-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JBHvf7Ae8hjx1WkSNmuNvxWLVtDWbyZnBjqeG5dLqznjO4vGcrRxudS2lixcm58Q Hnty6FI3gCYWTVhaGZhkBA== 0000022356-98-000003.txt : 19980317 0000022356-98-000003.hdr.sgml : 19980317 ACCESSION NUMBER: 0000022356-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCE BANCSHARES INC /MO/ CENTRAL INDEX KEY: 0000022356 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 430889454 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-02989 FILM NUMBER: 98565014 BUSINESS ADDRESS: STREET 1: 1000 WALNUT CITY: KANSAS CITY STATE: MO ZIP: 64106 BUSINESS PHONE: 8162342000 MAIL ADDRESS: STREET 1: P O BOX 13686 CITY: KANSAS CITY STATE: MO ZIP: 64199 10-K 1 12/31/97 FORM 10-K - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 0-2989 COMMERCE BANCSHARES, INC. (Exact name of registrant as specified in its charter) Missouri 43-0889454 (State of Incorporation) (IRS Employer Identification No.) 1000 Walnut, Kansas City, MO 64106 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (816) 234-2000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: $5 PAR VALUE COMMON STOCK (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ As of February 20, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $2,396,000,000. As of February 20, 1998, there were 38,510,451 shares of Registrant's $5 Par Value Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE - ------------------------------------------------------------------------------- The Annual Report to Shareholders for the fiscal year ended December 31, 1997 is incorporated in Part I, Part II, and Part IV of the Form 10-K. Portions of the definitive proxy statement with respect to the annual meeting of shareholders to be held on April 15, 1998, are incorporated in Part III. - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Commerce Bancshares, Inc. (the "Company"), a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Missouri on August 4, 1966. The Company presently owns or controls substantially all of the outstanding capital stock of one national banking association located in Missouri, one national banking association located in Illinois, three national banking associations in Kansas, and a credit card bank which is located in Nebraska and is limited in its activities to the issuance of credit cards. The Company also owns directly several non-banking subsidiaries which are engaged in owning real estate which is leased to the Company's banking subsidiaries, underwriting credit life and credit accident and health insurance, selling property and casualty insurance (all such insurance relating to extensions of credit made by the banking subsidiaries), providing venture capital through both a small business investment corporation as well as a venture capital limited partnership (in which the Company has a 50% interest and which is managed by the Company), and mortgage banking. The Company also owns second tier holding companies which are the direct owners of several of the above mentioned banks. The results of operations of each of the non-banking subsidiaries of the Company are insignificant and do not materially affect the results of operation of the Company. As reflected on pages 28 through 31 of the 1997 Annual Report to Shareholders, the loan portfolio of the Company is well diversified. It does, however, contain certain risks as discussed on pages 31 through 32. The Company is operating in a multi-state environment that consists of a profitable blend of commercial, real estate, and consumer lending activities. The Company is the second largest Missouri-based bank holding company in terms of deposit market share. The banking subsidiary of the Company with locations in Missouri regional markets (which comprise approximately 81% of the banking assets of the Company) competes with approximately 500 Missouri banks, together with savings and loans and other financial institutions. The Illinois and Kansas subsidiary banks encounter the same or similar competition in their markets where over 900 Illinois banks and over 500 Kansas banks operate. In addition, the three states are served by numerous savings associations, credit unions, finance companies, and other financial intermediaries offering similar products to the customer base. Missouri, being centrally located in the United States, provides a natural site for production and distribution facilities and also serves as a transportation hub. The economy is well-diversified with many major industries represented, such as automobile manufacturing, aircraft manufacturing, food production and agricultural production together with related industries. Missouri has a relatively balanced real estate market and the Missouri unemployment rate is generally at or below the national average. There are no significant economic problems in general for the communities served by the Company. The adjacent states of Kansas and Illinois share many of the same characteristics in the communities being served and their local economies are generally stable and not abnormally weakened by the national economy. In the banking industry, Missouri is unique with two Federal Reserve Banks, located in St. Louis and Kansas City, which results in operating efficiencies for the subsidiary banks and their customers. In addition, the banking subsidiary in Illinois is a member of the Federal Reserve Bank of Chicago which provides additional flexibility to the operations area. The banking subsidiaries compete with other financial institutions engaged in the business of making loans or accepting deposit accounts, such as savings and loan associations, insurance companies, small loan companies, credit unions, finance companies, and other banking intermediaries, some or all of which may be located in the communities where the Company's banking subsidiaries are located. Such competition is based primarily on rates and quality of service provided. The Company, as a bank holding company, is primarily regulated by the Board of Governors of the Federal Reserve System. The subsidiary banks of the Company are all national banking associations and as such are primarily regulated by the Comptroller of the Currency. 2 As discussed on page 47 of the 1997 Annual Report to Shareholders, the Company completed the acquisitions of two Kansas banks in 1997 and a third Kansas bank effective March 1, 1998. During 1997, the Company continued to merge its subsidiary bank charters in an effort to improve customer service and minimize operating overhead. Commerce Bank, N.A. (Wichita, KS) was merged into Commerce Bank, N.A. (Hays, KS) and the main location of the surviving bank was changed to Wichita, KS. Commerce Bank, N.A. (Clayton, MO) was merged into Commerce Bank, N.A. (Kansas City, MO), with the surviving bank designated as Commerce Bank, N.A. (Missouri). The Company and its subsidiaries employed 4,497 persons on a full-time basis and 784 persons on a part-time basis at December 31, 1997. The information required under the caption "Statistical Disclosure by Bank Holding Companies" is included in the "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and the "Notes to Financial Statements" sections of the 1997 Annual Report to Shareholders as indicated below and is hereby incorporated by reference. The following schedule reflects the page number of the Annual Report where the various captioned information is shown.
ANNUAL REPORT PAGE ------------- I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 23, 38-41 II. Investment Portfolio 32, 49 III. Loan Portfolio Types of Loans 28 Maturities and Sensitivities of Loans to Changes in Interest Rates 28 Risk Elements 31-32 IV. Summary of Loan Loss Experience 24-26 V. Deposits 36, 38-39 VI. Return on Equity and Assets 22 VII. Short-Term Borrowings 50
3 ITEM 2. PROPERTIES The larger banking subsidiaries maintain their main offices in various buildings listed below. These are owned by the banking subsidiary or a subsidiary. The banks lease unoccupied premises to the public. The buildings are located in the downtown areas of the cities they serve.
NET RENTABLE % OCCUPIED % OCCUPIED BUILDING SQUARE FOOTAGE IN TOTAL BY BANK -------- -------------- ---------- ---------- 922 Walnut Kansas City, MO...................... 205,000 84% 57% 1000 Walnut Kansas City, MO...................... 384,000 93 30 720 Main Kansas City, MO...................... 180,000 98 85 8000 Forsyth Clayton, MO.......................... 197,000 94 86 416 Main Peoria, IL........................... 224,000 80 25 150 N. Main Wichita, KS.......................... 191,000 82 55
The main offices of the other subsidiary banks and branch locations are owned by the respective bank with the exception of Commerce Bank of Omaha, N.A., which leases its main office. Additionally, a number of branch locations are located in leased premises, including retail, convenience and grocery stores. ITEM 3. LEGAL PROCEEDINGS The information required by this item is set forth under the caption "Commitments and Contingencies" on page 58 of the Annual Report to Shareholders for the fiscal year ended December 31, 1997, and is hereby incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1997 to a vote of security holders through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF THE REGISTRANT The following are the executive officers of the Company, each of whom is elected annually, and there are no arrangements or understandings between any of the persons so named and any other person pursuant to which such person was elected as an executive officer. NAME AND AGE POSITIONS WITH REGISTRANT Jeffery D. Aberdeen, 44 Controller of the Company since December, 1995. Assistant Controller of the Company and Controller of Commerce Bank, N.A. (Kansas City, MO), a former subsidiary of the Company, prior thereto. Andrew F. Anderson, 46 Chairman of the Board, President and Chief Executive Officer of Commerce Bank, N.A. (Illinois), a subsidiary of the Company, since August, 1995. President and Chief Executive Officer of The Peoples Bank of Bloomington, IL prior thereto. John O. Brown, 64 Vice Chairman of the Company and Commerce Bank, N.A. (Missouri), a subsidiary of the Company, since February, 1995. Chairman of the Board of Commerce Bank, N.A. (Kansas City, MO) prior thereto. 4 A. Bayard Clark, 52 Chief Financial Officer, Executive Vice President and Treasurer of the Company since December, 1995. Executive Vice President of the Company prior thereto. Robert A. Hammerschmidt, Jr., Executive Vice President of Commerce Bank, N.A. 46 (Missouri) since July, 1996. President and Chief Executive Officer of Commerce Bank, N.A. (Columbia, MO), a former subsidiary of the Company, prior thereto. David W. Kemper, 47 Chairman of the Board of Directors of the Company since November, 1991, Chief Executive Officer of the Company since June, 1986, and President of the Company since April, 1982. Chairman of the Board and President of Commerce Bank, N.A. (Missouri). He is the son of James M. Kemper, Jr. (a former Director and former Chairman of the Board of the Company) and the brother of Jonathan M. Kemper, Vice Chairman of the Company. Jonathan M. Kemper, 44 Vice Chairman of the Company since November, 1991 and Vice Chairman of Commerce Bank, N.A. (Missouri) since December, 1997. Prior thereto, he was Chairman of the Board and Chief Executive Officer from February, 1995 and President from July, 1996 of Commerce Bank, N.A. (Kansas City, MO). President and Chief Executive Officer of Commerce Bank, N.A. (Kansas City, MO) prior thereto. He is the son of James M. Kemper, Jr. (a former Director and former Chairman of the Board of the Company) and the brother of David W. Kemper, Chairman, President, and Chief Executive Officer of the Company. Charles G. Kim, 37 Executive Vice President of the Company since April, 1995. Prior thereto, he was Senior Vice President of Commerce Bank, N.A. (Clayton, MO), a former subsidiary of the Company, from April, 1993. Vice President of Commerce Bank, N.A. (Clayton, MO) prior thereto. Seth M. Leadbeater, 47 Executive Vice President of Commerce Bank, N.A. (Missouri) since December, 1997. Prior thereto, he was President of Commerce Bank, N.A. (Clayton, MO) from October, 1992. Prior thereto, he was Executive Vice President of Commerce Bank, N.A. (Clayton, MO) from April, 1991. Executive Vice President of Commerce Bank, N.A. (Kansas City, MO) prior thereto. Peter F. Mackie, 57 Vice President of the Company and Executive Vice President of Commerce Bank, N.A. (Missouri). Robert C. Matthews, Jr., 50 Executive Vice President of the Company since December, 1989. Michael J. Petrie, 41 Senior Vice President of the Company since April, 1995. Prior thereto, he was Vice President of the Company from April, 1993. Prior thereto, he was Vice President of Commerce Bank, N.A. (Kansas City, MO). William A. Sullins, Jr., 59 Vice Chairman of the Company since August, 1992. Vice Chairman of Commerce Bank, N.A. (Clayton, MO) prior thereto. 5 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS The information required by this item is set forth on page 21 of the Annual Report to Shareholders for the fiscal year ended December 31, 1997, and is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is set forth on page 22 of the Annual Report to Shareholders for the fiscal year ended December 31, 1997, and is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is set forth on pages 22 through 41 of the Annual Report to Shareholders for the fiscal year ended December 31, 1997, and is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is set forth on pages 42 through 62 of the Annual Report to Shareholders for the fiscal year ended December 31, 1997, and is hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 401 and 405 of Regulation S-K regarding executive officers is included in Part I--Item 4 of this Form 10-K under the caption "Executive Officers of the Registrant" and the caption "Election of Directors" in the definitive proxy statement, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K regarding executive compensation is included under the captions "Executive Compensation", "Retirement Benefits", "Compensation Committee Report on Executive Compensation", and "Compensation Committee Interlocks and Insider Participation" in the definitive proxy statement, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K is covered under the caption "Voting Securities and Ownership Thereof by Certain Beneficial Owners and Management" in the definitive proxy statement, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 404 of Regulation S-K is covered under the caption "Election of Directors" in the definitive proxy statement, which is incorporated herein by reference. 6 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Financial Statements--The Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Cash Flows, Statements of Stockholders' Equity, Notes to Financial Statements and Summary of Quarterly Statements of Income (2) Financial Statement Schedules--All schedules are omitted as such information is inapplicable or is included in the financial statements. (3) Exhibits: 3--Articles of Incorporation and By-Laws: (a) Restated Articles of Incorporation, as amended, were filed in quarterly report on Form 10-Q dated August 9, 1996, and the same are hereby incorporated by reference. (b) Restated By-Laws were filed in quarterly report on Form 10-Q dated August 9, 1996, and the same are hereby incorporated by reference. 4--Instruments defining the rights of security holders, including indentures: (a) Pursuant to paragraph 4(iii) of Item 601 Regulation S-K, Registrant will furnish to the Commission upon request copies of long-term debt instruments. (b) Shareholder Rights Plan contained in an Amended and Restated Rights Agreement was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. (c) Form of Rights Certificate and Election to Exercise was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. (d) Form of Certificate of Designation of Preferred Stock was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. 10--Material Contracts (Each of the following is a management contract or compensatory plan arrangement.): (a) Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (b) Commerce Bancshares, Inc. Incentive Stock Option Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (c) Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (e) Copy of Supplemental Retirement Income Plan established by Commerce Bancshares, Inc. for James M. Kemper, Jr. was filed in annual report on Form 10-K dated March 6, 1992, and the same is hereby incorporated by reference. (f) Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. 7 (g) Commerce Executive Retirement Plan was filed in annual report on Form 10-K dated March 8, 1996, and the same is hereby incorporated by reference. (h) Commerce Bancshares, Inc. Restricted Stock Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (i) Form of Severance Agreement between Commerce Bancshares, Inc. and certain of its executive officers entered into as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. 13--Annual Report to Security Holders 21--Subsidiaries of the Registrant 23--Independent Accountants' Consent 24--Powers of Attorney (in the following form): POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby appoint J. Daniel Stinnett and Jeffery D. Aberdeen, or either of them, attorney for the undersigned to sign the Annual Report on Form 10-K of Commerce Bancshares, Inc., for the fiscal year ended December 31, 1997, together with any and all amendments which might be required from time to time with respect thereto, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, with respect to Commerce Bancshares, Inc., with full power and authority in either of said attorneys to do and perform in the name of and on behalf of the undersigned every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person. IN WITNESS WHEREOF, the undersigned have executed these presents this 6th day of February, 1998. Signed by the following directors: Messrs. Giorgio Balzer; Fred L. Brown; James B. Hebenstreit; David W. Kemper; Jonathan M. Kemper; Terry O. Meek; Benjamin F. Rassieur III; L. W. Stolzer, Andrew C. Taylor; and Robert H. West. 27--Financial Data Schedule (b) Reports on Form 8-K: No report on Form 8-K was filed during the last quarter of 1997. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 11th day of March, 1998. COMMERCE BANCSHARES, INC. /s/J. Daniel Stinnett By: _____________________ J. Daniel Stinnett Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 11th day of March, 1998. /s/Jeffery D. Aberdeen ------------------------- Jeffery D. Aberdeen Controller (Chief Accounting Officer) /s/A. Bayard Clark ------------------------- A. Bayard Clark Chief Financial Officer David W. Kemper ) (Chief Executive Officer) ) Giorgio Balzer ) Fred L. Brown ) James B. Hebenstreit ) Jonathan M. Kemper } A majority of the James M. Kemper, Jr. ) Board of Directors* Terry O. Meek ) Benjamin F. Rassieur III ) L. W. Stolzer ) Andrew C. Taylor ) Robert H. West ) - -------- *David W. Kemper, Director and Chief Executive Officer, and the other Directors of Registrant listed, executed a power of attorney authorizing J. Daniel Stinnett, their attorney-in-fact, to sign this report on their behalf. /s/J. Daniel Stinnett ------------------------- J. Daniel Stinnett, Attorney-in-Fact 9 INDEX TO EXHIBITS 3--Articles of Incorporation and By-Laws: (a) Restated Articles of Incorporation, as amended, were filed in quarterly report on Form 10-Q dated August 9, 1996, and the same are hereby incorporated by reference. (b) Restated By-Laws were filed in quarterly report on Form 10-Q dated August 9, 1996, and the same are hereby incorporated by reference. 4--Instruments defining the rights of security holders, including indentures: (a) Pursuant to paragraph 4(iii) of Item 601 Regulation S-K, Registrant will furnish to the Commission upon request copies of long-term debt instruments. (b) Shareholder Rights Plan contained in an Amended and Restated Rights Agreement was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. (c) Form of Rights Certificate and Election to Exercise was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. (d) Form of Certificate of Designation of Preferred Stock was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. 10--Material Contracts (Each of the following is a management contract or compensatory plan arrangement.): (a) Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (b) Commerce Bancshares, Inc. Incentive Stock Option Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (c) Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (e) Copy of Supplemental Retirement Income Plan established by Commerce Bancshares, Inc. for James M. Kemper, Jr. was filed in annual report on Form 10-K dated March 6, 1992, and the same is hereby incorporated by reference. (f) Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. (g) Commerce Executive Retirement Plan was filed in annual report on Form 10-K dated March 8, 1996, and the same is hereby incorporated by reference. (h) Commerce Bancshares, Inc. Restricted Stock Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996 and the same is hereby incorporated by reference. 10 (i) Form of Severance Agreement between Commerce Bancshares, Inc. and certain of its executive officers entered into as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference. 13--Annual Report to Security Holders 21--Subsidiaries of the Registrant 23--Independent Accountants' Consent 24--Powers of Attorney 27--Financial Data Schedule 11 EX-13 2 12/31/97 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 MISSION STATEMENT COMMERCE BANK WILL BE THE PREFERRED PROVIDER OF TARGETED FINANCIAL SERVICES IN OUR COMMUNITIES BASED ON STRONG CUSTOMER RELATIONSHIPS. WE WILL STRENGTHEN THESE RELATIONSHIPS BY PROVIDING THE RIGHT SOLUTIONS THAT COMBINE OUR TECHNOLOGY, EXPERTISE AND FINANCIAL STRENGTH. OUR GOAL IS TO CREATE CUSTOMER LOYALTY, SHAREHOLDER VALUE AND EMPLOYEE SATISFACTION. Be accessible. Offer solutions. Build relationships. CONTENTS ANNUAL MEETING Chairman's Letter Page 2 The annual meeting of Shareholders will be held Wednesday, April 15, Management Report Page 11 1998 at 10:00 a.m. in The Plaza, Ritz-Carlton, 100 Carondelet Management's Discussion and Plaza, Clayton, Missouri 63105 Analysis of Consolidated Financial Condition and TRANSFER AGENT, REGISTRAR Results of Operations Page 22 AND DIVIDEND DISBURSING AGENT First Chicago Trust Company of Financial Statements of Commerce New York, P.O. Box 2500, Jersey Bancshares, Inc. and City, New Jersey 07303-2500, Subsidiaries Page 42 800-446-2617. Notes to Financial NOTICE Statements Page 46 Shareholders, analysts or potential investors desiring Independent Auditors' additional information may make Report Page 60 their requests in writing to Mr. Jeffery D. Aberdeen, Controller, Directors and Officers Page 63 at the address of the Company. DIVIDEND REINVESTMENT PROGRAM Commerce Brokerage Services, Inc.* offers Equity Dividend Reinvestment for securities held within a Commerce brokerage account. Our brokerage customers may elect this option for more than 6,200 individual securities, including the common stock of Commerce Bancshares, Inc. For information, please contact any of our Regional Investment Specialists or one of our main brokerage offices: St. Louis 314-746-8777 Kansas City 816-234-2416 800-356-1606 800-772-SAVE * An affiliate of Commerce Bancshares, Inc. and a registered broker-dealer. FINANCIAL HIGHLIGHTS (This page not included in the EDGARized exhibit.) 1 CHAIRMAN'S LETTER (This section not included in the EDGARized exhibit.) 2 - 7 MANAGEMENT REPORT (This section not included in the EDGARized exhibit.) 8 - 20 Commerce Bancshares, Inc. CONTENTS
Pages ----- Common Stock Data Below Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 22 through 41 Consolidated Financial Statements: Balance Sheets 42 Statements of Income 43 Statements of Cash Flows 44 Statements of Stockholders' Equity 45 Notes to Financial Statements 46 through 60 Independent Auditors' Report 60 Statement of Management's Responsibility 61 Summary of Quarterly Statements of Income 62 ================================================================================
COMMON STOCK DATA Commerce Bancshares, Inc. (Parent) The following table sets forth the high and low prices of actual transactions for the Company's common stock (CBSH) and cash dividends paid for the periods indicated (restated for the 1997 stock dividend).
Cash 1997 High Low Dividends - -------------------------------------------------------------------------------- First Quarter $48.10 $42.26 $.195 Second Quarter 45.95 40.00 .195 Third Quarter 57.02 42.86 .195 Fourth Quarter 70.25 53.69 .195 1996 - -------------------------------------------------------------------------------- First Quarter $34.81 $31.52 $.172 Second Quarter 33.45 30.95 .172 Third Quarter 36.73 30.16 .172 Fourth Quarter 47.14 35.03 .172 1995 - -------------------------------------------------------------------------------- First Quarter $26.56 $23.32 $.155 Second Quarter 27.86 26.13 .155 Third Quarter 34.45 26.13 .155 Fourth Quarter 34.69 32.18 .155
Commerce Bancshares, Inc. common shares are publicly traded in the over-the- counter market on the NASDAQ National Market System. The Company had 5,694 shareholders of record as of December 31, 1997. 21 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. The historical trends reflected in the restated financial information presented below are not reflective of anticipated future results.
KEY RATIOS - ------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- (Based on average balance sheets): Return on total assets 1.37% 1.28% 1.21% 1.21% 1.14% Return on stockholders' equity 14.08 13.40 12.72 13.05 12.99 Efficiency ratio 59.94 60.96 62.60 65.10 64.58 Loans to deposits 70.93 67.07 68.28 61.07 58.08 Net yield on interest earning assets (on a tax equivalent basis) 4.61 4.40 4.50 4.46 4.22 Non-interest bearing deposits to total deposits 21.35 19.65 19.81 19.60 19.72 Equity to total assets 9.74 9.53 9.48 9.30 8.75 Cash dividend payout ratio 23.24 23.28 24.07 22.07 21.28 ========================================================================================================================= SELECTED FINANCIAL DATA - ------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 397,774 $365,743 $355,745 $314,617 $284,524 Provision for loan losses 31,354 24,522 14,629 5,845 11,381 Non-interest income 180,092 159,162 133,150 121,028 121,423 Non-interest expense 344,450 317,954 305,484 282,078 257,316 Net income 132,702 119,512 107,640 96,111 86,894 Net income per share-basic* 3.40 2.99 2.60 2.48 2.28 Net income per shares-diluted* 3.36 2.97 2.59 2.46 2.26 Total assets 10,306,941 9,698,186 9,573,951 8,035,574 8,047,413 Loans 6,224,381 5,472,342 5,317,813 4,432,662 4,024,075 Investment securities 2,664,931 2,721,515 2,594,753 2,645,420 2,805,630 Deposits 8,700,578 8,166,429 8,193,092 6,990,430 6,839,470 Long-term debt 7,102 14,120 14,562 6,487 6,894 Stockholders' equity 980,784 924,271 883,783 728,198 712,620 Cash dividends per common share* .781 .689 .622 .543 .480 =========================================================================================================================
*Restated for 5% stock dividend distributed in December 1997 and adoption of SFAS No. 128
RESULTS OF OPERATIONS - ------------------------------------------------------------------------------------------------------------------------- $ Change % Change (Dollars in thousands) '97-'96 '96-'95' '97-'96 '96-'95 - ------------------------------------------------------------------------------------------------------------------------- Net interest income $32,031 $ 9,998 8.8% 2.8% Provision for loan losses 6,832 9,893 27.9 67.6 Non-interest income 20,930 26,012 13.2 19.5 Non-interest expense 26,496 12,470 8.3 4.1 Income taxes 6,443 1,775 10.2 2.9 - ------------------------------------------------------------------------------------------------------------------------- Net income $13,190 $11,872 11.0% 11.0% =========================================================================================================================
Consolidated net income for 1997 was $132.7 million, an 11.0% increase over 1996 net income. Diluted earnings per share increased 13.1% to $3.36 in 1997 compared to $2.97 in 1996. The return on assets was 1.37% in 1997, compared to 1.28% in 1996, while the return on equity increased to 14.08%. The increase in net income was mainly due to strong growth in the net interest margin, mainly as a result of growth in loans, coupled with a 13.2% growth in non-interest income, but offset by a higher provision for loan losses and higher non-interest expense. The improvement in non-interest income resulted from an increase in credit card, trust and other money management fee income, while growth in non- interest expense occurred due to increases in incentive compensation and higher data processing costs. Net income was $119.5 million in 1996 compared to $107.6 million in 1995, with a 14.7% increase in diluted earnings per share. The $11.9 million increase over 1995 included significant growth in non-interest income, mainly due to increases in fees from deposit accounts, credit cards and trust services, combined with gains on 22 investment securities. The change in non-interest expense included lower federal deposit insurance expense, coupled with relatively flat costs for marketing and data processing. Over the past several years, the Company has focused on improving internal efficiency and profitability. Through a series of internal mergers, the number of bank charters was reduced from 16 in 1995 to 6 in 1996. The Company has continued this process in 1997 by merging its two large banks, thereby reducing its existing charters by one. This merger should further streamline and improve operations and result in enhancements for customers. In 1997, two Kansas banks with assets of $295 million were acquired at a cost of $53.2 million in treasury stock and $4.3 million in cash. In 1995, banks with assets totaling $1.2 billion were acquired at a cost of $12.0 million in treasury stock, $75.7 million in newly issued common stock and $94.1 million in cash. Certain of these transactions have been recorded using the pooling of interests method of accounting. However, prior year financial results have not been restated for these poolings because those restated amounts do not differ materially from the Company's historical operating results. The Company has signed a definitive agreement to merge with Pittsburg Bancshares, Inc., a one-bank Kansas holding company with four locations and approximately $120 million in assets. The merger is expected to be completed in the first quarter of 1998, subject to regulatory and stockholder approval. It is not expected to have a material effect on the financial statements of the Company. The Board of Directors declared a fourth annual consecutive 5% stock dividend on October 3, 1997, payable on December 12, 1997. All per share and average share data in this report has been restated to reflect the 1997 stock dividend. NET INTEREST INCOME The following table summarizes the changes in net interest income on a fully tax equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate. Management believes this allocation method, applied on a consistent basis, provides meaningful comparisons between the respective periods.
- --------------------------------------------------------------------------------------------------------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Change due to Change due to Average Average Average Average (In thousands) Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME, FULLY TAXABLE EQUIVALENT BASIS Loans $ 41,682 $ 2,674 $ 44,356 $18,857 $(15,762) $ 3,095 Investment securities: U.S. government & federal agency securities (10,067) 1,511 (8,556) 3,553 (318) 3,235 State & municipal securities (1,237) (48) (1,285) (632) 115 (517) Other securities 13,174 (1,506) 11,668 (4,656) 2,022 (2,634) Federal funds sold and securities purchased under agreements to resell (11,962) 275 (11,687) 15,362 (2,103) 13,259 - --------------------------------------------------------------------------------------------------------------------------- Total interest income 31,590 2,906 34,496 32,484 (16,046) 16,438 - --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Savings 48 97 145 (332) (457) (789) Interest bearing demand 7,351 (1,999) 5,352 17,014 (8,376) 8,638 Time open & C.D.'s of less than $100,000 (1,332) (1,236) (2,568) (353) 1,452 1,099 Time open & C.D.'s of $100,000 and over (594) 268 (326) 555 (379) 176 Federal funds purchased and securities sold under agreements to repurchase 6 769 775 24 (2,389) (2,365) Long-term debt and other borrowings (224) 21 (203) (106) 14 (92) - --------------------------------------------------------------------------------------------------------------------------- Total interest expense 5,255 (2,080) 3,175 16,802 (10,135) 6,667 - --------------------------------------------------------------------------------------------------------------------------- Net interest income, fully taxable equivalent basis $ 26,335 $ 4,986 $ 31,321 $15,682 $ (5,911) $ 9,771 =========================================================================================================================== 23
Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations [Cont.] Net interest income was $397.8 million in 1997, $365.7 million in 1996 and $355.7 million in 1995. Compared to the prior year, net interest income increased $32.0 million, or 8.8%, in 1997 and increased $10.0 million, or 2.8%, in 1996. The increase in 1997 was the result of strong growth in average loans which increased by 9.3%, coupled with slightly higher earning asset rates and relatively stable deposit costs. The increase in net interest income in 1996 resulted from average loan growth of $160.0 million, but was partially offset by higher deposit costs and slightly lower rates on earning assets. The net yield on earning assets was 4.61% in 1997, 4.40% in 1996 and 4.50% in 1995. The net yield on earning assets increased 21 basis points in 1997 compared to 1996. Average interest earning assets increased 3.5% in 1997 over 1996, compared to 5.0% in 1996 over 1995. Average interest bearing liabilities increased 1.0% in 1997 compared to 4.9% in 1996. A portion of the 1996 increase over 1995 was due to acquisitions in 1995 of banks with assets of $1.2 billion. Tax equivalent interest income was $687.0 million in 1997, $652.5 million in 1996 and $636.0 million in 1995; and represents an increase of $34.5 million, or 5.3%, in 1997 and an increase of $16.4 million, or 2.6%, in 1996. The increased interest income in 1997 was due mainly to growth in average loans of $493.6 million, or 9.3%, partially offset by a $220.7 million decrease in average balances invested in short-term federal funds sold and securities purchased under agreements to resell. Average loan yields improved slightly. Loans represented 67% of average interest earning assets in 1997, investment securities represented 30% and short-term federal funds sold and securities purchased under agreement to resell represented 3%. Average balances and rates earned on investment securities in total increased slightly; during the year investments in U.S. government and federal agencies were shifted to CMO's and other marketable securities. The increase in interest income in 1996 compared to 1995 was due to increases in average balances on loans and federal funds sold/resell agreements, partially offset by lower rates earned on these categories. Total interest expense was $285.1 million in 1997, $281.9 million in 1996 and $275.3 million in 1995. The $3.2 million increase in 1997 interest expense compared to 1996 was due mainly to increases in average interest bearing deposits. Total average interest bearing deposits increased by $73.4 million in 1997, fueled mainly by growth in the Company's Premium Money Market deposit accounts and long-term certificates of deposit, but partially offset by declines in interest checking, investment savings and short-term certificates of deposit. Overall deposit rates remained stable during the year in most categories but reflected lower interest checking rates paid. Premium and other money market, interest checking, savings and certificates of deposit represented 39%, 19%, 5% and 37%, respectively, of total average interest bearing deposits. Interest expense increased $6.6 million, or 2.4%, in 1996 over 1995. Again, growth in Premium Money Market accounts contributed significantly to the increase in interest expense over 1995. Partially offsetting was a decline of 6 basis points in rates paid on total average deposits. PROVISION AND ALLOWANCE FOR LOAN LOSSES Management records the provision for loan losses, on an individual bank basis, in amounts sufficient to result in an allowance for loan losses that will cover current net charge-offs and risks believed to be inherent in the loan portfolio of each bank. Amounts charged against current income are based on such factors as past loan loss experience, current loan portfolio mix, evaluation of actual and potential losses in the loan portfolio, prevailing regional and national economic conditions that might have an impact on the portfolio, regular reviews and examinations of the loan portfolio conducted by internal loan reviewers supervised by Commerce Bancshares, Inc. (the Parent), and reviews and examinations by bank regulatory authorities. The balance in the allowance for loan losses is reduced when a loan or part thereof is considered by management to be uncollectible. Recoveries on loans previously charged off are added back to the allowance. During periods of growth in the loan portfolio, a portion of the provision may be taken to reflect management's 24 desire to maintain a satisfactory allowance to protect the Company from those losses which occur as a natural part of doing business. As with any financial institution, weak economic conditions, higher inflation, interest rates, or unemployment may lead to increased losses in the loan portfolio. Conversely, improvements in economic conditions tend to reduce the amounts charged against the allowance. Management has established various controls in order to limit future losses at the lending affiliates, such as: 1) a "watch list" of possible problem loans, 2) specific loan retention limits in relation to the size of each affiliate and market, 3) documented policies concerning loan administration (loan file documentation, disclosures, approvals, etc.) and 4) a loan review staff employed by the Parent which travels to subsidiary bank markets to audit for adherence to established Company controls and to review the quality and anticipated collectibility of the portfolio. Management determines which loans are possibly uncollectible or represent a greater risk of loss and makes additional provision to expense, if necessary, to maintain the allowance at a satisfactory level on an individual bank basis. The allowance for loan losses at December 31, 1997, was 1.70% of loans outstanding compared to 1.79% at year end 1996. The allowance for loan losses at year end covered non-performing assets (defined as non-accrual loans, loans 90 days delinquent and still accruing interest, and foreclosed real estate) by 217%. Net charge-offs totaled $27.9 million in 1997 compared to $24.8 million in 1996. The ratio of net charge-offs to average loans outstanding in 1997 was .48% compared to .47% in 1996 and .31% in 1995. The increase in net charge-offs in 1997 compared to 1996 was mainly attributable to higher net credit card losses coupled with improved loss experience in other consumer lending areas and continued favorable commercial lending experience. The provision for loan losses was $31.4 million, exceeding 1997 net charge-offs by $3.4 million, compared to a provision of $24.5 million in 1996 and $14.6 million in 1995. A subsidiary bank is an issuer of Visa and MasterCard credit cards. Credit card loans outstanding at year end 1997 amounted to $548.9 million, or 8.8% of total loans. The percentage of consumer loans outstanding which are generated through revolving credit balances and cash advances is significantly higher for Commerce than it is for a banking group that does not issue credit cards. Because credit card loans traditionally have a higher than average ratio of net charge-offs to loans outstanding when compared with other portfolio segments, management requires that a separate allowance for loan losses on credit card loans be maintained which, on a consolidated basis, was $16.1 million or 2.93% of credit card loans outstanding at December 31, 1997. Net charge-offs amounted to 3.81% of average credit card loans in 1997 compared to 2.92% in 1996. During 1997, the banking industry experienced increasing credit losses on these loans primarily due to high levels of consumer installment and revolving debt, rising delinquency, and decade-high levels of personal bankruptcies. Net charge-offs at major banks this year have ranged from 4% to over 7% of credit card loans. The Company has also experienced an increase in losses on credit card loans due to these same factors. However, its net charge-off experience has been significantly lower than industry averages. Other than as previously noted, management is not aware of any significant risks in the current loan portfolio mix that would result from concentrations of loans within any particular market, industry, or portfolio segment. Other than for the credit card risk mentioned above, management does not allocate the allowance for loan losses. It is deemed to be a general reserve available for all types of loan losses. The allowance at year end 1997 represented a 3.79 times multiple of net loan losses for the year just ended. Based on current economic conditions, management considers the December 31, 1997 allowance adequate to cover the possible risk of loss in the loan portfolio at the present time. Various appraisals and estimates of current value influence the calculation of the required allowance at any point in time. If economic conditions in the region deteriorate significantly, it is possible that additional assets would be classified as non-performing, and accordingly, additional provision for possible losses would be required. Such an event and its duration cannot be predicted at this time. 25 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations [Cont.] The schedule which follows summarizes the relationship between loan balances and activity in the allowance for loan losses:
Years Ended December 31 -------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------- Net loans outstanding at end of period (A) $ 6,224,381 $ 5,472,342 $ 5,317,813 $ 4,432,662 $ 4,024,075 ========================================================================================================================== Average loans outstanding (A) $ 5,815,192 $ 5,321,584 $ 5,161,552 $ 4,180,065 $ 3,835,834 ========================================================================================================================== Allowance for loan losses: Balance at beginning of period $ 98,223 $ 98,537 $ 87,179 $ 85,830 $ 77,149 -------------------------------------------------------------------------------------------------------------------------- Additions to allowance through charges to expense 31,354 24,522 14,629 5,845 11,381 -------------------------------------------------------------------------------------------------------------------------- Allowances of acquired banks 4,275 -- 12,932 2,953 3,661 -------------------------------------------------------------------------------------------------------------------------- Recovery of loans previously charged off: Business 2,992 1,739 1,632 2,540 3,690 Construction 340 -- -- 3 508 Business real estate 500 416 542 663 562 Personal real estate 70 123 99 226 141 Personal banking 3,420 2,628 2,633 2,259 2,528 Credit card 2,927 2,172 2,163 2,015 1,947 -------------------------------------------------------------------------------------------------------------------------- Total recoveries 10,249 7,078 7,069 7,706 9,376 -------------------------------------------------------------------------------------------------------------------------- Loans charged off: Business 5,734 4,912 3,422 2,511 3,858 Construction 300 -- -- -- 12 Business real estate 113 205 391 1,243 418 Personal real estate 401 341 208 196 395 Personal banking 8,472 9,327 7,413 3,442 3,897 Credit card 23,163 17,129 11,838 7,763 7,157 -------------------------------------------------------------------------------------------------------------------------- Total loans charged off 38,183 31,914 23,272 15,155 15,737 -------------------------------------------------------------------------------------------------------------------------- Net loans charged off 27,934 24,836 16,203 7,449 6,361 -------------------------------------------------------------------------------------------------------------------------- Balance at end of period $ 105,918 $ 98,223 $ 98,537 $ 87,179 $ 85,830 ========================================================================================================================== Ratio of net charge-offs to average loans outstanding .48% .47% .31% .18% .17% Ratio of allowance to loans at end of period 1.70% 1.79% 1.85% 1.97% 2.13% Ratio of provision to average loans outstanding .54% .46% .28% .14% .30% ==========================================================================================================================
(A) Net of unearned income; before deducting allowance for loan losses
NON-INTEREST INCOME ---------------------------------------------------------------------------------------------------------------------------- % Change (Dollars in thousands) 1997 1996 1995 '97-'96 '96-'95 ---------------------------------------------------------------------------------------------------------------------------- Trust fees $ 41,224 $ 35,536 $ 32,378 16.0% 9.8% Deposit account charges and other fees 57,223 54,506 44,658 5.0 22.1 Credit card transaction fees 30,703 26,586 23,341 15.5 13.9 Trading account profits and commissions 7,420 5,982 5,158 24.0 16.0 Net gains on securities transactions 3,253 3,293 897 (1.2) 267.1 Other 40,269 33,259 26,718 21.1 24.5 ---------------------------------------------------------------------------------------------------------------------------- Total non-interest income $180,092 $159,162 $133,150 13.2% 19.5% ============================================================================================================================ As a % of operating income (net interest income plus non-interest income) 31.2% 30.3% 27.2% Operating income per full-time equivalent employee $ 115.9 $ 108.1 $ 100.0 ============================================================================================================================
Non-interest income totaled $180.1 million in 1997, $159.2 million in 1996 and $133.2 million in 1995. The increase in non-interest income in 1997 of 13.2% resulted mainly from double digit growth in credit card transaction fees, trust fees, and other money management areas including bond, brokerage and mutual fund activities. The growth in credit card fees, which totaled $4.1 million, resulted from increased sales from both merchant and cardholder customers. Trust fee income grew $5.7 million as a result of new account growth and improved market conditions. Included in the other income category are gains on sales of student loans 26 and leveraged leases, which increased $3.1 million in 1997 over 1996. Also included in other income are various types of fee income, such as other money management, non-customer ATM and international transaction fees. These fees increased $5.0 million compared to the prior year. In 1996 compared to 1995, deposit account charges increased $9.8 million, partially due to fee restructuring and added cash management fees. Trust fees increased $3.2 million, reflecting increased new business coupled with improvement in market value of assets upon which some fees are based. Credit card transaction fees grew by $3.2 million. Included in other income were gains on sales of branches and fixed assets, which totaled $3.1 million more than in 1995. In 1997, the Parent and a venture capital subsidiary contributed net gains on equity securities transactions of $3.5 million. Banking subsidiaries contributed net gains of $2.2 million and $480 thousand in 1996 and 1995, respectively, on portfolio investment securities, with the remaining net gains attributable to sales of equity securities by the Parent and a venture capital subsidiary.
NON-INTEREST EXPENSE - -------------------------------------------------------------------------------------------------------------- % Change (Dollars in thousands) 1997 1996 1995 '97-'96 '96-'95 - -------------------------------------------------------------------------------------------------------------- Salaries $156,497 $141,328 $136,646 10.7% 3.4% Employee benefits 22,598 23,963 21,207 (5.7) 13.0 Net occupancy 21,570 21,456 20,294 .5 5.7 Equipment 16,492 15,185 14,256 8.6 6.5 Supplies and communication 25,838 24,697 24,139 4.6 2.3 Data processing 24,628 20,778 20,997 18.5 (1.0) Federal deposit insurance 1,120 2,124 8,807 (47.3) (75.9) Marketing 12,757 11,698 11,611 9.1 .7 Goodwill and core deposit premium amortization 9,778 11,448 11,094 (14.6) 3.2 Foreclosed property expense, net 1,114 2,406 164 (53.7) NM Other 52,058 42,871 36,269 21.4 18.2 - -------------------------------------------------------------------------------------------------------------- Total non-interest expense $344,450 $317,954 $305,484 8.3% 4.1% ============================================================================================================== Efficiency ratio (non-interest expense as a % of operating income excluding net gains on securities transactions) 59.9% 61.0% 62.6% Salaries and benefits as a % of total non-interest expense 52.0% 52.0% 51.7% Number of full-time equivalent employees 4,985 4,854 4,890 ==============================================================================================================
Non-interest expense totaled $344.5 million in 1997, $318.0 million in 1996 and $305.5 million in 1995. In 1997 compared to 1996, salaries increased $15.2 million, or 10.7%, which includes increased payroll costs for incentive pay on new business, while employee benefits decreased $1.4 million, or 5.7%. Equipment expense includes an increase in data processing equipment depreciation of $813 thousand. Data processing expense increased $3.9 million, partially because of increases in fee related credit card transaction volumes and higher charges by other information service providers. Goodwill and core deposit premium amortization decreased because of the effect of accelerated amortization methods, partially offset by additional goodwill recorded in a September 1997 purchase acquisition. Other expense above includes increases in professional fees of $1.9 million and software expenses of $1.9 million. In 1996 compared to 1995, salaries increased $4.7 million, or 3.4%, which reflected an overall reduction in full-time equivalent employees, partially offset by higher benefit costs, mainly in the health care area. Federal deposit insurance expense decreased $6.7 million due to a decrease in the assessment rate which began in mid 1995. Included in 1996 federal deposit insurance expense was a $1.3 million one-time charge in connection with the recapitalization of the Savings Association Insurance Fund. Since 1996, the Company has undertaken steps to address the issues and exposures related to the Year 2000 which may affect key financial, operational and information 27 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations (Cont.) systems. During this period, assessments of key financial, operational and information systems were completed. System modifications are underway for all major financial, operational and information systems. Plans to test system modifications as well as modifications to other operational systems will continue into 1998. The Company expects to substantially complete all Year 2000 conversion projects by the end of 1998. These costs, which are expensed as incurred, have not been material to date and are not expected to have a material impact on the Company's earnings in the future. INCOME TAXES Income tax expense was $69.4 million, $62.9 million and $61.1 million in 1997, 1996 and 1995, respectively. The effective tax rate on income from operations was 34.3%, 34.5% and 36.2% in 1997, 1996 and 1995, respectively. The difference between these effective tax rates and the federal statutory rate of 35% was mainly due to state and local income taxes and non-deductible goodwill amortization, offset by tax exempt interest income on state and municipal obligations. The lower effective tax rates in 1997 and 1996 were due to lower state income taxes and in 1996, the contribution of an appreciated asset. FINANCIAL CONDITION LOAN PORTFOLIO ANALYSIS A breakdown of average balances invested in each category of loans appears on page 38. Classifications of consolidated loans by major category at December 31 for each of the past five years are as follows:
Balance at December 31 - ------------------------------------------------------------------------------------------------------ (In thousands) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------ Business $2,056,862 $1,700,678 $1,716,080 $1,393,979 $1,380,452 Real estate--construction 233,209 182,474 168,031 127,948 90,102 Real estate--business 926,107 758,650 695,558 586,769 533,467 Real estate--personal 1,148,236 1,010,572 983,249 813,134 734,771 Personal banking 1,311,081 1,256,684 1,258,809 1,120,366 917,683 Credit card 548,886 563,284 496,086 390,466 367,600 - ------------------------------------------------------------------------------------------------------ Total loans, net of unearned income $6,224,381 $5,472,342 $5,317,813 $4,432,662 $4,024,075 ======================================================================================================
The contractual maturities of loan categories at December 31, 1997, and a breakdown of those loans between predetermined rate and floating rate loans are as follows:
Principal Payments Due - ------------------------------------------------------------------------------------------------------ In After One After One Year Year Through Five (In thousands) or Less Five Years Years Total - ------------------------------------------------------------------------------------------------------ Business $1,315,811 $ 702,430 $ 38,621 2,056,862 Real estate--construction 161,898 65,030 6,281 233,209 Real estate--business 299,815 533,090 93,202 926,107 Real estate--personal 105,749 215,646 826,841 1,148,236 - ------------------------------------------------------------------------------------------------------ Total $1,883,273 $1,516,196 $964,945 4,364,414 ====================================================================================================== Personal banking (1) 1,311,081 Credit card (2) 548,886 - ------------------------------------------------------------------------------------------------------ Total loans, net of unearned income $6,224,381 ====================================================================================================== Loans with predetermined rate $ 762,020 $ 773,332 $224,844 $1,760,196 Loans with floating rate 1,121,253 742,864 740,101 2,604,218 - ------------------------------------------------------------------------------------------------------ Total $1,883,273 $1,516,196 $964,945 $4,364,414 ======================================================================================================
(1) Personal banking loans with floating rate totaled $461,847,000. (2) Credit card loans with floating rate totaled $481,570,000. 28 Total loans grew $752.0 million, or 13.7%, during 1997 compared to growth of $154.5 million, or 2.9%, during 1996. The growth in 1997 came principally from business, business real estate and construction loans, which grew 20.9%, 22.1% and 27.8%, respectively. This growth in 1997 was partly reflective of the effects of two bank acquisitions during the year in which the Company acquired loans of approximately $150 million, plus the effects of a strong economy throughout many of the markets the Company serves. Additionally, other banking consolidations in a number of the markets have provided the Company an opportunity to establish new customer relationships. The Company currently generates approximately 29% of its loan portfolio in the St. Louis regional market and 23% in the Kansas City regional market. The portfolio is diversified from a commercial and retail standpoint, with 51.6% in loans to business and 48.4% in loans to individual consumers. Such a balanced approach to loan portfolio management and an aversion toward credit concentrations, from an industry, geographic and product perspective, have enabled the Company to avoid problem loan levels and loan losses that characterized the banking industry in the early 1990s. Loans by type as a percentage of total loans follows:
- ------------------------------------------------------------------------------ December 31 1997 1996 - ------------------------------------------------------------------------------ Business 33.0% 31.1% Real estate--construction 3.7 3.3 Real estate--business 14.9 13.9 Real estate--personal 18.5 18.4 Personal banking 21.1 23.0 Credit card 8.8 10.3 - ------------------------------------------------------------------------------ Total loans 100.0% 100.0% ==============================================================================
BUSINESS LOANS Total business loans amounted to $2.06 billion at December 31, 1997, compared to $1.70 billion at December 31, 1996, an increase of $356.2 million, or 20.9%. Approximately $25 million of the growth resulted from the acquisition of two banks during 1997, while the remaining growth came predominately from growth in the Kansas City and St. Louis markets. This group of loans is comprised primarily of loans to customers in the regional trade area of the bank subsidiaries in the central Midwest, encompassing the states of Missouri, Kansas, Illinois and adjacent Midwestern markets. The bank subsidiaries generally do not participate in credits of large, publicly traded companies unless operations are maintained in the local communities or regional markets. The portfolio is diversified from an industry standpoint and includes businesses engaged in manufacturing, wholesaling, retailing, agribusiness, insurance, financial services, public utilities, and other service businesses. Emphasis is upon middle-market and community businesses with known local management and financial stability. Consistent with management's strategy and emphasis upon relationship banking, most borrowing customers also maintain deposit accounts and utilize other banking services. There were net loan charge- offs in this category of $2.7 million in 1997 compared to $3.2 million in 1996. Non-accrual business loans increased to $15.1 million (.7% of business loans) at December 31, 1997, compared to $7.0 million (.4% of business loans) at December 31, 1996. Continued growth in business loans will be based upon strong solicitation efforts in a highly competitive market environment for quality loans. Asset quality is, in part, a function of management's consistent application of conservative underwriting standards. Therefore, portfolio growth in 1998 is dependent upon the strength of the economy, the actions of the Federal Reserve with regard to targets for economic growth and inflationary tendencies, and the competitive environment as previously described. REAL ESTATE--CONSTRUCTION The portfolio of loans in this category amounted to $233.2 million at December 31, 1997, compared to $182.5 million at year end 1996, reflecting growth of $50.7 million, or 27.8%. Over 60% of this growth was the result of bank acquisitions in which $37 million in construction loans were acquired. Non- accrual loans in this category were $1.9 million at year end 1997 compared to $552 thousand at year end 1996. The portfolio consists of 29 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations (Cont.) residential construction, commercial construction and land development loans, predominantly in the local markets of the Company's banking subsidiaries. Commercial construction loans are for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, strip shopping centers, and other commercial properties. Exposure to larger speculative office and rental space is minimal. Residential construction and land development loans are primarily located in the Kansas City and St. Louis metropolitan areas. The Company experienced $40 thousand net recoveries in 1997 and no loan losses in 1996. Management is not aware of any significant adverse exposure in this category. REAL ESTATE--BUSINESS Total business real estate loans were $926.1 million at December 31, 1997, reflecting growth of $167.5 million, or 22.1%. Again, bank acquisitions contributed $35 million to this loan growth, while the remainder of the growth came from the Company's major markets in Missouri, Kansas and Illinois. Non- accrual balances have decreased at December 31, 1997 to $4.3 million, or .5% of the loans in this category, compared to $4.4 million at year end 1996. The Company experienced net recoveries of $387 thousand in 1997 and $211 thousand in 1996. This category includes mortgage loans secured by commercial properties which are primarily located in the local and regional trade territories of the customers of the affiliate banks. The economic conditions in local markets are generally strong, positively impacting debt service capabilities and collateral values for both owner-occupied and investment real estate. Significant deterioration is not anticipated in 1998, provided that the economy performs at or near the Federal Reserve's target level for growth. REAL ESTATE--PERSONAL The mortgage loans in this category are extended, predominantly, for owner- occupied residential properties. At December 31, 1997, there were $1.15 billion in loans outstanding compared to $1.01 billion at December 31, 1996, reflecting growth of $137.7 million, or 13.6%. This growth is partly attributable to loans of $33 million acquired in bank mergers in 1997. The Company has not experienced significant problem credits in this category recently as there were net charge- offs of $331 thousand in 1997 compared to $218 thousand in 1996. The non-accrual balances of loans in this category were $1.9 million, or .2% of the category, at December 31, 1997 and 1996. The five year history of net charge-offs on the real estatepersonal loan category reflects nominal losses and credit quality is considered to be above average. PERSONAL BANKING Total personal banking loans were $1.31 billion at December 31, 1997, and reflected growth of $54.4 million, or 4.3% over the previous year. Net charge- offs were $5.1 million in 1997 compared to $6.7 million in 1996. The majority of personal banking loan losses were related to indirect paper purchases generally secured by automobiles. This consumer loan portfolio consists of both secured and unsecured loans to individuals for various personal reasons such as automobile financing, securities purchases, home improvements, recreational and educational purposes. This category also includes $180.1 million of home equity loan balances at December 31, 1997, with an additional $303.0 million in unused lines of credit that can be drawn at the discretion of the borrower. These home equity lines are secured by first or second mortgages on residential property of the borrower. The underwriting terms for the home equity line product permit borrowing availability, in the aggregate, generally up to 80% of the appraised value of the collateral property. Given reasonably stable real estate values over time, the collateral margin improves with the regular amortization of prior mortgage loans. Approximately 35% of the loans in the personal banking category are extended on a floating interest rate basis. CREDIT CARD Total credit card loans amounted to $548.9 million at December 31, 1997, compared to $563.3 million at December 31, 1996, representing a $14.4 million decline. The credit card portfolio is concentrated within regional markets served by the Company. Approximately 57.4% of the households in Missouri that own a Commerce 30 credit card product also maintain a deposit relationship with a subsidiary bank. The Company has a variety of credit card products, which offer ATM access to either advances against the credit card account or transactions against related deposit accounts. Approximately 88% of the outstanding credit card loans have a floating interest rate. Net charge-offs amounted to $20.2 million in 1997, which was a $5.3 million increase over 1996. Such losses were attributable to higher delinquencies and bankruptcies and were noted as part of national trends throughout the industry. The net charge-off ratios of 3.8% in 1997 and 2.9% in 1996 continue, however, to be well below national averages. Future growth in this portfolio is anticipated through targeted marketing and product design to segmented groups. During 1998, it is anticipated that new products will continue to be introduced or extended to affiliate bank markets to fill in product line gaps for consumers, along with products aimed at the corporate and small business markets. The Company refrains from national pre-approved mailing techniques which have caused some of the credit card problems experienced by other banking companies. Current delinquency ratios are in line with past charge-off results. Significant changes in loss trends, when compared to the fourth quarter of 1997 results, are not currently anticipated by management. RISK ELEMENTS OF LOAN PORTFOLIO Management reviews the loan portfolio continuously for evidence of problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on non-accrual status, the need for additional allowance for loan loss, and (if appropriate) partial or full charge-off. Those loans on which management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment (generally, loans that are 90 days past due as to principal and/or interest payments) are placed on non-accrual status. After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. Interest is included in income subsequent to the date the loan is placed on non-accrual status only as interest is received and so long as management is satisfied there is no impairment of collateral values. The loan is returned to accrual status only when the borrower has brought all past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. A schedule of non-performing assets according to risk category follows:
December 31 - ----------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ======================================================================================================================= Non-accrual $23,382 $13,945 $16,234 $11,385 $14,328 Past due 90 days and still accruing interest 24,383 24,806 15,690 13,090 7,289 - ----------------------------------------------------------------------------------------------------------------------- Total impaired loans 47,765 38,751 31,924 24,475 21,617 Real estate acquired in foreclosure 994 1,136 1,955 7,290 10,057 - ----------------------------------------------------------------------------------------------------------------------- Total non-performing assets $48,759 $39,887 $33,879 $31,765 $31,674 ======================================================================================================================= Non-performing assets as a percentage of total loans .78% .73% .64% .72% .79% ======================================================================================================================= Non-performing assets as a percentage of total assets .47% .41% .35% .40% .39% =======================================================================================================================
The effect of non-accruing loans on interest income for 1997 is presented below:
(In thousands) - ---------------------------------------------------------------- Gross amount of interest that would have been recorded at original rate $2,782 Interest that was reflected in income 980 - ---------------------------------------------------------------- Interest income not recognized $1,802 ================================================================
Non-accrual loans increased $9.4 million over 1996, mainly in the business category. Loans past due 90 days and still accruing interest decreased $423 thousand at December 31, 1997 compared to December 31, 1996. Loans past due 90 days and still accruing interest increased $9.1 million at December 31, 1996 compared 31 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations (Cont.) to December 31, 1995. Approximately 50% of the 1996 increase was related to the credit card portfolio, discussed above. At December 31, 1997, the Company's mortgage banking subsidiary held residential real estate loans of approximately $22.4 million at lower of cost or market, which are to be resold to secondary markets within approximately three months. The Parent and a venture capital and investment banking subsidiary had debt and equity investments with a carrying value of $8.1 million in 10 companies or partnerships at December 31, 1997. A $30 million limited partnership venture fund was organized by the Company in 1993 with 49% outside participation, which is managed by a subsidiary. The Company's investment in this partnership was approximately $9.2 million at December 31, 1997. Management believes the potential for long-term gains in this type of investment activity outweighs the potential risk of losses. There were no loan concentrations of multiple borrowers in similar activities at December 31, 1997 which exceeded 5% of total loans. The Company's aggregate legal lending limit to any single or related borrowing entities is in excess of $100 million. The largest such exposures generally do not exceed $50 million. INVESTMENT SECURITIES PORTFOLIO ANALYSIS At December 31, 1997, available for sale securities totaled $2.61 billion, which included a net unrealized gain in fair value of $47.0 million. The amount of the related after tax unrealized gain reported in stockholders' equity was $29.1 million. Non-marketable equity securities, which are carried at cost (less allowances for other than temporary declines in value) are generally held by the Parent and non-banking subsidiaries due to regulatory restrictions, except for Federal Reserve Bank stock held by banking subsidiaries. During 1997, the total investment securities portfolio decreased $74.1 million to $2.62 billion (excluding unrealized gains/losses) compared to $2.69 billion at the previous year end. This decrease was generally the result of regular maturities of investment securities which proceeds were used to fund added loan growth realized during the year. Partly offsetting this decline was an additional $110.7 million in investment securities from bank acquisitions. The average tax equivalent yield was 6.29% in 1997 and 6.28% in 1996. Investment securities (excluding trading securities) at year end for the past two years are shown as follows:
December 31 - ------------------------------------------------------------------------------ (In thousands) 1997 1996 - ------------------------------------------------------------------------------ Amortized Cost U.S. government and federal agency obligations $1,448,402 $1,705,869 State and municipal obligations 91,906 98,886 CMO's and asset-backed securities 832,211 705,848 Other debt securities 174,031 108,453 Equity securities 64,857 61,693 - ------------------------------------------------------------------------------ Total $2,611,407 $2,680,749 ============================================================================== Fair Value U.S. government and federal agency obligations $1,461,593 $1,717,945 State and municipal obligations 94,115 101,293 CMO's and asset-backed securities 837,056 703,515 Other debt securities 173,972 108,442 Equity securities 91,718 79,055 - ------------------------------------------------------------------------------ Total $2,658,454 $2,710,250 ==============================================================================
A summary of maturities by category of investment securities and the weighted average yield for each range of maturities as of December 31, 1997, is presented in the financial statements note on Investment Securities on page 49. U.S. government and federal agency securities comprise 55% of the investment portfolio at December 31, 1997, with a weighted average yield of 6.25% and an estimated average maturity of 2.5 years; CMO's and asset-backed securities comprise 31% with a weighted average yield of 6.31% and an estimated average maturity of 3.2 years. Other debt and equity securities above include Federal Reserve Bank stock and other bonds, notes, corporate stock (held primarily by non-banking entities) and debentures. The tax equivalent yield on these securities in 1997 computed on average balances invested was approximately 5.51%. 32 DEPOSITS AND BORROWINGS Deposits are the primary funding source for the Company's banks, and are acquired from a broad base of local markets, including both individual and corporate customers. Total deposits were $8.70 billion at year end 1997 and $8.17 billion at year end 1996, reflecting growth of $534.1 million, or 6.5%. Bank acquisitions during 1997 added $253.0 million of this total growth. At year end 1997, 24% of total deposits were in non-interest bearing demand, 48% in savings and interest bearing demand and 25% in time open and C.D.'s under $100,000. At year end 1996, total deposits were comprised of 22% in non-interest bearing demand, 49% in savings and interest bearing demand and 26% in time open and C.D.'s under $100,000. Core deposits (defined as all non-interest and interest bearing deposits, excluding short-term C.D.'s of $100,000 and over) supported 93% of average earning assets in 1997 and 1996. Average balances by major deposit category for the last six years appear on pages 38 and 39. The maturity schedule of time deposits of $100,000 and over outstanding at December 31, 1997 appears in the financial statements note on Fair Value of Financial Instruments. Short-term borrowings consist mainly of federal funds purchased and securities sold under agreements to repurchase. Balances outstanding at year end 1997 were $512.6 million, a $14.2 million decrease from $526.8 million outstanding at year end 1996. The Company's long-term debt, which was approximately $7 million at year end 1997, consists mainly of mortgages and borrowings from the Federal Home Loan Bank. LIQUIDITY AND CAPITAL RESOURCES The liquid assets of the Parent consist primarily of available for sale securities, which include readily marketable equity securities and commercial paper, and securities purchased under agreements to resell. Total investment securities and repurchase agreements were $71.7 million at cost and $92.4 million at fair value at December 31, 1997 ($10.0 million of which is pledged under a self-insured officer and director liability program) compared to $94.4 million at cost and $108.9 million at fair value at December 31, 1996. Total liabilities of the Parent at December 31, 1997 decreased to $10.6 million compared to $12.6 million at December 31, 1996. The Parent had no third-party short-term borrowings or long-term debt at December 31, 1997. Primary sources of funds for the Parent are dividends and management fees from its subsidiary banks, which were $103.8 million and $16.8 million, respectively, in 1997. The Parent also collected $27.6 million from subsidiary banks to reimburse data processing costs paid by the Parent. The subsidiary banks may distribute dividends without prior regulatory approval that do not exceed the sum of net income for the current year and retained net income for the preceding two years, subject to maintenance of minimum capital requirements. The Parent's commercial paper, which management believes is readily marketable, has a P1 rating from Moody's and an A1 rating from Standard & Poor's. No commercial paper was outstanding during the past three years. The Company is also rated A by Thomson BankWatch with a corresponding short-term rating of TBW-1. This credit availability, along with available secured short-term borrowings from an affiliate bank, should provide adequate funds to meet any outstanding or future commitments of the Parent. Management is not aware of any factors that would cause these ratings to be adversely impacted. The liquid assets held by bank subsidiaries include available for sale securities, which consist mainly of investments in U.S. government and federal agency securities and mortgage-backed securities. The available for sale bank portfolio totaled $2.52 billion at December 31, 1997, including an unrealized net gain of $20.0 million. Investment securities maturing in 1998 and 1999 total approximately $447 million and $351 million, respectively. The Company (on a consolidated basis) continues to maintain a sound equity to assets ratio of 9.74%, based on 1997 average balances. At December 31, 1997, the Company and each of its banking subsidiaries met minimum risk based capital requirements. Consolidated 33 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations (Cont.) Tier I and Total capital ratios were 12.10% and 13.22%, respectively, and the leverage ratio was 8.81%. The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash and due from banks of $145.0 million in 1997. The cash generated by operating activities, which amounted to $216.4 million in 1997, provides a high degree of liquidity. Most of the Company's investing activities arise from customer lending and the investment of funds in available for sale securities and short-term federal funds sold and repurchase agreements. The net cash required by investing activities was $210.3 million in 1997. The liquidity needs arising from these activities are largely satisfied by maturities of the same in addition to a major financing item, the customer deposit base, and short-term borrowings of federal funds purchased. Future short-term liquidity needs for daily operations are not expected to vary significantly and the Company maintains adequate liquidity to meet that cash flow. The Company's sound equity base, along with its low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options. Cash and stock requirements for acquisitions, funding of various employee benefit programs and dividends were as follows:
- ---------------------------------------------------------- (In millions) 1997 1996 1995 - ---------------------------------------------------------- Cash used in acquisitions $ 4.3 $ -- $94.1 Acquisition-related issuance of treasury stock 53.2 -- 12.0 Acquisition-related issuance of new stock -- -- 75.7 Purchases of treasury stock 94.1 78.4 40.0 Exercise of stock options, sales to affiliate non-employee directors and restricted stock awards (2.6) (4.0) (4.1) Cash dividends 30.4 27.5 26.0 ==========================================================
In February 1997, the Board of Directors authorized the Company to purchase up to 2,000,000 shares of common stock, in either the open market or privately negotiated transactions, to be used for employee benefit programs and stock dividends. At December 31, 1997, the Company had acquired approximately 1,645,000 shares under the 1997 authorization. Various commitments and contingent liabilities arise in the normal course of business which are properly not recorded on the balance sheet. The most significant of these are loan commitments totaling $2.52 billion (excluding approximately $2.03 billion in unused approved lines of credit related to credit card loan agreements) and standby letters of credit, net of participations to non-affiliated companies, totaling $169.4 million at December 31, 1997. The Company has various other financial instruments with off-balance-sheet risk, such as commercial letters of credit, foreign exchange contracts to purchase and sell foreign currency, and interest rate swap agreements. Management does not anticipate any material losses arising from commitments and contingent liabilities and believes there are no material commitments to extend credit that represent risks of an unusual nature. INTEREST RATE SENSITIVITY The Company's Asset/Liability Management Committee monitors the interest rate sensitivity of the Company's balance sheet on a monthly basis. The Company's policy is to minimize the impact of changing rates on net interest income by maintaining a reasonable balance of rate sensitive assets and liabilities. The Company continually reviews the repricing characteristics of its assets and liabilities and the rates paid and charged for deposits and loans. Deposit rates are reviewed at least weekly and loan rates are monitored closely, particularly on larger commercial relationships. Interest rate risk is evaluated using various tools, including interest sensitivity analysis and simulation techniques. The following schedule presents the Company's interest sensitivity analysis as of December 31, 1997 and identifies the repricing characteristics of the balance sheet and resulting difference between assets and liabilities repricing within selected time intervals. In this analysis the interest sensitivity position is balanced when an equal amount of assets and liabilities reprice during a given time interval. Excess 34 assets or liabilities repricing in a given time period result in the "Interest sensitivity GAP" shown in the following schedule. A positive gap indicates that more assets than liabilities will reprice in a given time period, while a negative gap indicates that more liabilities will reprice. The schedule indicates that the Company is liability sensitive in time intervals of less than one year and means that interest bearing liabilities can reprice faster than earning assets. This is supported by the fact that 73% of the Company's deposits are of the non-maturity type. This would indicate that the net interest margin should improve when interest rates decline and decline when interest rates increase. While this interest sensitivity analysis is a widely used measure of interest rate risk, it provides an incomplete picture of the sensitivity position of the Company and should be used only in conjunction with other factors of financial performance. In addition to changes in market interest rates, the Company's net interest margin is also impacted by changes in funding demands. When these demands increase, deposit rates can also increase, and in a declining interest rate environment, the result could be a decrease in the net interest margin. In the same way, it is possible for the net interest margin to increase in a rising interest rate environment, which could happen if funding demands are low and allow a slower increase in the rates paid on deposits. Accordingly, even though the interest sensitivity analysis may be used as an indication of interest margin direction and interest rate risk, it does not factor in all the variables necessary to evaluate true interest rate risk. For these reasons, the Company also evaluates its interest rate risk position using simulation models and other evaluation tools to monitor and manage its balance sheet and related earnings potential. Such models are prepared regularly during the year using a variety of assumptions, including rates of loan and deposit growth, product pricing and elasticity, and various interest rate scenarios based on outside market rate projections that the Company purchases from a national vendor. The Company has set policy limits of interest rate risk to be assumed in the normal course of business and continually monitors such limits through its simulation process. The Company has been successful in meeting the interest rate sensitivity objectives set forth in its policy and has been well within the policy limits all year. While the overall conclusions drawn by this simulation process have remained fairly consistent over time, changes in market factors and the Company's overall position generally cause variations in the specific results with each cycle of iterations. At December 31, 1997, the simulation results showed that the interest rate risk position of the Company was relatively neutral, as the impact of a gradual parallel 100 basis point rise or fall in interest rates over the next 12 months was calculated to be approximately 1% of net interest income. The Company does not use any off-balance-sheet derivative products to a significant degree, but rather uses traditional methods of managing its assets and liabilities while maintaining its normal high credit standards. Management believes the Company is appropriately positioned for future interest rate movements. 35 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations [Cont.] The following is an analysis of sensitivity gaps of interest earning assets and interest bearing liabilities:
REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS December 31, 1997 1-3 4-6 7-12 2-5 Over 5 (In thousands) Months Months Months Years Years Total - ---------------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans, net of unearned income $ 2,984,873 $ 203,370 $1,288,089 $1,511,286 $236,763 $6,224,381 Investment securities 223,955 28,890 282,796 1,933,828 195,462 2,664,931 Federal funds sold and securities purchased under agreements to resell 132,980 -- -- -- -- 132,980 - ---------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 3,341,808 232,260 1,570,885 3,445,114 432,225 9,022,292 - ---------------------------------------------------------------------------------------------------------------------------- Interest bearing liabilities: Time open & C.D.'s of less than $100,000 528,816 438,183 496,189 672,158 15,373 2,150,719 Time open & C.D.'s of $100,000 & over 71,096 36,090 54,659 53,312 733 215,890 Savings and interest bearing demand 4,209,141 -- -- -- -- 4,209,141 Federal funds purchased and securities sold under agreements to repurchase 512,558 -- -- -- -- 512,558 Long-term debt and other borrowings 268 3,109 242 2,262 1,326 7,207 - ---------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 5,321,879 477,382 551,090 727,732 17,432 7,095,515 - ---------------------------------------------------------------------------------------------------------------------------- Interest sensitivity GAP $(1,980,071) $(245,122) $1,019,795 $2,717,382 $414,793 $1,926,777 ============================================================================================================================
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In January 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", for the provisions that became effective at that date. This SFAS provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The adoption did not have a material effect on the Company's financial statements. The Financial Accounting Standards Board also issued SFAS No. 127, "Deferral of the Provisions of FASB Statement 125", which deferred to January 1, 1998 certain provisions of SFAS No. 125. The adoption of SFAS No. 127 is not expected to have a material effect on the Company's financial statements. SFAS No. 130, "Reporting Comprehensive Income", requires the reporting of comprehensive income and its components in the 1998 financial statements. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. The Company's most significant component of other comprehensive income is the unrealized holding gains and losses on available for sale securities. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", requires reporting about operating segments, products and services, geographic areas, and major customers. Its objective is to provide information about the different types of business activities and economic environments in which businesses operate. The first disclosures will be required in the 1998 Annual Report. EFFECTS OF INFLATION The impact of inflation on financial institutions differs significantly from that exerted on industrial entities. Financial institutions are not heavily involved in large capital expenditures used in the production, acquisition or sale of products. Virtually all assets and liabilities of financial institutions are monetary in nature and represent obligations to pay or receive fixed and determinable amounts not affected by future changes in prices. Changes in interest rates have a significant effect on the earnings of financial institutions. Higher interest rates generally follow the rising demand of borrowers 36 and the corresponding increased funding requirements of financial institutions. Although interest rates are viewed as the price of borrowing funds, the behavior of interest rates differs significantly from the behavior of the prices of goods and services. Prices of goods and services may be directly related to that of other goods and services while the price of borrowing relates more closely to the inflation rate in the prices of those goods and services. As a result, when the rate of inflation slows, interest rates tend to decline while absolute prices for goods and services remain at higher levels. Interest rates are also subject to restrictions imposed through monetary policy, usury laws and other artificial constraints. The rate of inflation has been relatively low over the past few years. CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains "forward-looking statements" within the meaning of the federal securities laws. Such statements are subject to certain risks and uncertainties, including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. 37 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations [Cont.] AVERAGE BALANCE SHEETS AVERAGE RATES AND YIELDS
Years Ended December 31 - -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Average Average Interest Rates Interest Rates (Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Loans: (A) Business (B) $1,835,546 $146,304 7.97% $1,670,328 $131,652 7.88% Construction and development 247,530 21,458 8.67 168,220 14,670 8.72 Real estate - business 824,356 70,539 8.56 719,377 61,845 8.60 Real estate - personal 1,068,668 84,255 7.88 990,069 77,568 7.83 Personal banking 1,308,293 112,572 8.60 1,262,166 109,065 8.64 Credit card 530,799 71,521 13.47 511,424 67,493 13.20 - -------------------------------------------------------------------------------------------------------------------------------- Total loans 5,815,192 506,649 8.71 5,321,584 462,293 8.69 - -------------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 1,599,452 99,895 6.25 1,763,146 108,451 6.15 State & municipal obligations (B) 99,328 7,775 7.83 115,021 9,060 7.88 CMO's and asset-backed securities 789,039 50,030 6.34 653,301 40,913 6.26 Trading account securities 8,358 444 5.32 6,500 345 5.30 Other marketable securities (B) 111,140 6,624 5.96 51,320 3,529 6.88 Other non-marketable securities 43,529 1,899 4.36 36,820 2,542 6.90 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,650,846 166,667 6.29 2,626,108 164,840 6.28 - -------------------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 246,361 13,647 5.54 467,103 25,334 5.42 - -------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 8,712,399 686,963 7.88 8,414,795 652,467 7.75 - -------------------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses (102,145) (98,312) Unrealized gain (loss) on investment securities 25,903 21,675 Cash and due from banks 635,444 623,523 Land, buildings and equipment-net 213,087 208,967 Other assets 187,513 194,278 - ------------------------------------------------------------ ---------- Total assets $9,672,201 $9,364,926 ============================================================ ========== LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 301,010 7,310 2.43 $ 299,018 7,165 2.40 Interest bearing demand 3,776,101 126,719 3.36 3,656,476 121,367 3.32 Time open & C.D.'s of less than $100,000 2,160,892 116,798 5.41 2,195,628 119,366 5.44 Time open & C.D.'s of $100,000 and over 210,283 11,280 5.36 223,723 11,606 5.19 - -------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,448,286 262,107 4.06 6,374,845 259,504 4.07 - -------------------------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 450,439 22,202 4.93 449,831 21,427 4.76 Long-term debt and other borrowings (C) 11,565 851 7.37 14,690 1,054 7.17 - -------------------------------------------------------------------------------------------------------------------------------- Total borrowings 462,004 23,053 4.99 464,521 22,481 4.84 - -------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 6,910,290 285,160 4.13% 6,839,366 281,985 4.12% - -------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing demand deposits 1,750,171 1,559,157 Other liabilities 69,539 74,374 Stockholders' equity 942,201 892,029 - ------------------------------------------------------------ ----------- Total liabilities and equity $9,672,201 $9,364,926 ============================================================ ========== Net interest margin (T/E) $401,803 $370,482 ================================================================================================================================ Net yield on interest earning assets 4.61% 4.40% ================================================================================================================================ Percentage increase in net interest margin (T/E) over the prior year 8.45% 2.71% ================================================================================================================================
- -------------------------------------------------------------------------------------- 1995 - -------------------------------------------------------------------------------------- Average Interest Rates (Dollars in thousands) Average Income/ Earned/ Balance Expense Paid - -------------------------------------------------------------------------------------- ASSETS Loans: (A) Business (B) $1,703,933 $141,872 8.33% Construction and development 130,346 12,227 9.38 Real estate - business 693,539 61,958 8.93 Real estate - personal 954,956 74,571 7.81 Personal banking 1,258,729 110,202 8.76 Credit card 420,049 58,368 13.90 - -------------------------------------------------------------------------------------- Total loans 5,161,552 459,198 8.90 - -------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 1,705,562 105,216 6.17 State & municipal obligations (B) 123,152 9,577 7.78 CMO's and asset-backed securities 719,747 44,928 6.24 Trading account securities 3,975 240 6.03 Other marketable securities (B) 66,368 4,110 6.19 Other non-marketable securities 26,407 685 2.59 - -------------------------------------------------------------------------------------- Total investment securities 2,645,211 164,756 6.23 - -------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 205,547 12,075 5.87 - -------------------------------------------------------------------------------------- Total interest earning assets 8,012,310 636,029 7.94 - -------------------------------------------------------------------------------------- Less allowance for loan losses (95,884) Unrealized gain (loss) on investment securities (13,983) Cash and due from banks 607,656 Land, buildings and equipment-net 205,702 Other assets 209,168 - ------------------------------------------------------------ Total assets $8,924,969 ============================================================ LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 312,049 7,954 2.55 Interest bearing demand 3,329,272 112,729 3.39 Time open & C.D.'s of less than $100,000 2,206,655 118,267 5.36 Time open & C.D.'s of $100,000 and over 213,950 11,430 5.34 - -------------------------------------------------------------------------------------- Total interest bearing deposits 6,061,926 250,380 4.13 - -------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 442,413 23,792 5.38 Long-term debt and other borrowings (C) 16,195 1,146 7.08 - -------------------------------------------------------------------------------------- Total borrowings 458,608 24,938 5.44 - -------------------------------------------------------------------------------------- Total interest bearing liabilities 6,520,534 275,318 4.22% - -------------------------------------------------------------------------------------- Non-interest bearing demand deposits 1,497,474 Other liabilities 60,527 Stockholders' equity 846,434 - -------------------------------------------------------------------------------------- Total liabilities and equity $8,924,969 ====================================================================================== Net interest margin (T/E) $360,711 ====================================================================================== Net yield on interest earning assets 4.50% ====================================================================================== Percentage increase in net interest margin (T/E) over the prior year 13.58% ======================================================================================
(A) Loans on non-accrual status are included in the computation of average balances. Included in interest income above are loan fees and late charges, net of amortization of deferred loan origination costs, which are immaterial. Credit card income from merchant discounts and net interchange fees are not included in loan income. (B) Interest income and yields are presented on a fully-taxable equivalent basis using the Federal statutory income tax rate. Business loan interest income includes tax free loan income of $3,144,000 in 1997, $3,934,000 in 1996, $4,259,000 in 1995, $3,916,000 in 1994 and $4,281,000 in 1993, including tax equivalent adjustments of $1,045,000 in 1997, $1,323,000 in 1996, $1,438,000 in 1995, $1,378,000 in 1994 and $1,517,000 in 1993. State and municipal interest income includes tax equivalent adjustments of $2,583,000 in 1997, $2,956,000 in 38
Years Ended December 31 - ---------------------------------------------------------------------------------------------------- 1994 1993 1992 - ---------------------------------------------------------------------------------------------------- Average Average Average Average Balance Interest Rates Interest Rates Interest Rates Five Year Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Compound Balance Expense Paid Balance Expense Paid Balance Expense Paid Growth Rate - ------------------------------------------------------------------------------------------------------------------ $1,392,650 $ 99,111 7.12% $1,281,458 $ 81,416 6.35% $1,160,801 $ 78,418 6.76% 9.60% 115,628 9,372 8.11 102,825 7,746 7.53 115,019 8,692 7.56 16.57 538,793 43,256 8.03 493,503 37,505 7.60 401,444 33,219 8.27 15.48 759,338 53,473 7.04 716,273 53,428 7.46 624,071 54,124 8.67 11.36 1,013,462 80,513 7.94 920,157 75,080 8.16 876,678 77,931 8.89 8.34 360,194 47,082 13.07 321,618 44,141 13.72 296,272 44,726 15.10 12.37 - ------------------------------------------------------------------------------------------------------------------ 4,180,065 332,807 7.96 3,835,834 299,316 7.80 3,474,285 297,110 8.55 10.85 - ------------------------------------------------------------------------------------------------------------------ 2,076,150 121,339 5.84 2,497,041 143,395 5.74 2,094,399 130,918 6.25 (5.25) 46,602 3,549 7.62 41,141 3,181 7.73 26,566 2,246 8.45 30.18 586,935 35,132 5.99 60,425 3,552 5.88 -- -- -- NA 4,168 159 3.82 4,731 220 4.66 7,420 477 6.43 2.41 69,870 4,191 6.00 70,837 3,933 5.55 122,476 6,069 4.96 (1.92) 20,424 631 3.09 21,024 924 4.39 17,996 959 5.33 19.32 - ------------------------------------------------------------------------------------------------------------------ 2,804,149 165,001 5.88 2,695,199 155,205 5.76 2,268,857 140,669 6.20 3.16 - ------------------------------------------------------------------------------------------------------------------ 132,672 5,457 4.11 282,625 8,735 3.09 422,732 15,379 3.64 (10.24) - ------------------------------------------------------------------------------------------------------------------ 7,116,886 503,265 7.07 6,813,658 463,256 6.80 6,165,874 453,158 7.35 7.16 - ------------------------------------------------------------------------------------------------------------------ (86,664) (83,767) (68,344) 8.37 (15,424) -- -- NA 555,171 573,494 508,594 4.55 194,159 196,809 183,109 3.08 149,568 149,909 132,021 7.27 - ---------- ---------- ---------- ---------- $7,913,696 $7,650,103 $6,921,254 6.92% ========== ========== ========== ========== $ 273,032 6,618 2.42 $ 248,681 6,012 2.42 $ 188,332 5,979 3.17 9.83% 3,247,965 84,037 2.59 3,124,098 78,995 2.53 2,788,635 88,330 3.17 6.25 1,826,661 77,884 4.26 1,790,418 77,165 4.31 1,786,175 93,752 5.25 3.88 155,813 6,213 3.99 138,271 5,038 3.64 135,805 5,826 4.29 9.14 - ------------------------------------------------------------------------------------------------------------------ 5,503,471 174,752 3.18 5,301,468 167,210 3.15 4,898,947 193,887 3.96 5.65 - ------------------------------------------------------------------------------------------------------------------ 287,642 10,384 3.61 318,951 8,141 2.55 271,181 8,071 2.98 10.68 7,129 542 7.60 7,118 554 7.79 12,566 1,021 8.13 (1.65) - ------------------------------------------------------------------------------------------------------------------ 294,771 10,926 3.71 326,069 8,695 2.67 283,747 9,092 3.20 10.24 - ------------------------------------------------------------------------------------------------------------------ 5,798,242 185,678 3.20% 5,627,537 175,905 3.13% 5,182,694 202,979 3.92% 5.92 - ------------------------------------------------------------------------------------------------------------------ 1,341,721 1,302,634 1,121,481 9.31 37,515 50,902 60,619 2.78 736,218 669,030 556,460 11.11 - ---------- ---------- ---------- ---------- $7,913,696 $7,650,103 $6,921,254 6.92% ================================================================================================================== $317,587 $287,351 $250,179 ================================================================================================================== 4.46% 4.22% 4.06% ================================================================================================================== 10.52% 14.86% 11.12% ==================================================================================================================
1996, $3,075,000 in 1995, $1,097,000 in 1994 and $944,000 in 1993. Interest income on other marketable securities includes tax equivalent adjustments of $459,000 in 1997, $585,000 in 1996, $513,000 in 1995, $509,000 in 1994 and $382,000 in 1993. (C) Interest expense of $58,000, $125,000, $60,000, $14,000 and $17,000 which was capitalized on construction projects in 1997, 1996, 1995, 1994 and 1993, respectively, is not deducted from the interest expense shown above. 39 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations [Cont.] QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
Year Ended December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Fourth Quarter Third Quarter Second Quarter First Quarter - ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Rates Rates Rates Rates (Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/ Balance Paid Balance Paid Balance Paid Balance Paid - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Loans: Business (A) $1,992 8.06% $1,870 7.93% $1,779 8.04% $1,698 7.84% Construction and development 261 8.83 304 8.63 231 8.64 192 8.54 Real estate--business 888 8.53 842 8.54 803 8.62 764 8.54 Real estate--personal 1,136 7.86 1,078 7.87 1,050 7.91 1,009 7.90 Personal banking 1,355 8.58 1,324 8.55 1,287 8.64 1,265 8.64 Credit card 527 13.81 526 13.55 525 13.17 546 13.36 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 6,159 8.73 5,944 8.68 5,675 8.73 5,474 8.71 - ----------------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 1,474 6.22 1,590 6.25 1,652 6.25 1,686 6.26 State & municipal obligations (A) 98 7.77 101 7.64 100 8.07 98 7.83 CMO's and asset-backed securities 838 6.40 824 6.29 777 6.33 716 6.34 Trading account securities 10 5.14 10 5.58 7 6.03 6 4.34 Other marketable securities (A) 112 5.83 101 5.89 116 6.00 116 6.11 Other non-marketable securities 44 (.03) 43 5.67 43 6.40 43 5.62 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,576 6.21 2,669 6.29 2,695 6.33 2,665 6.31 - ----------------------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 229 5.62 166 5.74 231 5.61 362 5.35 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 8,964 7.93 8,779 7.90 8,601 7.90 8,501 7.82 - ----------------------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses (105) (104) (102) (98) Unrealized gain on investment securities 44 33 3 24 Cash and due from banks 677 661 606 595 Land, buildings and equipment--net 213 215 214 210 Other assets 194 183 191 182 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $9,987 $9,767 $9,513 $9,414 =================================================================================================================================== LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 303 2.44 $ 308 2.43 $ 306 2.43 $ 286 2.40 Interest bearing demand 3,841 3.35 3,747 3.38 3,768 3.35 3,748 3.35 Time open & C.D.'s under $100,000 2,169 5.44 2,185 5.40 2,163 5.40 2,126 5.38 Time open & C.D.'s $100,000 & over 220 5.44 212 5.45 205 5.34 204 5.22 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,533 4.07 6,452 4.09 6,442 4.06 6,364 4.05 - ----------------------------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 468 5.00 485 4.92 401 5.02 448 4.78 Long-term debt and other borrowings 9 7.46 10 7.31 13 7.33 14 7.35 - ----------------------------------------------------------------------------------------------------------------------------------- Total borrowings 477 5.05 495 4.97 414 5.09 462 4.86 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 7,010 4.14% 6,947 4.15% 6,856 4.12% 6,826 4.10% - ----------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing demand deposits 1,903 1,804 1,689 1,600 Other liabilities 94 67 49 67 Stockholders' equity 980 949 919 921 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and equity $9,987 $9,767 $9,513 $9,414 =================================================================================================================================== Net interest margin (T/E) $ 106 $ 102 $ 99 $ 95 =================================================================================================================================== Net yield on interest earning assets 4.69% 4.61% 4.62% 4.52% ===================================================================================================================================
(A) Includes tax equivalent calculations. 40
Year Ended December 31, 1996 - ----------------------------------------------------------------------------------------------------------------------------- Fourth Quarter Third Quarter Second Quarter First Quarter - ----------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Rates Rates Rates Rates (Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/ Balance Paid Balance Paid Balance Paid Balance Paid - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Loans: Business (A) $1,644 7.82% $1,670 7.89% $1,686 7.84% $1,682 7.97% Construction and development 168 8.64 164 8.63 169 8.71 171 8.89 Real estate--business 750 8.53 723 8.58 703 8.65 701 8.63 Real estate--personal 1,003 7.77 985 7.73 991 7.83 981 8.01 Personal banking 1,287 8.53 1,244 8.61 1,254 8.69 1,265 8.74 Credit card 531 13.12 517 13.10 503 12.99 494 13.60 - ----------------------------------------------------------------------------------------------------------------------------- Total loans 5,383 8.63 5,303 8.66 5,306 8.66 5,294 8.80 - ----------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 1,753 6.18 1,796 6.13 1,789 6.14 1,714 6.16 State & municipal obligations (A) 107 7.91 115 7.72 118 8.02 120 7.87 CMO's and asset-backed securities 669 6.22 664 6.21 633 6.32 648 6.31 Trading account securities 8 7.16 4 .77 8 5.78 7 5.09 Other marketable securities (A) 69 7.34 53 6.35 45 6.47 37 7.27 Other non-marketable securities 40 16.95 39 5.95 34 2.05 34 .95 - ----------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,646 6.46 2,671 6.21 2,627 6.22 2,560 6.22 - ----------------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 451 5.42 386 5.41 454 5.38 579 5.47 - ----------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 8,480 7.78 8,360 7.73 8,387 7.72 8,433 7.79 - ----------------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses (98) (98) (99) (98) Unrealized gain on investment securities 20 -- 14 52 Cash and due from banks 597 624 616 657 Land, buildings and equipment--net 209 208 208 210 Other assets 184 189 197 208 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $9,392 $9,283 $9,323 $9,462 ============================================================================================================================= LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 288 2.41 $ 296 2.41 $ 306 2.35 $ 306 2.41 Interest bearing demand 3,673 3.32 3,651 3.29 3,665 3.30 3,638 3.37 Time open & C.D.'s under $100,000 2,150 5.38 2,174 5.38 2,213 5.39 2,246 5.58 Time open & C.D.'s $100,000 & over 208 5.19 220 5.14 234 5.13 232 5.30 - ----------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,319 4.04 6,341 4.03 6,418 4.04 6,422 4.17 - ----------------------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 464 4.70 425 4.78 429 4.75 481 4.83 Long-term debt and other borrowings 15 7.21 15 7.16 15 7.32 15 7.02 - ----------------------------------------------------------------------------------------------------------------------------- Total borrowings 479 4.77 440 4.86 444 4.83 496 4.90 - ----------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 6,798 4.09% 6,781 4.09% 6,862 4.09% 6,918 4.22% - ----------------------------------------------------------------------------------------------------------------------------- Non-interest bearing demand deposits 1,626 1,556 1,507 1,546 Other liabilities 64 66 71 96 Stockholders' equity 904 880 883 902 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and equity $9,392 $9,283 $9,323 $9,462 ============================================================================================================================= Net interest margin (T/E) $ 96 $ 92 $ 91 $ 91 ============================================================================================================================= Net yield on interest earning assets 4.50% 4.41% 4.37% 4.33% =============================================================================================================================
(A) Includes tax equivalent calculations. 41 Consolidated Balance Sheets Commerce Bancshares, Inc. and Subsidiaries
December 31 - ---------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------- (In thousands) ASSETS Loans, net of unearned income $6,224,381 $5,472,342 Allowance for loan losses (105,918) (98,223) - ---------------------------------------------------------------------------------------------- Net loans 6,118,463 5,374,119 - ---------------------------------------------------------------------------------------------- Investment securities: Available for sale 2,614,040 2,670,420 Trading account 6,477 11,265 Other non-marketable 44,414 39,830 - ---------------------------------------------------------------------------------------------- Total investment securities 2,664,931 2,721,515 - ---------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 132,980 368,690 Cash and due from banks 978,239 833,260 Land, buildings and equipment - net 214,209 209,777 Goodwill and core deposit premium - net 85,377 87,928 Customers' acceptance liability 900 1,259 Other assets 111,842 101,638 - ---------------------------------------------------------------------------------------------- Total assets $10,306,941 $9,698,186 ============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing demand $ 2,124,828 $1,800,684 Savings and interest bearing demand 4,209,141 4,021,376 Time open and C.D.'s of less than $100,000 2,150,719 2,138,206 Time open and C.D.'s of $100,000 and over 215,890 206,163 - ---------------------------------------------------------------------------------------------- Total deposits 8,700,578 8,166,429 - ---------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 512,558 526,807 Long-term debt and other borrowings 7,207 14,120 Other liabilities 104,914 65,300 Acceptances outstanding 900 1,259 - ---------------------------------------------------------------------------------------------- Total liabilities 9,326,157 8,773,915 - ---------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $1 par value Authorized and unissued 2,000,000 shares -- -- Common stock, $5 par value Authorized 80,000,000 shares; issued 38,857,209 shares in 1997 and 37,565,369 shares in 1996 194,286 187,827 Capital surplus 145,847 104,292 Retained earnings 626,387 621,689 Treasury stock of 210,596 shares in 1997 and 187,977 shares in 1996, at cost (14,252) (7,422) Unearned employee benefits (601) (340) Unrealized securities gain - net of tax 29,117 18,225 - ---------------------------------------------------------------------------------------------- Total stockholders' equity 980,784 924,271 ============================================================================================== Total liabilities and stockholders' equity $10,306,941 $9,698,186 ==============================================================================================
See accompanying notes to financial statements. 42 Consolidated Statements of Income Commerce Bancshares, Inc. and Subsidiaries
For the Years Ended December 31 - --------------------------------------------------------------------------------------------------- (In thousands, except per share data) 1997 1996 1995 - --------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $505,604 $460,970 $457,760 Interest on investment securities 163,625 161,299 161,168 Interest on federal funds sold and securities purchased under agreements to resell 13,647 25,334 12,075 - --------------------------------------------------------------------------------------------------- Total interest income 682,876 647,603 631,003 - --------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits: Savings and interest bearing demand 134,029 128,532 120,683 Time open and C.D.'s of less than $100,000 116,798 119,366 118,267 Time open and C.D.'s of $100,000 and over 11,280 11,606 11,430 Interest on federal funds purchased and securities sold under agreements to repurchase 22,202 21,427 23,792 Interest on long-term debt and other borrowings 793 929 1,086 - --------------------------------------------------------------------------------------------------- Total interest expense 285,102 281,860 275,258 - --------------------------------------------------------------------------------------------------- Net interest income 397,774 365,743 355,745 Provision for loan losses 31,354 24,522 14,629 - --------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 366,420 341,221 341,116 - --------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Trust fees 41,224 35,536 32,378 Deposit account charges and other fees 57,223 54,506 44,658 Credit card transaction fees 30,703 26,586 23,341 Trading account profits and commissions 7,420 5,982 5,158 Net gains on securities transactions 3,253 3,293 897 Other 40,269 33,259 26,718 - --------------------------------------------------------------------------------------------------- Total non-interest income 180,092 159,162 133,150 - --------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 179,095 165,291 157,853 Net occupancy 21,570 21,456 20,294 Equipment 16,492 15,185 14,256 Supplies and communication 25,838 24,697 24,139 Data processing 24,628 20,778 20,997 Marketing 12,757 11,698 11,611 Goodwill and core deposit 9,778 11,448 11,094 Other 54,292 47,401 45,240 - --------------------------------------------------------------------------------------------------- Total non-interest expense 344,450 317,954 305,484 - --------------------------------------------------------------------------------------------------- Income before income taxes 202,062 182,429 168,782 Less income taxes 69,360 62,917 61,142 - --------------------------------------------------------------------------------------------------- Net income $132,702 $119,512 $107,640 =================================================================================================== Net income per share-basic $ 3.40 $ 2.99 $ 2.60 Net income per share-diluted $ 3.36 $ 2.97 $ 2.59 =================================================================================================== Cash dividends per common share $ .781 $ .689 $ .622 =================================================================================================== See accompanying notes to financial statements.
43 Consolidated Statements of Cash Flows Commerce Bancshares, Inc. and Subsidiaries
For the Years Ended December 31 - --------------------------------------------------------------------------------------------------------------------------- (In thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 132,702 $ 119,512 $ 107,640 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 31,354 24,522 14,629 Provision for depreciation and amortization 30,433 31,134 31,173 Accretion of investment security discounts (5,681) (5,630) (5,656) Amortization of investment security premiums 9,140 20,194 24,596 Provision for deferred income taxes 16,731 3,303 3,549 Net gains on securities transactions (3,253) (3,293) (897) Net (increase) decrease in trading account securities 1,412 (1,230) (4,859) Decrease in interest receivable 6,750 10,190 19 Increase (decrease) in interest payable 1,622 (1,214) 10,863 Other changes, net (4,771) 17,194 14,204 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 216,439 214,682 195,261 - --------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net cash received (paid) in acquisitions 6,200 -- (33,226) Cash paid in sales of branches -- (38,134) -- Proceeds from sales of available for sale securities 534,452 704,120 917,063 Proceeds from maturities of available for sale securities 904,695 496,928 535,722 Purchases of available for sale securities (1,258,881) (1,351,654) (930,080) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell 244,235 154,612 (424,202) Net increase in loans (621,438) (188,731) (222,684) Purchases of premises and equipment (27,621) (26,436) (25,798) Sales of premises and equipment 8,085 7,000 8,673 - --------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (210,273) (242,295) (174,532) - --------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in non-interest bearing demand, savings and interest bearing demand deposits 350,260 131,861 265,672 Net increase (decrease) in time open and C.D.s (68,346) (107,418) 53,208 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase (14,249) 163,904 (59,843) Repayment of long-term debt (6,952) (495) (8,805) Purchases of treasury stock (94,067) (78,408) (40,024) Issuance under stock purchase, option and benefit plans 2,599 4,039 4,149 Cash dividends paid on common stock (30,432) (27,462) (26,039) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 138,813 86,021 188,318 - --------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 144,979 58,408 209,047 Cash and cash equivalents at beginning of year 833,260 774,852 565,805 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 978,239 $ 833,260 $ 774,852 =========================================================================================================================== See accompanying notes to financial statements.
44 Statements of Stockholders' Equity Commerce Bancshares, Inc. and Subsidiaries
Unearned Net Common Capital Retained Treasury Employee Unrealized (In thousands) Stock Surplus Earnings Stock Benefits Gain (Loss) Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 $169,851 $ 54,575 $ 576,331 $(12,148) $(295) $(60,116) $728,198 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 107,640 107,640 Change in unrealized gain (loss) on available for sale securities 86,927 86,927 Purchase of treasury stock (71,368) 33 (71,335) Cash dividends paid ($.622 per share) (26,039) (26,039) Issuance under stock purchase, option and award plans, net (2,797) 8,241 (454) 4,990 Purchase acquisitions (435) 5,315 4,880 Pooling acquisition, net 13,371 (4,872) 32,360 7,625 38 48,522 5% stock dividend, net 4,605 37,944 (71,904) 29,355 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 187,827 84,415 618,388 (32,980) (716) 26,849 883,783 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 119,512 119,512 Change in unrealized gain (loss) on available for sale securities (8,624) (8,624) Purchase of treasury stock (47,844) 24 (47,820) Cash dividends paid ($.689 per share) (27,462) (27,462) Issuance under stock purchase, option and award plans, net (3,217) 7,747 352 4,882 5% stock dividend, net 23,094 (88,749) 65,655 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 187,827 104,292 621,689 (7,422) (340) 18,225 924,271 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 132,702 132,702 Change in unrealized gain (loss) on available for sale securities 10,892 10,892 Purchase of treasury stock (96,296) (96,296) Cash dividends paid ($.781 per share) (30,432) (30,432) Issuance under stock purchase, option and award plans, net (2,953) 9,458 (261) 6,244 Purchase acquisition 1,383 9,256 10,639 Pooling acquisition (37,200) 17,612 42,352 22,764 5% stock dividend, net 6,459 80,325 (115,184) 28,400 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 $194,286 $145,847 $ 626,387 $(14,252) $(601) $ 29,117 $980,784 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to financial statements.
45 Notes to Financial Statements Commerce Bancshares, Inc. and Subsidiaries SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Company follows generally accepted accounting principles (GAAP) and reporting practices applicable to the banking industry. The preparation of financial statements under GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. While the financial statements reflect management's best estimates and judgment, actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its substantially wholly-owned subsidiaries (after elimination of all material intercompany balances and transactions). Certain amounts for prior years have been reclassified to conform to the current year presentation. ACQUISITIONS/INTANGIBLE ASSETS The Company amortizes the cost in excess of the fair value of net assets acquired in purchase business combinations (goodwill) using the straight-line method over periods of 15-20 years. When facts and circumstances indicate potential impairment, the Company evaluates the recoverability of asset carrying values, including goodwill, using estimates of undiscounted future cash flows over remaining asset lives. Any impairment loss is measured by the excess of carrying values over fair values. Core deposit intangibles are amortized over a maximum of 10 years using accelerated methods. Results of operations of companies acquired in purchase business combinations are included from the date of acquisition. LOANS Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest on loans is discontinued when, in management's judgment, the collectibility of interest or principal in the normal course of business is doubtful. Loan and commitment fees are deferred and recognized as income over the life of the loan or commitment as an adjustment of yield. ALLOWANCE/PROVISION FOR LOAN LOSSES The provision for loan losses is based upon management's estimate of the amount required to maintain an adequate allowance for losses, reflective of the risks in the loan portfolio. This estimate is based upon reviews of the portfolio, past loan loss experience, current economic conditions and such other factors, which in management's judgment, deserve current recognition. Impaired loans include all non-accrual loans and loans 90 days delinquent and still accruing interest. INVESTMENTS IN DEBT AND EQUITY SECURITIES Securities classified as available for sale are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Premiums and discounts are amortized to interest income over the estimated lives of the securities. Gains and losses are calculated using the specific identification method. Trading account securities are carried at fair value with unrealized gains and losses recorded as non-interest income. Investments in equity securities without readily determinable fair values are stated at cost, less allowances for other than temporary declines in value. PROPERTY AND EQUIPMENT Land is stated at cost, and buildings and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line and accelerated methods. Maintenance and repairs are charged to expense as incurred. INCOME TAXES The Company and its eligible subsidiaries file consolidated income tax returns. Deferred income taxes are provided on temporary differences between the financial reporting bases and income tax bases of the Company's assets and liabilities. 46 DERIVATIVES The Company is exposed to market risk, including changes in interest rates, currency exchange rates, and certain commodity prices. To manage the volatility relating to these exposures, the Company's risk management policies permit its use of derivative products. The Company uses derivatives on a limited basis, but more often manages normal asset and liability positions by altering the products it offers and by selling portions of specific loan or investment portfolios as necessary. The Company does not trade in derivative financial instruments for speculative purposes. Management believes the Company has and will be able to continue to position itself to handle these risks satisfactorily, without significant use of derivatives. TREASURY STOCK Purchases of the Company's common stock are recorded at cost. Upon reissuance, treasury stock is reduced based upon the average cost basis of shares held. INCOME PER SHARE Basic income per share is computed using the weighted average number of common shares outstanding during each year. Diluted income per share includes the effect of all dilutive potential common shares (primarily stock options) outstanding during each year. All per share data has been restated to reflect the 5% stock dividend distributed on December 12, 1997 and the adoption of SFAS No. 128. ACQUISITIONS The Company has signed a definitive agreement to acquire City National Bank of Pittsburg, Kansas, with assets of $120 million. The merger will be recorded as a stock transaction accounted for as a pooling of interests. Subject to regulatory and stockholder approvals, completion of the acquisition is anticipated in the first quarter of 1998. It is not expected to have a material impact on the financial statements of the Company. In May 1997, the Company acquired Shawnee State Bank, located in the Kansas City metropolitan area, with assets of $202 million. The acquisition was recorded as pooling of interests. The Citizens National Bank in Independence, Kansas, was acquired in September 1997 in a purchase transaction. The Citizens National Bank had assets of $93 million at acquisition date. Total consideration paid in these two transactions was cash of $4.3 million and treasury stock valued at $53.2 million. Goodwill of $7.2 million was recorded by the Company in the Citizens purchase transaction. During 1995, the Company acquired four banks with an aggregate purchase price of $181.8 million. Three of the acquisitions were accounted for under the purchase method of accounting and one was accounted for as a pooling of interests. The Company issued common stock valued at $82.8 million in its acquisition of The Peoples Bank of Bloomington, Illinois, in March 1995 in a transaction recorded under the pooling of interests method of accounting. The Peoples Bank had assets of $444 million at the date of acquisition. Union National Bank of Wichita, Kansas, was acquired for cash of $86.7 million in April 1995 in a transaction accounted for under the purchase method of accounting. Union National Bank had assets of $673 million at the acquisition date. In March and May 1995, the Company acquired the Cotton Exchange Bank in Kennett, Missouri, and the Chillicothe State Bank in Chillicothe, Illinois. Aggregate consideration paid in these two transactions, which were accounted for using the purchase method, consisted of cash of $7.4 million and treasury stock valued at $4.9 million. Total goodwill and core deposit intangible assets recorded by the Company in connection with the three purchase acquisitions was $64.9 million. Financial statements for periods prior to the consummation of acquisitions accounted for as poolings have not been restated because such restated amounts do not differ materially from the Company's historical financial statements. The following schedule summarizes pro forma consolidated financial data as 47 Notes to Financial Statements [Cont.] Commerce Bancshares, Inc. and Subsidiaries if the 1997 acquisitions had been consummated on January 1, 1996:
(In thousands, except per share data) 1997 1996 - ------------------------------------------------------------- Net interest income plus non-interest income $583,892 $539,394 Net income 133,978 123,065 Net income per share -- diluted 3.35 2.97 =============================================================
LOANS AND ALLOWANCE FOR LOSSES Major classifications of loans at December 31, 1997 and 1996 are as follows:
(In thousands) 1997 1996 - ------------------------------------------------------------ Business $2,056,862 $1,700,678 Real estate -- construction 233,209 182,474 Real estate -- business 926,107 758,650 Real estate -- personal 1,148,236 1,010,572 Personal banking 1,311,081 1,256,684 Credit card 548,886 563,284 - ------------------------------------------------------------ Total loans $6,224,381 $5,472,342 ============================================================
Loans to directors and executive officers of the Parent and its significant subsidiaries and to their associates are summarized as follows:
(In thousands) - ---------------------------------------- Balance at January 1, 1997 $ 58,192 - ---------------------------------------- Additions 83,957 Amounts collected 100,936 Amounts written off -- - ---------------------------------------- Balance at December 31, 1997 $ 41,213 ========================================
Management believes all loans to directors and executive officers have been made in the ordinary course of business with normal credit terms, including interest rate and collateralization, and do not represent more than a normal risk of collection. There were no outstanding loans at December 31, 1997, to principal holders of the Company's common stock. The Company's lending activity is generally centered in Missouri and its contiguous states. The Company maintains a diversified portfolio with no significant industry concentrations of credit risk. Loans and loan commitments are extended under the Company's normal credit standards, controls, and monitoring features. Most credit commitments are short term in nature, and maturities generally do not exceed five years. Credit terms typically provide for floating rates of interest, and fixed rates are generally not set for more than three to five years. Collateral is commonly required and would include such assets as marketable securities and cash equivalent assets, accounts receivable and inventory, equipment, other forms of personal property, and real estate. At December 31, 1997, unfunded loan commitments totaled $2,520,944,000 (excluding $2,034,191,000 in unused approved lines of credit related to credit card loan agreements) which could be drawn by customers subject to certain review and terms of agreement. A summary of the allowance for loan losses is as follows:
Years Ended December 31 - --------------------------------------------------------------------- (In thousands) 1997 1996 1995 - --------------------------------------------------------------------- Balance, January 1 $ 98,223 $98,537 $87,179 - --------------------------------------------------------------------- Additions: Provision for loan losses 31,354 24,522 14,629 Allowances of acquired banks 4,275 -- 12,932 - --------------------------------------------------------------------- Total additions 35,629 24,522 27,561 - --------------------------------------------------------------------- Deductions: Loan losses 38,183 31,914 23,272 Less recoveries 10,249 7,078 7,069 - --------------------------------------------------------------------- Net loan losses 27,934 24,836 16,203 - --------------------------------------------------------------------- Balance, December 31 $105,918 $98,223 $98,537 =====================================================================
Impaired loans include all non-accrual loans and loans 90 days delinquent and still accruing interest. The net amount of interest income recorded on such loans during their impairment period was not significant. The Company ceased recognition of interest income on loans with a book value of $23,382,000 and $13,945,000 at December 31, 1997 and 1996, respectively. The interest income not recognized on non-accrual loans was $1,802,000, $1,617,000 and $1,868,000 during 1997, 1996 and 1995, respectively. Loans 90 days delinquent and still accruing interest amounted to $24,383,000 and $24,806,000 at December 31, 1997 and 1996, respectively. Real estate and other assets acquired in foreclosure amounted to approximately $3,600,000 and $2,600,000 at December 31, 1997 and 1996, respectively. 48 INVESTMENT SECURITIES A summary of the available for sale investment securities by maturity groupings as of December 31, 1997 follows below. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security at December 31, 1997. Yields on tax exempt securities have not been adjusted for tax exempt status.
Weighted Amortized Fair Average (Dollars in thousands) Cost Value Yield - ------------------------------------------------------------------------------------------------- U.S. government and federal agency obligations: Within 1 year $ 251,266 $ 251,637 6.47% After 1 but within 5 years 1,194,777 1,207,479 6.20 After 5 but within 10 years 2,036 2,077 7.13 After 10 years 323 400 5.21 - ------------------------------------------------------------------------------------------------- Total U.S. government and federal agency obligations 1,448,402 1,461,593 6.25 ================================================================================================= State and municipal obligations: Within 1 year 17,754 17,856 5.19 After 1 but within 5 years 55,721 57,079 5.26 After 5 but within 10 years 16,361 17,026 5.44 After 10 years 2,070 2,154 5.77 - ------------------------------------------------------------------------------------------------- Total state and municipal obligations 91,906 94,115 5.29 ================================================================================================= CMO's and asset-backed securities 832,211 837,056 6.31 ================================================================================================= Other debt securities: Within 1 year 173,914 173,855 After 1 but within 5 years 110 110 After 5 but within 10 years 7 7 - ------------------------------------------------------------------------------------------------- Total other debt securities 174,031 173,972 ================================================================================================= Equity securities 20,443 47,304 ================================================================================================= Total available for sale investment securities $2,566,993 $2,614,040 =================================================================================================
The unrealized gains and losses by type are as follows:
Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- December 31, 1997 U.S. government and federal agency obligations $1,448,402 $ 14,001 $ 810 $1,461,593 State and municipal obligations 91,906 2,271 62 94,115 CMO's and asset-backed securities 832,211 7,284 2,439 837,056 Other debt securities 174,031 17 76 173,972 Equity securities 20,443 27,661 800 47,304 - ----------------------------------------------------------------------------------------------------------------- Total $2,566,993 $ 51,234 $ 4,187 $2,614,040 ================================================================================================================= December 31, 1996 U.S. government and federal agency obligations $1,705,869 $ 16,838 $ 4,762 $1,717,945 State and municipal obligations 98,886 2,478 71 101,293 CMO's and asset-backed securities 705,848 3,815 6,148 703,515 Other debt securities 108,453 -- 11 108,442 Equity securities 21,863 17,952 590 39,225 - ----------------------------------------------------------------------------------------------------------------- Total $2,640,919 $ 41,083 $11,582 $2,670,420 =================================================================================================================
The following table presents proceeds from sales of securities and the components of net securities gains.
(In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------- Proceeds from sales $534,452 $704,120 $917,063 =================================================================================== Realized gains $ 4,564 $ 4,600 $ 3,188 Realized losses 1,311 1,307 2,291 - ----------------------------------------------------------------------------------- Net realized gains $ 3,253 $ 3,293 $ 897 ===================================================================================
Investment securities with a par value of $897,023,000 and $1,021,998,000 were pledged at December 31, 1997 and 1996, respectively, to secure public deposits and for other purposes as required by law. Except for U.S. government and federal agency obligations, no investment in a single issuer exceeds 10% of stockholders' equity. 49 Notes to Financial Statements [Cont.] Commerce Bancshares, Inc. and Subsidiaries LAND, BUILDINGS AND EQUIPMENT Land, buildings and equipment consist of the following at December 31, 1997 and 1996:
(In thousands) 1997 1996 - --------------------------------------------------- Land $ 52,616 $ 51,676 Buildings and improvements 256,167 247,949 Equipment 146,143 130,657 - --------------------------------------------------- Total 454,926 430,282 - --------------------------------------------------- Less accumulated depreciation and amortization 240,717 220,505 - --------------------------------------------------- Net land, buildings and equipment $214,209 $209,777 ===================================================
Depreciation expense of $19,678,000, $19,183,000 and $19,578,000 for 1997, 1996 and 1995, respectively, was included in net occupancy expense, equipment expense and other expense in the Consolidated Statements of Income. Repairs and maintenance expense of $14,016,000, $13,082,000 and $11,182,000 for 1997, 1996 and 1995, respectively, was included in net occupancy expense, equipment expense and other expense. BORROWINGS Short-term borrowings of the Company consisted primarily of federal funds purchased and securities sold under agreements to repurchase by subsidiary banks. The following presents balance and interest rate information on these borrowings.
(Dollars in thousands) 1997 1996 1995 - ------------------------------------------------------ Balance: Average $450,439 $449,831 $442,413 Year end 512,558 526,807 362,903 Maximum month-end during year 549,907 526,807 589,270 - ------------------------------------------------------ Interest rate: Average 4.9% 4.8% 5.4% Year end 5.2% 5.0% 4.8% ======================================================
Long-term debt of the Company was $7,102,000 at December 31, 1997, including $3,000,000 which will be repaid in 1998. None of the Company's borrowings have any related compensating balance requirements which restrict the usage of Company assets. However, regulations of the Federal Reserve System require reserves to be maintained by all banking institutions according to the types and amounts of certain deposit liabilities. These requirements restrict usage of a portion of the amounts shown as consolidated "Cash and due from banks" from everyday usage in operation of the banks. The minimum reserve requirements for the subsidiary banks at December 31, 1997 totaled $148,108,000. Cash payments for interest on deposits and borrowings during 1997, 1996 and 1995 on a consolidated basis amounted to $283,281,000, $282,792,000 and $264,503,000, respectively. INCOME TAXES Total income taxes for 1997, 1996 and 1995 were allocated as shown in the following tables. Income tax expense from operations for the years ended December 31, 1997, 1996 and 1995 consists of:
(In thousands) Current Deferred Total - ----------------------------------------------------------- Year ended December 31, 1997: U.S. federal $50,573 $15,917 $66,490 State and local 2,056 814 2,870 - ----------------------------------------------------------- $52,629 $16,731 $69,360 =========================================================== Year ended December 31, 1996: U.S. federal $54,550 $ 3,303 $57,853 State and local 5,064 -- 5,064 - ----------------------------------------------------------- $59,614 $ 3,303 $62,917 =========================================================== Year ended December 31, 1995: U.S. federal $52,639 $ 3,549 $56,188 State and local 4,954 -- 4,954 - ----------------------------------------------------------- $57,593 $ 3,549 $61,142 ===========================================================
Income tax expense (benefits) allocated directly to stockholders' equity for the years ended December 31, 1997, 1996 and 1995 consists of:
(In thousands) 1997 1996 1995 - ---------------------------------------------------------- Unrealized gain (loss) on securities available for sale $ 6,546 $(5,284) $53,447 Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (1,470) (292) (324) - ---------------------------------------------------------- Income tax expense (benefits) allocated to stockholders' equity $ 5,076 $(5,576) $53,123 ==========================================================
50 The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
(In thousands) 1997 1996 - ---------------------------------------------------------- Deferred tax assets: Loans, principally due to allowance for loan losses $ 47,216 $41,766 Unearned fee income, due to earlier recognition for tax purposes 1,030 1,269 Deferred compensation, principally due to accrual for financial reporting purposes 1,870 1,269 Accrued expenses, principally due to accrual for financial reporting purposes 1,164 2,342 Net operating loss carryforwards of acquired companies 191 252 Other 327 732 - ---------------------------------------------------------- Total gross deferred tax assets 51,798 47,630 - ---------------------------------------------------------- Deferred tax liabilities: Investment securities, principally due to discount accretion 4,135 3,393 Capitalized interest 909 1,002 Unrealized gain on securities available for sale 17,822 11,276 Land, buildings and equipment, principally due to write-up in value in purchase accounting entries for finanical reporting 22,711 22,249 Core deposit intangible, principally due to purchase accounting entries for financial reporting 6,150 8,100 Pension benefit obligation, due to recognition of the excess pension asset for financial reporting purposes 2,098 2,451 Realignment of corporate entities 21,167 -- Other 2,862 5 - ---------------------------------------------------------- Total gross deferred tax liabilities 77,854 48,476 - ---------------------------------------------------------- Net deferred tax liability $(26,056) $ (846) ==========================================================
Actual income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:
(In thousands) 1997 1996 1995 - ------------------------------------------------------------- Computed "expected" tax expense $70,722 $63,850 $59,073 Increase (reduction) in income taxes resulting from: Amortization of goodwill 1,628 1,499 1,444 Tax exempt income (2,240) (2,625) (2,829) Tax deductible dividends on allocated shares held by the Company's ESOP (720) (678) (665) State and local income taxes, net of federal income tax benefit 1,866 3,601 3,631 Other, net (1,896) (2,730) 488 - ------------------------------------------------------------- Total income tax expense $69,360 $62,917 $61,142 =============================================================
Cash payments of income taxes, net of refunds and interest received, amounted to $36,335,000, $64,860,000 and $52,268,000 on a consolidated basis during 1997, 1996 and 1995, respectively. The Parent had net receipts of $846,000, $1,644,000, and $3,010,000 during 1997, 1996 and 1995, respectively, from tax benefits. EMPLOYEE BENEFIT PLANS Employee benefits charged to operating expenses aggregated $22,598,000, $23,963,000 and $21,207,000 for 1997, 1996 and 1995, respectively. Substantially all of the Company's employees are covered by a noncontributory defined benefit pension plan. Participants are fully vested after five years of service and the benefits are based on years of participation and average annualized earnings. The Company's funding policy is to contribute funds to a trust as necessary to 51 Notes to Financial Statements [Cont.] Commerce Bancshares, Inc. and Subsidiaries provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution may not be made in a particular year. The following items are components of the net pension cost for the years ended December 31, 1997, 1996 and 1995:
(In thousands) 1997 1996 1995 - --------------------------------------------------------------- Service cost--benefits earned during the year $ 2,731 $ 2,647 $ 2,311 Interest cost on projected benefit obligation 3,767 3,343 3,152 Actual plan assets value (increase) decrease (11,816) (5,578) (8,219) Net amortization and deferral 6,323 429 3,695 - --------------------------------------------------------------- Net periodic pension cost $ 1,005 $ 841 $ 939 ===============================================================
The following table sets forth the pension plan's funded status, using a valuation date of September 30, 1997 and 1996:
1997 1996 - -------------------------------------------------------------------- (In thousands) Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefits of $47,071,000 in 1997 and $41,693,000 in 1996 $(48,816) $(42,635) Additional benefits based on estimated future salary levels (8,745) (7,367) - -------------------------------------------------------------------- Projected benefit obligation (57,561) (50,002) Plan assets at fair value 62,774 55,078 - -------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 5,213 5,076 Unrecognized net loss from past experience different from that assumed and effects of change in assumptions 5,456 7,403 Prior service benefit not yet recognized in net pension cost (1,634) (1,800) Unrecognized net transition asset being recognized over 15 years (3,191) (3,830) - -------------------------------------------------------------------- Prepaid pension cost included in other assets $ 5,844 $ 6,849 ====================================================================
Assumptions used in computing the plan's funded status were:
1997 1996 1995 - ------------------------------------------------- Discount rate 7.25% 7.75% 7.25% Rate of increase in future compensation levels 5.00% 5.00% 5.00% Long-term rate of return on assets 9.00% 8.50% 8.00% =================================================
At December 31, 1997, approximately 83% of plan assets were invested in U.S. government bonds and corporate bonds and equities. In addition to the pension plan, substantially all of the Company's employees are covered by a contributory defined contribution plan (401K), the Participating Investment Plan. Under the plan, the Company makes matching contributions, which aggregated $2,466,000 in 1997, $2,320,000 in 1996 and $2,352,000 in 1995. The Company formed an employee stock ownership plan (ESOP) in 1987 and borrowed funds from an unaffiliated lender to acquire shares for the ESOP. The final principal payment was made in December 1994 and the ESOP assets were merged into the Participating Investment Plan. The Company's final contribution to the ESOP, which was charged to salaries and benefits, was $368,000 in 1995. STOCK OPTION PLANS, RESTRICTED STOCK AWARDS AND DIRECTORS STOCK PURCHASE PLAN* The Company has reserved 5,874,947 shares of its common stock for issuance under various stock option plans offered to certain key employees of the Company and its subsidiaries. Options are granted, by action of the Board of Directors, to acquire stock at fair market value at the date of the grant, for a term of 10 years. 52 At December 31, 1997, 2,794,490 shares remain available for option grants under these programs. The following tables summarize option activity over the last three years and current options outstanding.
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Option Price Shares Option Price Shares Option Price - ------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,271,113 $26.06 1,185,433 $22.97 1,133,065 $20.61 - ------------------------------------------------------------------------------------------------------------------- Granted 299,368 44.71 295,675 32.23 325,651 25.13 Cancelled (6,821) 37.37 (19,577) 28.33 (26,019) 25.73 Exercised (157,415) 24.83 (190,418) 16.14 (247,264) 14.70 - ------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,406,245 $30.12 1,271,113 $26.06 1,185,433 $22.97 ===================================================================================================================
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------------- Weighted Number Average Weighted Number Weighted Outstanding at Remaining Average Exercisable at Average Range of December 31 Contractual Exercise December 31 Exercise Exercise Prices 1997 Life Price 1997 Price - -------------------------------------------------------------------------------------------------------- $19.20-$25.05 423,834 6.0 years $22.84 356,369 $22.43 $25.06-$26.46 417,858 5.7 years 26.04 416,409 26.04 $26.47-$44.61 561,141 8.6 years 38.49 205,333 36.38 $44.62-$55.71 3,412 9.8 years 55.58 854 55.58 - -------------------------------------------------------------------------------------------------------- $19.20-$55.71 1,406,245 6.9 years $30.12 978,965 $26.92 ========================================================================================================
The Company has a restricted stock award plan under which 182,325 shares of common stock are reserved, and 118,271 shares remain available for grant at December 31, 1997. The plan allows for awards to key employees, by action of the Board of Directors, with restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the restriction period. The restriction period may not exceed 10 years. The Company issued awards totaling 9,976 shares in 1997, 8,102 shares in 1996 and 24,180 shares in 1995, resulting in deferred compensation amounts of $461,000, $257,000 and $632,000, respectively. Approximately $165,000, $189,000 and $178,000 was amortized to salaries expense in 1997, 1996 and 1995, respectively. Unamortized deferred compensation of $601,000, $340,000 and $716,000 has been recorded as a reduction of stockholders' equity at December 31, 1997, 1996 and 1995, respectively. The Company has a directors stock purchase plan whereby outside directors of the Company and its subsidiaries may elect to use their directors' fees to purchase Company stock at market value each month-end. Remaining shares reserved for this plan total 134,635 at December 31, 1997. In 1997, 17,251 shares were purchased at an average price of $49.91 and in 1996, 24,771 shares were purchased at an average price of $34.56. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock- based compensation plans other than for restricted stock and performance-based awards. Had compensation cost for the Company's other stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company's net income and diluted earnings per share would have been reduced by approximately $1,636,000, or $.04 per share in 1997 and $1,423,000, or $.04 per share in 1996. 53 Notes to Financial Statements [Cont.] Commerce Bancshares, Inc. and Subsidiaries Following is a summary of the fair values of options granted using the Black- Scholes option-pricing model.
(Dollars in thousands) 1997 1996 - ------------------------------------------------------------------------ Fair value at grant date $3,534 $3,228 Assumptions: Dividend yield 2.0% 2.0% Volatility 21.0% 24.0% Risk-free interest rate 5.8% 6.1% Expected life 7.8 years 7.6 years ========================================================================
*All share and per share amounts in this note have been restated for the 5% stock dividend distributed on the $5 par common stock in December 1997 and the adoption of SFAS No. 128. COMMON STOCK Statement of Financial Accounting Standards No. 128 required the reporting of two measurements of performance over the reporting periods. Basic income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted income per share gives effect to all dilutive potential common shares that were outstanding during the year. The shares used in the calculation of basic and diluted income per share, which have been restated for the annual 5% stock dividends, are shown below.
For the Years Ended December 31 - ------------------------------------------------------------------- (In thousands) 1997 1996 1995 - ------------------------------------------------------------------- Weighted average common shares outstanding 38,994 39,917 41,391 Stock options 529 280 248 - ------------------------------------------------------------------- 39,523 40,197 41,639 ===================================================================
Under a Rights Agreement dated August 23, 1988, as amended in the amended and restated rights agreement with Commerce Bank, N.A. as rights agent, dated as of July 19, 1996, certain rights have attached to the common stock. Under certain circumstances relating to the acquisition of, or tender offer for, a specified percentage of the Company's outstanding common stock, holders of the common stock may exercise the rights and purchase shares of Series A Preferred Stock or, at a discount, common stock of the Company or an acquiring company. In February 1997, the Board of Directors authorized the Company to purchase up to 2,000,000 shares of common stock, in either the open market or privately negotiated transactions, in order to provide future funding for employee benefit programs and stock dividends. This action began after the completion of the stock repurchase program authorized in 1996. Approximately 1,645,000 shares have been acquired under the 1997 approval through December 31, 1997. On December 12, 1997, the Company distributed its fourth consecutive 5% stock dividend on the $5 par common stock. All per share data in this report has been restated to reflect the stock dividend. The table below is a summary of share activity in 1997. - -------------------------------------------------------------------------------- Purchases of common stock 1,898,304 Issuance of stock: Sales under employee and director plans 179,379 Purchase acquisition 197,488 Pooling acquisition 940,315 5% stock dividend 1,850,343 ================================================================================
REGULATORY CAPITAL REQUIREMENTS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that could have a direct material effect on the Company's financial statements. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of the Company's assets, liabilities and certain off- balance-sheet items as calculated under regulatory accounting practices. The Company's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Tier 1 capital to total average assets (leverage ratio), and minimum ratios of Tier 1 and Total capital to risk-weighted assets (as defined). The minimum required leverage ratio is 4%, the minimum Tier 1 capital ratio is 4%, and the minimum Total capital ratio is 8%. 54 The Company's actual capital amounts and ratios at the last two year ends are as follows:
(Dollars in thousands) 1997 1996 - -------------------------------------------------------------------------------- Risk-Weighted Assets $7,178,225 $6,283,359 Tier 1 Capital $ 868,535 $ 820,609 Total Capital $ 949,291 $ 892,177 Tier 1 Capital Ratio 12.10% 13.06% Total Capital Ratio 13.22% 14.20% Leverage Ratio 8.81% 8.84% ================================================================================
Management believes that, at December 31, 1997, the Company meets all capital requirements to which it is subject. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of estimated fair values for financial instruments held by the Company. Fair value estimates, methods and assumptions are set forth below. LOANS Fair values are estimated for various groups of loans segregated by 1) type of loan, 2) fixed/adjustable interest terms and 3) performing/non-performing status. The fair value of performing loans, except student and credit card loans, is calculated by discounting scheduled cash flows through contractual maturity using market rates that reflect credit and interest rate risk. The cash flows through maturity for individual loans are aggregated for the Company's asset/liability analysis. Rate forecasts are purchased from an outside company specializing in rate forecasting. Discount rates are computed for each loan category using these rate forecasts adjusted by the Company's interest spread and other considerations management deems necessary. Student loans are valued under the Company's current contract with SALLIE MAE. Fair value of non-accrual loans approximates their carrying value, because such loans are recorded at the appraised or estimated recoverable value of the collateral or the underlying cash flow. Estimated fair value of credit card loans approximates the existing balances outstanding at year end because management believes the current credit card yield is equal to the current market rate for similar instruments. This estimate does not include the additional value that relates to future cash flows from new loans generated from existing card holders over the estimated life of the customer relationship. The "Carrying Amount" of loans in the schedule below excludes deferred or unamortized fees and costs related to the loan transaction. INVESTMENT SECURITIES The fair values of the debt and equity instruments in the available for sale and trading sections of the investment security portfolio are estimated based on prices published in financial newspapers or bid quotations received from securities dealers. The fair value of those equity investments for which a market source is not readily available is estimated at carrying value. A breakdown of investment securities by category and maturity is provided in the financial statements note on Investment Securities. Fair value estimates are based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership, possible tax ramifications or estimated transaction costs. FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND CASH AND DUE FROM BANKS The carrying amounts of federal funds sold and securities purchased under agreements to resell and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell generally mature in 90 days or less and present little or no risk. DEPOSITS Statement 107 specifies that the fair value of deposits with no stated maturity is equal to the amount payable 55 Notes to Financial Statements (Cont.) Commerce Bancshares, Inc. and Subsidiaries on demand. Such deposits include savings and interest and non-interest bearing demand deposits. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using like-term Treasury indices and yield curves supplied by an external company specializing in rate forecasting. Discount rates are computed for each deposit category using these rate forecasts adjusted by the Company's interest spread and other considerations management deems necessary. The fair value estimates do not include the benefit that results from the low- cost funding provided by the deposit liabilities compared to the cost of borrowing funds. BORROWINGS Federal funds purchased and securities sold under agreements to repurchase mature or reprice within 90 days; therefore, their fair value approximates carrying value. The fair value of long-term debt is estimated by discounting contractual maturities using an estimate of the current market rate for similar instruments. The estimated fair values of the Company's financial instruments are as follows:
1997 1996 - ----------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Loans $6,237,039 $6,272,858 $5,454,627 $5,470,412 Available for sale investment securities 2,614,040 2,614,040 2,670,420 2,670,420 Trading account securities 6,477 6,477 11,265 11,265 Other non-marketable securities 44,414 44,414 39,830 39,830 Federal funds sold and securities purchased under agreements to resell 132,980 132,980 368,690 368,690 Cash and due from banks 978,239 978,239 833,260 833,260 - ----------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES Non-interest bearing demand deposits $2,124,828 $2,124,828 $1,800,684 $1,800,684 Savings and interest bearing demand deposits 4,209,141 4,209,141 4,021,376 4,021,376 Time open and C.D.'s: Maturing in year 1 1,584,470 1,589,614 1,653,009 1,652,333 Maturing in year 2 523,248 525,733 387,005 385,191 Maturing in year 3 152,351 153,350 158,332 157,734 Maturing in year 4 47,775 48,122 92,995 93,603 Maturing in year 5 42,659 42,971 39,484 38,936 Maturing in over 5 years 16,106 16,313 13,544 13,452 Federal funds purchased and securities sold under agreements to repurchase 512,558 512,558 526,807 526,807 Long-term debt and other borrowings 7,207 7,343 14,120 14,802 ===========================================================================================================
56 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The fair value of letters of credit and commitments to extend credit is based on the fees currently charged to enter into similar agreements. The aggregate of these fees is not material. Foreign exchange contracts are generally executed at a customer's request and an offsetting contract is executed, eliminating the Company's exposure. Interest rate swap contracts are entered into by the Company to limit its interest rate risk. The fair value of these contracts is determined by contacting appropriate brokers for the current cost of selling, purchasing or closing out the various contracts. The fair values of the foreign exchange contracts and interest rate swaps are not material. These instruments are also referenced in either the financial statements notes on Financial Instruments with Off-Balance-Sheet Risk or Loans and Allowance for Losses. LIMITATIONS Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for many of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties and cannot be determined with precision. Changes in assumptions could significantly affect the estimates. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company engages in various transactions with off-balance-sheet risk in the normal course of business to meet customer financing needs. The Company uses the same credit policies in making the commitments and conditional obligations described below as it does for on-balance-sheet instruments. Issuance of standby and commercial letters of credit beneficially assist customers engaged in a wide range of commercial enterprise and international trade. Standby letters of credit serve as payment assurances to a third party in the event the bank's customer fails to perform its financial and/or contractual obligations. Most expire over the next 12 months and are secured by 1) a line of credit with, 2) a certificate of deposit held by, 3) marketable securities held by, or 4) a deed of trust held by a banking subsidiary. At December 31, 1997, standby letters of credit outstanding of the banking subsidiaries amounted to $169,387,000, net of $2,830,000 participated to non-affiliated companies. Commercial letters of credit generally finance the purchase of imported goods and provide a payment engagement against presentation of documents meeting the terms and conditions set forth in the letter of credit instrument. There were $28,085,000 outstanding commercial letters of credit at December 31, 1997. Transactions involving securities described as "when-issued" are treated as conditional transactions in a security authorized for issuance but not yet actually issued. Purchases and sales of when-issued securities for which settlement date has not occurred are not to be reflected in the financial statements until settlement date. At December 31, 1997, the Company's commitments to purchase and sell when-issued securities were not material. The Company enters into foreign exchange contracts to purchase and sell foreign currency. Most of the contracts offset each other and risk arises only if one of the contracts is not performed and the currency must be bought or sold at the prevailing market rate. The Company also enters into interest rate swaps and other contracts to purchase securities to limit its interest rate risk. The notional value of these contracts was $266,438,000 at December 31, 1997. The current credit exposure (or replacement cost) across all off-balance-sheet derivative contracts covered by the risk-based capital standards was $6,277,000 at December 31, 1997. 57 See financial statements note on Loans and Allowance for Losses for a discussion of unfunded loan commitments. COMMITMENTS AND CONTINGENCIES The Company leases certain premises and equipment, all of which were classified as operating leases. The rent expense under such arrangements amounted to $2,401,000, $2,361,000 and $2,079,000 in 1997, 1996 and 1995, respectively. A summary of minimum lease commitments follows:
(In thousands) Type of Property - -------------------------------------------------------------------------------- Years Ended Real Total December 31 Property Equipment Commitments - -------------------------------------------------------------------------------- 1998 $ 1,955 $246 $ 2,201 1999 1,809 39 1,848 2000 1,623 5 1,628 2001 1,606 4 1,610 2002 1,507 -- 1,507 After 18,480 -- 18,480 - -------------------------------------------------------------------------------- Total minimum lease payments $27,274 ================================================================================
All leases expire prior to 2055. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, the future minimum lease commitments will not be less than the amounts shown for 1998. The Company incurred expense of $11,989,000 in 1997, $9,505,000 in 1996 and $8,648,000 in 1995 under an agreement to outsource certain data processing services. Future payments will adjust for inflation and transaction volume. The Company owns approximately 51% interest in a venture capital partnership, with an original commitment to fund $15,456,000 over the ten-year life of the partnership. Contributions to the partnership were $2,273,000 in January 1998, $3,030,000 in 1997, $1,515,000 in 1996 and $3,030,000 in 1995. In the normal course of business, the Company had certain lawsuits pending at December 31, 1997. In the opinion of management, after consultation with legal counsel, none of these suits will have a significant effect on the financial condition and results of operations of the Company. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Following are the condensed financial statements of Commerce Bancshares, Inc. (Parent only) for the periods indicated: CONDENSED BALANCE SHEETS
December 31 - --------------------------------------------------------------------------------------------- (In thousands) 1997 1996 - --------------------------------------------------------------------------------------------- ASSETS Investment in consolidated subsidiaries: Banks $847,645 $783,014 Non-banks 29,104 25,081 Receivables from subsidiaries, net of borrowings 10,583 8,042 Cash 167 121 Securities purchased under agreements to resell 7,100 7,338 Investment securities: Available for sale 73,339 90,845 Other non-marketable 11,968 10,728 Other assets 11,447 11,674 - --------------------------------------------------------------------------------------------- Total assets $991,353 $936,843 ============================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued taxes and other liabilities $ 10,569 $ 12,572 - --------------------------------------------------------------------------------------------- Total liabilities 10,569 12,572 - --------------------------------------------------------------------------------------------- Stockholders' equity 980,784 924,271 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $991,353 $936,843 =============================================================================================
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31 - ------------------------------------------------------------------------------------------------------------ (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ INCOME Dividends received: Bank subsidiaries $103,626 $120,024 $124,129 Non-bank subsidiaries 200 250 -- Earnings of consolidated subsidiaries, net of dividends 28,628 (393) (13,057) Interest on investment securities 4,326 3,886 2,992 Interest on securities purchased under agreements to resell 233 244 228 Management fees charged subsidiaries 16,842 13,951 13,024 Data processing fees charged subsidiaries 27,638 21,596 18,030 Net gains (losses) on securities transactions 1,967 (507) 226 Other 702 69 201 - ------------------------------------------------------------------------------------------------------------ Total income 184,162 159,120 145,773 ============================================================================================================ EXPENSE Salaries and employee benefits 28,525 21,981 19,992 Marketing 351 123 207 External data processing 11,552 9,041 8,658 Other 13,928 10,621 10,354 - ------------------------------------------------------------------------------------------------------------ Total expense 54,356 41,766 39,211 - ------------------------------------------------------------------------------------------------------------ Income tax expense (benefit) (2,896) (2,158) (1,078) - ------------------------------------------------------------------------------------------------------------ Net income $132,702 $119,512 $107,640 ============================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31 - ------------------------------------------------------------------------------------------------------------ (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $132,702 $119,512 $107,640 Adjustments to reconcile net income to net cash provided by operating activities: Earnings of consolidated subsidiaries, net of dividends (28,628) 393 13,057 Other adjustments, net (3,824) (1,883) 3,521 - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 100,250 118,022 124,218 - ------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Cash paid in acquisitions -- -- (94,102) (Increase) decrease in investment in subsidiaries, net 457 (438) (4,283) (Increase) decrease in receivables from subsidiaries, net of borrowings (2,541) 456 (1,359) Proceeds from sales of investment securities 2,538 627 12,943 Proceeds from maturities of investment securities 474,729 249,023 263,557 Purchases of investment securities (453,391) 298,241) 271,748) Net decrease in securities purchased under agreements to resell 238 34,830 34,504 Net purchases of equipment (334) (2,723) (1,513) - ------------------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities 21,696 (16,466) (62,001) - ------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Purchases of treasury stock (94,067) (78,408) (40,024) Sales of treasury stock 2,599 4,039 4,149 Cash dividends paid on common stock (30,432) (27,462) (26,039) - ------------------------------------------------------------------------------------------------------------ Net cash used by financing activities (121,900) (101,831) (61,914) - ------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash 46 (275) 303 Cash at beginning of year 121 396 93 - ------------------------------------------------------------------------------------------------------------ Cash at end of year $ 167 $ 121 $ 396 ============================================================================================================
59 Notes to Financial Statements [Cont.] Commerce Bancshares, Inc. and Subsidiaries Dividends paid by the Parent were substantially provided from subsidiary bank dividends. The subsidiary banks may distribute dividends without prior regulatory approval that do not exceed the sum of net income for the current year and retained net income for the preceding two years, subject to maintenance of minimum capital requirements. The Parent charges fees to its subsidiaries for management services provided, which are allocated to the subsidiaries based primarily on total average assets. The Parent also charges data processing fees, which are allocated to the subsidiaries based on transaction volume. The Parent makes advances to non-banking subsidiaries and subsidiary bank holding companies. Advances are made to the Parent by subsidiary bank holding companies for investment in temporary liquid securities. Interest on such advances is based on market rates. At December 31, 1997, the Parent had lines of credit for general corporate purposes of $20,000,000 with a subsidiary bank. At December 31, 1997, the Parent had no borrowings from the subsidiary bank. Investment securities held by the Parent, which consist primarily of common stock and commercial paper, included an unrealized gain in fair value of $20,702,000 at December 31, 1997. The corresponding net of tax unrealized gain included in stockholders' equity was $12,886,000. Also included in stockholders' equity was the unrealized net of tax gain in fair value of investment securities held by subsidiaries, which amounted to $16,231,000 at December 31, 1997. Under a security agreement related to self-insurance for officer and director liability, $10,000,000 in market value of the Parent's investment securities were pledged at December 31, 1997. ================================================================================ Independent Auditors' Report The Board of Directors Commerce Bancshares, Inc.: We have audited the accompanying consolidated balance sheets of Commerce Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commerce Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP January 30, 1998 Kansas City, Missouri 60 Statement of Management's Responsibility Commerce Bancshares, Inc. and Subsidiaries FINANCIAL STATEMENTS Commerce Bancshares, Inc. is responsible for the preparation, integrity, and fair presentation of its published financial statements. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on judgments and estimates of management. INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining an effective internal control structure over financial reporting. The system contains monitoring mechanisms, and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions over time, the effectiveness of an internal control system may vary. Management assessed its internal control structure over financial reporting as of December 31, 1997. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that Commerce Bank, N.A. (Missouri), Commerce Bank, N.A. (Illinois) and Commerce Bank, N.A. (Wichita, Kansas) maintained effective internal control structures over financial reporting as of December 31, 1997. Commerce Bank, N.A. (Kansas City, Missouri) and Commerce Bank, N.A. (St. Louis, Missouri), prior year reporting banks, were merged to form Commerce Bank, N.A. (Missouri) effective December 31, 1997. COMPLIANCE WITH LAWS AND REGULATIONS Management is also responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders as designated by the FDIC as safety and soundness laws and regulations. Management assessed its compliance with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that Commerce Bank, N.A. (Missouri), Commerce Bank, N.A. (Illinois) and Commerce Bank, N.A. (Wichita, Kansas), subsidiary insured depository institutions of Commerce Bancshares, Inc., complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 1997. 61 SUMMARY OF QUARTERLY STATEMENTS OF INCOME Years Ended December 31, 1997, 1996 and 1995
For the Quarter Ended - ------------------------------------------------------------------------------------------ (In thousands, except per share data) 12/31/97 9/30/97 6/30/97 3/31/97 - ------------------------------------------------------------------------------------------ Interest income $178,039 $173,686 $168,339 $162,812 Interest expense (73,054) (72,628) (70,395) (69,025) - ------------------------------------------------------------------------------------------ Net interest income 104,985 101,058 97,944 93,787 Non-interest income 49,457 46,687 42,385 41,563 Salaries and employee benefits (46,571) (45,818) (43,708) (42,998) Other expense (44,228) (41,826) (40,185) (39,116) Provision for loan losses (8,716) (7,807) (7,293) (7,538) - ------------------------------------------------------------------------------------------ Income before income taxes 54,927 52,294 49,143 45,698 Income taxes (18,179) (18,072) (16,810) (16,299) - ------------------------------------------------------------------------------------------ Net income $ 36,748 $ 34,222 $ 32,333 $ 29,399 ========================================================================================== Net income per share basic* $ .94 $ .88 $ .83 $ .75 Net income per share diluted* $ .93 $ .87 $ .82 $ .74 ========================================================================================== Weighted average shares basic* 38,936 38,924 39,086 39,032 Weighted average shares diluted* 39,628 39,461 39,510 39,494 ========================================================================================== For the Quarter Ended - ------------------------------------------------------------------------------------------ (In thousands, except per share data) 12/31/96 9/30/96 6/30/96 3/31/96 - ------------------------------------------------------------------------------------------ Interest income $164,676 $161,147 $159,706 $162,074 Interest expense (69,891) (69,618) (69,791) (72,560) - ------------------------------------------------------------------------------------------ Net interest income 94,785 91,529 89,915 89,514 Non-interest income 43,257 40,449 38,660 36,796 Salaries and employee benefits (42,009) (40,971) (41,154) (41,157) Other expense (38,295) (39,106) (37,811) (37,451) Provision for loan losses (7,459) (6,082) (5,428) (5,553) - ------------------------------------------------------------------------------------------ Income before income taxes 50,279 45,819 44,182 42,149 Income taxes (17,823) (14,964) (15,264) (14,866) - ------------------------------------------------------------------------------------------ Net income $ 32,456 $ 30,855 $ 28,918 $ 27,283 ========================================================================================== Net income per share basic* $ .82 $ .78 $ .72 $ .67 Net income per share diluted* $ .81 $ .77 $ .72 $ .67 ========================================================================================== Weighted average shares basic* 39,389 39,598 40,124 40,568 Weighted average shares diluted* 39,818 39,817 40,336 40,823 ========================================================================================== For the Quarter Ended - ------------------------------------------------------------------------------------------ (In thousands, except per share data) 12/31/95 9/30/95 6/30/95 3/31/95 - ------------------------------------------------------------------------------------------ Interest income $164,672 $164,091 $160,644 $141,596 Interest expense (73,603) (73,590) (69,756) (58,309) - ------------------------------------------------------------------------------------------ Net interest income 91,069 90,501 90,888 83,287 Non-interest income 36,469 34,194 31,899 30,588 Salaries and employee benefits (39,901) (41,156) (39,650) (37,146) Other expense (38,384) (35,849) (38,934) (34,464) Provision for loan losses (5,939) (3,927) (1,930) (2,833) - ------------------------------------------------------------------------------------------ Income before income taxes 43,314 43,763 42,273 39,432 Income taxes (15,066) (16,153) (15,514) (14,409) - ------------------------------------------------------------------------------------------ Net income $ 28,248 $ 27,610 $ 26,759 $ 25,023 ========================================================================================== Net income per share basic* $ .68 $ .66 $ .64 $ .62 Net income per share diluted* $ .68 $ .66 $ .63 $ .62 ========================================================================================== Weighted average shares basic* 41,426 41,817 42,166 40,135 Weighted average shares diluted* 41,775 42,106 42,354 40,299 ==========================================================================================
* Restated for 5% stock dividend distributed in December 1997 and adoption of SFAS No. 128 62 OFFICERS, DIRECTORS, COMMUNITY BANK DIRECTORS, FEATURED DIRECTORS (These lists not included in EDGARized exhibit.) 63 through inside back cover EX-21 3 LIST OF CONSOLIDATED SUBSIDIARIES Exhibit 21 The consolidated subsidiaries of the Registrant at March 1, 1998, were as follows: State or Other Jurisdiction of Name Location Incorporation Commerce Bank, National Association Kansas City, MO United States CB Building Corp. Kansas City, MO Missouri Tower Redevelopment Corporation Kansas City, MO Missouri Twin City Development Company, Inc. Kansas City, KS Kansas Commerce Financial Corp. Clayton, MO Missouri Commerce Realty Corp. Clayton, MO Missouri County Realty Corp. Clayton, MO Missouri Commerce Brokerage Services, Inc. Clayton, MO Missouri Clayton Financial Corp. Clayton, MO Missouri Clayton Realty Corp. Clayton, MO Missouri Commerce Insurance Services, Inc. Fenton, MO Missouri Commerce Bank of Omaha, National Association Omaha, NE United States Commerce Bank, National Association Peoria, IL United States Commerce Bank, National Association Wichita, KS United States Union Center, Inc. Wichita, KS Kansas 21st Street Redevelopment Company, L.C. Wichita, KS Kansas Commerce Securities Corp. Wichita, KS Kansas City National Bank Pittsburg, KS United States The Citizens National Bank in Independence Independence, KS United States Mid-America Financial Corp. Kansas City, MO Missouri Delaware Redevelopment Corporation Kansas City, MO Missouri CBI Insurance Company Kansas City, MO Arizona Capital for Business, Inc. Kansas City, MO Missouri Commerce Property and Casualty Agency, Inc. Kansas City, MO Missouri Commerce Mortgage Corp. Kansas City, MO Missouri CFB Venture Fund I, Inc. Clayton, MO Missouri CFB Partners, Inc. Kansas City, MO Missouri UBI Financial Services, Inc. Wichita, KS Kansas CBI-Illinois, Inc. Kansas City, MO Delaware CBI-Kansas, Inc. Kansas City, MO Kansas Shawnee State, Inc. Wichita, KS Kansas EX-23 4 ACCOUNTANTS' CONSENT Exhibit 23 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors Commerce Bancshares, Inc.: We consent to incorporation by reference in Registration Statements No. 33- 28294, No. 33-82692, No. 33-8075, No. 33-78344, No. 33-61499, No. 33-61501 and No. 333-14651, each on Form S-8 of Commerce Bancshares, Inc. of our report dated January 30, 1998, relating to the consolidated balance sheets of Commerce Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Commerce Bancshares, Inc. KPMG PEAT MARWICK LLP Kansas City, Missouri March 11, 1998 EX-24 5 POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby appoint J. Daniel Stinnett and Jeffery D. Aberdeen, or either of them, attorney for the undersigned to sign the Annual Report on Form 10-K of Commerce Bancshares, Inc., for the fiscal year ended December 31, 1997, together with any and all amendments which might be required from time to time with respect thereto, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, with respect to Commerce Bancshares, Inc., with full power and authority in either of said attorneys to do and perform in the name of and on behalf of the undersigned every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person. IN WITNESS WHEREOF, the undersigned have executed these presents this 6th day of February, 1998. s/ Giorgio Balzer s/ Fred L. Brown s/ James B. Hebenstreit s/ David W. Kemper s/ Jonathan M. Kemper s/ Terry O. Meek s/ Benjamin F. Rassieur III s/ L.W. Stolzer s/ Andrew C. Taylor s/ Robert H. West EX-27 6 12/31/97 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Commerce Bancshares, Inc. 12/31/97 Form 10-K and is qualified in its entirety by reference to such financial statements. 1000 YEAR DEC-31-1997 DEC-31-1997 978,239 0 132,980 6,477 2,614,040 0 0 6,224,381 105,918 10,306,941 8,700,578 512,663 105,814 7,102 0 0 194,286 786,498 10,306,941 505,604 163,181 13,647 682,876 262,107 285,102 397,774 31,354 3,253 344,450 202,062 132,702 0 0 132,702 3.40 3.36 4.61 23,382 24,383 0 0 98,223 38,183 10,249 105,918 105,918 0 0 Certificates of deposit of $297,000 are included in Investments- Held-For-Sale. Excludes non-marketable investment securities of $44,414,000. Gross of allowance for loan losses. Excludes interest of $444,000 on trading account securities. A 5% stock dividend was distributed on December 12, 1997. Prior financial data schedules have not been restated. Yield is computed on a tax equivalent basis.
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