-----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, StJYuvUlFunTdQsVM93kV4TxqDMMDEibUoI8haOdARPg3av897TZ0rdWxeJPiDzI g9PYHTfMy8EkSlbVfrdrkQ== 0000022356-99-000005.txt : 19990512 0000022356-99-000005.hdr.sgml : 19990512 ACCESSION NUMBER: 0000022356-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990511 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-Q SEC ACT: SEC FILE NUMBER: 000-02989 FILM NUMBER: 99616830 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-Q 1 3/31/99 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-Q ------------ (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-2989 Commerce Bancshares, Inc. (Exact name of registrant as specified in its charter) Missouri 43-0889454 (State of Incorporation) (IRS Employer Identification No.) 1000 Walnut, Kansas City, MO 64106 (Address of principal executive offices and Zip Code) (816) 234-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 3, 1999, the registrant had outstanding 60,708,830 shares of its $5 par value common stock, registrant's only class of common stock. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Part I: FINANCIAL INFORMATION In the opinion of management, the consolidated financial statements of Commerce Bancshares, Inc. and Subsidiaries as of March 31, 1999 and December 31, 1998 and the related notes include all material adjustments which were regularly recurring in nature and necessary for fair presentation of the financial condition and the results of operations for the periods shown. The consolidated financial statements of Commerce Bancshares, Inc. and Subsidiaries and management's discussion and analysis of financial condition and results of operations are presented in the schedules as follows: Schedule 1: Consolidated Balance Sheets Schedule 2: Consolidated Statements of Income Schedule 3: Statements of Changes in Stockholders' Equity Schedule 4: Consolidated Statements of Cash Flows Schedule 5: Notes to Consolidated Financial Statements Schedule 6: Management's Discussion and Analysis of Financial Condition and Results of Operations, including Quantitative and Qualitative Disclosures about Market Risk Part II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (27) Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter ended March 31, 1999. The exhibit set forth above was filed as part of Form 10-Q with the Securities and Exchange Commission but is not included herein. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Commerce Bancshares, Inc. /s/ J. Daniel Stinnett By __________________________________ J. Daniel Stinnett Vice President & Secretary Date: May 11, 1999 /s/ Jeffery D. Aberdeen By __________________________________ Jeffery D. Aberdeen Controller (Chief Accounting Officer) Date: May 11, 1999 2 Schedule 1 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31 December 31 1999 1998 ----------- ----------- (Unaudited) (In thousands) ASSETS Loans, net of unearned income........................ $ 6,948,963 $ 7,046,852 Allowance for loan losses............................ (119,557) (117,092) ----------- ----------- Net loans........................................ 6,829,406 6,929,760 ----------- ----------- Investment securities: Available for sale................................. 2,795,379 2,988,230 Trading account.................................... 7,263 14,210 Other non-marketable............................... 29,287 29,276 ----------- ----------- Total investment securities...................... 2,831,929 3,031,716 ----------- ----------- Federal funds sold and securities purchased under agreements to resell................................ 366,540 261,535 Cash and due from banks.............................. 656,844 738,672 Land, buildings and equipment, net................... 223,533 222,129 Goodwill and core deposit premium, net............... 74,876 77,009 Customers' acceptance liability...................... 976 808 Other assets......................................... 88,265 140,394 ----------- ----------- Total assets..................................... $11,072,369 $11,402,023 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing demand........................ $ 1,518,144 $ 1,657,037 Savings and interest bearing demand................ 5,275,280 5,295,897 Time open and C.D.'s of less than $100,000......... 2,234,323 2,269,835 Time open and C.D.'s of $100,000 and over.......... 293,838 307,428 ----------- ----------- Total deposits................................... 9,321,585 9,530,197 Federal funds purchased and securities sold under agreements to repurchase............................ 505,877 617,830 Long-term debt and other borrowings.................. 26,802 27,130 Accrued interest, taxes and other liabilities........ 141,787 145,273 Acceptances outstanding.............................. 976 808 ----------- ----------- Total liabilities................................ 9,997,027 10,321,238 ----------- ----------- Stockholders' equity: Preferred stock, $1 par value. Authorized and unissued 2,000,000 shares......................... -- -- Common stock, $5 par value. Authorized 80,000,000 shares; issued 61,352,684 shares.................. 306,763 306,763 Capital surplus.................................... 103,641 106,159 Retained earnings.................................. 653,822 624,256 Treasury stock of 587,103 shares in 1999 and 193,208 shares in 1998, at cost................... (24,175) (8,561) Unearned employee benefits......................... (1,085) (904) Accumulated other comprehensive income............. 36,376 53,072 ----------- ----------- Total stockholders' equity....................... 1,075,342 1,080,785 ----------- ----------- Total liabilities and stockholders' equity....... $11,072,369 $11,402,023 =========== ===========
See accompanying notes to financial statements. 3 Schedule 2 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31 --------------------- 1999 1998 ---------- ---------- (Unaudited) (In thousands, except per share data) INTEREST INCOME Interest and fees on loans............................... $ 137,740 $ 134,320 Interest on investment securities ....................... 40,715 39,188 Interest on federal funds sold and securities purchased under agreements to resell.............................. 6,043 4,045 ---------- ---------- Total interest income................................ 184,498 177,553 ---------- ---------- INTEREST EXPENSE Interest on deposits: Savings and interest bearing demand.................... 33,083 34,823 Time open and C.D.'s of less than $100,000............. 28,929 28,979 Time open and C.D.'s of $100,000 and over.............. 3,782 3,106 Interest on federal funds purchased and securities sold under agreements to repurchase.......................... 6,310 6,464 Interest on long-term debt and other borrowings.......... 228 107 ---------- ---------- Total interest expense............................... 72,332 73,479 ---------- ---------- Net interest income.................................. 112,166 104,074 Provision for loan losses................................ 8,550 10,716 ---------- ---------- Net interest income after provision for loan losses.. 103,616 93,358 ---------- ---------- NON-INTEREST INCOME Trust fees............................................... 13,912 11,653 Deposit account charges and other fees................... 16,241 14,389 Credit card transaction fees............................. 8,900 7,095 Trading account profits and commissions.................. 2,785 2,281 Net gains on securities transactions..................... 636 1,421 Other.................................................... 14,982 13,120 ---------- ---------- Total non-interest income............................ 57,456 49,959 ---------- ---------- NON-INTEREST EXPENSE Salaries and employee benefits........................... 54,025 48,506 Net occupancy............................................ 6,659 5,293 Equipment................................................ 4,875 4,266 Supplies and communication............................... 8,160 7,098 Data processing.......................................... 8,211 6,937 Marketing................................................ 3,251 2,759 Goodwill and core deposit................................ 2,133 2,296 Other.................................................... 15,387 13,266 ---------- ---------- Total non-interest expense........................... 102,701 90,421 ---------- ---------- Income before income taxes............................... 58,371 52,896 Less income taxes........................................ 19,686 18,413 ---------- ---------- Net income........................................... $ 38,685 $ 34,483 ========== ========== Net income per share--basic.............................. $ .63 $ .57 ========== ========== Net income per share--diluted............................ $ .62 $ .56 ========== ========== Cash dividends per common share.......................... $ .150 $ .138 ========== ==========
See accompanying notes to financial statements. 4 Schedule 3 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Number of Unearned Other Shares Common Capital Retained Treasury Employee Comprehensive Issued Stock Surplus Earnings Stock Benefits Income Total ---------- -------- -------- -------- -------- -------- ------------- ---------- (Unaudited) (Dollars in thousands) Balance January 1, 1999 ....................... 61,352,684 $306,763 $106,159 $624,256 $ (8,561) $ (904) $53,072 $1,080,785 Net income............. 38,685 38,685 Change in unrealized gain (loss) on available for sale securities............ (16,696) (16,696) ---------- Total comprehensive income................ 21,989 ---------- Purchase of treasury stock................. (21,185) (21,185) Sales under option and benefit plans......... (2,499) 5,282 2,783 Issuance of stock under restricted stock award plan.................. (19) 289 (270) -- Restricted stock award amortization.......... 89 89 Cash dividends paid ($.15 per share)...... (9,119) (9,119) ---------- -------- -------- -------- -------- ------- ------- ---------- Balance March 31, 1999.. 61,352,684 $306,763 $103,641 $653,822 $(24,175) $(1,085) $36,376 $1,075,342 ========== ======== ======== ======== ======== ======= ======= ========== Balance January 1, 1998. 58,285,813 $291,429 $ 48,704 $626,387 $(14,252) $ (601) $29,117 $ 980,784 Net income............. 34,483 34,483 Change in unrealized gain (loss) on available for sale securities............ 14,740 14,740 ---------- Total comprehensive income................ 49,223 ---------- Pooling acquisition.... 360,000 1,800 (11,346) 7,639 16,101 139 14,333 Purchase of treasury stock................. (11,504) (11,504) Sales under option and benefit plans......... (1,010) 2,190 1,180 Issuance of stock under restricted stock award plan.................. 11 492 (503) -- Restricted stock award amortization.......... 60 60 Cash dividends paid ($.138 per share) .... (8,480) (8,480) ---------- -------- -------- -------- -------- ------- ------- ---------- Balance March 31, 1998.. 58,645,813 $293,229 $ 36,359 $660,029 $ (6,973) $(1,044) $43,996 $1,025,596 ========== ======== ======== ======== ======== ======= ======= ==========
See accompanying notes to financial statements. 5 Schedule 4 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31 ---------------------- 1999 1998 ---------- ---------- (Unaudited) (In thousands) OPERATING ACTIVITIES: Net income ............................................ $ 38,685 $ 34,483 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ........................... 8,550 10,716 Provision for depreciation and amortization ......... 8,370 7,978 Accretion of investment security discounts .......... (824) (1,298) Amortization of investment security premiums ........ 2,805 1,883 Net gains on sales of investment securities (A) ..... (636) (1,421) Net (increase) decrease in trading account securities.......................................... 4,568 (530) Decrease in interest receivable ..................... 1,055 1,685 Increase (decrease) in interest payable ............. (1,745) 235 Other changes, net .................................. 56,867 (46,779) ---------- ---------- Net cash provided by operating activities ......... 117,695 6,952 ---------- ---------- INVESTING ACTIVITIES: Net cash received in acquisition....................... -- 4,044 Proceeds from sales of investment securities (A)....... 75,217 96,351 Proceeds from maturities of investment securities (A).. 623,095 337,145 Purchases of investment securities (A) ................ (532,982) (354,018) Net increase in federal funds sold and securities purchased under agreements to resell ................. (105,005) (38,491) Net (increase) decrease in loans....................... 96,254 (151,051) Purchases of premises and equipment.................... (7,689) (5,800) Sales of premises and equipment........................ 768 682 ---------- ---------- Net cash provided (used) by investing activities... 149,658 (111,138) ---------- ---------- FINANCING ACTIVITIES: Net decrease in non-interest bearing demand, savings, and interest bearing demand deposits.................. (159,510) (111,288) Net increase (decrease) in time open and C.D.'s........ (49,142) 6,321 Net decrease in federal funds purchased and securities sold under agreements to repurchase .................. (111,953) (9,303) Repayment of long-term debt ........................... (272) (215) Purchases of treasury stock ........................... (20,191) (11,419) Exercise of stock options by employees ................ 1,006 723 Cash dividends paid on common stock ................... (9,119) (8,480) ---------- ---------- Net cash used by financing activities ............. (349,181) (133,661) ---------- ---------- Decrease in cash and cash equivalents.............. (81,828) (237,847) Cash and cash equivalents at beginning of year......... 738,672 978,239 ---------- ---------- Cash and cash equivalents at March 31 ............. $ 656,844 $ 740,392 ========== ==========
- -------- (A) Available for sale and other non-marketable securities, excluding trading account securities. Net cash payments of income taxes for the three month period were $15,815,000 in 1999 and $12,100,000 in 1998. Interest paid on deposits and borrowings for the three month period was $74,037,000 in 1999 and $73,200,000 in 1998. See accompanying notes to financial statements. 6 Schedule 5 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 (Unaudited) 1. Principles of Consolidation and Presentation The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 1998 data to conform to current year presentation. Results of operations for the three month period ended March 31, 1999 are not necessarily indicative of results to be attained for any other period. The significant accounting policies followed in the preparation of the quarterly financial statements are the same as those disclosed in the 1998 Annual Report to stockholders to which reference is made. 2. Allowance for Loan Losses The following is a summary of the allowance for loan losses for the three months ended March 31, 1999 and 1998.
1999 1998 -------- -------- (In thousands) Balance, January 1..................................... $117,092 $105,918 -------- -------- Additions: Provision for loan losses............................ 8,550 10,716 Allowance for loan losses of acquired bank........... -- 964 -------- -------- Total additions.................................... 8,550 11,680 -------- -------- Deductions: Loan losses.......................................... 9,039 10,991 Less recoveries on loans............................. 2,954 1,962 -------- -------- Net loan losses.................................... 6,085 9,029 -------- -------- Balance, March 31...................................... $119,557 $108,569 ======== ========
At March 31, 1999, non-performing assets were $39,238,000, which was .56% of total loans and .35% of total assets. This balance consisted of $16,569,000 in loans not accruing interest, $21,145,000 in loans past due 90 days and still accruing interest, and $1,524,000 in foreclosed real estate. 3. Investment Securities Investment securities, at fair value, consist of the following at March 31, 1999 and December 31, 1998.
March 31 December 31 1999 1998 ---------- ----------- (In thousands) Available for sale: U.S. government and federal agency obligations... $1,331,672 $1,448,547 State and municipal obligations.................. 95,333 101,785 CMO's and asset-backed securities................ 1,222,958 974,377 Other debt securities............................ 97,954 419,413 Equity securities................................ 47,462 44,108 Trading account securities......................... 7,263 14,210 Other non-marketable securities.................... 29,287 29,276 ---------- ---------- Total investment securities.................... $2,831,929 $3,031,716 ========== ==========
7 4. Common Stock The shares used in the calculation of basic and diluted income per share for the three months ended March 31, 1999 and 1998 are shown below.
1999 1998 ------ ------ (In thousands) Weighted average common shares outstanding.................. 61,046 61,037 Stock options............................................... 871 1,094 ------ ------ 61,917 62,131 ====== ======
5. Comprehensive Income SAFS No. 130, "Reporting Comprehensive Income", requires the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. The Company's only component of other comprehensive income is the unrealized holding gains and losses on available for sale securities.
For the Three Months Ended March 31 ---------------------- 1999 1998 ---------- ---------- (In thousands) Unrealized holding gains (losses).................. $ (26,323) $ 25,056 Less: reclassification adjustment for gains included in net income............................ 636 1,421 ---------- --------- Net unrealized gains (losses) on securities........ (26,959) 26,635 Income tax expense (benefit)....................... (10,263) 8,895 ---------- --------- Other comprehensive income (loss).................. $ (16,696) $ 14,740 ========== =========
6. Segments Management has established three operating segments within the Company. The Consumer segment includes the retail branch network, consumer finance, bankcard, student loans and discount brokerage services. The Commercial segment provides corporate lending, leasing, and international services, as well as business, government deposit and cash management services. The Money Management segment provides traditional trust and estate tax planning services, and advisory and discretionary investment management services. The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments. Financial data for 1998 bank acquisitions which have not yet been assimilated into the business segment and cost allocation systems are included in the Consumer segment and are not considered material.
Money Segment Other/ Consolidated Consumer Commercial Management Totals Elimination Totals -------- ---------- ---------- -------- ----------- ------------ (In thousands) Three Months Ended March 31, 1999 Net interest income after loan loss expense................ $ 6,216 $ 60,163 $(4,709) $ 61,670 $ 41,946 $103,616 Cost of funds allocation............. 50,621 (22,937) 6,152 33,836 (33,836) -- Non-interest income..... 30,805 6,932 18,453 56,190 1,266 57,456 ------- -------- ------- -------- -------- -------- Total net revenue....... 87,642 44,158 19,896 151,696 9,376 161,072 Non-interest expense.... 64,568 19,356 12,728 96,652 6,049 102,701 ------- -------- ------- -------- -------- -------- Income before income taxes.................. $23,074 $ 24,802 $ 7,168 $ 55,044 $ 3,327 $ 58,371 ======= ======== ======= ======== ======== ======== Three Months Ended March 31, 1998 Net interest income after loan loss expense................ $ 521 $ 58,226 $(4,240) $ 54,507 $ 38,851 $ 93,358 Cost of funds allocation............. 55,902 (24,282) 5,427 37,047 (37,047) -- Non-interest income..... 26,269 6,237 15,444 47,950 2,009 49,959 ------- -------- ------- -------- -------- -------- Total net revenue....... 82,692 40,181 16,631 139,504 3,813 143,317 Non-interest expense.... 54,040 18,507 11,161 83,708 6,713 90,421 ------- -------- ------- -------- -------- -------- Income before income taxes.................. $28,652 $ 21,674 $ 5,470 $ 55,796 $ (2,900) $ 52,896 ======= ======== ======= ======== ======== ========
The segment activity, as shown above, includes both direct and allocated items. Amounts in the "Other/Elimination" column include activity not related to the segments, such as that relating to administrative functions, and the effect of certain expense allocations to the segments. 8 Schedule 6 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 1999 (Unaudited) The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 1998 Annual Report on Form 10-K. Results of operations for the three month period ended March 31, 1999 are not necessarily indicative of results to be attained for any other period.
Three Months Ended March 31 -------------- 1999 1998 ------ ------ Per Share Data Net income--basic............................................. $ 63 $ .57 Net income--diluted........................................... .62 .56 Cash dividends................................................ .150 .138 Book value.................................................... 17.70 16.70 Market price.................................................. 38.50 45.48 Selected Ratios (Based on average balance sheets) Loans to deposits............................................. 75.04% 74.10% Non-interest bearing deposits to total deposits............... 14.87 21.84 Equity to loans............................................... 15.43 15.83 Equity to deposits............................................ 11.58 11.73 Equity to total assets........................................ 9.66 9.84 Return on total assets........................................ 1.40 1.38 Return on realized stockholders' equity....................... 15.17 14.52 Return on total stockholders' equity.......................... 14.53 14.01 (Based on end-of-period data) Efficiency ratio.............................................. 59.51 57.74 Tier I capital ratio.......................................... 11.95 12.32 Total capital ratio........................................... 13.08 13.42 Leverage ratio................................................ 8.75 9.00
Summary Consolidated net income for the first three months of 1999 was $38.7 million; a $4.2 million or 12.2% increase over the first three months of 1998. Diluted earnings per share increased 10.7% to $.62 compared to $.56 for the same period in the prior year. The first quarter of 1999 was the Company's twelfth consecutive quarter of double digit growth in earnings per share. The return on assets for the first quarter of 1999 was 1.40% versus 1.38% last year. The return on realized equity increased to 15.17% compared to 14.52% in 1998. Net interest income increased $8.1 million, or 7.8%, over the first three months of 1998, mainly due to loan growth. Non-interest income increased $7.5 million, or 15.0% over 1998, due to core fee income growth. The provision for loan losses decreased $2.2 million. Partially offsetting was an increase in non-interest expense of $12.3 million, or 13.6%, which included an increase of $5.5 million in salaries and benefits. 9 Net Interest Income The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate. Management believes this allocation method, applied on a consistent basis, provides meaningful comparisons between the respective periods. Analysis of Changes in Net Interest Income
Three Months Ended March 31, 1999 vs. 1998 -------------------------- Change due to -------------------------- Average Average Volume Rate Total ------- -------- ------- (In thousands) Interest income, fully taxable equivalent basis: Loans.............................................. $13,658 $(10,217) $3,441 Investment securities: U.S. government and federal agency securities.... (996) (831) (1,827) State and municipal obligations.................. 45 (14) 31 CMO's and asset-backed securities................ 2,496 (298) 2,198 Other securities................................. 1,327 (163) 1,164 Federal funds sold and securities purchased under agreements to resell.............................. 2,997 (999) 1,998 ------- -------- ------- Total interest income.......................... 19,527 (12,522) 7,005 ------- -------- ------- Interest expense: Deposits: Savings.......................................... 170 (361) (191) Interest bearing demand.......................... 7,385 (8,934) (1,549) Time open & C.D.'s of less than $100,000......... 1,176 (1,226) (50) Time open & C.D.'s of $100,000 and over.......... 988 (312) 676 Federal funds purchased and securities sold under agreements to repurchase.......................... 1,147 (1,301) (154) Long-term debt and other borrowings................ 370 (274) 96 ------- -------- ------- Total interest expense......................... 11,236 (12,408) (1,172) ------- -------- ------- Net interest income, fully taxable equivalent basis............................................. $ 8,291 $ (114) $ 8,177 ======= ======== =======
Net interest income for the first quarter of 1999 was $112.2 million, a 7.8% increase over the first quarter of 1998. For the quarter, the net interest rate margin was 4.49% compared with 4.66% in the first quarter of 1998 and 4.50% in the fourth quarter of 1998. Total interest income increased $6.9 million, or 3.9%, over the first quarter of 1998, mainly due to an increase of $691.4 million in average loan balances. This growth was partly reflective of the effects of bank acquisitions in 1998, in which the Company acquired loans of approximately $238 million, plus the effects of a strong economy in many of the Company's markets. Also contributing to this growth was an increase of $158.4 million in average balances invested in CMO's and asset-backed securities and $216.3 million in federal funds sold and resell agreements. These increases were partially offset by a decrease of 65 basis points in average loan rates. The average tax equivalent yield on interest earning assets was 7.35% in the first quarter of 1999 compared to 7.93% in the first quarter of 1998. Total interest expense (net of capitalized interest) decreased $1.1 million, or 1.6%, compared to the first quarter of 1998 due mainly to lower average rates paid on interest bearing demand deposits, partially offset by higher average balances in these deposits. Average rates paid on all interest bearing liabilities decreased from 4.15% in the first quarter of 1998 to 3.42% in the first quarter of 1999. 10 Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on page 17. Risk Elements of Loan Portfolio Non-performing assets include impaired loans (non-accrual loans and loans 90 days delinquent and still accruing interest) and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment (generally, loans that are 90 days past due as to principal and/or interest payments). These loans were made primarily to borrowers in Missouri, Kansas and Illinois. The following table presents non-performing assets.
March 31 December 31 1999 1998 -------- ----------- (In thousands) Non-accrual loans................................... $16,569 $17,831 Past due 90 days and still accruing interest........ 21,145 24,529 ------- ------- Total impaired loans................................ 37,714 42,360 Foreclosed real estate.............................. 1,524 2,521 ------- ------- Total non-performing assets..................... $39,238 $44,881 ======= ======= Non-performing assets to total loans................ .56% .64% Non-performing assets to total assets............... .35% .39%
The level of non-performing assets decreased 12.6% from year end 1998 totals. Non-accrual loans at March 31, 1999 consisted mainly of business loans ($7.4 million), business real estate loans ($2.6 million) and construction and land development loans ($5.6 million). Loans which were 90 or more days past due included credit card loans of $6.7 million and business loans of $6.4 million. A subsidiary bank issues Visa and MasterCard credit cards, and credit card loans outstanding amounted to $492.0 million at March 31, 1999. Because credit card loans traditionally have a higher than average ratio of net charge-offs to loans outstanding, management requires that a specific allowance for losses on credit card loans be maintained, which was $14.8 million, or 3.0% of credit card loans at March 31, 1999. The annualized net charge-off ratio for credit card loans was 3.47% for the first three months of 1999 compared to 3.98% for the first three months of 1998. The risk presented by the above loans and foreclosed real estate is not considered by management to be materially adverse in relation to normal credit risks generally taken by lenders. Provision/Allowance for Loan Losses
Three Months Ended ----------------------------------------- Dec. 31, 1998 Mar. 31, 1999 Mar. 31, 1998 ------------- ------------- ------------- (Dollars in thousands) Provision for loan losses...... $6,971 $8,550 $10,716 Net charge-offs................ 7,686 6,085 9,029 Net annualized charge-offs as a percentage of average loans... .44% .35% .58%
Management records the provision for loan losses, on an individual bank basis, in amounts that result in an allowance for loan losses sufficient to cover current net charge-offs and risks believed to be inherent in the loan portfolio of each bank. Management's evaluation includes such factors as past loan loss experience, current loan portfolio mix, evaluation of actual and potential losses in the loan portfolio, prevailing regional and national economic conditions that might have an impact on the portfolio, regular reviews and examinations of the loan portfolio conducted by internal loan reviewers supervised by Commerce Bancshares, Inc. (the Parent), and reviews and examinations by bank regulatory authorities. As a result of these factors, the provision for loan losses 11 decreased $2.2 million compared to the first quarter of 1998 and increased $1.6 million compared to the fourth quarter of 1998. The allowance for loan losses as a percentage of loans outstanding was 1.72% at March 31, 1999, compared to 1.66% at year-end 1998 and 1.69% at March 31, 1998. The allowance at March 31, 1999 was 305% of non-performing assets. Management believes that the allowance for loan losses, which is a general reserve, is adequate to cover actual and potential losses in the loan portfolio under current conditions. Other than as previously noted, management is not aware of any significant risks in the current loan portfolio due to concentrations of loans within any particular industry, nor of any separate types of loans within a particular category of non-performing loans that are unusually significant as to possible loan losses when compared to the entire loan portfolio. Non-Interest Income
Three Months Increase Ended March 31 (decrease) ---------------- --------------- 1999 1998 Amount Percent ------- ------- ------ ------- (Dollars in thousands) Trust fees............................. $13,912 $11,653 $2,259 19.4% Deposit account charges and other fees. 16,241 14,389 1,852 12.9 Credit card transaction fees........... 8,900 7,095 1,805 25.4 Trading account profits and commissions........................... 2,785 2,281 504 22.1 Net gains on securities transactions... 636 1,421 (785) (55.2) Other.................................. 14,982 13,120 1,862 14.2 ------- ------- ------ Total non-interest income.......... $57,456 $49,959 $7,497 15.0 ======= ======= ====== As a % of operating income (net interest income plus non-interest income)............................... 33.9% 32.4% ======= =======
Non-interest income rose 15.0% in the first quarter of 1999 compared to the first quarter of 1998. Trust fees increased $2.3 million, mainly due to account growth and increases in the value of assets managed. The growth in deposit account fees was mainly due to higher return item and NSF fees collected and growth in cash management product fees. Credit card fees rose $1.8 million because of increased transaction volumes in both the cardholder and merchant areas, improved product pricing, and growth in the Company's debit card product. Other income increased $1.9 million over the first quarter of 1998 due to increases in brokerage-related income, including fees from mutual fund sales, and international and foreign exchange income. Non-Interest Expense
Three Months Increase Ended March 31 (decrease) ---------------- --------------- 1999 1998 Amount Percent -------- ------- ------ ------- (Dollars in thousands) Salaries and employee benefits........... $ 54,025 $48,506 $5,519 11.4% Net occupancy............................ 6,659 5,293 1,366 25.8 Equipment................................ 4,875 4,266 609 14.3 Supplies and communication............... 8,160 7,098 1,062 15.0 Data processing.......................... 8,211 6,937 1,274 18.4 Marketing................................ 3,251 2,759 492 17.8 Goodwill and core deposit................ 2,133 2,296 (163) (7.1) Other.................................... 15,387 13,266 2,121 16.0 -------- ------- ------ Total non-interest expense........... $102,701 $90,421 12,280 13.6 ======== ======= ======
12 Non-interest expense rose 13.6% compared to the first quarter of 1998. Salaries and employee benefits increased $5.5 million over the first quarter of 1998. Additional full-time equivalent employees, partly due to acquisitions, contract programming and incentive compensation all contributed to salary growth, while increased medical costs contributed to higher overall benefits. Occupancy costs increased over the first quarter of 1998 due partly to increased rent on office space, building repairs, and real estate tax expense. Equipment costs partly reflect higher costs of branch technology expenditures made over the last year. Data processing expense increased $1.3 million, due in part to account growth and higher charges by information service providers. The efficiency ratio was 59.51% in the first quarter of 1999 compared to 57.74% in the first quarter of 1998 and 60.03% in the fourth quarter of 1998. Year 2000 Readiness Disclosure* Introduction As discussed in the 1998 Annual Report to Shareholders, the Company has developed a comprehensive plan to attain Year 2000 compliance. The plan has four general phases: (1) assessment, which includes inventorying and evaluating business processes and elements that must be modified; (2) renovation, which includes the modification, replacement or elimination of non-compliant items; (3) validation, or testing; and (4) implementation, which involves putting the renovated systems and equipment into operation. As the last phase is completed, integrated implementation is performed to ensure that validated items operate correctly in relation with one another. State of Readiness Mission critical items (defined to be those programs and processes that are essential to activities which present significant financial risk or risk in reputation) were identified in the assessment phase. At April 12, 1999, approximately 93% of the mission critical items had been assessed for Year 2000 issues, renovated where necessary, tested and implemented. Of the remaining mission critical items, 3% are still in the validation phase and 4% are in the renovation phase. The Company is well into integrated implementation of internal mission critical software systems and expects independent testing to be complete ahead of year end. The Company interfaces with many third parties, including customers, supply vendors, service providers, and counterparties. Some of its major systems are provided by third parties. The Company has communicated with significant third parties to determine the extent to which the Company may be affected by those third parties' failure to remediate their own Year 2000 issues. Assessments have been prepared for all of the Company's largest customers and counterparties. The Company will continue to monitor the progress of third party testing and implementation procedures throughout 1999, but cannot at this time determine the financial effect if significant third party remediation efforts fail. Costs to Address Year 2000 Issues The total cost of the Company's Year 2000 project is currently estimated to range between $4.5 and $5.5 million. Since inception through March 31, 1999, the cost has totaled approximately $3.0 million. This cost does not include computer equipment and software that is replaced within scheduled time frames in the normal course of business. A significant portion of these costs are not likely to be incremental costs to the Company, but rather will represent the redeployment of existing Company resources. System renovation costs for the Company are relatively low because a significant portion of the Company's software is vendor-supplied. Risks of Company's Year 2000 Issues The Company's estimate of Year 2000 project costs and the dates set forth above by which certain phases of the project are expected to be completed are based on management's best current estimates. Actual results could differ from those anticipated. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on 13 the Company's results of operations, liquidity and financial condition due to the general uncertainty inherent in the Year 2000 problem. The Company believes that, with the completion of the Year 2000 project as scheduled, the possibility of significant interruptions and failures of normal operations should be reduced. Year 2000 Contingency Plans The Company has developed remediation contingency plans and business resumption contingency plans. Remediation plans address actions to be taken if the remediation of a mission critical system falls behind schedule or is unsuccessful. At March 31, 1999, the Company had completed the remediation plan testing for mission critical items. Most of these contingency plans involve development of manual procedures or use of alternate systems. Business resumption plans address Year 2000 problems that occur notwithstanding the remediation efforts of the Company and third parties. They include issues like liquidity needs and dependence on utility, postal and other service providers. As part of its Year 2000 business resumption planning, the Company is modifying its current business resumption plans to reflect Year 2000 issues. Review and testing of business resumption plans is well underway, and independent testing is expected to be completed by the end of the second quarter 1999. Readers are cautioned that forward-looking statements contained in the Year 2000 discussion above should be read in conjunction with the Company's disclosures under the heading: "Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995". *This statement is made pursuant to the Year 2000 Information and Readiness Disclosure Act. This statement originated from the Company and concerns (1) assessments, projections, or estimates of year 2000 processing capabilities; (2) plans, objectives, or timetables for implementing or verifying year 2000 processing capabilities; (3) test plans, dates, or results; and/or (4) reviews and comments concerning year 2000 processing capabilities as defined by the Act. Liquidity and Capital Resources The liquid assets of the Parent consist primarily of commercial paper, overnight repurchase agreements and equity securities, most of which are readily marketable. The fair value of these investments was $109.7 million at March 31, 1999 compared to $119.0 million at December 31, 1998. Included in the fair values were unrealized net gains of $27.2 million at March 31, 1999 and $26.6 million at December 31, 1998. The Parent's liabilities totaled $22.0 million at March 31, 1999, compared to $14.2 million at December 31, 1998. Liabilities at March 31, 1999 included $8.0 million advanced mainly from subsidiary bank holding companies in order to combine resources for short-term investment in liquid assets. The Parent had no short-term borrowings from affiliate banks or long-term debt during 1999. The Parent's commercial paper, which management believes is readily marketable, has a P1 rating from Moody's and an A1 rating from Standard & Poor's. The Company is also rated A by Thomson BankWatch with a corresponding short-term rating of TBW-1. This credit availability should provide adequate funds to meet any outstanding or future commitments of the Parent. The liquid assets held by bank subsidiaries include federal funds sold and securities purchased under agreements to resell and available for sale investment securities. These liquid assets had a fair value of $3.04 billion at March 31, 1999 and $3.11 billion at December 31, 1998. The available for sale bank portfolio included an unrealized net gain in fair value of $28.1 million at March 31, 1999 compared to an unrealized net gain of $55.2 million at December 31, 1998. U.S. government and federal agency securities comprised 50% and CMO's and asset-backed securities comprised 46% of the banking subsidiaries' available for sale portfolio at March 31, 1999. The estimated average maturity of the available for sale investment portfolio was 3.1 years at March 31, 1999 and 2.3 years at December 31, 1998. In February 1999, the Board of Directors announced the approval of additional purchases of the Company's common stock, bringing the total purchase authorization to 3,000,000 shares. At March 31, 1999, the Company had acquired 344,112 shares under this authorization. The Company has routinely used these reacquired shares to fund annual stock dividends and employee benefit programs. 14 The Company had an equity to asset ratio of 9.66% based on 1999 average balances. As shown in the following table, the Company's capital exceeded the minimum risk-based capital and leverage requirements of the regulatory agencies.
Min. Ratios for March 31 December 31 Well-Capitalized 1999 1998 Banks ---------- ----------- ---------------- (Dollars in thousands) Risk-Adjusted Assets............. $8,083,245 $8,426,289 Tier I Capital................... 965,762 952,488 Total Capital.................... 1,057,279 1,060,692 Tier I Capital Ratio............. 11.95% 11.30% 6.00% Total Capital Ratio.............. 13.08% 12.59% 10.00% Leverage Ratio................... 8.75% 8.80% 5.00%
The Company's cash and cash equivalents (defined as "Cash and due from banks") were $656.8 million at March 31, 1999, a decrease of $81.8 million from December 31, 1998. Contributing to the net cash outflow were net decreases of $159.5 million in demand deposits and $112.0 million in short- term borrowings, and a net increase of $105.0 million in overnight investments. These outflows were partially offset by a $165.3 million increase in proceeds from sales and maturities of investment securities, net of purchases, and $117.7 million generated from operating activities. Total assets decreased 2.9% from year end 1998. The Company has various commitments and contingent liabilities which are properly not reflected on the balance sheet. Loan commitments (excluding lines of credit related to credit card loan agreements) totaled approximately $2.93 billion, standby letters of credit totaled $237.7 million, and commercial letters of credit totaled $18.1 million at March 31, 1999. The Company has little risk exposure in off-balance-sheet derivative contracts. The notional value of these contracts (interest rate and foreign exchange rate contracts) was $220.9 million at March 31, 1999. The current credit exposure (or replacement cost) across all off-balance-sheet derivative contracts covered by the risk-based capital standards was $5.9 million at March 31, 1999. Management does not anticipate any material losses to arise from these contingent items and believes there are no material commitments to extend credit that represent risks of an unusual nature. Quantitative and Qualitative Disclosures about Market Risk The Company's assets and liabilities are principally financial in nature and the resulting net interest income thereon is subject to changes in market interest rates and the mix of various assets and liabilities. Interest rates in the financial markets affect the Company's decisions on pricing its assets and liabilities which impacts net interest income, a significant cash flow source for the Company. As a result, a substantial portion of the Company's risk management activities relates to managing interest rate risk. The Company's Asset/Liability Management Committee monitors the interest rate sensitivity of the Company's balance sheet monthly using earnings simulation models and interest sensitivity GAP analysis. Using these tools, management attempts to optimize the asset/liability mix to minimize the impacts of significant rate movements within a broad range of interest rate scenarios. One set of simulation models is prepared to determine the impact on net interest income for the coming twelve months under several interest rate scenarios. One such scenario uses rates and volumes at March 31, 1999 for the twelve month projection. When this position is subjected to a graduated shift in interest rates of 100 basis points rising and 100 basis points falling, the annual impact to the Company's net interest income is as follows:
$ in % of Net Scenario millions Int. Income -------- -------- ----------- 100 basis points rising.............................. $ 4.8 1% 100 basis points falling............................. (3.3) (1)
15 Currently, the Company does not have significant risks related to foreign exchange, commodities or equity risk exposures. Impact of Accounting Standards Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", will be adopted by the Company on January 1, 2000. It establishes accounting and reporting standards for derivative instruments and hedging activities. All derivatives must be recognized on the balance sheet at fair value, with special accounting requirements for designated hedging activities. Certain changes in fair value must be adjusted through income. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. 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. 16 AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS Three Months Ended March 31, 1999 and 1998
First Quarter 1999 First Quarter 1998 --------------------------------- --------------------------------- Interest Avg. Rates Interest Avg. Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid ----------- -------- ---------- ----------- -------- ---------- (Unaudited) (Dollars in thousands) ASSETS: Loans: Business (A)........... $ 2,366,020 $ 41,842 7.17% $ 2,088,136 $ 40,636 7.89% Construction and development........... 350,312 6,690 7.75 234,308 4,907 8.49 Real estate--business.. 1,000,229 19,623 7.96 935,984 19,585 8.49 Real estate--personal.. 1,330,328 24,256 7.39 1,183,885 22,894 7.84 Personal banking....... 1,443,552 29,262 8.22 1,340,421 28,371 8.58 Credit card............ 508,943 16,371 13.05 525,270 18,210 14.06 ----------- -------- ----- ----------- -------- ----- Total loans.......... 6,999,384 138,044 8.00 6,308,004 134,603 8.65 ----------- -------- ----- ----------- -------- ----- Investment securities: U.S. government & federal agency........ 1,370,597 20,501 6.07 1,434,616 22,328 6.31 State & municipal obligations (A)....... 94,516 1,889 8.11 92,305 1,858 8.16 CMO's and asset-backed securities............ 1,011,920 15,646 6.27 853,530 13,448 6.39 Trading account securities............ 17,812 263 6.00 8,642 128 6.00 Other marketable securities (A)........ 198,359 2,754 5.63 113,754 1,567 5.59 Other non-marketable securities............ 32,614 427 5.31 31,270 585 7.59 ----------- -------- ----- ----------- -------- ----- Total investment securities.......... 2,725,818 41,480 6.17 2,534,117 39,914 6.39 ----------- -------- ----- ----------- -------- ----- Federal funds sold and securities purchased under agreements to resell................ 509,698 6,043 4.81 293,383 4,045 5.59 ----------- -------- ----- ----------- -------- ----- Total interest earning assets...... 10,234,900 185,567 7.35 9,135,504 178,562 7.93 -------- ----- -------- ----- Less allowance for loan losses................. (117,492) (105,754) Unrealized gain on investment securities.. 74,289 56,928 Cash and due from banks. 578,656 637,022 Land, buildings and equipment, net......... 222,344 215,562 Other assets............ 190,136 208,626 ----------- ----------- Total assets......... $11,182,833 $10,147,888 =========== =========== LIABILITIES AND EQUITY: Interest bearing deposits: Savings................ $ 335,252 1,644 1.99 $ 306,819 1,835 2.43 Interest bearing demand................ 5,050,704 31,439 2.52 3,955,920 32,988 3.38 Time open & C.D.'s of less than $100,000.... 2,253,202 28,929 5.21 2,161,456 28,979 5.44 Time open & C.D.'s of $100,000 and over..... 301,188 3,782 5.09 229,098 3,106 5.50 ----------- -------- ----- ----------- -------- ----- Total interest bearing deposits.... 7,940,346 65,794 3.36 6,653,293 66,908 4.08 ----------- -------- ----- ----------- -------- ----- Borrowings: Federal funds purchased and securities sold under agreements to repurchase............ 606,832 6,310 4.22 514,430 6,464 5.10 Long-term debt and other borrowings...... 26,991 228 3.42 7,087 132 7.53 ----------- -------- ----- ----------- -------- ----- Total borrowings..... 633,823 6,538 4.18 521,517 6,596 5.13 ----------- -------- ----- ----------- -------- ----- Total interest bearing liabilities. 8,574,169 72,332 3.42% 7,174,810 73,504 4.15% -------- ----- -------- ----- Non-interest bearing demand deposits........ 1,386,708 1,859,514 Other liabilities....... 141,918 115,130 Stockholders' equity.... 1,080,038 998,434 ----------- ----------- Total liabilities and equity.............. $11,182,833 $10,147,888 =========== =========== Net interest margin (T/E).................. $113,235 $105,058 ======== ======== Net yield on interest earning assets......... 4.49% 4.66% ======== ========
- -------- (A) Stated on a tax equivalent basis using a federal income tax rate of 35%. 17 EX-27 2 3/31/99 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Commerce Bancshares, Inc. 3/31/99 Form 10-Q and is qualified in its entirety by reference to such financial statements. 1000 3-MOS DEC-31-1999 MAR-31-1999 656,844 0 366,540 7,263 2,795,379 0 0 6,948,963 119,557 11,072,369 9,321,585 505,877 142,763 26,802 0 0 306,763 768,579 11,072,369 137,740 40,452 6,043 184,498 65,794 72,332 112,166 8,550 636 102,701 58,371 38,685 0 0 38,685 .63 .62 4.49 16,569 21,145 0 0 117,092 9,039 2,954 119,557 119,557 0 0 Certificates of deposit of $100,000 are included in Investments- Held-For-Sale. Excludes non-marketable securities of $29,287,000. Gross of allowance for loan losses. Excludes interest of $263,000 on trading account securities. Yield is computed on a tax equivalent basis.
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