealized gain (loss) on
securities available for sale $14,766 $6,546 $(5,284)
Compensation expense for tax
purposes in excess of
amounts recognized for
financial reporting purposes (1,475) (1,470) (292)
- -----------------------------------------------------------------
INCOME TAX EXPENSE
(BENEFITS) ALLOCATED TO
STOCKHOLDERS' EQUITY $13,291 $5,076 $(5,576)
=================================================================
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below.
(In thousands) 1998 1997
- --------------------------------------------------------------
Deferred tax assets:
Loans, principally due to
allowance for loan losses $ 50,735 $ 47,216
Unearned fee income, due to earlier
recognition for tax purposes 832 1,030
Deferred compensation,
principally due to accrual for
financial reporting purposes 1,864 1,870
Accrued expenses, principally due to
accrual for financial reporting purposes 1,584 1,164
Net operating loss carryforwards
of acquired companies 157 191
Other 258 327
- ---------------------------------------------------------------
TOTAL GROSS DEFERRED TAX ASSETS 55,430 51,798
===============================================================
Deferred tax liabilities:
Investment securities,
principally due to discount accretion 2,168 4,135
Capitalized interest 896 909
Unrealized gain on
securities available for sale 32,588 17,822
Land, buildings and equipment,
principally due to write-up in
value in purchase accounting
entries for finanical reporting 29,230 22,711
Core deposit intangible, principally
due to purchase accounting entries
for financial reporting 4,467 6,150
Pension benefit obligation, due to
recognition of the excess pension
asset for financial reporting purposes 1,773 2,098
Realignment of corporate entities 37,850 21,167
Other 2,526 2,862
- ----------------------------------------------------------------
TOTAL GROSS DEFERRED TAX LIABILITIES 111,498 77,854
- ----------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ (56,068) $(26,056)
================================================================
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) 1998 1997 1996
- ----------------------------------------------------------------
Computed "expected"
tax expense $78,947 $70,722 $63,850
Increase (reduction) in income taxes
resulting from:
Amortization of goodwill 1,716 1,628 1,499
Tax exempt income (2,334) (2,240) (2,625)
Tax deductible dividends on
allocated shares held by
the Company's ESOP (734) (720) (678)
State and local income
taxes, net of federal
income tax benefit 2,097 1,866 3,601
Other, net (4,219) (1,896) (2,730)
- -----------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $75,473 $69,360 $62,917
=================================================================
Cash payments of income taxes, net of refunds and interest received, amounted to
$56,220,000, $36,335,000 and $64,860,000 on a consolidated basis during 1998,
1997 and 1996, respectively. The Parent had net receipts of $3,341,000, $846,000
and $1,644,000 during 1998, 1997 and 1996, respectively, from tax benefits.
EMPLOYEE BENEFIT PLANS
Employee benefits charged to operating expenses aggregated $25,255,000,
$22,598,000 and $23,963,000 for 1998, 1997 and 1996, 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 make contributions to a trust as necessary to
provide for current service and for any unfunded accrued actuarial liabilities
over a reasonable period. To the extent that these requirements are fully
covered by assets in the trust, a contribution may not be made in a particular
year. The following items are components of the net pension cost for the years
ended December 31, 1998, 1997 and 1996.
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------
Service cost-benefits
earned during the year $ 3,329 $ 2,731 $ 2,647
Interest cost on projected
benefit obligation 4,006 3,767 3,343
Actual plan assets value
(increase) decrease (5,512) (11,816) (5,578)
Net amortization and deferral (795) 6,323 429
- ----------------------------------------------------------------
NET PERIODIC PENSION COST $ 1,028 $ 1,005 $ 841
================================================================
55
The following table sets forth the pension plan's funded status, using valuation
dates of September 30, 1998 and 1997.
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
- -------------------------------------------------------------------------------------------------
Projected benefit obligation
at beginning of year $57,561 $50,002
Service cost 3,329 2,731
Interest cost 4,006 3,767
Amendments 259 -
Benefits paid (4,314) (5,396)
Actuarial (gain) loss (533) 6,457
- -------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year 60,308 57,561
- -------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
- -------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year 62,774 55,078
Actual return on plan assets 3,368 13,092
Benefits paid (4,314) (5,396)
- -------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 61,828 62,774
- -------------------------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 1,520 5,213
Unrecognized net loss from past
experience different from that assumed
and effects of change in assumptions 7,067 5,456
Prior service benefit not yet recognized
in net pension cost (1,218) (1,634)
Unrecognized net transition asset
being recognized over 15 years (2,553) (3,191)
- -------------------------------------------------------------------------------------------------
PREPAID PENSION COST INCLUDED IN
OTHER ASSETS $ 4,816 $ 5,844
- -------------------------------------------------------------------------------------------------
Assumptions used in computing the plan's funded status were:
1998 1997 1996
- ------------------------------------------------------------------------------
Discount rate 6.75% 7.25% 7.75%
Rate of increase in future
compensation levels 5.70% 5.00% 5.00%
Long-term rate of return on assets 9.00% 9.00% 8.50%
- ------------------------------------------------------------------------------
At December 31, 1998, approximately 88% of plan assets were invested in U.S.
government bonds, 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 $2,692,000 in 1998, $2,466,000 in 1997 and
$2,320,000 in 1996.
STOCK OPTION PLANS, RESTRICTED STOCK AWARDS AND DIRECTORS STOCK PURCHASE PLAN*
The Company has reserved 9,253,039 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.
At December 31, 1998, 3,971,184 shares remain available for option grants under
these programs. The following tables summarize option activity over the last
three years and current options outstanding.
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Option Price Shares Option Price Shares Option Price
- -------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT BEGINNING OF YEAR 2,214,327 $19.12 2,001,494 $16.55 1,866,548 $14.59
- -------------------------------------------------------------------------------------------------------------------------
Granted 445,174 42.85 471,505 28.39 465,688 20.46
Cancelled (14,694) 34.43 (10,743) 23.73 (30,834) 17.99
Exercised (247,379) 16.31 (247,929) 15.77 (299,908) 10.25
- -------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR 2,397,428 $23.73 2,214,327 $19.12 2,001,494 $16.55
=========================================================================================================================
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding At Remaining Average Exercisable At Average
Range of Exercise Prices December 31, 1998 Contractual Life Exercise Price December 31, 1998 Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
$12.19 - $16.32 855,908 5.1 years $15.23 855,908 $15.23
$16.59 - $20.52 664,316 6.0 years 19.05 557,391 18.78
$26.30 - $28.33 437,794 8.1 years 28.31 215,124 28.31
$35.15 - $47.26 439,410 9.1 years 42.78 109,174 42.71
- -------------------------------------------------------------------------------------------------------------------------
$12.19 - $47.26 2,397,428 6.6 years $23.73 1,737,597 $19.71
=========================================================================================================================
The Company has a restricted stock award plan under which 287,161 shares of
common stock are reserved, and 165,445 shares remain available for grant at
December 31, 1998. 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
56
NOTES TO FINANCIAL STATEMENTS [CONT.] COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
restriction period. The restriction period may not exceed 10 years. The Company
issued awards totaling 15,785 shares in 1998, 15,712 shares in 1997 and 12,760
shares in 1996, resulting in deferred compensation amounts of $687,000, $461,000
and $257,000, respectively. Approximately $276,000, $165,000 and $189,000 was
amortized to salaries expense in 1998, 1997 and 1996, respectively. Unamortized
deferred compensation of $904,000, $601,000 and $340,000 has been recorded as a
reduction of stockholders' equity at December 31, 1998, 1997 and 1996,
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 189,906 at December 31, 1998. In 1998, 22,150 shares were purchased
at an average price of $43.61 and in 1997, 27,170 shares were purchased at an
average price of $31.69.
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 $2,947,000, or $.05 per share in 1998, $2,173,000, or $.03 per
share in 1997, and $1,666,000, or $.03 per share in 1996.
Following is a summary of the fair values of options granted using the Black-
Scholes option-pricing model.
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Fair value at grant date $5,995 $4,426 $3,310
Assumptions:
Dividend yield 2.0% 2.0% 2.0%
Volatility 24.2% 21.0% 24.0%
Risk-free interest rate 5.0% 5.8% 6.1%
Expected life 6.5 years 7.8 years 7.6 years
- --------------------------------------------------------------------------------
*All share and per share amounts in this note have been restated for the three
for two stock split and 5% stock dividend distributed in 1998.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards 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 as shown below.
For The Years Ended December 31
- --------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- --------------------------------------------------------------------------
Unrealized holding gains (losses) $43,941 $19,153 $(12,467)
Less: reclassification adjustment for
gains included in net income 5,915 1,606 1,441
- --------------------------------------------------------------------------
Net unrealized gains
(losses) on securities 38,026 17,547 (13,908)
Income tax expense (benefit) 14,674 6,655 (5,284)
- --------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME $23,352 $10,892 $ (8,624)
==========================================================================
SEGMENTS
Management has established three operating segments within the Company. The
Consumer segment includes the retail branch network, consumer finance, bankcard,
student loans and discount brokerage services. The Commercial segment provides
corporate lending, leasing, and international services, as well as business,
government deposit and cash management services. The Money Management segment
provides traditional trust and estate tax planning services, and advisory and
discretionary investment management services.
The Company's business line reporting system derives segment information by
specifically attributing most assets and income statement items to a segment.
The Company's internal funds transfer pricing methodology allocates a standard
cost for funds used or credit for funds provided to all segment assets and
liabilities using funding pools. Income and expense that directly relate to
segment operations are recorded in the segment when incurred. Expenses that
indirectly support the segments are allocated based on the most appropriate
method available.
The Company's reportable segments are strategic lines of business that offer
different products and services. They are managed separately because each line
services a specific customer need, requiring different performance measurement
analyses and marketing strategies.
57
The following tables present selected financial information by segment and
reconciliations of combined segment totals to consolidated totals. There were no
material intersegment revenues between the three segments. Financial data for
1998 bank acquisitions which have not yet been assimilated into the business
segment and cost allocation systems are included in the Consumer segment and are
not considered material.
SEGMENT INCOME STATEMENT DATA
Money Segment Other/ Consolidated
(In Thousands) Consumer Commercial Management Totals Elimination Totals
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998:
Net interest income after loan loss expense $ 5,104 $244,795 $(18,830) $231,069 $ 159,802 $390,871
Cost of funds allocation 214,894 (98,183) 23,995 140,706 (140,706) -
Non-interest income 114,116 25,840 65,300 205,256 8,781 214,037
- -----------------------------------------------------------------------------------------------------------------------------
Total net revenue 334,114 172,452 70,465 577,031 27,877 604,908
Non-interest expense 232,685 74,167 45,616 352,468 26,876 379,344
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes $101,429 $ 98,285 $ 24,849 $224,563 $ 1,001 $225,564
=============================================================================================================================
Year Ended December 31, 1997:
Net interest income after loan loss expense $ 2,324 $213,382 $(14,391) $201,315 $ 165,105 $366,420
Cost of funds allocation 220,687 (80,803) 18,409 158,293 (158,293)
Non-interest income 93,084 26,321 53,048 172,453 7,639 180,092
- -----------------------------------------------------------------------------------------------------------------------------
Total net revenue 316,095 158,900 57,066 532,061 14,451 546,512
Non-interest expense 207,187 72,242 40,702 320,131 24,319 344,450
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes $108,908 $ 86,658 $ 16,364 $211,930 $ (9,868) $202,062
=============================================================================================================================
Year Ended December 31, 1996:
Net interest income after loan loss expense $ (7,564) $179,984 $(12,983) $159,437 $ 181,784 $341,221
Cost of funds allocation 206,340 (60,353) 16,676 162,663 (162,663)
Non-interest income 77,984 26,632 44,853 149,469 9,693 159,162
- -----------------------------------------------------------------------------------------------------------------------------
Total net revenue 276,760 146,263 48,546 471,569 28,814 500,383
Non-interest expense 192,547 65,864 35,951 294,362 23,592 317,954
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 84,213 $ 80,399 $ 12,595 $177,207 $ 5,222 $182,429
=============================================================================================================================
The segment activity, as shown above, includes both direct and allocated items.
Amounts in the "Other/Elimination" column include activity not related to the
segments, such as that relating to administrative functions, and the effect of
certain expense allocations to the segments.
SEGMENT BALANCE SHEET DATA
Money Segment Other/ Consolidated
(In Thousands) Consumer Commercial Management Totals Elimination Totals
- ------------------------------------------------------------------------------------------------------------------------------
Average Balances For 1998:
Assets $3,384,943 $3,392,879 $75,160 $6,852,982 $3,616,641 $10,469,623
Loans 3,235,438 3,363,228 1,112 6,599,778 (2,947) 6,596,831
Deposits 6,970,588 1,764,350 24,975 8,759,913 8,320 8,768,233
===============================================================================================================================
Average Balances For 1997:
Assets $3,086,178 $2,895,082 $42,223 $6,023,483 $3,648,718 $ 9,672,201
Loans 2,941,810 2,870,083 2,663 5,814,556 636 5,815,192
Deposits 6,435,869 1,726,790 35,528 8,198,187 270 8,198,457
===============================================================================================================================
The above segment balances include only those items directly associated with the
segment. The "Other/Elimination" column includes unallocated bank balances not
associated with a segment, (such as investment securities, federal funds sold,
goodwill and core deposit premium), balances relating to certain other
administrative and corporate functions, and eliminations between segment and
non-segment balances. This column also includes the resulting effect of
allocating such items as float, deposit reserve and capital for the purpose of
computing the cost or credit for funds used/provided.
58
NOTES TO FINANCIAL STATEMENTS (CONT.) COMMERCE BANCSHARES, INC AND SUBSIDIARIES
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 all stock dividends, are
shown below.
For The Years Ended December 31
- ----------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------
Weighted average common
shares outstanding 61,067 61,415 62,870
Stock options 1,037 834 440
- ----------------------------------------------------------------------------
62,104 62,249 63,310
============================================================================
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 1998, the Board of Directors approved additional purchases of the
Company's common stock, bringing the total purchase authorization to 3,000,000
shares. The Company has routinely used these reacquired shares to fund employee
benefit programs and annual stock dividends. Approximately 1,565,000 shares have
been acquired under the 1998 approval through December 31, 1998.
On March 30, 1998, a three for two stock split in the form of a 50% stock
dividend was distributed on the $5 par common stock. Accordingly, the number of
shares issued was increased by 19,428,605. In addition, the Company distributed
a 5% stock dividend for the fifth consecutive year on December 18, 1998. All per
share data in this report has been restated to reflect the stock dividends. The
table below is a summary of share activity in 1998, as restated for the three
for two stock split.
==============================================================================
Purchases of common stock 1,822,932
Issuance of stock:
Sales under employee and director plans 270,435
Pooling acquisitions 1,824,744
5% stock dividend 2,917,310
==============================================================================
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 ratios for
well-capitalized banks are 6.00% for Tier I capital, 10.00% for Total capital
and 5.00% for the leverage ratio.
The Company's actual capital amounts and ratios at the last two year ends are as
follows:
(DOLLARS IN THOUSANDS) 1998 1997
==============================================================================
Risk-Weighted Assets $8,426,289 $7,178,225
Tier 1 Capital $ 952,488 $ 868,535
Total Capital $1,060,692 $ 949,291
Tier 1 Capital Ratio 11.30% 12.10%
Total Capital Ratio 12.59% 13.22%
Leverage Ratio 8.80% 8.81%
===============================================================================
Management believes that, at December 31, 1998, the Company meets all capital
requirements to which it is subject.
59
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 is calculated by discounting all cash flows
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. Discount rates are computed for each loan category
using projected market rates adjusted by the Company's interest spread and other
considerations management deems necessary. 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 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.
Discount rates are computed for each deposit category using the Treasury curve
adjusted to approximate the Company's cost of funds.
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.
60
NOTES TO FINANCIAL STATEMENTS (CONT.) COMMERCE BANCSHARES, INC AND SUBSIDIARIES
The estimated fair values of the Company's financial instruments are as follows:
1998 1997
- ---------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In Thousands) Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
- ----------------
Loans $7,010,142 $7,067,656 $6,237,039 $6,272,858
Available for sale investment securities 2,988,230 2,988,230 2,614,040 2,614,040
Trading account securities 14,210 14,210 6,477 6,477
Other non-marketable securities 29,276 29,276 44,414 44,414
Federal funds sold and securities purchased under
agreements to resell 261,535 261,535 132,980 132,980
Cash and due from banks 738,672 738,672 978,239 978,239
=========================================================================================================
FINANCIAL LIABILITIES
- ---------------------
Non-interest bearing demand deposits $1,657,037 $1,657,037 $2,124,828 $2,124,828
Savings and interest bearing demand deposits 5,295,897 5,295,897 4,209,141 4,209,141
Time open and C.D.'s:
Maturing in year 1 1,811,778 1,812,142 1,584,470 1,589,614
Maturing in year 2 476,520 477,148 523,248 525,733
Maturing in year 3 171,192 171,419 152,351 153,350
Maturing in year 4 51,399 51,489 47,775 48,122
Maturing in year 5 49,969 50,047 42,659 42,971
Maturing in over 5 years 16,405 16,469 16,106 16,313
Federal funds purchased and securities
sold under agreements to repurchase 617,830 617,830 512,558 512,558
Long-term debt and other borrowings 27,130 26,837 7,207 7,343
=========================================================================================================
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.
61
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, 1998, standby letters of
credit outstanding of the banking subsidiaries amounted to $238,745,000, net of
$292,000 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 $22,353,000 outstanding
commercial letters of credit at December 31, 1998. 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, 1998, the Company's commitments to purchase and sell when-issued
securities were $2,831,000.
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 to
limit its interest rate risk. The notional value of these contracts was
$315,971,000 at December 31, 1998. The current credit exposure (or replacement
cost) across all off-balance-sheet derivative contracts covered by the risk-
based capital standards was $11,280,000 at December 31, 1998.
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
$3,054,000, $2,401,000 and $2,361,000 in 1998, 1997 and 1996, respectively. A
summary of minimum lease commitments follows:
(IN THOUSANDS) TYPE OF PROPERTY
- --------------------------------------------------------------------
REAL TOTAL
YEARS ENDED DECEMBER 31 PROPERTY EQUIPMENT COMMITMENTS
- --------------------------------------------------------------------
1999 $ 2,787 $232 $ 3,019
2000 2,594 198 2,792
2001 2,383 108 2,491
2002 1,917 22 1,939
2003 1,609 19 1,628
After 16,726 - 16,726
- --------------------------------------------------------------------
Total minimum
lease payments $28,595
====================================================================
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 1999.
The Company incurred expense of $15,248,000 in 1998, $11,989,000 in 1997 and
$9,505,000 in 1996 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 1998,
$3,030,000 in 1997 and $1,515,000 in 1996. The Company's remaining commitment
at December 31, 1998 was $2,273,000.
In the normal course of business, the Company had certain lawsuits pending at
December 31, 1998. 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.
62
NOTES TO FINANCIAL STATEMENTS [CONT.] COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
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) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Investment in consolidated subsidiaries:
Banks $ 913,447 $ 847,645
Non-banks 31,497 29,104
Receivables from subsidiaries, net of borrowings 7,059 10,583
Cash 492 167
Securities purchased under agreements to resell 7,002 7,100
Investment securities:
Available for sale 109,773 73,339
Other non-marketable 2,265 665
Other assets 23,416 22,750
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,094,951 $ 991,353
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable, accrued taxes and other liabilities $ 14,166 $ 10,569
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 14,166 10,569
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity 1,080,785 980,784
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,094,951 $ 991,353
===============================================================================================================
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
INCOME
- ------
Dividends received:
Bank subsidiaries $ 142,316 $ 103,626 $ 120,024
Non-bank subsidiaries 379 200 250
Earnings of consolidated subsidiaries, net of dividends 8,317 28,628 (393)
Interest on investment securities 4,198 3,451 2,774
Interest on securities purchased under agreements to resell 316 233 244
Management fees charged subsidiaries 20,719 16,842 13,951
Data processing fees charged subsidiaries - 27,638 21,596
Net gains (losses) on securities transactions 1,101 1,967 (507)
Other 1,588 1,577 1,181
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCOME 178,934 184,162 159,120
===============================================================================================================
EXPENSE
- -------
Salaries and employee benefits 19,854 28,525 21,981
Marketing 519 351 123
External data processing 3 11,552 9,041
Other 10,664 13,928 10,621
- ---------------------------------------------------------------------------------------------------------------
TOTAL EXPENSE 31,040 54,356 41,766
- ---------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) (2,197) (2,896) (2,158)
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 150,091 $ 132,702 $ 119,512
===============================================================================================================
63
CONDENSED STATEMENTS OF CASH FLOWS
For The Years Ended December 31
- ----------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 150,091 $ 132,702 $ 119,512
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings of consolidated subsidiaries, net of dividends (8,317) (28,628) 393
Other adjustments, net 2,168 (5,329) (3,398)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 143,942 98,745 116,507
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
(Increase) decrease in investment in subsidiaries, net (3) 457 (438)
(Increase) decrease in receivables from subsidiaries, net of borrowings 3,524 (2,541) 456
Proceeds from sales of investment securities 6,994 2,538 627
Proceeds from maturities of investment securities 432,963 473,204 249,023
Purchases of investment securities (471,530) (450,361) (296,726)
Net decrease in securities purchased under agreements to resell 98 238 34,830
Net purchases of equipment (526) (334) (2,723)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (28,480) 23,201 (14,951)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchases of treasury stock (85,132) (94,067) (78,408)
Sales of treasury stock 3,737 2,599 4,039
Cash dividends paid on common stock (33,742) (30,432) (27,462)
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (115,137) (121,900) (101,831)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 325 46 (275)
Cash at beginning of year 167 121 396
- ----------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 492 $ 167 $ 121
================================================================================================================
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. In 1997 and 1996, the Parent charged data
processing fees, which were allocated to the subsidiaries based on transaction
volume. In 1998, the data servicing department was transferred from the Parent
to a subsidiary bank, with a resulting decline in related fee income, provider
expense, salary and depreciation expense on the Parent. 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, 1998, the Parent had a $20,000,000 line of credit for general
corporate purposes with a subsidiary bank. During 1998, 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
$26,643,000 at December 31, 1998. The corresponding net of tax unrealized gain
included in stockholders' equity was $16,519,000. Also included in stockholders'
equity was the unrealized net of tax gain in fair value of investment securities
held by subsidiaries, which amounted to $36,553,000 at December 31, 1998.
64
INDEPENDENT AUDITORS' REPORT COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
January 29, 1999
Kansas City, Missouri
65
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, 1998. 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, 1998.
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, 1998.
66
SUMMARY OF QUARTERLY STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
For The Quarter Ended
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 12/31/98 9/30/98 6/30/98 3/31/98
- -------------------------------------------------------------------------------------------------------------
Interest income $187,299 $183,468 $180,151 $177,553
Interest expense (75,429) (76,863) (74,955) (73,479)
- -------------------------------------------------------------------------------------------------------------
Net interest income 111,870 106,605 105,196 104,074
Non-interest income 57,667 50,670 55,741 49,959
Salaries and employee benefits (51,061) (48,644) (49,879) (48,506)
Other expense (52,583) (43,301) (43,455) (41,915)
Provision for loan losses (6,971) (7,777) (11,410) (10,716)
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 58,922 57,553 56,193 52,896
Income taxes (18,522) (19,839) (18,699) (18,413)
- -------------------------------------------------------------------------------------------------------------
Net income $ 40,400 $ 37,714 $ 37,494 $ 34,483
- -------------------------------------------------------------------------------------------------------------
Net income per share - basic* $ .66 $ .62 $ .61 $ .57
Net income per share - diluted* $ .65 $ .61 $ .60 $ .56
- -------------------------------------------------------------------------------------------------------------
Weighted average shares - basic* 61,106 60,758 61,371 61,037
Weighted average shares - diluted* 62,084 61,721 62,485 62,131
- -------------------------------------------------------------------------------------------------------------
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* $ .60 $ .56 $ .52 $ .48
Net income per share - diluted* $ .59 $ .55 $ .52 $ .47
- -------------------------------------------------------------------------------------------------------------
Weighted average shares - basic* 61,324 61,305 61,560 61,475
Weighted average shares - diluted* 62,414 62,151 62,229 62,202
- -------------------------------------------------------------------------------------------------------------
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* $ .52 $ .49 $ .46 $ .43
Net income per share - diluted* $ .52 $ .49 $ .46 $ .42
- -------------------------------------------------------------------------------------------------------------
Weighted average shares - basic* 62,038 62,366 63,195 63,894
Weighted average shares - diluted* 62,713 62,712 63,530 64,297
- -------------------------------------------------------------------------------------------------------------
* Restated for the three for two stock split and 5% stock dividend distributed
in 1998.
COMMUNITY BANK DIRECTORS
(This list not included in EDGARized exhibit.)
67 through 72
OFFICERS AND DIRECTORS
(This list not included in EDGARized exhibit.)
Inside Back Cover