=============================================================================== 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, 1995 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. ___X___ As of January 31, 1996, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $1,240,000,000. As of January 31, 1996, there were 36,805,139 shares of Registrant's $5 Par Value Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement with respect to the annual meeting of shareholders to be held on April 17, 1996, are incorporated in Part III. =============================================================================== 1
TABLE OF CONTENTS <TABLE> ITEM PAGE ==== ==== <C> <S> <C> PART I 1. Business ..................................................................... 3 2. Properties..................................................................... 4 3. Legal Proceedings.............................................................. 5 4. Submission of Matters to a Vote of Security Holders............................ 5 PART II 5. Market for the Registrant's Common Equity and Related Security Holder Matters.. 6 6. Selected Financial Data........................................................ 6 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 6 8. Financial Statements and Supplementary Data.................................... 7 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................................................................... 7 PART III 10. Directors and Executive Officers of the Registrant............................. 7 11. Executive Compensation......................................................... 7 12. Security Ownership of Certain Beneficial Owners and Management................. 7 13. Certain Relationships and Related Transactions................................. 7 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 7 Signatures.......................................................................... 10 Financial Information............................................................... Appendix A </TABLE> 2
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 nine national banking associations located in Missouri, one state bank and one national banking association located in Illinois, one state bank and 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 and leasing the same 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 A-4 through A-7 of Appendix A, attached hereto, the loan portfolio of the Company is well diversified. It does, however, contain certain risks as discussed on pages A-7 and A-8. The Company is operating in a multi- state environment that consists of a profitable blend of commercial, real estate, and consumer lending activities. Based on deposits, loans and assets of the banking subsidiaries at the close of 1995, the Company was the third largest multi-bank holding company headquartered in the State of Missouri. The banking subsidiaries of the Company which are located in Missouri (which comprise 79.4% of the banking assets of the Company) compete with approximately 500 Missouri banks together with savings and loans and other financial institutions. The Illinois and Kansas subsidiary banks meet 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 subsidiaries in Illinois are members 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. 3
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 (except Commerce Bank, Lawrence, KS and Commerce Bank, Bloomington, IL) are all national banking associations and as such are primarily regulated by the Comptroller of the Currency. The two state banks are regulated by state banking authorities and the FDIC. As discussed on pages A-1, A-2 and A-40 of Appendix A, attached hereto, the Company completed several acquisitions of banks in Missouri, Illinois and Kansas during 1995. They allowed the Company to enter several new markets (Bloomington and Chillicothe, IL; Kennett, MO; and Wichita, KS). The Company also opened several new full service branches and ATM locations in an ongoing effort to service the customer base. The Company also effected the merger of several bank charters in an effort to improve customer service and minimize operating overhead. Commerce Bank, N.A. (Leavenworth, KS) and Commerce Bank, N.A. (Kansas City, MO) were merged into Commerce Bank, N.A. (Kansas City, KS). The main location of the surviving bank was changed to Kansas City, MO. Commerce Bank (El Dorado, KS) along with its wholly-owned subsidiary, ADC, Inc., was merged into Commerce Bank, N.A. (Wichita, KS). ADC, Inc. was subsequently liquidated. Commerce Bank, N.A. (Clayton, MO) was merged into Commerce Bank, N.A. (Poplar Bluff, MO) and the main location of the surviving bank was changed to Clayton, MO. Incidental to certain of the above transactions, selected second-tier holding companies were dissolved. Additional mergers of banks owned by the Company are expected. The Company and its subsidiaries employed 4,437 persons on a full-time basis and 704 persons on a part-time basis at December 31, 1995. 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 Appendix A, attached hereto. The following schedule reflects the page number of Appendix A where the various captioned information is shown. <TABLE> <CAPTION> APPENDIX PAGE ======== <C> <S> <C> I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential A-12 through A-20 II. Investment Portfolio A-10 and A-11, A-33 and A-34 III. Loan Portfolio Types of Loans A-4 Maturities and Sensitivities of Loans to Changes in Interest Rates A-3 and A-4 Risk Elements A-7 and A-8 IV. Summary of Loan Loss Experience A-8 through A-10 V. Deposits A-3, A-12 through A-14 VI. Return on Equity and Assets A-1 VII. Short-Term Borrowings A-34 </TABLE> ITEM 2. PROPERTIES At December 31, 1995, Commerce Bank, N.A. (Kansas City, MO), through its wholly-owned subsidiary, CB Building Corp. (CB Building) owned the Commerce Trust Building, a 15-story office building located in downtown Kansas City, Missouri, which was constructed in 1906 and contains net rentable space of approximately 205,000 square feet. The building is presently 83% occupied. The bank occupies approximately 48% of the total available space. CB Building also owns the Commerce Bank Building, an 18-story office building in downtown Kansas City, Missouri, which was opened in mid-1986 and has net rentable space of approximately 384,000 square feet. The Company and Commerce Bank, N.A., presently occupy approximately 32% of the net rentable space and 4
the building is presently 95% leased. In addition, CB Building also owns parking garage facilities adjacent to the Commerce Trust Building and the Commerce Bank Building. Another subsidiary of the Company, Mid-America Financial Corp., through its wholly-owned subsidiary, Delaware Redevelopment Corporation, owns the Executive Plaza Building, a 9-story office building in Kansas City, Missouri, which opened for occupancy in early 1974 and has net rentable space of approximately 180,000 square feet. The building is 100% leased and the bank occupies approximately 85% of the available space. The main banking offices of Commerce Bank, N.A. (Clayton, MO), are in a 15-story office building owned by a subsidiary of the bank and located in Clayton, Missouri, in the St. Louis, Missouri area. The bank occupies approximately 167,000 square feet of the 197,000 net rentable square footage in the building and the building is presently 99% leased. The main banking offices of Commerce Bank, N.A. (Peoria) are in a 17-story office building owned by the bank and located in downtown Peoria, Illinois. The building is presently 91% leased with the bank occupying approximately 32% of the 224,000 net rentable square footage. The main banking offices of Commerce Bank, N.A. (Wichita) are in a 10-story office building owned by its wholly-owned subsidiary, Union Center, Inc., and is located in downtown Wichita, Kansas. The building is presently 60% leased with the bank occupying approximately 42% of the 191,000 net rentable square footage. The main offices of the other subsidiary banks of the Company are owned by the respective bank with the exception of Commerce Bank of Omaha, N.A., which leases its main office. Additionally, an insignificant number of branch locations are located in leased premises. ITEM 3. LEGAL PROCEEDINGS The information required by this item is set forth under the caption "Commitments and Contingencies" on page A-45 of Appendix A, attached hereto. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1995 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, 42........ Controller of the Company since December, 1995. Assistant Controller of the Company and Controller of Commerce Bank, N.A. (Kansas City, MO), a subsidiary of the Company, prior thereto. John O. Brown, 62.............. Vice Chairman of the Company and Commerce Bank, N.A. (Kansas City, MO) since February, 1995. Chairman of the Board of Commerce Bank, N.A. (Kansas City, MO) prior thereto. Kenneth L. Carter, 53.......... President and Chief Executive Officer of Commerce Bank, N.A. (Springfield, MO), a subsidiary of the Company. A. Bayard Clark, 50............ Chief Financial Officer of the Company since December, 1995. Executive Vice President of the Company prior thereto. 5
NAME AND AGE POSITIONS WITH REGISTRANT ============ ========================= David W. Kemper, 45............ 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 Chief Executive Officer of Commerce Bank, N.A. (Clayton, MO), a subsidiary of the Company, since January, 1985. He is the son of James M. Kemper, Jr. (a 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, 42......... Vice Chairman of the Company since November, 1991. Chairman of the Board and Chief Executive Officer of Commerce Bank, N.A. (Kansas City, MO) since February, 1995. 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 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, 35............. Executive Vice President of the Company since April, 1995. Prior thereto, he was Senior Vice President of Commerce Bank, N.A. (Clayton, MO) from April, 1993. Vice President of Commerce Bank, N.A. (Clayton, MO) prior thereto. David D. Kling, 49............. Executive Vice President of the Company. Seth M. Leadbeater, 45......... President of Commerce Bank, N.A. (Clayton, MO) since 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, 55............ Vice President of the Company and Executive Vice President of Commerce Bank, N.A. (Clayton, MO). Robert C. Matthews, Jr., 48.... Executive Vice President of the Company. Michael J. Petrie, 39.......... 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., 57.... Vice Chairman of the Company since August, 1992. Vice Chairman of Commerce Bank, N.A. (Clayton, MO) prior thereto. William G. Watson, 47.......... Chairman of the Board and Chief Executive Officer of Commerce Bank, N.A. (Wichita, KS), a subsidiary of the Company, since April, 1995. President and Chief Executive Officer of Union Bancshares, Inc. prior thereto. 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 A of Appendix A, attached hereto. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is set forth on page A-1 of Appendix A, attached hereto. 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 A-1 through A-25 of Appendix A, attached hereto. 6
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is set forth on pages A-26 through A-48 of Appendix A, attached hereto. 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 Items 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. 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, Consolidated Statements of Stockholders' Equity, Notes to Financial Statements and Summary of Quarterly Statements of Income, all for the years ended or as of December 31, 1995, 1994 and 1993, are included in Appendix A, attached hereto. (2) Financial Statement Schedules--All schedules are omitted as such information is inapplicable or is included in the financial statements. (3) Exhibits--The following exhibits, numbered as prescribed, of previously filed information (except where indicated as included herein) are hereby incorporated by reference. 3--Articles of Incorporation and By-Laws: (a) Restated Articles of Incorporation as filed with the Secretary of State of Missouri on October 8, 1986, were filed in annual report on Form 10-K dated March 30, 1987, and the same are hereby incorporated by reference. 7
(b) First Amendment to Restated Articles of Incorporation was filed in quarterly report on Form 10-Q for the period ended June 30, 1987 and dated July 30, 1987, and the same is hereby incorporated by reference. (c) Second Amendment to Restated Articles of Incorporation was filed in annual report on Form 10-K dated March 22, 1990, and the same is hereby incorporated by reference. (d) By-Laws as currently amended were filed in annual report on Form 10-K dated March 6, 1992, and the same are hereby incorporated by reference. (e) Amendment to Restated Articles of Incorporation to increase authorized shares to 60,000,000 shares with a par value of $5.00 was reported on Form 10-Q dated August 6, 1993, and the same is 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 a Rights Agreement dated August 23, 1988, between Registrant and Morgan Shareholder Services Trust Company (now First Chicago Trust Company of New York) was filed on Form 8-K dated August 23, 1988, and the same is hereby incorporated by reference. 10--Material Contracts: (a) Commerce Bancshares, Inc. Executive Incentive Compensation Plan-- Amendment and Restatement of December 3, 1993, was filed in quarterly report on Form 10-Q dated August 5, 1994, and the same is hereby incorporated by reference. (b) Copy of Commerce Bancshares, Inc. Incentive Stock Option Plan as adopted on April 16, 1986, was filed in annual report on Form 10-K dated March 30, 1987, and the same is hereby incorporated by reference. (c) Copy of Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan, and now captioned the Commerce Bancshares, Inc. 1996 Non-Qualified Stock Option Plan, as amended and restated in its entirety on April 19, 1995, was filed in quarterly report on Form 10-Q dated August 9, 1995, and the same is hereby incorporated by reference. (d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors dated July 1, 1989 was filed on Form 10-Q for the quarterly period ended June 30, 1989, and the same is hereby incorporated by reference. (e) Copy of Security Agreement with respect to Directors and Officers Liability was filed in quarterly report on Form 10-Q dated July 30, 1986, and the same is hereby incorporated by reference. (f) 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. (g) Copy of Agreement between Commerce Bancshares, Inc. and James M. Kemper, Jr. relating to the provision of consulting and other services by James M. Kemper, Jr. for Commerce Bancshares, Inc. was filed in annual report on Form 10-K dated March 6, 1992, and the same is hereby incorporated by reference. (h) Copy of 1996 Incentive Stock Option Plan was filed in quarterly report on Form 10-Q dated August 9, 1995, and the same is hereby incorporated by reference. (i) Commerce Executive Retirement Plan--included herein. 21--Subsidiaries of the Registrant--included herein 23--Independent Accountants' Consent--included herein 8
24--Powers of Attorney (in the following form): POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does 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, 1995, 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 has executed these presents this 9th day of February, 1996. Signed by the following directors: Messrs. Giorgio Balzer; Fred L. Brown; James B. Hebenstreit; David W. Kemper; James M. Kemper, Jr.; Terry O. Meek; Benjamin F. Rassieur, Jr.; John H. Robinson, Jr.; L. W. Stolzer; and Andrew C. Taylor. 27--Financial Data Schedule (b) Reports on Form 8-K: No report on Form 8-K was filed during the last quarter of 1995. 9
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 8TH DAY OF MARCH, 1996. Commerce Bancshares, Inc. By: s/J. Daniel Stinnett ------------------------------------- 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 8TH DAY OF MARCH, 1996. 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 James M. Kemper, Jr. A majority of the Terry O. Meek Board of Directors* Benjamin F. Rassieur, Jr. John H. Robinson, Jr. L. W. Stolzer Andrew C. Taylor - -------------- *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 10
COMMERCE BANCSHARES, INC. INDEX TO APPENDIX A Containing all Financial Information and Supplementary Data <TABLE> <CAPTION> PAGES ----- <S> <C> Common Stock Data Below Management's Discussion and Analysis of Financial Condition and Results of Operations--Including Key Ratios and Five Year Summary of Selected Financial Data A-1 through A-25 Statement of Management's Responsibility A-26 Independent Auditors' Report A-26 Summary of Significant Accounting Policies A-27 Consolidated Financial Statements: Balance Sheets A-28 Statements of Income A-29 Statements of Cash Flows A-30 Statements of Stockholders' Equity A-31 Notes to Financial Statements--Including Parent Company Condensed Financial Statements A-32 through A-47 Summary of Quarterly Statements of Income A-48 - ------------------------------------------------------------------------------------------------ </TABLE> COMMON STOCK DATA Commerce Bancshares, Inc. (Parent) The following table sets forth the high and low prices for the Company's common stock (CBSH) and cash dividends paid for the periods indicated (restated for the 1995 stock dividend). <TABLE> <CAPTION> Cash 1995 High Low Dividends - ----------------------------------------------- <S> <C> <C> <C> First Quarter $29.29 $25.71 $.171 Second Quarter 30.71 28.81 .171 Third Quarter 37.98 28.81 .171 Fourth Quarter 38.25 35.48 .171 1994 - ----------------------------------------------- First Quarter $29.71 $25.40 $.136 Second Quarter 29.59 26.53 .154 Third Quarter 30.39 26.76 .154 Fourth Quarter 29.25 25.71 .154 1993 - ----------------------------------------------- First Quarter $29.78 $26.91 $.121 Second Quarter 30.23 24.49 .136 Third Quarter 28.57 24.94 .136 Fourth Quarter 29.93 24.72 .136 </TABLE> Commerce Bancshares, Inc. common shares are publicly traded in the over-the- counter market on the NASDAQ National Market System. Prices reflected in the table above are last-sale prices and represent actual transactions. The Company had 5,941 shareholders of record as of December 31, 1995. A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS KEY RATIOS The table below summarizes various key ratios for the last five years. The 1995 and 1994 equity ratios include the SFAS 115 adjustment for unrealized gains and losses on available for sale investment securities. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Ratios (based on average balance sheets): Loans and leases to deposits 68.28% 61.07% 58.08% 57.71% 58.89% Non-interest bearing deposits to total deposits 19.81 19.60 19.72 18.63 17.49 Equity to total assets 9.48 9.30 8.75 8.04 7.49 Return on total assets 1.21 1.21 1.14 1.04 .93 Return on stockholders' equity 12.72 13.05 12.99 12.88 12.43 Net yield on interest earning assets (on a tax equivalent basis) 4.50 4.46 4.22 4.06 3.93 Cash dividend payout ratio 24.07 22.07 21.28 21.58 23.66 Efficiency ratio 62.60 65.10 64.58 65.35 65.00 ======================================================================================================================= FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA - ----------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 355,745 $ 314,617 $ 284,524 $ 247,708 $ 222,650 Non-interest income 133,150 121,028 121,423 108,607 85,100 Net income 107,640 96,111 86,894 71,655 59,776 Net income per common and common equivalent share* 2.85 2.72 2.49 2.21 1.92 Total assets 9,573,951 8,035,574 8,047,413 7,541,613 6,765,413 Long-term debt 14,562 6,487 6,894 7,267 38,106 Dividends per common share* .686 .599 .529 .478 .454 ======================================================================================================================= </TABLE> *Restated for 5% stock dividend distributed in December 1995 Consolidated net income for 1995 was $107.6 million compared to $96.1 million in 1994 and $86.9 million in 1993. Compared to 1994, net interest income increased $41.1 million and non-interest income increased $12.1 million. These increases were partially offset by increases of $23.4 million in other expense, $9.5 million in income taxes and $8.8 million in the provision for loan losses. In addition, four acquisitions completed in 1995 contributed $6.4 million to net income. The Company also benefited in 1995 from a significant refund and reduction in FDIC insurance expense. The 1994 increase over 1993 was largely due to a $30.1 million increase in net interest income and a $5.5 million decrease in the provision for loan losses, partially offset by a $24.8 million increase in other expense. Compared to 1992, net interest income increased $36.8 million, non-interest income increased $12.8 million and the provision for loan losses decreased $7.8 million. These increases to net income were partially offset by increases of $31.9 million in other expense and $10.3 million in income taxes. The Company's acquisition history for the past three years is summarized below: <TABLE> <CAPTION> Date of Acquisition Asset Size - -------------------------------------------------------------------------------------------- <S> <C> <C> Five bank charters during 1993 $431 million Five bank charters during 1994 376 million Cotton Exchange Bank (Kennett, Missouri) 3/1/95 63 million The Peoples Bank (Bloomington, Illinois) 3/1/95 444 million Union National Bank (Wichita, Kansas) 4/17/95 673 million Chillicothe State Bank (Chillicothe, Illinois) 5/1/95 24 million ============================================================================================ </TABLE> A-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) Acquisitions during 1993 required common stock valued at $63.3 million and cash of $1.2 million. Acquisitions during 1994 required treasury stock valued at $44.5 million, newly issued common stock valued at $3.5 million and $2.7 million in cash. Acquisitions during 1995 required treasury stock valued at $12.0 million, newly issued common stock valued at $75.7 million and cash of $94.1 million. On a pro forma basis, including consideration of the opportunity cost from the funds used, the 1995 acquisitions would have lowered earnings per share by $.14 for 1995, as presented in the financial statements note on Acquisitions. 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. In April 1993, the Board of Directors declared a three for two stock split effected in the form of a stock dividend. Certificates evidencing the dividend were distributed to stockholders in May 1993. On December 2, 1994, the Board declared a 5% stock dividend which was distributed on December 29, 1994. On October 6, 1995, the Board declared a 5% stock dividend which was distributed on December 15, 1995. All per share data in this report has been restated to reflect the 1995 stock dividend. More specific comments on these and various other aspects of the Company's operations and financial condition are discussed below: 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, 1995 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 assets or liabilities repricing in a given time period result in the "Interest sensitivity GAP" shown at the bottom of the 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 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. During 1994, as the federal funds and prime rates increased, rates on retail deposits, especially non-maturity accounts, tended to rise much more slowly due to lower funding demands and produced increases to the Company's net interest margin. When demand for funds increased during 1995, deposit rates increased even though overall prime and federal funds rates were declining, thus causing downward pressure on the net interest margin. 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. A-2
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. The Company has set policy limits of interest rate risk to be assumed in the normal course of business and continually prepares simulation models to monitor such limits. 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. The Company does not use 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. The following is an analysis of sensitivity gaps of interest earning assets and interest bearing liabilities: <TABLE> <CAPTION> REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS December 31, 1995 1-3 4-6 7-12 2-5 Over 5 (In thousands) Months Months Months Years Years Total - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Interest earning assets: Loans and leases $ 2,804,242 $ 258,646 $ 842,296 $1,178,474 $234,155 $5,317,813 Investment securities 39,248 50,750 310,667 1,779,902 414,186 2,594,753 Federal funds sold and securities purchased under agreements to resell 523,302 -- -- -- -- 523,302 - ------------------------------------------------------------------------------------------------------------------ Total interest earning assets 3,366,792 309,396 1,152,963 2,958,376 648,341 8,435,868 - ------------------------------------------------------------------------------------------------------------------ Interest bearing liabilities: Time & C.D.'s under $100,000 609,318 513,967 500,194 609,431 20,480 2,253,390 Time & C.D.'s $100,000 & over 63,770 52,422 62,453 39,240 1,066 218,951 Interest bearing demand & savings 3,891,801 -- -- -- -- 3,891,801 Federal funds purchased and securities sold under agreements to repurchase 362,903 -- -- -- -- 362,903 Long-term debt and other borrowings 121 119 244 10,853 3,225 14,562 - ------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 4,927,913 566,508 562,891 659,524 24,771 6,741,607 - ------------------------------------------------------------------------------------------------------------------ Interest sensitivity GAP $(1,561,121) $(257,112) $ 590,072 $2,298,852 $623,570 $1,694,261 ================================================================================================================== </TABLE> INTEREST INCOME AND EARNING ASSETS Average interest earning assets in 1995 were $8.01 billion compared to $7.12 billion in 1994 and $6.81 billion in 1993. Loans represented 64% of average interest earning assets in 1995, investment securities represented 33% and short-term federal funds sold and securities purchased under agreements to resell represented 3%. Tax equivalent interest income was $636.0 million in 1995, $503.3 million in 1994 and $463.3 million in 1993. In 1995 compared to 1994, tax equivalent interest income increased $132.8 million due mainly to increases in average balances invested in loans and the average tax equivalent rates earned on loans. Average balances invested in business and personal banking loans increased $311.3 million, or 22.4%, and $245.3 million, or 24.2%, respectively. Excluding balances of banks acquired in 1994 and 1995, business and personal banking loan average balances increased 13.2% and 10.7%, respectively. Average tax equivalent rates earned on business and personal banking loans increased 121 and 82 basis points, respectively. Compared to 1993, 1994 tax equivalent interest income increased $40.0 million, mainly due to a $344.2 million increase in total average loans and a 77 basis point increase in the average rate earned on business loans. Compared to 1992, tax equivalent interest income increased $10.1 million, mainly due to an increase of $361.5 million in the average balances invested in loans and $426.3 million in investment securities. Partially offsetting these effects were tax equivalent rate A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) decreases of 75 basis points in loans and 44 basis points in investment securities. The average tax equivalent rate on interest earning assets was 7.94% in 1995, 7.07% in 1994 and 6.80% in 1993. LOAN PORTFOLIO ANALYSIS A breakdown of average balances invested in each category of loans appears on page A-12. Classifications of consolidated loans by major category at December 31 for each of the past five years are as follows: <TABLE> <CAPTION> Balance at December 31 - -------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Business $1,716,080 $1,393,979 $1,380,452 $1,221,525 $1,109,353 Real estate--construction 168,031 127,948 90,102 123,955 107,740 Real estate--business 695,558 586,769 533,467 453,226 389,940 Real estate--personal 983,249 813,134 734,771 666,074 573,422 Consumer 1,258,809 1,120,366 917,683 885,998 848,751 Credit card 496,086 390,466 367,600 336,637 298,921 - -------------------------------------------------------------------------------------------------- Total loans, net of unearned income $5,317,813 $4,432,662 $4,024,075 $3,687,415 $3,328,127 ================================================================================================== </TABLE> The contractual maturities of loan categories at December 31, 1995, and a breakdown of those loans between predetermined rate and floating rate loans are as follows: <TABLE> <CAPTION> Principal Payments Due - -------------------------------------------------------------------------------------------------- In After One After One Year Year Through Five (In thousands) or Less Five Years Years Total - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Business $1,227,959 $ 454,651 $ 33,470 $1,716,080 Real estate--construction 119,047 33,300 15,684 168,031 Real estate--business 263,886 357,350 74,322 695,558 Real estate--personal 98,158 229,827 655,264 983,249 - -------------------------------------------------------------------------------------------------- Total $1,709,050 $1,075,128 $778,740 3,562,918 ================================================================================================== Consumer (1) 1,258,809 Credit card (2) 496,086 - -------------------------------------------------------------------------------------------------- Total loans, net of unearned income $5,317,813 ================================================================================================== Loans with predetermined rate $ 762,647 $ 458,374 $218,629 $1,439,650 Loans with floating rate 946,403 616,754 560,111 2,123,268 - -------------------------------------------------------------------------------------------------- Total $1,709,050 $1,075,128 $778,740 $3,562,918 ================================================================================================== </TABLE> (1) Consumer loans with floating rate totaled $517,349. (2) Credit card loans with floating rate totaled $414,279. The loan and lease portfolio has grown significantly over the past three years, and the ratio of average loans outstanding to total deposits has grown from 58.1% in 1993 to 61.1% in 1994 and to 68.3% in 1995. Loans and leases constituted 63.0% of total earning assets at December 31, 1995. Stronger loan growth in major markets, accompanied by the impact of acquisitions in Bloomington, Illinois, and Wichita, Kansas, exceeded overall deposit growth and contributed to the increase in the ratio of average loans to total deposits. While it is management's goal to deploy a larger portion of deposits in higher yielding loan assets, this strategy is tempered in the current economic and competitive environment. A stronger loan demand in 1995, coupled with improved earnings and capitalization of the banking industry, has led to intense competition for loan assets. Consolidations within the banking industry, coupled with excess lending capacity and the demand for greater earnings, continue to encourage less stringent underwriting standards, lower rates and longer term fixed rate pricing options, and more liberal offering terms and conditions. Given management's longer term commitment to asset quality and its strategy to minimize the impact of changes in interest rate levels on net A-4
interest income, the loan portfolio has exhibited moderate levels of internal growth in 1995. Growth in the loan and lease portfolio has been impacted by the purchase of new affiliate banks, along with aggressive solicitation of small and middle-market companies within our primary trade territories. Loan balances of approximately $680 million were acquired through bank acquisitions during 1995. The Company currently generates approximately 34.8% of its loan and lease portfolio from its St. Louis subsidiary bank and 23.7% from its Kansas City subsidiary bank. The portfolio is diversified from a commercial and retail standpoint, with 48.5% in loans to business and 51.5% 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. BUSINESS LOANS - This group of loans (totaling $1.72 billion and 32.3% of total loans at year end) 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, as shown on page A-10, of $1.8 million in 1995 compared to net recoveries of $29 thousand in 1994 and net charge-offs of $168 thousand in 1993. Such losses continue to be below industry averages. 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 1996 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. On the basis of average balances, business loans for 1995 increased 22.4% over 1994 levels, which increased 8.7% over 1993 levels. Excluding loan balances of banks acquired after January 1, 1994, average business loans increased 13.2% in 1995 compared to 1994. Non-accrual business loans increased to $9.9 million (.6% of business loans) at December 31, 1995 compared to $5.2 million (.4% of business loans) at December 31, 1994, and $6.3 million (.5% of business loans) at December 31, 1993. REAL ESTATE-CONSTRUCTION - The portfolio of loans in this category amounted to $168.0 million at December 31, 1995 compared to $127.9 million at year end 1994 and $90.1 million at year end 1993. Such loans represented 3.2% of total loans at December 31, 1995. Non-accrual loans in this category were $304 thousand at year end 1995, $52 thousand at year end 1994 and none at year end 1993. Management continues to maintain relatively low exposure in this category. The portfolio consists of residential construction, commercial construction, and land development loans, predominantly in the local markets of the Company's banking subsidiaries. Commercial construction loans are for small and medium- sized office and medical buildings, manufacturing and warehouse facilities, strip shopping centers, and other commercial properties. Exposure to larger speculative office and rental space is minimal. Residential construction and land development loans are primarily located in Kansas City and A-5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) St. Louis metropolitan areas. The Company experienced no loan losses in 1995 compared to net recoveries of $3 thousand in 1994 and $496 thousand in 1993. Management is not aware of any significant adverse exposure in this category. REAL ESTATE-BUSINESS - 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. At December 31, 1995, there were $695.6 million in balances outstanding secured by commercial properties, which was 13.1% of total loans. Excluding loan balances of banks acquired after January 1, 1994, average business real estate loans increased 10.0% in 1995 over 1994. Non-accrual balances have increased in 1995 to $3.4 million, or .5% of the loans in this category, compared to $3.3 million in 1994 and $5.6 million in 1993. The Company experienced net recoveries of $151 thousand in 1995 compared to net charge-offs of $580 thousand in 1994 and net recoveries of $144 thousand in 1993. 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 1996, given that the economy performs at or near the Federal Reserve's target level for growth of 2.5%. REAL ESTATE-PERSONAL - The mortgage loans in this category are extended, predominantly, for owner-occupied residential properties. At December 31, 1995, there were $983.2 million in loans outstanding, or 18.5% of total loans. Excluding balances of banks acquired after January 1, 1994, average personal real estate loans increased 7.5% in 1995 over 1994. The Company has not experienced significant problem credits in this category recently as there were net charge-offs of $109 thousand in 1995 compared to net recoveries of $30 thousand in 1994 and net charge-offs of $254 thousand in 1993. The non-accrual balances of loans in this category were $2.4 million at December 31, 1995, or .2% of the category, compared with $2.5 million at December 31, 1994 and $2.1 million at December 31, 1993. The five year history of net charge-offs on the real estate-personal loan category reflects nominal losses and credit quality is considered to be above average. CONSUMER - The 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 $155.4 million of home equity loan balances at December 31, 1995, with an additional $260.2 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. Historically, the underwriting terms for the home equity line product have generally limited borrowing availability such that, when combined with outstanding loan balances of prior mortgage loans, it would not exceed 70% of the appraised value of the real estate. In late 1994, based upon management's perception of a stronger and more stable economic and real estate market environment, the underwriting guidelines were changed and now permit borrowing availability, in the aggregate, 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 41% of the loans in the Consumer category are extended on a floating interest rate basis. Total average loan balances for 1995 were $1.26 billion compared to $1.01 billion in 1994 and $920.2 million in 1993. Excluding balances of banks acquired after January 1, 1994, average consumer loans increased 10.7% in 1995 compared to 1994. Net charge-offs increased $3.6 million in 1995 over 1994, but have been below .4% of consumer loans for each of the past three years. A-6
CREDIT CARD - The credit card portfolio is concentrated within our regional market. Approximately 57% of the households in Missouri that own a Commerce Special Connections credit card also maintain a deposit relationship with a subsidiary bank. Net charge-offs amounted to $9.7 million in 1995, which was a $3.9 million increase over 1994. Such losses were attributable to higher delinquencies and bankruptcies occurring during the second half of 1995 and were noted as part of national trends throughout the industry. The net charge-off ratios of 2.3% in 1995 and 1.6% in 1994 and 1993 are well below national averages. The average balance in credit card loans for 1995 was $420.0 million compared to $360.2 million in 1994 and $321.6 million in 1993. Excluding balances of banks acquired after January 1, 1994, average credit card loans increased 9.6% in 1995 compared to 1994. Approximately 84% of the outstanding credit card loans have a floating interest rate. The Company has a variety of credit card products, all of which offer ATM access to either advances against the credit card account or transactions against related deposit accounts. Continued growth is anticipated through targeted marketing and product design to segmented groups. During 1996, a number of new products will be introduced to fill in product line gaps for consumers, along with products aimed at the corporate and small business markets. The Company continues to refrain 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 with 1995 results and with the results of other industry providers, are not 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: <TABLE> <CAPTION> December 31 - -------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Non-accrual $16,234 $11,385 $14,328 $19,370 $25,780 Past due 90 days and still accruing interest 15,690 13,090 7,289 8,293 8,884 Real estate acquired in foreclosure 1,955 7,290 10,057 12,366 6,292 - -------------------------------------------------------------------------------------------------------- Total non-performing assets $33,879 $31,765 $31,674 $40,029 $40,956 ======================================================================================================== Non-performing assets as a percentage of total loans .64% .72% .79% 1.09% 1.23% ======================================================================================================== </TABLE> A-7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) The effect of non-accruing loans on interest income for 1995 is presented below: <TABLE> <CAPTION> (In thousands) - ---------------------------------------------------------------------------------- <S> <C> Gross amount of interest that would have been recorded at original rate $2,178 Interest that was reflected in income 310 - ---------------------------------------------------------------------------------- Interest income not recognized $1,868 ================================================================================== </TABLE> Included in the "Consumer" loans category is a home equity loan product, the "Anytime Line", which had $155.4 million in loans outstanding and $260.2 million in unused lines of credit at December 31, 1995. These loans, secured by real estate, should be viewed together with the "Real Estate-Personal" category in evaluating total loan balances supported by similar collateral. At December 31, 1995, the Company's mortgage banking subsidiary held residential real estate loans of approximately $5.8 million at lower of cost or market, which are to be resold to secondary markets within approximately three months. Management does not believe the risk in real estate loans is abnormal at this time. The Parent and a venture capital and investment banking subsidiary had debt and equity investments with a carrying value of $5.0 million in 18 companies or partnerships at December 31, 1995. 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 $5.0 million at December 31, 1995. 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, 1995 which exceeded 10% of total loans. PROVISION FOR LOAN LOSSES The loan loss provision in 1995 was $14.6 million compared to $5.8 million in 1994 and $11.4 million in 1993. The increase in 1995 was principally related to increased losses in consumer and credit card loans. Net charge-offs were $16.2 million in 1995 compared to $7.4 million in 1994 and $6.4 million in 1993. Management generally 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 thus charged against current income are based on such factors as past loan loss experience as related to 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 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 is the result of management's desire to maintain a satisfactory allowance to protect the Company from those losses which occur as a natural part of doing business. The allowance for loan losses at December 31, 1995, was 1.85% of loans and leases outstanding compared to 1.97% at year end 1994 and 2.13% at year end 1993. The allowance for loan losses at year end covered non-performing assets by 290.8%. 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. As with any financial institution, poor economic conditions, high inflation, high interest rates, or high 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 A-8
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, 3) fully documented policy concerning loan administration (loan file documentation, disclosures, approvals, etc.) and 4) a loan review staff employed by the Parent which travels to subsidiary banks 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 state the allowance at a satisfactory level on an individual bank basis. A subsidiary bank is an issuer of Visa and MasterCard credit cards. Therefore, the percentage of consumer loans outstanding which are generated through credit card sales drafts and cash advances is significantly higher for Commerce than it is for a banking group that does not issue credit cards. Also, because credit card loans traditionally have a higher than average ratio of net charge-offs to loans outstanding, management requires that a separate allowance for loan losses on credit card loans be maintained which, on a consolidated basis, was $11.9 million or 2.46% of average credit card loans outstanding for the month of December 1995. Net charge-offs related to credit cards were 2.30% of average credit card loans for 1995 compared to 1.60% in 1994 and 1.62% in 1993. 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 losses when compared to the entire loan portfolio. 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. Based on current economic conditions, management considers the December 31, 1995 allowance adequate to cover the possible risk of loss in the areas described above. 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. A-9
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 account: <TABLE> <CAPTION> Years Ended December 31 - ------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net loans and leases outstanding at end of period (A) $5,317,813 $4,432,662 $4,024,075 $3,687,415 $3,328,127 ============================================================================================================= Average loans and leases outstanding (A) $5,161,552 $4,180,065 $3,835,834 $3,474,285 $3,259,219 ============================================================================================================= Allowance for loan losses: Balance at beginning of period $ 87,179 $ 85,830 $ 77,149 $ 61,676 $ 58,947 - ------------------------------------------------------------------------------------------------------------- Additions to allowance through charges to expense 14,629 5,845 11,381 19,146 19,021 - ------------------------------------------------------------------------------------------------------------- Other adjustments 12,932 2,953 3,661 4,507 (790) - ------------------------------------------------------------------------------------------------------------- Recovery of loans previously charged off: Business 1,632 2,540 3,690 1,841 1,209 Construction -- 3 508 52 40 Business real estate 542 663 562 2,584 1,301 Personal real estate 99 226 141 162 132 Consumer 2,633 2,259 2,528 2,193 2,096 Credit card 2,163 2,015 1,947 1,771 1,396 - ------------------------------------------------------------------------------------------------------------- Total recoveries 7,069 7,706 9,376 8,603 6,174 - ------------------------------------------------------------------------------------------------------------- Loans charged off: Business 3,422 2,511 3,858 4,258 4,341 Construction -- -- 12 31 245 Business real estate 391 1,243 418 1,538 4,044 Personal real estate 208 196 395 351 380 Consumer 7,413 3,442 3,897 3,302 4,920 Credit card 11,838 7,763 7,157 7,303 7,746 - ------------------------------------------------------------------------------------------------------------- Total loans charged off 23,272 15,155 15,737 16,783 21,676 - ------------------------------------------------------------------------------------------------------------- Net loans charged off 16,203 7,449 6,361 8,180 15,502 - ------------------------------------------------------------------------------------------------------------- Balance at end of period $ 98,537 $ 87,179 $ 85,830 $ 77,149 $ 61,676 ============================================================================================================= Ratio of net charge-offs to average loans and leases outstanding .31% .18% .17% .24% .48% Ratio of allowance to loans and leases at end of period 1.85% 1.97% 2.13% 2.09% 1.85% Ratio of provision to average loans and leases outstanding .28% .14% .30% .55% .58% ============================================================================================================= </TABLE> (A) Net of unearned income; before deducting allowance for loan losses. INVESTMENT SECURITIES PORTFOLIO ANALYSIS On January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and classified substantially all of its investment portfolio as available for sale. The Company's portfolio consists mainly of U.S. government and federal agency securities and CMO's and asset-backed securities, which may be sold in response to changes in interest rates, anticipated prepayments or liquidity needs. At December 31, 1995, available for sale securities totaled $2.55 billion, which included an unrealized gain in fair value of $43.4 million. The amount of the related after tax unrealized gain reported in stockholders' equity was $26.8 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. The average balances of investment securities (excluding the unrealized gain/loss) were $2.65 billion in 1995 compared to $2.80 billion in 1994 and $2.70 billion in 1993. The average tax equivalent yield was 6.23% in 1995, 5.88% in 1994 and 5.76% in 1993. There was little change in tax equivalent interest income earned on investment securi- A-10
ties in 1995 compared to 1994. Average balances invested in U.S. government and federal agency securities decreased $370.6 million, partially offset by increases in average balances invested in CMO's and asset-backed securities and state and municipal obligations, and an increase of 33 basis points earned on U.S. government and federal agency securities. In 1994, tax equivalent interest income on investment securities increased $9.8 million over 1993. An increase of $526.5 million in average balances invested in CMO's and asset-backed securities and higher rates earned on U.S. government and federal agency securities contributed to the increase. Partially offsetting this increase was a $420.9 million decrease in average balances invested in U.S. government and federal agency securities. Management began reinvesting maturities of U.S. government and federal agencies in CMO's and asset-backed securities in the latter part of 1993 in order to achieve a higher return on a portion of the investment portfolio. In 1993 compared to 1992, tax equivalent interest income on investment securities increased $14.5 million. This was mainly due to a $402.6 million increase in average balances invested in U.S. government and federal agency securities. The increase was partially offset by a decrease of 51 basis points in average rates earned on these securities. Investment securities (excluding trading securities) at year end for the past three years are shown below: <TABLE> <CAPTION> December 31 - ------------------------------------------------------------------------------------ (In thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Amortized Cost: U.S. government and federal agency obligations $1,684,679 $1,845,149 $2,344,771 State and municipal obligations 124,352 57,014 42,228 CMO's and asset-backed securities 666,334 747,721 322,349 Other debt securities 11,011 46,574 56,553 Equity securities 55,599 40,494 34,559 - ------------------------------------------------------------------------------------ Total $2,541,975 $2,736,952 $2,800,460 ==================================================================================== Fair Value: U.S. government and federal agency obligations $1,707,111 $1,797,291 $2,409,546 State and municipal obligations 128,043 56,422 43,891 CMO's and asset-backed securities 670,522 692,822 321,093 Other debt securities 10,982 45,748 56,843 Equity securities 68,726 47,598 44,713 - ------------------------------------------------------------------------------------ Total $2,585,384 $2,639,881 $2,876,086 ==================================================================================== </TABLE> The 1995 fair values above include gross unrealized gains of $49.9 million which are partially offset by gross unrealized losses of $6.5 million. Included are net unrealized gains of $11.0 million on the investment portfolio of the Parent, which consists primarily of equity securities, with gross unrealized gains of $12.7 million partially offset by gross unrealized losses of $1.7 million. A summary of maturities by category of investment securities and the weighted average yield for each range of maturities as of December 31, 1995, is presented in the financial statements note on Investment Securities on page A-33. 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, 1995. Yields on tax exempt securities have not been adjusted for tax exempt status in that note. U.S. government and federal agency securities comprise 66% of the investment portfolio at December 31, 1995, with a weighted average yield of 6.11% and an average maturity of 2.2 years; CMO's and asset-backed securities comprise 26% with a weighted average yield of 6.28% and an average maturity of 4.6 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 of immaterial amounts. The tax equivalent yield on these securities in 1995 computed on average balances invested was approximately 5.17%. A-11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS <TABLE> <CAPTION> Years Ended December 31 - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 ============================================================================================================= Average Average Average Balance Interest Rates Interest Rates Five Year (Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/ Compound Balance Expense Paid Balance Expense Paid Growth Rate - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> ASSETS Loans and leases: (A) Business (including foreign) (B) $1,703,933 $141,872 8.33% $1,392,650 $ 99,111 7.12% 9.93% Construction and development 130,346 12,227 9.38 115,628 9,372 8.11 (1.34) Real estate - business 693,539 61,958 8.93 538,793 43,256 8.03 13.40 Real estate - personal 954,956 74,571 7.81 759,338 53,473 7.04 11.19 Personal banking 1,258,729 110,202 8.76 1,013,462 80,513 7.94 7.67 Credit card 420,049 58,368 13.90 360,194 47,082 13.07 12.11 - --------------------------------------------------------------------------------------------------------------------------- Total loans and leases 5,161,552 459,198 8.90 4,180,065 332,807 7.96 9.76 - --------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 1,705,562 105,216 6.17 2,076,150 121,339 5.84 6.04 State & municipal obligations (B) 123,152 9,577 7.78 46,602 3,549 7.62 47.84 CMO's and asset-backed securities 719,747 44,928 6.24 586,935 35,132 5.99 NA Trading account securities 3,975 240 6.03 4,168 159 3.82 (1.95) Other marketable securities (B) 66,368 4,110 6.19 69,870 4,191 6.00 (17.57) Other non-marketable securities 26,407 685 2.59 20,424 631 3.09 7.95 - --------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,645,211 164,756 6.23 2,804,149 165,001 5.88 12.22 - --------------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 205,547 12,075 5.87 132,672 5,457 4.11 (18.73) - --------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 8,012,310 636,029 7.94 7,116,886 503,265 7.07 8.59 - --------------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses (95,884) (86,664) 10.04 Unrealized loss on investment securities (13,983) (15,424) NA Cash and due from banks 607,656 555,171 6.68 Land, buildings and equipment - net 205,702 194,159 3.39 Other assets 209,168 149,568 12.79 - ------------------------------------------------------ ---------- ---------- Total assets $8,924,969 $7,913,696 8.36% ====================================================== ========== ========== LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 312,049 7,954 2.55 $ 273,032 6,618 2.42 15.76% Interest bearing demand 3,329,272 112,729 3.39 3,247,965 84,037 2.59 9.78 Time open & C.D.'s of less than $100,000 2,206,655 118,267 5.36 1,826,661 77,884 4.26 6.06 Time open & C.D.'s of $100,000 and over 213,950 11,430 5.34 155,813 6,213 3.99 (5.68) - --------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,061,926 250,380 4.13 5,503,471 174,752 3.18 7.78 - --------------------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 442,413 23,792 5.38 287,642 10,384 3.61 8.09 Long-term debt and other borrowings (C) 16,195 1,146 7.08 7,129 542 7.60 (16.56) - --------------------------------------------------------------------------------------------------------------------------- Total borrowings 458,608 24,938 5.44 294,771 10,926 3.71 6.17 - --------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 6,520,534 275,318 4.22% 5,798,242 185,678 3.20% 7.66 - --------------------------------------------------------------------------------------------------------------------------- Demand - non-interest bearing deposits 1,497,474 1,341,721 9.56 Other liabilities 60,527 37,515 (4.44) Stockholders' equity 846,434 736,218 13.87 - ------------------------------------------------------ ---------- ---------- Total liabilities and equity $8,924,969 $7,913,696 8.36% =========================================================================================================================== Net interest margin (T/E) $360,711 $317,587 =========================================================================================================================== Net yield on interest earning assets 4.50% 4.46% =========================================================================================================================== Percentage increase in net interest margin (T/E) over the prior year 13.58% 10.52% =========================================================================================================================== </TABLE> (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. A-12
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS (cont.) <TABLE> <CAPTION> Years Ended December 31 - --------------------------------------------------------------------------------------------- 1993 1992 - --------------------------------------------------------------------------------------------- Average Average Interest Rates Interest Rates (Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Loans and leases: (A) Business (including foreign) (B) $1,281,458 $ 81,416 6.35% $1,160,801 $ 78,418 6.76% Construction and development 102,825 7,746 7.53 115,019 8,692 7.56 Real estate--business 493,503 37,505 7.60 401,444 33,219 8.27 Real estate--personal 716,273 53,428 7.46 624,071 54,124 8.67 Personal banking 920,157 75,080 8.16 876,678 77,931 8.89 Credit card 321,618 44,141 13.72 296,272 44,726 15.10 - --------------------------------------------------------------------------------------------- Total loans and leases 3,835,834 299,316 7.80 3,474,285 297,110 8.55 - --------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 2,497,041 143,395 5.74 2,094,399 130,918 6.25 State & municipal obligations (B) 41,141 3,181 7.73 26,566 2,246 8.45 CMO's and asset-backed securities 60,425 3,552 5.88 -- -- -- Trading account securities 4,731 220 4.66 7,420 477 6.43 Other marketable securities (B) 70,837 3,933 5.55 122,476 6,069 4.96 Other non-marketable securities 21,024 924 4.39 17,996 959 5.33 - --------------------------------------------------------------------------------------------- Total investment securities 2,695,199 155,205 5.76 2,268,857 140,669 6.20 - --------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 282,625 8,735 3.09 422,732 15,379 3.64 - --------------------------------------------------------------------------------------------- Total interest earning assets 6,813,658 463,256 6.80 6,165,874 453,158 7.35 - --------------------------------------------------------------------------------------------- Less allowance for loan losses (83,767) (68,344) Cash and due from banks 573,494 508,594 Land, buildings and equipment--net 196,809 183,109 - ---------------------------------------- ----------- Other assets 149,909 132,021 Total assets $7,650,103 $6,921,254 ======================================== =========== LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 248,681 6,012 2.42 $ 188,332 5,979 3.17 Interest bearing demand 3,124,098 78,995 2.53 2,788,635 88,330 3.17 Time open & C.D.'s of less than $100,000 1,790,418 77,165 4.31 1,786,175 93,752 5.25 Time open & C.D.'s of $100,000 and over 138,271 5,038 3.64 135,805 5,826 4.29 - --------------------------------------------------------------------------------------------- Total interest bearing deposits 5,301,468 167,210 3.15 4,898,947 193,887 3.96 - --------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 318,951 8,141 2.55 271,181 8,071 2.98 Long-term debt and other borrowings (C) 7,118 554 7.79 12,566 1,021 8.13 - --------------------------------------------------------------------------------------------- Total borrowings 326,069 8,695 2.67 283,747 9,092 3.20 - --------------------------------------------------------------------------------------------- Total interest bearing liabilities 5,627,537 175,905 3.13% 5,182,694 202,979 3.92% - --------------------------------------------------------------------------------------------- Demand--non-interest bearing deposits 1,302,634 1,121,481 Other liabilities 50,902 60,619 Stockholders' equity 669,030 556,460 - ---------------------------------------- ----------- Total liabilities and equity $7,650,103 $6,921,254 ============================================================================================ Net interest margin (T/E) $287,351 $250,179 ============================================================================================ Net yield on interest earning assets 4.22% 4.06% ============================================================================================ Percentage increase in net interest margin (T/E) over the prior year 14.86% 11.12% ============================================================================================ </TABLE> (B) State and municipal interest income includes tax equivalent adjustments of $3,075,000 in 1995, $1,097,000 in 1994, $944,000 in 1993, $641,000 in 1992 and $462,000 in 1991. Business loan interest income includes tax free loan income of $4,259,000 in 1995, $3,916,000 in 1994, $4,281,000 in 1993, $4,722,000 in 1992 and $6,019,000 in 1991, including tax equivalent adjustments of $1,438,000 in 1995, $1,378,000 in 1994, $1,517,000 in 1993, $1,644,000 in 1992 and $1,947,000 in 1991. Interest income on other marketable securities includes tax equivalent adjustments of $513,000 in 1995, $509,000 in 1994, $382,000 in 1993, $252,000 in 1992 and $202,000 in 1991. (C) Interest expense of $60,000, $14,000, $17,000, $66,000 and $125,000 which was capitalized on construction projects in 1995, 1994, 1993, 1992 and 1991, respectively, is not deducted from the interest expense shown above. A-13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS (cont.) <TABLE> <CAPTION> Years Ended December 31 - --------------------------------------------------------------------------------------------- 1991 1990 - --------------------------------------------------------------------------------------------- Average Average Interest Rates Interest Rates (Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Loans and leases: (A) Business (including foreign) (B) $1,056,376 $ 92,112 8.72% $1,061,471 $106,073 9.99% Construction and development 108,478 10,202 9.40 139,467 14,893 10.68 Real estate--business 390,611 38,190 9.78 369,897 38,949 10.53 Real estate--personal 570,654 56,996 9.99 561,860 58,356 10.39 Personal banking 869,369 89,039 10.24 869,899 97,277 11.18 Credit card 263,731 43,288 16.41 237,210 40,033 16.88 - --------------------------------------------------------------------------------------------- Total loans and leases 3,259,219 329,827 10.12 3,239,804 355,581 10.98 - --------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 1,654,517 131,738 7.96 1,271,841 109,336 8.60 State & municipal obligations (B) 13,395 1,702 12.71 17,435 2,350 13.48 Trading account securities 5,433 357 6.57 4,386 348 7.93 Other marketable securities (B) 294,895 18,784 6.37 174,436 14,063 8.06 Other non-marketable securities 16,647 611 3.67 18,016 651 3.61 - --------------------------------------------------------------------------------------------- Total investment securities 1,984,887 153,192 7.72 1,486,114 126,748 8.53 - --------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 489,869 28,434 5.80 579,754 47,330 8.16 - --------------------------------------------------------------------------------------------- Total interest earning assets 5,733,975 511,453 8.92 5,305,672 529,659 9.98 - --------------------------------------------------------------------------------------------- Less allowance for loan losses (59,441) (59,420) Cash and due from banks 447,756 439,739 Land, buildings and equipment--net 177,984 174,119 Other assets 117,905 114,604 - ---------------------------------------- ---------- Total assets $6,418,179 $5,974,714 ======================================== ========== LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 148,972 7,260 4.87 $ 150,098 7,485 4.99 Interest bearing demand 2,379,299 120,358 5.06 2,087,613 128,069 6.13 Time open & C.D.'s of less than $100,000 1,840,020 127,949 6.95 1,644,045 131,328 7.99 Time open & C.D.'s of $100,000 and over 198,130 12,212 6.16 286,575 21,948 7.66 - --------------------------------------------------------------------------------------------- Total interest bearing deposits 4,566,421 267,779 5.86 4,168,331 288,830 6.93 - --------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 293,986 15,016 5.11 299,876 22,230 7.41 Long-term debt and other borrowings (C) 38,711 3,522 9.10 40,032 3,652 9.12 - --------------------------------------------------------------------------------------------- Total borrowings 332,697 18,538 5.57 339,908 25,882 7.61 - --------------------------------------------------------------------------------------------- Total interest bearing liabilities 4,899,118 286,317 5.84% 4,508,239 314,712 6.98% - --------------------------------------------------------------------------------------------- Demand--non-interest bearing deposits 968,123 948,420 Other liabilities 69,951 75,971 Stockholders' equity 480,987 442,084 - ---------------------------------------- ---------- Total liabilities and equity $6,418,179 $5,974,714 ============================================================================================= Net interest margin (T/E) $225,136 $214,947 ============================================================================================= Net yield on interest earning assets 3.93% 4.05% ============================================================================================= Percentage increase in net interest margin (T/E) over the prior year 4.74% 1.83% ============================================================================================= </TABLE> See notes on pages A-12 and A-13. A-14
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E) DUE TO VOLUMES AND RATES <TABLE> <CAPTION> 1995 vs 1994 1994 vs 1993 - ------------------------------------------------------------------------------------------------------------------------------- Increase or (Decrease) Increase or (Decrease) Due to Change In Due to Change In - ------------------------------------------------------------------------------------------------------------------------------- Total Total (In thousands) Average Average Increase Average Average Increase Volume Rate (B) (Decrease) Volume Rate (B) (Decrease) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> VARIANCE IN INTEREST INCOME ON Loans and leases: Business (including foreign) (A) $ 21,504 $21,257 $ 42,761 $ 6,853 $10,842 $ 17,695 Construction and development 1,194 1,661 2,855 964 662 1,626 Real estate--business 12,426 6,276 18,702 3,442 2,309 5,751 Real estate--personal 13,772 7,326 21,098 3,213 (3,168) 45 Personal banking 19,474 10,215 29,689 7,614 (2,181) 5,433 Credit card 7,823 3,463 11,286 5,293 (2,352) 2,941 - ------------------------------------------------------------------------------------------------------------------------------- Total loans and leases 76,193 50,198 126,391 27,379 6,112 33,491 - ------------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency (21,642) 5,519 (16,123) (27,349) 5,293 (22,056) State & municipal obligations (A) 5,833 195 6,028 422 (54) 368 CMO's and asset-backed securities 7,955 1,841 9,796 35,132 (3,552) 31,580 Trading account securities (7) 88 81 (26) (35) (61) Other marketable securities (A) (210) 129 (81) (54) 312 258 Other non-marketable securities 185 (131) 54 (26) (267) (293) - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities (7,886) 7,641 (245) 8,099 1,697 9,796 - ------------------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 2,981 3,637 6,618 (4,633) 1,355 (3,278) - ------------------------------------------------------------------------------------------------------------------------------- Total interest income 71,288 61,476 132,764 30,845 9,164 40,009 =============================================================================================================================== VARIANCE IN INTEREST EXPENSE ON Interest bearing deposits: Savings 944 392 1,336 589 17 606 Interest bearing demand 2,791 25,901 28,692 3,156 1,886 5,042 Time open & C.D.'s of less than $100,000 15,928 24,455 40,383 2,203 (1,484) 719 Time open & C.D.'s of $100,000 and over 2,231 2,986 5,217 812 363 1,175 - ------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 21,894 53,734 75,628 6,760 782 7,542 - ------------------------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 5,485 7,923 13,408 (929) 3,172 2,243 Long-term debt and other borrowings 689 (85) 604 1 (13) (12) - ------------------------------------------------------------------------------------------------------------------------------- Total borrowings 6,174 7,838 14,012 (928) 3,159 2,231 - ------------------------------------------------------------------------------------------------------------------------------- Total interest expense 28,068 61,572 89,640 5,832 3,941 9,773 - ------------------------------------------------------------------------------------------------------------------------------- Change in net interest margin (T/E) $ 43,220 $ (96) $ 43,124 $ 25,013 $ 5,223 $ 30,236 =============================================================================================================================== </TABLE> (A) Stated on a tax equivalent basis. (B) 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. A-15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E) DUE TO VOLUMES AND RATES (cont.) <TABLE> <CAPTION> 1993 vs 1992 1992 vs 1991 - -------------------------------------------------------------------------------------------------------------------------------- Increase or (Decrease) Increase or (Decrease) Due to Change In Due to Change In - -------------------------------------------------------------------------------------------------------------------------------- Total Total (In thousands) Average Average Increase Average Average Increase Volume Rate (B) (Decrease) Volume Rate (B) (Decrease) - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> VARIANCE IN INTEREST INCOME ON Loans and leases: Business (including foreign) (A) $ 7,771 $ (4,773) $ 2,998 $ 8,659 $ (22,353) $(13,694) Construction and development (922) (24) (946) 615 (2,125) (1,510) Real estate--business 7,613 (3,327) 4,286 1,059 (6,030) (4,971) Real estate--personal 7,994 (8,690) (696) 5,336 (8,208) (2,872) Personal banking 3,865 (6,716) (2,851) 749 (11,857) (11,108) Credit card 3,827 (4,412) (585) 5,340 (3,902) 1,438 - -------------------------------------------------------------------------------------------------------------------------------- Total loans and leases 30,148 (27,942) 2,206 21,758 (54,475) (32,717) - -------------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 25,165 (12,688) 12,477 35,015 (35,835) (820) State & municipal obligations (A) 1,232 (297) 935 1,674 (1,130) 544 CMO's and asset-backed securities 3,552 -- 3,552 -- -- -- Trading account securities (173) (84) (257) 139 (19) 120 Other marketable securities (A) (1,097) (1,039) (2,136) (10,955) (1,760) (12,715) Other non-marketable securities 161 (196) (35) 50 298 348 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 28,840 (14,304) 14,536 25,923 (38,446) (12,523) - -------------------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell (5,100) (1,544) (6,644) (3,894) (9,161) (13,055) - -------------------------------------------------------------------------------------------------------------------------------- Total interest income 53,888 (43,790) 10,098 43,787 (102,082) (58,295) ================================================================================================================================ VARIANCE IN INTEREST EXPENSE ON Interest bearing deposits: Savings 1,913 (1,880) 33 1,917 (3,198) (1,281) Interest bearing demand 10,067 (19,402) (9,335) 20,348 (52,376) (32,028) Time open & C.D.'s of less than $100,000 1,437 (18,024) (16,587) (3,148) (31,049) (34,197) Time open & C.D.'s of $100,000 and over 303 (1,091) (788) (3,655) (2,731) (6,386) - -------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 13,720 (40,397) (26,677) 15,462 (89,354) (73,892) - -------------------------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 1,449 (1,379) 70 (1,169) (5,776) (6,945) Long-term debt and other borrowings (443) (24) (467) (2,379) (122) (2,501) - -------------------------------------------------------------------------------------------------------------------------------- Total borrowings 1,006 (1,403) (397) (3,548) (5,898) (9,446) - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense 14,726 (41,800) (27,074) 11,914 (95,252) (83,338) - -------------------------------------------------------------------------------------------------------------------------------- Change in net interest margin (T/E) $39,162 $ (1,990) $ 37,172 $ 31,873 $ (6,830) $ 25,043 ================================================================================================================================ </TABLE> (A) Stated on a tax equivalent basis. (B) 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. A-16
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E) DUE TO VOLUMES AND RATES (cont.) <TABLE> <CAPTION> 1991 vs 1990 1990 vs 1989 - ------------------------------------------------------------------------------------------------------------------ Increase or (Decrease) Increase or (Decrease) Due to Change In Due to Change In - ------------------------------------------------------------------------------------------------------------------ Total Total (In thousands) Average Average Increase Average Average Increase Volume Rate (B) (Decrease) Volume Rate (B) (Decrease) ================================================================================================================== <S> <C> <C> <C> <C> <C> <C> VARIANCE IN INTEREST INCOME ON Loans and leases: Business (including foreign) (A) $ (545) $(13,416) $(13,961) $ 5,841 $ (8,775) $ (2,934) Construction and development (3,313) (1,378) (4,691) (544) (972) (1,516) Real estate - business 2,190 (2,949) (759) 4,332 (1,694) 2,638 Real estate - personal 917 (2,277) (1,360) 2,588 1,287 3,875 Personal banking (60) (8,178) (8,238) 6,114 (730) 5,384 Credit card 4,479 (1,224) 3,255 3,992 200 4,192 - ------------------------------------------------------------------------------------------------------------------ Total loans and leases 3,668 (29,422) (25,754) 22,323 (10,684) 11,639 - ------------------------------------------------------------------------------------------------------------------ Investment securities: U.S. government & federal agency 32,910 (10,508) 22,402 16,015 1,949 17,964 State & municipal obligations (A) (545) (103) (648) (2,570) 186 (2,384) Trading account securities 83 (74) 9 53 (23) 30 Other marketable securities (A) 9,198 (4,477) 4,721 (2,083) (2,122) (4,205) Other non-marketable securities (49) 9 (40) (23) (251) (274) - ------------------------------------------------------------------------------------------------------------------ Total investment securities 41,597 (15,153) 26,444 11,392 (261) 11,131 - ------------------------------------------------------------------------------------------------------------------ Federal funds sold and securities purchased under agreements to resell (7,335) (11,561) (18,896) 9,523 (5,556) 3,967 - ------------------------------------------------------------------------------------------------------------------ Total interest income 37,930 (56,136) (18,206) 43,238 (16,501) 26,737 ================================================================================================================== VARIANCE IN INTEREST EXPENSE ON Interest bearing deposits: Savings (57) (168) (225) (1,636) 3 (1,633) Interest bearing demand 18,290 (26,001) (7,711) 18,804 (7,415) 11,389 Time open & C.D.'s of less than $100,000 15,810 (19,189) (3,379) 27,113 (91) 27,022 Time open & C.D.'s of $100,000 and over (6,859) (2,877) (9,736) (4,067) (1,906) (5,973) - ------------------------------------------------------------------------------------------------------------------ Total interest bearing deposits 27,184 (48,235) (21,051) 40,214 (9,409) 30,805 - ------------------------------------------------------------------------------------------------------------------ Borrowings: Federal funds purchased and securities sold under agreements to repurchase (451) (6,763) (7,214) (6,749) (3,463) (10,212) Long-term debt and other borrowings (120) (10) (130) 2,104 180 2,284 - ------------------------------------------------------------------------------------------------------------------ Total borrowings (571) (6,773) (7,344) (4,645) (3,283) (7,928) - ------------------------------------------------------------------------------------------------------------------ Total interest expense 26,613 (55,008) (28,395) 35,569 (12,692) 22,877 - ------------------------------------------------------------------------------------------------------------------ Change in net interest margin (T/E) $11,317 $ (1,128) $ 10,189 $ 7,669 $ (3,809) $ 3,860 ================================================================================================================== </TABLE> (A) Stated on a tax equivalent basis. (B) 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. A-17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS <TABLE> <CAPTION> Year Ended December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS Loans and leases: Business (including foreign) (A) $1,761 8.24% $1,802 8.24% $1,765 8.50% $1,485 8.32% Construction and development 139 9.19 129 9.23 125 9.48 130 9.64 Real estate - business 713 8.84 728 8.83 716 9.14 615 8.91 Real estate - personal 990 7.93 996 7.94 984 7.76 848 7.57 Personal banking 1,306 8.82 1,312 8.86 1,282 8.78 1,132 8.52 Credit card 457 13.77 426 13.99 405 14.19 390 13.64 - ----------------------------------------------------------------------------------------------------------------------- Total loans and leases 5,366 8.90 5,393 8.89 5,277 8.98 4,600 8.80 - ----------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 1,669 6.17 1,632 6.20 1,722 6.19 1,803 6.12 State & municipal obligations (A) 133 8.00 144 7.77 141 7.94 73 7.07 CMO's and asset-backed securities 681 6.22 689 6.14 761 6.27 749 6.33 Trading account securities 5 5.83 4 5.49 3 7.45 3 5.65 Other marketable securities (A) 46 6.76 55 5.79 75 6.00 89 6.31 Other non-marketable securities 33 1.39 26 4.15 25 3.00 22 2.08 - ----------------------------------------------------------------------------------------------------------------------- Total investment securities 2,567 6.23 2,550 6.24 2,727 6.27 2,739 6.18 - ----------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 366 5.81 301 5.80 86 6.20 65 6.14 - ----------------------------------------------------------------------------------------------------------------------- Total interest earning assets 8,299 7.94 8,244 7.96 8,090 8.04 7,404 7.80 - ----------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses (98) (98) (98) (88) Unrealized gain (loss) on investment securities 28 17 (19) (84) Cash and due from banks 645 640 589 555 Land, buildings and equipment -- net 210 210 209 194 Other assets 224 224 221 166 - ----------------------------------------------------------------------------------------------------------------------- Total assets $9,308 $9,237 $8,992 $8,147 ======================================================================================================================= LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 312 2.52 $ 323 2.54 $ 330 2.56 $ 283 2.58 Interest bearing demand 3,505 3.47 3,403 3.48 3,289 3.38 3,115 3.20 Time open & C.D.'s under $100,000 2,261 5.59 2,302 5.53 2,267 5.34 1,993 4.92 Time open & C.D.'s $100,000 & over 230 5.47 224 5.53 217 5.44 184 4.84 - ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING DEPOSITS 6,308 4.25 6,252 4.26 6,103 4.13 5,575 3.84 - ----------------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 430 5.30 461 5.37 475 5.52 403 5.30 Long-term debt and other borrowings 15 7.41 16 7.27 18 7.42 16 6.14 - ----------------------------------------------------------------------------------------------------------------------- TOTAL BORROWINGS 445 5.37 477 5.43 493 5.59 419 5.34 - ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES 6,753 4.33% 6,729 4.34% 6,596 4.24% 5,994 3.95% - ----------------------------------------------------------------------------------------------------------------------- Demand - non-interest bearing deposits 1,569 1,559 1,494 1,365 Other liabilities 93 66 54 29 Stockholders' equity 893 883 848 759 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $9,308 $9,237 $8,992 $8,147 ======================================================================================================================= NET INTEREST MARGIN (T/E) $ 93 $ 92 $ 92 $ 84 ======================================================================================================================= NET YIELD ON INTEREST EARNING ASSETS 4.42% 4.42% 4.58% 4.61% ======================================================================================================================= </TABLE> (A) Includes tax equivalent calculations. A-18
<TABLE> <CAPTION> QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS (cont.) Year Ended December 31, 1994 - ----------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS Loans and leases: Business (including foreign) (A) $1,409 7.82% $1,409 7.35% $1,390 6.97% $1,362 6.27% Construction and development 126 8.71 125 8.78 116 7.69 95 6.90 Real estate - business 566 8.76 540 8.16 523 7.73 526 7.39 Real estate - personal 798 7.21 760 6.99 742 6.96 736 7.00 Personal banking 1,094 8.19 1,035 8.03 987 7.76 936 7.76 Credit card 370 13.24 362 13.00 358 12.72 350 13.33 - ----------------------------------------------------------------------------------------------------------------------- Total loans and leases 4,363 8.41 4,231 8.08 4,116 7.77 4,005 7.53 - ----------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 1,898 5.91 1,988 5.83 2,145 5.85 2,278 5.80 State & municipal obligations (A) 53 7.29 44 7.63 45 7.63 44 8.00 CMO's and asset-backed securities 736 6.16 636 5.96 556 5.88 417 5.86 Trading account securities 4 4.50 4 3.01 3 5.26 5 3.03 Other marketable securities (A) 74 6.44 72 5.52 64 6.31 69 5.74 Other non-marketable securities 20 2.57 21 2.23 21 (1.09) 21 8.67 - ----------------------------------------------------------------------------------------------------------------------- Total investment securities 2,785 5.99 2,765 5.85 2,834 5.84 2,834 5.86 - ----------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 91 5.15 140 4.66 116 3.99 184 3.24 - ----------------------------------------------------------------------------------------------------------------------- Total interest earning assets 7,239 7.44 7,136 7.15 7,066 6.94 7,023 6.74 - ----------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses (87) (87) (87) (86) Unrealized gain (loss) on investment securities (72) (39) (14) 66 Cash and due from banks 559 555 536 570 Land, buildings and equipment - net 193 193 195 196 Other assets 166 146 141 145 - ----------------------------------------------------------------------------------------------------------------------- Total assets $7,998 $7,904 $7,837 $7,914 ======================================================================================================================= LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 278 2.56 $ 275 2.43 $ 274 2.36 $ 266 2.34 Interest bearing demand 3,172 2.86 3,245 2.59 3,298 2.48 3,278 2.43 Time open & C.D.'s under $100,000 1,939 4.56 1,810 4.28 1,783 4.09 1,772 4.09 Time open & C.D.'s $100,000 & over 170 4.46 157 4.07 150 3.79 146 3.54 - ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING DEPOSITS 5,559 3.48 5,487 3.18 5,505 3.03 5,462 2.99 - ----------------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 304 4.49 315 3.89 245 3.32 286 2.59 Long-term debt and other borrowings 7 7.79 8 7.11 7 7.77 7 7.79 - ----------------------------------------------------------------------------------------------------------------------- TOTAL BORROWINGS 311 4.56 323 3.97 252 3.44 293 2.71 - ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES 5,870 3.54% 5,810 3.23% 5,757 3.05% 5,755 2.98% - ----------------------------------------------------------------------------------------------------------------------- Demand - non-interest bearing deposits 1,370 1,342 1,322 1,333 Other liabilities 30 27 26 66 Stockholders' equity 728 725 732 760 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $7,998 $7,904 $7,837 $7,914 ======================================================================================================================= NET INTEREST MARGIN (T/E) $ 83 $ 81 $ 79 $ 75 ======================================================================================================================= NET YIELD ON INTEREST EARNING ASSETS 4.56% 4.52% 4.45% 4.30% ======================================================================================================================= </TABLE> (A) Includes tax equivalent calculations. A-19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS (cont.) <TABLE> <CAPTION> Year Ended December 31, 1993 - ----------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS Loans and leases: Business (including foreign) (A) $1,323 6.25% $1,288 6.25% $1,273 6.49% $1,241 6.43% Construction and development 88 7.36 92 7.76 103 7.49 129 7.53 Real estate--business 530 7.38 493 7.62 478 7.69 472 7.74 Real estate--personal 735 7.10 726 7.32 709 7.68 695 7.77 Personal banking 927 7.89 925 8.10 916 8.15 912 8.51 Credit card 337 13.27 322 13.36 310 13.94 317 14.38 - ---------------------------------------------------------------------------------------------------------------- Total loans and leases 3,940 7.57 3,846 7.70 3,789 7.90 3,766 8.05 - ---------------------------------------------------------------------------------------------------------------- Investment securities: U.S. government & federal agency 2,404 5.81 2,537 5.70 2,552 5.75 2,496 5.80 State & municipal obligations (A) 42 7.40 43 7.44 39 8.10 41 8.05 CMO's and asset-backed securities 185 5.84 54 6.00 -- -- -- -- Trading account securities 6 4.31 4 4.47 4 4.83 5 5.06 Other marketable securities (A) 64 2.80 67 5.55 76 5.79 76 5.06 Other non-marketable securities 21 4.32 21 3.42 21 3.89 21 6.04 - ---------------------------------------------------------------------------------------------------------------- Total investment securities 2,722 5.75 2,726 5.71 2,692 5.77 2,639 5.81 - ---------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 324 3.08 290 3.06 221 3.07 296 3.15 - ---------------------------------------------------------------------------------------------------------------- Total interest earning assets 6,986 6.65 6,862 6.72 6,702 6.89 6,701 6.95 - ---------------------------------------------------------------------------------------------------------------- Less allowance for loan losses (86) (85) (83) (80) Cash and due from banks 619 580 557 536 Land, buildings and equipment--net 197 197 198 195 Other assets 155 147 141 157 - ---------------------------------------------------------------------------------------------------------------- Total assets $7,871 $7,701 $7,515 $7,509 ================================================================================================================ LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 260 2.10 $ 262 2.44 $ 243 2.50 $ 229 2.67 Interest bearing demand 3,212 2.45 3,127 2.51 3,058 2.55 3,098 2.61 Time open & C.D.'s under $100,000 1,768 4.19 1,778 4.23 1,791 4.33 1,826 4.49 Time open & C.D.'s $100,000 & over 142 3.63 138 3.59 137 3.65 136 3.71 - ---------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 5,382 3.04 5,305 3.11 5,229 3.19 5,289 3.29 - ---------------------------------------------------------------------------------------------------------------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase 318 2.54 337 2.58 311 2.57 310 2.52 Long-term debt and other borrowings 7 7.84 7 7.67 7 7.78 7 7.86 - ---------------------------------------------------------------------------------------------------------------- Total borrowings 325 2.65 344 2.69 318 2.69 317 2.64 - ---------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 5,707 3.01% 5,649 3.08% 5,547 3.16% 5,606 3.25% - ---------------------------------------------------------------------------------------------------------------- Demand--non-interest bearing deposits 1,414 1,325 1,266 1,203 Other liabilities 51 47 46 60 Stockholders' equity 699 680 656 640 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and equity $7,871 $7,701 $7,515 $7,509 ================================================================================================================ Net interest margin (T/E) $ 74 $ 72 $ 71 $ 70 ================================================================================================================ Net yield on interest earning assets 4.19% 4.18% 4.27% 4.23% ================================================================================================================ </TABLE> (A) Includes tax equivalent calculations. A-20
INTEREST EXPENSE AND RELATED LIABILITIES Total interest expense (net of capitalized interest) was $275.3 million in 1995, $185.7 million in 1994, and $175.9 million in 1993. Total interest expense increased 48.3% in 1995 over 1994. If banks acquired in 1994 and 1995 are excluded, the increase would have been 29.5%. Average interest bearing liabilities totaled $6.52 billion in 1995, $5.80 billion in 1994 and $5.63 billion in 1993. The average cost was 4.22% in 1995, 3.20% in 1994 and 3.13% in 1993. Interest expense on deposits increased $75.6 million in 1995 over 1994 mainly due to increases of 80 basis points in rates paid on interest bearing demand deposits and 110 basis points in rates paid on time open and C.D.'s under $100,000. In 1994 compared to 1993, interest expense on deposits increased $7.5 million because of increases of $123.9 million in average balances of interest bearing demand deposits and $36.2 million in time open and C.D.'s under $100,000. Additionally, average rates paid on interest bearing demand deposits during 1994 increased 6 basis points. In 1993 compared to 1992, interest expense on deposits decreased $26.7 million due to an overall drop in interest rates. The average rates paid on interest bearing demand deposits decreased 64 basis points and the average rates paid on time open and C.D.'s under $100,000 decreased 94 basis points. This effect was partially offset by a $335.5 million increase in the average balance of interest bearing demand deposits. The deposit mix has remained stable over the past several years; at year end 1995, 22% of total deposits were in non-interest bearing demand, 48% in interest bearing demand and 28% in time open and C.D.'s under $100,000. Core deposits (defined as all non-interest bearing and interest bearing deposits excluding short-term C.D.'s of $100,000 and over) supported 93% of average earning assets in 1995. Interest expense on federal funds purchased and securities sold under agreements to repurchase increased $13.4 million in 1995 compared to 1994 because of increases in average rates paid and average balances borrowed. Average balances by major deposit category for the last six years appear on pages A-12 through A-14. The maturity schedule of time deposits of $100,000 and over outstanding at December 31, 1995, appears on page A-3. NET INTEREST INCOME The net interest income for 1995 was $355.7 million in 1995, $314.6 million in 1994 and $284.5 million in 1993. As shown on pages A-12 and A-13, the dollar difference between tax equivalent interest income and interest expense increased in each of the last three years. The net yield on interest earning assets stated as a percentage increased in each of the last three years for the reasons described above. NON-INTEREST INCOME Non-interest income totaled $133.2 million in 1995, $121.0 million in 1994 and $121.4 million in 1993. In 1995 compared to 1994, trust income increased $5.3 million, deposit account charges and other fees increased $4.7 million and miscellaneous credit card income increased $4.0 million. These increases were partially offset by a $1.5 million decrease in gains on securities transactions. Excluding banks acquired in 1994 and 1995, total non-interest income (excluding securities gains) increased 3.9% in 1995 compared to 1994. The slight decrease in 1994 from 1993 was mainly due to a $5.1 million decrease in gains on securities transactions and a $910 thousand decrease in net gains on the sales of loans and foreclosed assets. These decreases were largely offset by a $3.3 million increase in miscellaneous credit card income, a $1.4 million increase in miscellaneous fees and charges, and a $1.3 million fee collected in conjunction with the pay-off of a specific loan. The increase in miscellaneous fees and charges included increases in loan commitment fees and ATM fees. Most of the $12.8 million increase in 1993 over 1992 was due to increases in fee income. Deposit account charges and other fees increased $6.1 million, trust income increased $2.3 million, miscellaneous credit card income increased $2.1 million and A-21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) miscellaneous fees and charges increased $2.6 million. Net gains on the sales of loans and foreclosed assets increased $3.3 million. These increases were partially offset by a $3.8 million decrease in gains on securities transactions. OTHER EXPENSE Other expense totaled $305.5 million in 1995 compared to $282.1 million in 1994 and $257.3 million in 1993. The $23.4 million increase in 1995 over 1994 was mainly due to a $13.8 million increase in salaries and employee benefits. If expenses at banks acquired in 1994 and 1995 are excluded, salaries and employee benefits increased $684 thousand in 1995 compared to 1994 with a decrease of 185 full-time equivalent employees. Partially offsetting this increase was a $6.5 million decrease in F.D.I.C. insurance expense due to decreased rates. In addition, other operating expense increased $3.3 million in 1995 over 1994, mainly due to a $5.6 million increase in goodwill and core deposit premium amortization, partially offset by a $3.0 million decrease in charitable contribution expense. Excluding expenses of banks acquired in 1994 and 1995, total other expense decreased 4.1% in 1995 compared to 1994. The $24.8 million increase in 1994 over 1993 was mainly due to a $9.7 million increase in salaries and employee benefits (partly due to bank acquisitions) and a $6.1 million increase in other operating expense. Salaries and employee benefits increased because of merit and incentive raises, increases in benefit plan expense and increases in payroll taxes. The increase in operating expense included an increase of $3.4 million in charitable contribution expense and a $2.5 million reserve established for a potential contingent liability. The $31.9 million increase in 1993 over 1992 was mainly due to a $17.8 million increase in salaries and employee benefits. In addition to merit and incentive increases, full-time equivalent employees increased by over 450 during 1993, largely due to acquisitions. Occupancy expense increased $3.4 million and other operating expense increased $3.8 million, partly due to increased fees for professional services. Through the acquisition of Union National Bank in 1995, the Company acquired certain deposits which totaled $246 million at December 31, 1995, which are insured by the Savings Association Insurance Fund (SAIF). Based on current rates, annual SAIF insurance premiums on these deposits are $560 thousand. Congress has proposed legislation to recapitalize the SAIF. If legislation is passed to do so, the Company will be required to pay a one-time assessment of as much as $1.7 million. INCOME TAXES Income taxes for 1995 increased $9.5 million over 1994, $1.3 million over 1993 and $10.3 million over 1992, partially due to increases in taxable income. The effective tax rate on income from operations was 36.2%, 34.9% and 36.7% in 1995, 1994 and 1993, respectively. The difference between these effective tax rates and the statutory rate of 35% is mainly due to state and local income taxes and non-deductible goodwill amortization, offset by tax exempt interest income on state and political subdivision securities. The 1994 effective tax rate was also reduced by certain non-recurring state tax credits and the contribution of an appreciated asset. 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 $79.1 million at cost and $90.1 million at fair value at December 31, 1995 ($10.0 million of which is pledged under a self-insured officer and director liability program) compared to $118.8 million at cost and $122.8 million at fair value at December 31, 1994. Total liabilities of the Parent at December 31, 1995 increased to $44.3 million compared to $9.9 million at December 31, 1994 mainly because of a $31.0 million liability recorded at year end 1995 for a significant treasury stock purchase settling in 1996. The Parent had no short-term borrowings or long-term debt at A-22
December 31, 1995. Primary sources of funds for the Parent are dividends and management fees from its subsidiary banks, which were $124.1 million and $13.0 million, respectively, in 1995. The Parent also collected $18.0 million from subsidiary banks to reimburse data processing costs paid by the Parent. The subsidiary banks may distribute dividends without prior regulatory approval from 1996 earnings 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. 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 affiliate banks, 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 also 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 $2.50 billion at December 31, 1995, including an unrealized net gain of $30.1 million. The Company (on a consolidated basis) continues to maintain a sound equity to asset ratio at 9.48%, based on 1995 average balances. At December 31, 1995, the Company and each of its banking subsidiaries met minimum risk based capital requirements. Consolidated Tier I and Total capital ratios were 12.51% and 13.73%, respectively, and the leverage ratio was 8.27%. The cash flows from the operating, investing and financing activities of the Company in 1995 resulted in a net increase in cash and due from banks of $209.0 million over the 1994 year end balance. The cash generated by operating activities 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 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. The 1995 increase was due to $522.7 million in sales and maturities of investment securities, net of purchases, a $265.7 million net increase in savings and demand deposits and $195.3 million provided from ongoing operating activities. Offsetting these cash inflows were cash outflows of $424.2 million in purchases of short-term federal funds sold and repurchase agreements, net of maturities, and $222.7 million in additional loans made, net of repayments. 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 require partial funding through one or more of these options. The 1994 increase in cash and due from banks of $31.0 million was due to maturities of $299.4 million in short-term federal funds sold and repurchase agreements, net of purchases, $217.3 million in sales and maturities of investment securities, net of purchases, and $136.7 million provided from operating activities. Offsetting these cash inflows were cash outflows of $279.0 million in additional loans made, net of repayments, a $252.1 million net decrease in savings and demand deposits, and a $119.8 million net decrease in borrowings of federal funds purchased and repurchase agreements. The 1993 decrease of $15.9 million in cash and due from banks was mainly caused by $180.9 million in additional loans made, net of repayments, and $166.3 million in additional purchases of investment securities, net of maturities and sales, partially offset by $215.1 million in maturities of federal funds sold and securities purchased under agree- A-23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) ments to resell, net of purchases, and cash provided from operating activities. In 1993, proceeds from maturing securities were $280.3 million and proceeds from sales of securities were $500.9 million. Most of these securities sales were of U.S. government and federal agency securities that were sold shortly before maturity in order to take advantage of market conditions. During 1995, approximately $40.0 million was used to purchase treasury stock. The purchases were partially offset by exercise of stock options by employees and sales to affiliate outside directors (under a plan to invest their directors fees in Company stock) which, on a combined basis, totaled sales of $4.1 million. Acquisitions during 1995 required treasury stock valued at $12.0 million and newly issued stock of $75.7 million. During 1994, approximately $52.8 million was used to purchase treasury stock. Cash of $8.2 million was received on exercise of stock options, sales to directors and sales to employee benefit plans. In addition, bank acquisitions during 1994 required $44.5 million in treasury stock and $3.5 million in newly issued stock. During 1993, approximately $10.6 million was used to purchase treasury stock. Cash of $4.6 million was received on sales of treasury shares (excluding shares valued at $63.3 million which were issued in acquisitions). In June 1995, 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, 1995, the Company had acquired 1,455,000 shares under the 1995 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 $1.96 billion (excluding approximately $1.82 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 $121.5 million at December 31, 1995. 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 an interest rate swap agreement. 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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In 1995, the Company adopted Statements of Financial Accounting Standards No. 114 and 118, which require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. The adoption of these statements did not have a material effect on the financial statements, and the Company's previous approach to valuation of impaired loans was not revised due to immateriality. The Company will adopt SFAS No. 122 related to mortgage loan origination costs in 1996; the impact of this statement is expected to be immaterial. Also, SFAS No. 123, "Accounting for Stock-Based Compensation" will require pro forma disclosures in 1996 of net income and earnings per share as if a new accounting method based on the estimated fair value of employee stock options had been adopted. The Company has not decided if the optional accounting treatment proposed by SFAS No. 123 will be adopted. 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. Therefore, the direct results of inflation are limited to costs of goods and services used in operating the institution. There are, however, indirect effects of A-24
inflation such as the impact that it has on the level of loan demand. An example is the increased loan demand of customers requiring additional funds to maintain capital assets and inventories to produce and sell goods to the buying public. This demand is accelerated when customers increase borrowings for current purchases to avoid expected future price increases. Financial institutions must then meet this increased demand for loans by obtaining additional funds in the form of deposits or by raising funds through borrowings. Higher interest rates generally follow the rising demand of borrowers and the corresponding increased funding requirements of financial institutions. Although interest rates are viewed as the price of borrowing funds, the behavior of interest rates differs significantly from the behavior of the prices of goods and services. Prices of goods and services may be directly related to that of other goods and services while the price of borrowing relates more closely to the inflation rate in the prices of those goods and services. As a result, when the rate of inflation slows, interest rates tend to decline while absolute prices for goods and services remain at higher levels. Interest rates are also subject to restrictions imposed through monetary policy, usury laws and other artificial constraints. The rate of inflation has been relatively low over the past few years. GENERAL COMMENTS With our country experiencing a period of relative economic growth, the banking industry has been able to improve on its financial strength. Profit margins have in general improved. Consumer confidence surveys seem to move up and down with various events locally and around the world. Many consumers still have concerns about how long this current economic climate will continue. Changes in the political arena have occurred which are touted to be the signal for major changes in federal policies and regulations which will affect us all. Stockholders in most industries are continuing to pressure management for economies of scale which frequently result in mergers and/or downsizing and individuals are continually reminded that there are no guarantees of long-term job security. Consumer uncertainty can lead to debt reduction and economic slow down. Those in the business of banking have to sort out what we expect to happen and build plans to achieve the optimum return for stockholders along with unquestioned security and stability for both stockholders and customers. Banks must function within the boundaries established by banking regulations yet meet the high expectations of investors. Some banks have developed strategies to spur deposit growth in anticipation of future loan demand. Others are still evaluating the changes in spending patterns and are waiting to see how loan growth risks weigh against alternative investment options. Commerce looks upon these parameters with optimism as part of the challenge to be a solid, dependable partner in each community we serve while providing the right products at the right prices. In 1996, Commerce will continue to focus on extending markets with high-growth potential and improving our operating efficiencies in Missouri, Illinois and Kansas. Commerce also continues to limit loan growth to high quality, low risk credits while avoiding concentrations in any one industry. Customer service remains a primary goal. Commerce strives to offer sophisticated products designed on a personalized basis to meet our customers' needs, while maintaining emphasis on credit quality, efficiency, and cost control. A-25
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, 1995. 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. (St. Louis), Commerce Bank, N.A. (Kansas City), Commerce Bank, N.A. (Wichita), and Commerce Bank, N.A. (Springfield) maintained an effective internal control structure over financial reporting as of December 31, 1995. 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. (St. Louis), Commerce Bank, N.A. (Kansas City), Commerce Bank, N.A. (Wichita), and Commerce Bank, N.A. (Springfield), 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, 1995. - -------------------------------------------------------------------------------- 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, 1995, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 at December 31, 1995, 1994 and 1993, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP January 31, 1996 Kansas City, Missouri A-26
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATION The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. (Parent) and its subsidiaries (collectively, the Company) which are substantially wholly-owned. All significant intercompany accounts and transactions are eliminated in consolidation. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 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. LOANS AND COMMITMENTS Interest on loans is credited to operating income based upon the principal amount outstanding using primarily a simple interest calculation. The accrual of interest on loans is discontinued when, in management's judgment, the interest is uncollectible in the normal course of business. Interest collected on non-accrual loans is recorded on a cash basis. Loan and commitment fee income and related costs are deferred and amortized in relation to the respective loan or commitment. The Company's adoption in 1995 of Statements of Financial Accounting Standards No. 114 and 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" did not have a material impact on the Company's consolidated financial position or results of operations. SECURITIES Prior to 1994, investment securities were stated at cost, adjusted for amortization of premiums and accretion of discounts. On January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and classified most of its portfolio as available for sale. Investment securities classified as available for sale are stated at fair value, with the adjustment (net of tax) being reported as a separate component of stockholders' equity. Any premiums or discounts on purchases in this category are amortized as adjustments of the related interest income. Trading account securities are carried at fair value with adjustments recorded in 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. LAND, BUILDINGS AND EQUIPMENT Land is stated at cost, and buildings and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line or declining balance method, depending on the type of asset and the year of acquisition. Maintenance and repairs are charged to expense as incurred. 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 loan losses, on an individual subsidiary bank basis, reflective of the risks in the loan portfolio. The estimate is based on reviews of the loan portfolio, past loan loss experience, current economic conditions and such other factors which, in the opinion of management, deserve current recognition. INCOME TAXES The Parent and its eligible subsidiaries file consolidated income tax returns. Certain items are treated differently for financial reporting purposes than for income tax purposes. Deferred income taxes are provided in recognition of these temporary differences, using the tax rates expected to be in effect when the related temporary differences reverse. INCOME PER COMMON SHARE Income per share data is based on the weighted average number of common shares and common equivalent shares outstanding during each year. All per share data in this report has been restated to reflect the 5% stock dividend distributed on December 15, 1995. A-27
CONSOLIDATED BALANCE SHEETS Commerce Bancshares, Inc. and Subsidiaries <TABLE> <CAPTION> December 31 - -------------------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> ASSETS Loans and lease financing, net of unearned income $5,317,813 $4,432,662 $4,024,075 Allowance for loan losses (98,537) (87,179) (85,830) - -------------------------------------------------------------------------------------------- NET LOANS AND LEASE FINANCING 5,219,276 4,345,483 3,938,245 - -------------------------------------------------------------------------------------------- Investment securities: Held to maturity (fair value of $2,857,453,000 in 1993) --- --- 2,781,827 Available for sale 2,552,264 2,621,342 --- Trading account 9,369 5,539 5,170 Other non-marketable 33,120 18,539 18,633 - -------------------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES 2,594,753 2,645,420 2,805,630 - -------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 523,302 72,265 354,517 Cash and due from banks 774,852 565,805 534,785 Land, buildings and equipment - net 210,033 191,780 195,251 Customers' acceptance liability 9,435 15,213 14,274 Other assets 242,300 199,608 204,711 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $9,573,951 $8,035,574 $8,047,413 ============================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand - non-interest bearing $1,828,950 $1,448,422 $1,391,740 Savings and interest bearing demand 3,891,801 3,418,450 3,541,768 Time open and C.D.'s of less than $100,000 2,253,390 1,942,986 1,766,351 Time open and C.D.'s of $100,000 and over 218,951 180,572 139,611 - -------------------------------------------------------------------------------------------- TOTAL DEPOSITS 8,193,092 6,990,430 6,839,470 - -------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 362,903 290,647 395,083 Long-term debt and other borrowings 14,562 6,487 6,894 Accrued interest, taxes and other liabilities 110,176 4,599 79,072 Acceptances outstanding 9,435 15,213 14,274 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES 8,690,168 7,307,376 7,334,793 - -------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $1 par value Authorized and unissued 2,000,000 shares --- --- --- Common stock, $5 par value Authorized 60,000,000 shares; issued 37,565,369 shares in 1995, 33,970,106 shares in 1994 and 32,238,438 shares in 1993 187,827 169,851 161,192 Capital surplus 84,415 54,575 17,051 Retained earnings 618,388 576,331 545,424 Treasury stock of 861,951 shares in 1995, 401,087 shares in 1994 and 454,081 shares in 1993, at cost (32,980) (12,148) (8,982) Unearned employee benefits (716) (295) (2,065) Unrealized securities gain (loss) - net of tax 26,849 (60,116) --- - -------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 883,783 728,198 712,620 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,573,951 $8,035,574 $8,047,413 ============================================================================================ </TABLE> See accompanying notes to financial statements. A-28
CONSOLIDATED STATEMENTS OF INCOME COMMERCE BANCSHARES, INC. AND SUBSIDIARIES <TABLE> <CAPTION> For the Years Ended December 31 - -------------------------------------------------------------------------------------------- (In thousands, except per share data) 1995 1994 1993 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> INTEREST INCOME Interest and fees on loans and leases $457,760 $331,429 $297,798 Interest on investment securities 161,168 163,395 153,879 Interest on federal funds sold and securities purchased under agreements to resell 12,075 5,457 8,735 - -------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 631,003 500,281 460,412 - -------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits: Savings and interest bearing demand 120,683 90,655 85,007 Time open and C.D.'s of less than $100,000 118,267 77,884 77,165 Time open and C.D.'s of $100,000 and over 11,430 6,213 5,038 Interest on federal funds purchased and securities sold under agreements to repurchase 23,792 10,384 8,141 Interest on long-term debt and other borrowings 1,086 528 537 - -------------------------------------------------------------------------------------------- Total interest expense 275,258 185,664 175,888 - -------------------------------------------------------------------------------------------- Net interest income 355,745 314,617 284,524 Provision for loan losses 14,629 5,845 11,381 - -------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 341,116 308,772 273,143 - -------------------------------------------------------------------------------------------- NON-INTEREST INCOME Trust income 33,454 28,180 27,645 Deposit account charges and other fees 44,658 39,971 40,237 Trading account profits and commissions 5,158 4,903 5,243 Net gains on securities transactions 897 2,354 7,481 Miscellaneous credit card income 23,341 19,318 16,054 Other income 25,642 26,302 24,763 - -------------------------------------------------------------------------------------------- Total non-interest income 133,150 121,028 121,423 - -------------------------------------------------------------------------------------------- OTHER EXPENSE Salaries and employee benefits 157,853 144,015 134,355 Net occupancy expense on bank premises 20,294 18,017 17,280 Equipment expense 14,256 13,159 12,216 Supplies and communication expense 24,139 19,633 19,068 Data processing expense 20,997 16,837 14,041 Federal deposit insurance expense 8,807 15,349 14,668 Marketing expense 11,611 10,833 7,527 Other operating expense 47,527 44,235 38,161 - -------------------------------------------------------------------------------------------- Total other expense 305,484 282,078 257,316 - -------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 168,782 147,722 137,250 Less income taxes 61,142 51,611 50,356 - -------------------------------------------------------------------------------------------- Net income $107,640 $ 96,111 $ 86,894 ============================================================================================ Net income per common and common equivalent share $ 2.85 $ 2.72 $ 2.49 ============================================================================================ Weighted average common and common equivalent shares outstanding 37,802 35,397 34,911 Cash dividends per common share $ .686 $ .599 $ .529 ============================================================================================ </TABLE> See accompanying notes to financial statements. A-29
CONSOLIDATED STATEMENTS OF CASH FLOWS COMMERCE BANCSHARES, INC. AND SUBSIDIARIES <TABLE> <CAPTION> For the Years Ended December 31 - ------------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 107,640 $ 96,111 $ 86,894 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 14,629 5,845 11,381 Provision for depreciation and amortization 31,173 25,741 24,831 Accretion of investment security discounts (5,656) (1,704) (503) Amortization of investment security premiums 24,596 32,057 33,048 Provision for deferred income taxes 3,549 (6,651) (4,840) Net gains on securities transactions (897) (2,354) (7,481) Net (increase) decrease in trading account securities (4,859) 2,182 12,368 (Increase) decrease in interest receivable 19 (10,309) (303) Increase (decrease) in interest payable 10,863 5,033 (3,029) Other changes, net 14,204 (9,203) (1,657) - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 195,261 136,748 150,709 - ------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net cash received (paid) in acquisitions (33,226) 13,031 14,969 Proceeds from sales of held to maturity securities --- --- 500,882 Proceeds from maturities of held to maturity securities --- --- 280,291 Purchases of held to maturity securities --- --- (947,517) Proceeds from sales of available for sale securities 917,063 808,253 --- Proceeds from maturities of available for sale securities 535,722 230,303 --- Purchases of available for sale securities (930,080) (821,250) --- Net (increase) decrease in federal funds sold and securities purchased under agreements to resell (424,202) 299,393 215,075 Net increase in loans (222,684) (278,953) (180,867) Purchases of premises and equipment (25,798) (19,057) (15,979) Sales of premises and equipment 8,673 8,789 3,380 - ------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (174,532) 240,509 (129,766) - ------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase (decrease) in non-interest bearing demand, savings and interest bearing demand deposits 265,672 (252,099) 161,922 Net increase (decrease) in time open and C.D.'s 53,208 91,804 (141,579) Net decrease in federal funds purchased and securities sold under agreements to repurchase (59,843) (119,777) (32,425) Repayment of long-term debt (8,805) (438) (373) Purchases of treasury stock (40,024) (52,755) (10,629) Sales of treasury stock to employee benefit plans --- 5,599 2,228 Exercise of stock options by employees 3,294 1,756 1,587 Sales of treasury stock under directors stock purchase plan 855 797 813 Cash dividends paid on common stock (26,039) (21,124) (18,358) - ------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 188,318 (346,237) (36,814) - ------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 209,047 31,020 (15,871) Cash and cash equivalents at beginning of year 565,805 534,785 550,656 - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 774,852 $ 565,805 $ 534,785 ======================================================================================================= </TABLE> See accompanying notes to financial statements. A-30
STATEMENTS OF STOCKHOLDERS' EQUITY COMMERCE BANCSHARES, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Unearned Net Common Capital Retained Treasury Employee Unrealized (In thousands) Stock Surplus Earnings Stock Benefits Gain (Loss) Total <S> <C> <C> <C> <C> <C> <C> <C> - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 $161,192 $ 26,375 $456,484 $(37,021) $(3,312) $ -- $ 603,718 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 86,894 86,894 Purchase of treasury stock (10,629) (10,629) Sale of stock to the employee benefit plans 933 1,295 2,228 Cash dividends paid ($.529 per share) (18,358) (18,358) Exercise of stock options (185) 2,000 1,815 Sale of stock under directors stock purchase plan 273 540 813 Pooling acquisitions, net (16,380) 20,404 22,238 26,262 Purchase acquisitions 5,861 12,496 18,357 Issuance of stock under restricted stock award plan 118 99 (217) -- Restricted stock award amortization 89 89 ESOP benefit earned 56 1,375 1,431 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 161,192 17,051 545,424 (8,982) (2,065) -- 712,620 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 96,111 96,111 1/1/94 adoption of SFAS 115-- net unrealized gain on available for sale securities 47,116 47,116 Change in unrealized gain (loss) on available for sale securities (107,232) (107,232) Purchase of treasury stock (52,793) (52,793) Sale of stock to the employee benefit plans 184 5,415 5,599 Cash dividends paid ($.599 per share) (21,124) (21,124) Exercise of stock options (1,222) 3,137 1,915 Sale of stock under directors stock purchase plan 797 797 Purchase acquisitions 571 2,519 40,207 43,297 Issuance of stock under restricted stock award plan 15 71 (86) -- 5% stock dividend 8,088 35,992 (44,080) -- Restricted stock award amortization 106 106 ESOP benefit earned 36 1,750 1,786 - ----------------------------------------------------------------------------------------------------------------------------------- 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 ($.686 per share) (26,039) (26,039) Exercise of stock options (2,800) 6,757 3,957 Sale of stock under directors stock purchase plan (1) 856 855 Purchase acquisitions (435) 5,315 4,880 Pooling acquisition, net 13,371 (4,872) 32,360 7,625 38 48,522 Issuance of stock under restricted stock award plan 4 628 (632) -- 5% stock dividend, net 4,605 37,944 (71,904) 29,355 -- Restricted stock award amortization 178 178 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $187,827 $ 84,415 $618,388 $(32,980) $ (716) $ 26,849 $ 883,783 - ----------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to financial statements. </TABLE> A-31
NOTES TO FINANCIAL STATEMENTS Commerce Bancshares, Inc. and Subsidiaries ACCOUNTING POLICIES The summary of significant accounting policies of Commerce Bancshares, Inc. and Subsidiaries (Company) appears on page A-27 and is an integral part of the financial statements. Certain reclassifications were made to the 1994 and 1993 financial statements to conform to current year presentation. ================================================================================ LOANS, LEASES AND ALLOWANCE FOR LOSSES Major classifications of loans and leases at December 31, 1995, 1994 and 1993 are as follows: <TABLE> <CAPTION> - ----------------------------------------------------------------- (In thousands) 1995 1994 1993 - ----------------------------------------------------------------- <S> <C> <C> <C> Business $1,716,080 $1,393,979 $1,380,452 Real estate--construction 168,031 127,948 90,102 Real estate--business 695,558 586,769 533,467 Real estate--personal 983,249 813,134 734,771 Consumer 1,258,809 1,120,366 917,683 Credit card 496,086 390,466 367,600 - ----------------------------------------------------------------- Total loans and leases $5,317,813 $4,432,662 $4,024,075 ================================================================= </TABLE> Loans to directors and executive officers of the Parent and its significant subsidiaries and to their associates are summarized as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------ (In thousands) Deductions - ------------------------------------------------------------------------ <S> <C> <C> <C> <C> Balance at Amounts Amounts Balance at January 1, 1995 Additions Collected Written Off December 31, 1995 - ------------------------------------------------------------------------ $105,434 $426,450 $396,360 -- $135,524 </TABLE> 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, 1995, 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, 1995, unfunded loan commitments totaled $1,960,458,000 (excluding $1,820,391,000 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: <TABLE> <CAPTION> Years Ended December 31 - -------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - -------------------------------------------------------------------------- <S> <C> <C> <C> Balance, January 1 $87,179 $85,830 $77,149 - -------------------------------------------------------------------------- Additions: Provision for loan losses charged to expense 14,629 5,845 11,381 Allowance for loan losses of acquired banks 12,932 2,953 3,661 - -------------------------------------------------------------------------- Total additions 27,561 8,798 15,042 ========================================================================== Deductions: Loan losses 23,272 15,155 15,737 Less recoveries on loans 7,069 7,706 9,376 - -------------------------------------------------------------------------- Net loan losses 16,203 7,449 6,361 - -------------------------------------------------------------------------- Balance, December 31 $98,537 $87,179 $85,830 ========================================================================== </TABLE> A-32
Impaired loans include all non-accrual loans and loans 90 days delinquent and still accruing. Total impaired loans at December 31, 1995 approximate 1% of total loans. The net amount of interest income recorded on such loans during their impairment period was insignificant. The Company ceased recognition of interest income on loans with a book value of $16,234,000, $11,385,000 and $14,328,000 at December 31, 1995, 1994 and 1993, respectively. The interest income not recognized on these loans was $1,868,000, $2,051,000 and $2,047,000 during 1995, 1994 and 1993, respectively. Loans over 90 days delinquent and still accruing interest amounted to $15,690,000, $13,090,000 and $7,289,000 at December 31, 1995, 1994 and 1993, respectively. Real estate and other assets acquired in foreclosure amounted to approximately $3,900,000, $8,300,000 and $11,000,000 at December 31, 1995, 1994 and 1993, respectively. ================================================================================ INVESTMENT SECURITIES A summary of the available for sale investment securities by maturity groupings as of December 31, 1995 is as follows: <TABLE> <CAPTION> Weighted Par Amortized Fair Average (Dollars in thousands) Value Cost Value Yield - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. government and federal agency obligations: Within 1 year $ 333,062 $ 334,627 $ 335,758 5.85% After 1 but within 5 years 1,333,099 1,342,356 1,363,300 6.17 After 5 but within 10 years 7,250 7,108 7,432 6.96 After 10 years 588 588 621 7.37 - ------------------------------------------------------------------------------------------------------------- Total U.S. government and federal agency obligations $1,673,999 1,684,679 1,707,111 6.11% ============================================================================================================= State and municipal obligations: Within 1 year $ 26,862 27,399 27,522 5.68% After 1 but within 5 years 57,690 58,231 59,959 5.43 After 5 but within 10 years 34,034 33,975 35,540 5.42 After 10 years 4,637 4,747 5,022 5.78 - ------------------------------------------------------------------------------------------------------------- Total state and municipal obligations $ 123,223 124,352 128,043 5.49% ============================================================================================================= CMO's and asset-backed securities $ 668,188 666,334 670,522 6.28% ============================================================================================================= Other debt securities: Within 1 year 9,895 9,875 After 1 but within 5 years 1,096 1,088 After 5 but within 10 years 10 9 After 10 years 10 10 - ------------------------------------------------------------------------------------------------------------- Total other debt securities 11,011 10,982 ============================================================================================================= Equity securities 22,479 35,606 ============================================================================================================= Total available for sale investment securities $2,508,855 $2,552,264 ============================================================================================================= </TABLE> The unrealized gains and losses by type as of December 31, 1995, 1994 and 1993 are as follows: <TABLE> <CAPTION> 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Available for Sale Available for Sale Held to Maturity - --------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Gross Gross Gross Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized (In thousands) Gains Losses Gains Losses Gains Losses - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> U.S. government and federal agency obligations $24,172 $1,740 $ 2,585 $ 50,442 $64,798 $ 23 State and municipal obligations 3,735 44 82 674 1,665 2 CMO's and asset-backed securities 7,119 2,931 541 55,440 591 1,847 Other debt securities 5 34 19 846 293 3 Equity securities 14,901 1,774 9,233 2,129 10,521 367 - --------------------------------------------------------------------------------------------------------------------- Total $49,932 $6,523 $12,460 $109,531 $77,868 $2,242 ===================================================================================================================== </TABLE> A-33
NOTES TO FINANCIAL STATEMENTS (cont.) Commerce Bancshares, Inc. and Subsidiaries Proceeds from sales of investment securities during 1995 were $917,063,000, with gross gains of $3,188,000 and gross losses of $2,291,000 realized on those sales. Proceeds from sales of investment securities during 1994 were $808,253,000. Gross gains of $2,742,000 and gross losses of $388,000 were realized on those sales. Proceeds from sales of investment securities during 1993 were $500,882,000 with gross gains of $7,668,000 and gross losses of $187,000 realized on those sales. Investment securities with a par value of $1,081,509,000, $1,071,004,000 and $473,596,000 were pledged at December 31, 1995, 1994 and 1993, respectively, to secure public deposits and for other purposes as required by law. Except for U.S. government and federal agency obligations, no investment in a single issuer exceeds 10% of stockholders' equity. ================================================================================ LAND, BUILDINGS AND EQUIPMENT Land, buildings and equipment consist of the following at December 31, 1995, 1994 and 1993: <TABLE> <CAPTION> - ------------------------------------------------------------------------------ (In thousands) 1995 1994 1993 - ------------------------------------------------------------------------------ <S> <C> <C> <C> Land $ 52,146 $ 46,481 $ 44,563 Buildings and improvements 244,413 215,357 206,165 Equipment 119,366 103,603 94,897 - ------------------------------------------------------------------------------ Total 415,925 365,441 345,625 Less accumulated depreciation and amortization 205,892 173,661 150,374 - ------------------------------------------------------------------------------ Net land, buildings and equipment $210,033 $191,780 $195,251 - ------------------------------------------------------------------------------ </TABLE> Depreciation expense of $19,578,000, $18,243,000 and $17,803,000 for 1995, 1994 and 1993, respectively, was included in net occupancy expense on bank premises, equipment expense and other operating expense in the Consolidated Statements of Income. Repairs and maintenance expense of $11,182,000, $9,945,000 and $8,195,000 for 1995, 1994 and 1993, respectively, was included in net occupancy expense on bank premises, equipment expense and other operating expense. ================================================================================ BORROWINGS Short-term borrowings of the Company consisted of federal funds purchased and securities sold under agreements to repurchase by subsidiary banks of the following: <TABLE> <CAPTION> - ------------------------------------------------------ ------------------------ (Dollars in thousands) For the Year December 31 - ------------------------------------------------------ ------------------------ Maximum Weighted Average Outstanding Weighted Average Balance at any Average Balance Year Rate Outstanding Month End Rate Outstanding - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 1995 5.4% $442,413 $589,270 4.8% $362,903 1994 3.6 287,642 388,187 4.5 290,647 1993 2.6 318,951 538,933 2.6 395,083 - ------------------------------------------------------------------------------------------- </TABLE> Long-term debt of the Company was $14,562,000 at December 31, 1995, including $9,200,000 borrowed from the Federal Home Loan Bank by a subsidiary bank acquired in 1995. Such borrowings carry an average rate of 6.4%, and require payments of $6,200,000 and $3,000,000 in 1997 and 1998, respectively. 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, 1995 totaled $182,599,000. Cash payments for interest on deposits and borrowings during 1995, 1994 and 1993 on a consolidated basis amounted to $264,503,000, $180,645,000 and $178,919,000, respectively. A-34
INCOME TAXES Total income taxes for 1995, 1994 and 1993 were allocated as shown in the following tables: Income tax expense from operations for the years ended December 31, 1995, 1994 and 1993 consists of: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- (In thousands) Current Deferred Total - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> 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 =============================================================================================================== Year ended December 31, 1994: U.S. Federal $54,113 $ (6,651) $47,462 State and local 4,149 --- 4,149 - --------------------------------------------------------------------------------------------------------------- $58,262 $ (6,651) $51,611 =============================================================================================================== Year ended December 31, 1993: U.S. Federal $49,956 $ (4,840) $45,116 State and local 5,240 --- 5,240 - --------------------------------------------------------------------------------------------------------------- $55,196 $ (4,840) $50,356 =============================================================================================================== </TABLE> Income tax expense (benefits) allocated directly to stockholders' equity for the years ended December 31, 1995, 1994 and 1993 consists of: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Unrealized gain (loss) on securities available for sale $53,447 $(36,887) $ --- Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (324) (114) (228) Deductible dividends paid on unallocated shares held by the ESOP --- (36) (56) - --------------------------------------------------------------------------------------------------------------- Income tax expense (benefits) allocated to stockholders' equity $53,123 $(37,037) $ (284) =============================================================================================================== </TABLE> 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: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Computed "expected" tax expense $59,073 $ 51,703 $48,038 Increase (reduction) in income taxes resulting from: Amortization of goodwill 1,444 724 797 Tax exempt income (2,829) (1,392) (1,610) Tax deductible dividends on allocated shares held by the Company's ESOP (665) (567) (530) State and local income taxes, net of Federal income tax benefit 3,631 2,159 3,406 Other, net 488 (1,016) 255 - --------------------------------------------------------------------------------------------------------------- Total income tax expense $61,142 $ 51,611 $50,356 =============================================================================================================== </TABLE> A-35
NOTES TO FINANCIAL STATEMENTS (cont.) Commerce Bancshares, Inc. and Subsidiaries The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995, 1994 and 1993 are presented below: <TABLE> <CAPTION> - --------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - --------------------------------------------------------------------------- Deferred tax assets: <S> <C> <C> <C> Loans, principally due to allowance for loan losses $41,956 $42,037 $40,498 Unrealized loss on securities available for sale - 36,887 - Foreclosed property, due to writedowns for financial reporting purposes 629 1,424 1,142 Unearned fee income, due to earlier recognition for tax purposes 1,630 1,544 1,419 Deferred compensation, principally due to accrual for financial reporting purposes 930 715 543 Accrued expenses, principally due to accrual for financial reporting purposes 2,645 1,737 704 Net operating loss carryforwards of acquired companies 572 780 706 Other 503 219 185 - --------------------------------------------------------------------------- Total gross deferred tax assets 48,865 85,343 45,197 - --------------------------------------------------------------------------- Deferred tax liabilities: Investment securities, principally due to discount accretion 2,338 713 312 Capitalized interest 952 1,321 857 Unrealized gain on securities available for sale 16,560 - - Land, buildings and equipment, principally due to write-up in value in purchase accounting entries for financial reporting 19,426 17,311 19,656 Core deposit intangible, principally due to purchase accounting entries for financial reporting 9,979 3,786 4,185 Pension benefit obligation, due to recognition of the excess pension asset for financial reporting purposes 2,725 3,025 3,311 Other 4 12 33 - --------------------------------------------------------------------------- Total gross deferred tax liabilities 51,984 26,168 28,354 - --------------------------------------------------------------------------- Net deferred tax asset (liability) $(3,119) $59,175 $16,843 - --------------------------------------------------------------------------- </TABLE> Cash payments of income taxes, net of refunds and interest received, amounted to $52,268,000, $56,887,000 and $54,644,000 on a consolidated basis during 1995, 1994 and 1993, respectively. The Parent made cash payments of income taxes of $2,211,000 in 1993, and had net receipts of $3,010,000 in 1995 and $4,170,000 in 1994 from tax benefits. A-36
EMPLOYEE BENEFIT PLANS Employee benefits charged to operating expenses aggregated $21,207,000, $20,036,000 and $16,658,000 for 1995, 1994 and 1993, respectively. These benefits include payroll taxes, group insurance and retirement plans. 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 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, 1995, 1994 and 1993: <TABLE> <CAPTION> - ---------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - ---------------------------------------------------------------------------- <S> <C> <C> <C> Service cost-benefits earned during the year $ 2,311 $ 2,183 $ 1,737 Interest cost on projected benefit obligation 3,152 3,080 2,843 Actual plan assets value (increase) decrease (8,219) 1,287 (4,123) Net amortization and deferral 3,695 (5,732) (355) - ---------------------------------------------------------------------------- Net periodic pension cost $ 939 $ 818 $ 102 ============================================================================ </TABLE> The following table sets forth the pension plan's funded status, using a valuation date of September 30, 1995, 1994 and 1993: <TABLE> <CAPTION> (In thousands) - --------------------------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------- <S> <C> <C> <C> Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefits of $36,186,000 in 1995, $34,754,000 in 1994 and $35,213,000 in 1993 $(36,495) $(35,429) $(35,609) Additional benefits based on estimated future salary levels (11,499) (7,986) (5,037) - --------------------------------------------------------------------------------------- Projected benefit obligation (47,994) (43,415) (40,646) Plan assets at fair value 54,642 49,943 54,930 - --------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 6,648 6,528 14,284 Unrecognized net loss from past experience different from that assumed and effects of change in assumptions 7,475 7,790 1,151 Prior service benefit not yet recognized in net pension cost (1,965) (583) (243) Unrecognized net transition asset being recognized over 15 years (4,468) (5,106) (5,745) - --------------------------------------------------------------------------------------- Prepaid pension cost included in other assets $ 7,690 $ 8,629 $ 9,447 - --------------------------------------------------------------------------------------- </TABLE> The discount rate used to determine the actuarial present value of the projected benefit obligation was 7.75% for 1995 and 7.00% for 1994 and 1993. The rate of increase in future compensation levels was 5.00% for all three years presented. The long-term rate of return used was 8.00% for 1995, 7.00% for 1994 and 7.50% for 1993. At December 31, 1995, approximately 80% of plan assets were invested in U.S. government bonds and corporate equities. In addition to the pension plan, substantially all of the Company's employees are covered by a contributory defined contribution plan, the Participating Investment Plan. Under the plan, the Company makes matching contributions, which aggregated $2,352,000 in 1995, $838,000 in 1994 and $755,000 in 1993. A-37
NOTES TO FINANCIAL STATEMENTS (cont.) Commerce Bancshares, Inc. and Subsidiaries 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 unpaid balance of the loan, which was $1,750,000 at December 31, 1993, was included in other liabilities in the accompanying balance sheet. The unpaid balance represented unearned compensation and was recorded as a reduction of stockholders' equity in the accompanying 1993 balance sheet. The remaining balance of the loan was repaid in December 1994, and the ESOP assets were merged into the Participating Investment Plan. The Company's contributions to the ESOP charged to salaries and employee benefits aggregated $368,000, $1,359,000 and $1,376,000 in 1995, 1994 and 1993, respectively. - -------------------------------------------------------------------------------- STOCK OPTION PLANS, RESTRICTED STOCK AWARDS AND DIRECTORS STOCK PURCHASE PLAN* The Company has reserved 5,328,750 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 5 to 10 years. At December 31, 1995, 3,192,545 shares remain available for option grants under these programs. The following table summarizes option activity over the last three years and current options outstanding. <TABLE> <CAPTION> Number of Option Price Shares Per Share - ------------------------------------------------------------------------ <S> <C> <C> Outstanding -- December 31, 1992 819,347 $9.52 to $22.68 Granted 238,967 26.53 to 29.18 Canceled (2,067) 21.16 Exercised (139,286) 9.52 to 22.68 - ------------------------------------------------------------------------ Outstanding -- December 31, 1993 916,961 $11.19 to $29.18 Granted 252,898 28.34 Canceled (5,346) 21.16 to 29.18 Exercised (136,078) 12.09 to 21.16 - ------------------------------------------------------------------------ Outstanding -- December 31, 1994 1,028,435 $11.19 to $29.18 Granted 295,375 27.62 to 29.29 Canceled (23,600) 27.62 to 29.29 Exercised (224,276) 11.19 to 29.29 - ------------------------------------------------------------------------ Outstanding -- December 31, 1995 1,075,934 $13.98 to $29.29 ======================================================================== </TABLE> <TABLE> <CAPTION> Shares Price ------- ---------------- <S> <C> <C> <C> Options exercisable: December 31, 1995 694,094 $13.98 to $29.29 Additional options become exercisable: During 1996 181,425 26.53 to 29.29 During 1997 129,127 27.62 to 29.29 During 1998 71,288 27.62 to 29.29 </TABLE> The options expire as follows: 115,743 in 1996; 220,535 in 2002; 221,707 in 2003; 233,387 in 2004 and 284,562 in 2005. The Company has a restricted stock award plan under which 165,375 shares of common stock are reserved at December 31, 1995. 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 21,932 shares in 1995, 3,031 shares in 1994 and 7,442 shares in 1993, resulting in deferred compensation amounts of $632,000, $86,000 and $217,000, respectively. Approximately $178,000, $106,000 and $89,000 was amortized to salaries expense in 1995, 1994 and 1993, respectively. Unamortized deferred compensation of $716,000, $295,000 and $315,000 has been recorded as a reduction of stockholders' equity at December 31, 1995, 1994 and 1993, respectively. A-38
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 10,216 at December 31, 1995. Shares purchased each year and the average price of such purchases for the last three years are as follows: <TABLE> <CAPTION> Shares Price ------------------------ <S> <C> <C> 1995 26,616 $32.15 ------------------------ 1994 28,629 $27.84 ------------------------ 1993 30,140 $26.95 ------------------------ </TABLE> Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" will require pro forma disclosures in 1996 of net income and earnings per share as if a new accounting method based on the estimated fair value of employee stock options had been adopted. The Company has not yet decided if the optional accounting treatment proposed by SFAS No. 123 will be adopted. *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 1995. - -------------------------------------------------------------------------------- COMMON STOCK Under a Rights Agreement with First Chicago Trust Company of New York, as Rights Agent, dated August 23, 1988, 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 June 1995, 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 1994. Approximately 1,455,000 shares have been acquired under the 1995 approval through December 31, 1995. On December 15, 1995, the Company distributed its second 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 1995. <TABLE> <CAPTION> Issued Treasury Shares Shares ----------------------------------------------------------------- <S> <C> <C> December 31, 1994 33,970,106 401,087 Purchases of treasury stock - 2,029,398 Sales under employee and director plans - (262,878) Issuance in acquisitions, net 2,674,299 (430,221) 5% stock dividend 920,964 (875,435) ----------------------------------------------------------------- December 31, 1995 37,565,369 861,951 ================================================================= </TABLE> A-39
NOTES TO FINANCIAL STATEMENTS (cont.) Commerce Bancshares, Inc. and Subsidiaries ACQUISITIONS 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. During 1994, the Company acquired five banks in transactions which were all accounted for as purchases. The aggregate purchase price of these acquisitions was $50.7 million, and included treasury stock valued at $44.5 million, new common stock valued at $3.5 million, and $2.7 million of cash. Total assets of acquired banks aggregated $376 million. Goodwill and core deposit intangible assets recorded as a result of these acquisitions was $11.6 million. During 1993, the Company acquired five banks, three of which were accounted for as purchases and two of which were accounted for as poolings. Total consideration paid by the Company consisted of cash of $1.2 million and common stock valued at $63.3 million. Total assets of acquired banks aggregated $429 million. In connection with the purchase acquisitions, the Company recorded goodwill and core deposit intangible assets aggregating $4.5 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 if the 1994 and 1995 acquisitions had been consummated on January 1, 1994: <TABLE> <CAPTION> (In thousands, except per share data) 1995 1994 - ------------------------------------------------------------------ <S> <C> <C> Net interest income plus non-interest income $497,653 $497,697 Net income 103,909 101,737 Net income per share 2.71 2.58 ================================================================== </TABLE> A-40
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. INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL The carrying amounts for federal funds sold and securities purchased under agreements to resell approximate fair value because they generally mature in 90 days or less and present little or no risk. The fair values of the debt and equity instruments in the held to maturity, 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. Carrying value and estimated fair value of these investments are shown below: <TABLE> <CAPTION> December 31, 1995 December 31, 1994 December 31, 1993 - ----------------------------------------------------------------------------------------------------------- (In thousands) Carrying Estimated Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Investment securities: Held to maturity $ -- $ -- $ -- $ -- $2,781,827 $2,857,453 Available for sale 2,552,264 2,552,264 2,621,342 2,621,342 -- -- Trading account 9,369 9,369 5,539 5,539 5,170 5,170 Other non-marketable 33,120 33,120 18,539 18,539 18,633 18,633 Federal funds sold and securities purchased under agreements to resell 523,302 523,302 72,265 72,265 354,517 354,517 - ----------------------------------------------------------------------------------------------------------- </TABLE> A breakdown of investment securities by category and maturity is provided in the financial statements note on Investment Securities. The above 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. 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, home equity 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, included in the Consumer category, are valued under the Company's current contract with SALLIE MAE. The home equity loans, also included in the Consumer category, reprice monthly and their fair value approximates carrying value. 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. A-41
NOTES TO FINANCIAL STATEMENTS (cont.) Commerce Bancshares, Inc. and Subsidiaries The following table represents the carrying value and calculated fair value of loans: <TABLE> <CAPTION> (Dollars in thousands) Average Estimated Carrying Historical Discount Estimated December 31, 1995 Amount(A) Yield(B) Rate Fair Value - ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Business $1,704,657 8.14% 7.83% $1,711,086 Real estate--construction 167,914 9.03 8.84 167,494 Real estate--business 692,253 8.72 8.90 687,443 Real estate--personal 980,631 7.97 6.94 995,866 Consumer 1,247,200 9.22 9.82(C) 1,245,824 Credit card 496,086 12.21 12.21 496,086 Non-accrual 16,234 -- -- 16,234 December 31, 1994 - ----------------------------------------------------------------------------------- Business 1,387,067 8.05 8.37 1,388,098 Real estate--construction 128,173 8.92 9.66 127,585 Real estate--business 583,517 8.57 9.23 579,260 Real estate--personal 810,674 7.24 6.98 808,780 Consumer 1,108,934 8.97 9.34(C) 1,110,008 Credit card 390,466 12.03 12.03 390,466 Non-accrual 11,385 -- -- 11,385 December 31, 1993 - ----------------------------------------------------------------------------------- Business 1,372,065 6.00 6.28 1,374,726 Real estate--construction 90,341 6.92 7.27 90,342 Real estate--business 528,215 7.35 7.39 528,977 Real estate--personal 733,301 6.89 6.62 737,534 Consumer 907,751 8.60 8.11(C) 916,689 Credit card 367,600 11.91 11.91 367,600 Non-accrual 14,328 -- -- 14,328 - ----------------------------------------------------------------------------------- </TABLE> (A) "Carrying Amount" excludes deferred or unamortized fees and costs related to the loan transaction. (B) "Average Historical Yield" is the weighted average stated interest rate per the loan agreement on principal outstanding at year end, excluding any fees that may also be collected. (C) The discount rate shown relates to the loan principal in the Consumer category other than the student loan principal which was valued as discussed above. DEPOSITS Statement 107 specifies that the fair value of deposits with no stated maturity is equal to the amount payable on demand. Such deposits include savings and interest and non-interest bearing demand deposits. The fair value of certificates of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the three-month 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. <TABLE> <CAPTION> December 31, 1995 December 31, 1994 December 31, 1993 - --------------------------------------------------------------------------------------------------------- (In thousands) Carrying Estimated Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Amount Fair Value - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Non-interest bearing demand $1,828,950 $1,828,950 $1,448,422 $1,448,422 $1,391,740 $1,391,740 Savings 305,323 305,323 275,429 275,429 261,650 261,650 Interest bearing demand 3,586,478 3,586,478 3,143,021 3,143,021 3,280,118 3,280,118 Time open and certificates of deposit: Maturing in less than 1 year 1,775,924 1,779,138 1,460,209 1,449,293 1,365,536 1,367,385 Maturing in 1 year and over 696,417 706,659 663,349 624,829 540,426 544,275 - --------------------------------------------------------------------------------------------------------- </TABLE> The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds. A-42
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. <TABLE> <CAPTION> December 31, 1995 December 31, 1994 December 31, 1993 - --------------------------------------------------------------------------------------------------------- (In thousands) Carrying Estimated Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Amount Fair Value - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Federal funds purchased and securities sold under agreements to repurchase $362,903 $362,903 $290,647 $290,647 $395,083 $395,083 Long-term debt 14,562 15,533 6,487 7,794 6,894 8,690 - --------------------------------------------------------------------------------------------------------- </TABLE> ACCRUED INTEREST RECEIVABLE AND PAYABLE The carrying amounts for accrued interest receivable and payable approximate fair value due to their short-term nature and lack of anticipated credit concerns. 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. An interest rate swap contract was entered into by the Company to limit its interest rate risk on a single group of customer credits. 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 swap are not material. These instruments are also referenced in either the financial statements notes on Financial Instruments with Off-Balance-Sheet Risk or Loans, Leases 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. A-43
NOTES TO FINANCIAL STATEMENTS (cont.) Commerce Bancshares, Inc. and Subsidiaries 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, 1995, standby letters of credit outstanding of the banking subsidiaries amounted to $121,477,000, net of $1,785,000 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 $23,928,000 outstanding commercial letters of credit at December 31, 1995. Losses arising from these transactions have not been and are not expected to be material. Commerce Bank, N.A. (Kansas City) and Commerce Bank, N.A. (St. Louis) enter 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. Commerce Bank, N.A. (St. Louis) has entered into an interest rate swap contract to limit its interest rate risk on a single group of customer credits. The notional value of these contracts was $221,371,000 at December 31, 1995. The current credit exposure (or replacement cost) across all off-balance-sheet derivative contracts covered by the risk-based capital standards was $3,854,000 at December 31, 1995. See financial statements note on Loans, Leases and Allowance for Losses for a discussion of unfunded loan commitments. ================================================================================ 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 I capital to total average assets (leverage ratio), and minimum ratios of Tier I and Total capital to risk-weighted assets (as defined). The minimum required leverage ratio is 4%, the minimum Tier I capital ratio is 4%, and the minimum Total capital ratio is 8%. The Company's actual capital amounts and ratios at the last three year ends are as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------ (In thousands) 1995 1994 1993 - ------------------------------------------------------------------ <S> <C> <C> <C> Risk-Weighted Assets $6,045,112 $5,090,588 $4,621,407 Tier I Capital $ 756,452 $ 744,592 $ 676,334 Total Capital $ 829,784 $ 807,213 $ 733,634 Tier I Capital Ratio 12.51% 14.63% 14.63% Total Capital Ratio 13.73% 15.86% 15.87% Leverage Ratio 8.27% 9.29% 8.64% - ------------------------------------------------------------------ </TABLE> Management believes that, at December 31, 1995, the Company meets all capital requirements to which it is subject. A-44
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 $2,079,000, $1,619,000 and $1,257,000 for 1995, 1994 and 1993, respectively. A summary of minimum lease commitments follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------ (In thousands) Type of Property - ------------------------------------------------------------------------ Year Ended Real Total December 31 Property Equipment Commitments - ------------------------------------------------------------------------ <S> <C> <C> <C> 1996 $ 2,025 $323 $ 2,348 1997 1,839 281 2,120 1998 1,749 132 1,881 1999 1,599 -- 1,599 2000 1,446 -- 1,446 After 20,999 -- 20,999 - ------------------------------------------------------------------------ Total minimum lease payments $30,393 ======================================================================== </TABLE> 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 1996. The Company incurred expense of $8,648,000 in 1995, $7,139,000 in 1994 and $6,304,000 in 1993 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 $3,030,000 in 1995, $1,515,000 in 1994 and $1,821,000 in 1993. In the normal course of business, the Company had certain lawsuits pending at December 31, 1995. 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. A-45
NOTES TO FINANCIAL STATEMENTS (cont.) Commerce Bancshares, Inc. and Subsidiaries PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Following are the condensed financial statements of Commerce Bancshares, Inc. (Parent only) for the periods indicated: <TABLE> <CAPTION> (In thousands) December 31 - --------------------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS 1995 1994 1993 - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS Investment in consolidated subsidiaries: Banks $794,826 $575,344 $627,355 Non-banks 24,081 23,215 26,323 Receivables from subsidiaries, net of borrowings 8,498 7,139 386 Cash 396 93 197 Securities purchased under agreements to resell 42,168 76,672 20,309 Investment securities: Held to maturity (fair value of $39,429,000 in 1993) --- --- 32,426 Available for sale 39,872 40,302 --- Other non-marketable 8,019 5,856 4,726 Other assets 10,255 9,515 9,754 - --------------------------------------------------------------------------------------------- Total assets $928,115 $738,136 $721,476 ============================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued taxes and other liabilities $ 44,332 $ 9,938 $ 8,856 - --------------------------------------------------------------------------------------------- Total liabilities 44,332 9,938 8,856 - --------------------------------------------------------------------------------------------- Stockholders' equity 883,783 728,198 712,620 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $928,115 $738,136 $721,476 ============================================================================================= </TABLE> <TABLE> <CAPTION> (In thousands) For the Years Ended December 31 - --------------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME 1995 1994 1993 - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> INCOME Dividends received: Bank subsidiaries $124,129 $129,104 $ 33,238 Non-bank subsidiaries --- 3,795 2,800 Earnings of consolidated subsidiaries, net of dividends (13,057) (34,827) 52,898 Interest on investment securities 2,992 1,871 1,401 Interest on securities purchased under agreements to resell 228 565 174 Management fees charged subsidiaries 13,024 12,867 11,233 Data processing fees charged subsidiaries 18,030 16,817 14,216 Net gains on securities transactions 226 442 2,609 Other income 201 23 149 - --------------------------------------------------------------------------------------------- Total income 145,773 130,657 118,718 - --------------------------------------------------------------------------------------------- EXPENSE Salaries and employee benefits 19,992 19,118 17,365 Advertising expense 207 440 72 External data processing expense 8,658 7,143 5,677 Other expense 10,354 10,876 10,162 - --------------------------------------------------------------------------------------------- Total expense 39,211 37,577 33,276 - --------------------------------------------------------------------------------------------- Income tax expense (benefit) (1,078) (3,031) (1,452) - --------------------------------------------------------------------------------------------- Net income $107,640 $ 96,111 $ 86,894 ============================================================================================= </TABLE> A-46
<TABLE> <CAPTION> (In thousands) For the Years Ended December 31 - -------------------------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS 1995 1994 1993 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 107,640 $ 96,111 $ 86,894 Adjustments to reconcile net income to net cash provided by operating activities: Earnings of consolidated subsidiaries, net of dividends 13,057 34,827 (52,898) Other adjustments, net 3,521 1,441 (3,985) - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 124,218 132,379 30,011 - -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Cash paid in acquisitions (94,102) - - Increase in investment in subsidiaries, net (4,283) (433) (1,668) (Increase) decrease in receivables from subsidiaries, net of borrowings (1,359) (6,753) 7,459 Proceeds from sales of investment securities 12,943 3,634 5,308 Proceeds from maturities of investment securities 263,557 58,503 168,043 Purchases of investment securities (271,748) (65,423) (168,016) Net (increase) decrease in securities purchased under agreements to resell 34,504 (56,363) (15,309) Net (purchases) sales of equipment (1,513) 79 (1,607) - -------------------------------------------------------------------------------------------------------- Net cash used by investing activities (62,001) (66,756) (5,790) - -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Purchases of treasury stock (40,024) (52,755) (10,629) Sales of treasury stock 4,149 8,152 4,628 Cash dividends paid on common stock (26,039) (21,124) (18,358) - -------------------------------------------------------------------------------------------------------- Net cash used by financing activities (61,914) (65,727) (24,359) - -------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 303 (104) (138) Cash at beginning of year 93 197 335 - -------------------------------------------------------------------------------------------------------- Cash at end of year $ 396 $ 93 $ 197 ======================================================================================================== </TABLE> Dividends paid by the Parent were substantially provided from subsidiary bank dividends. The subsidiary banks may distribute dividends without prior regulatory approval from 1996 earnings 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 certain non-banking subsidiaries and subsidiary bank holding companies. Advances are made to the Parent by certain subsidiary bank holding companies for investment in temporary liquid securities. Interest on such advances is based on market rates. At December 31, 1995, the Parent had a line of credit for general corporate purposes of $20,000,000 with a subsidiary bank. At December 31, 1995, the Parent had no borrowings from the subsidiary. Investment securities held by the Parent, which consist primarily of common stock and commercial paper, included an unrealized gain in fair value of $10,968,000 at December 31, 1995. The corresponding net of tax unrealized gain included in stockholders' equity was $6,851,000. Also included in stockholders' equity was the unrealized net of tax gain in fair value of investment securities held by subsidiaries, which amounted to $19,998,000 at December 31, 1995. Under a security agreement related to self-insurance for officer and director liability, $10,000,000 in market value of the Parent company's investment securities were pledged at December 31, 1995. A-47
SUMMARY OF QUARTERLY STATEMENTS OF INCOME Years Ended December 31, 1995, 1994 and 1993 <TABLE> <CAPTION> For the Quarter Ended - ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> (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 common and common equivalent share* $ .75 $ .72 $ .70 $ .68 ==================================================================================== Weighted average common and common equivalent shares outstanding* 37,912 38,276 38,426 36,576 ==================================================================================== For the Quarter Ended - ------------------------------------------------------------------------------------ (In thousands, except per share data) 12/31/94 9/30/94 6/30/94 3/31/94 - ------------------------------------------------------------------------------------ Interest income $134,878 $127,860 $121,491 $116,052 Interest expense (52,400) (47,274) (43,731) (42,259) - ------------------------------------------------------------------------------------ Net interest income 82,478 80,586 77,760 73,793 Non-interest income 30,431 30,101 32,550 27,946 Salaries and employee benefits (35,280) (35,489) (37,239) (36,007) Other expense (37,709) (34,498) (35,208) (30,648) Provision for loan losses (2,051) (276) (2,063) (1,455) - ------------------------------------------------------------------------------------ Income before income taxes 37,869 40,424 35,800 33,629 Income taxes (13,597) (15,215) (11,216) (11,583) - ------------------------------------------------------------------------------------ Net income $ 24,272 $ 25,209 $ 24,584 $ 22,046 ==================================================================================== Net income per common and common equivalent share* $ .69 $ .71 $ .69 $ .63 ==================================================================================== Weighted average common and common equivalent shares outstanding* 35,393 35,300 35,603 35,293 ==================================================================================== For the Quarter Ended - ------------------------------------------------------------------------------------ (In thousands, except per share data) 12/31/93 9/30/93 6/30/93 3/31/93 - ------------------------------------------------------------------------------------ Interest income $116,471 $115,443 $114,332 $114,166 Interest expense (43,366) (43,900) (43,685) (44,937) - ------------------------------------------------------------------------------------ Net interest income 73,105 71,543 70,647 69,229 Non-interest income 32,372 29,964 29,835 29,252 Salaries and employee benefits (34,047) (33,673) (33,710) (32,925) Other expense (33,333) (30,321) (30,332) (28,975) Provision for loan losses (2,140) (2,559) (3,059) (3,623) - ------------------------------------------------------------------------------------ Income before income taxes 35,957 34,954 33,381 32,958 Income taxes (12,901) (13,489) (12,019) (11,947) - ------------------------------------------------------------------------------------ Net income $ 23,056 $ 21,465 $ 21,362 $ 21,011 ==================================================================================== Net income per common and common equivalent share* $ .65 $ .61 $ .62 $ .61 ==================================================================================== Weighted average common and common equivalent shares outstanding* 35,211 35,190 34,631 34,601 ==================================================================================== </TABLE> *Restated for stock dividend distributed December 1995 A-48
INDEX TO EXHIBITS ----------------- 3 - Articles of Incorporation and By-Laws (a) Restated Articles of Incorporation as filed with the Secretary of State of Missouri on October 8, 1986, were filed in annual report on Form 10-K dated March 30, 1987, and the same are hereby incorporated by reference. (b) First Amendment to Restated Articles of Incorporation was filed in quarterly report on Form 10-Q for the period ended June 30, 1987 and dated July 30, 1987, and the same is hereby incorporated by reference. (c) Second Amendment to Restated Articles of Incorporation was filed in annual report on Form 10-K dated March 22, 1990, and the same is hereby incorporated by reference. (d) By-Laws as currently amended were filed in annual report on Form 10-K dated March 6, 1992, and the same are hereby incorporated by reference. (e) Amendment to Restated Articles of Incorporation to increase authorized shares to 60,000,000 shares with a par value of $5.00 was reported on Form 10-Q dated August 6, 1993, and the same is 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 a Rights Agreement dated August 23, 1988, between Registrant and Morgan Shareholder Services Trust Company (now First Chicago Trust Company of New York) was filed on Form 8-K dated August 23, 1988, and the same is hereby incorporated by reference. 10 - Material Contracts (a) Commerce Bancshares, Inc. Executive Incentive Compensation Plan - Amendment and Restatement of December 3, 1993, was filed in quarterly report on Form 10-Q dated August 5, 1994, and the same is hereby incorporated by reference. (b) Copy of Commerce Bancshares, Inc. Incentive Stock Option Plan as adopted on April 16, 1986, was filed in annual report on Form 10-K dated March 30, 1987, and the same is hereby incorporated by reference.
(c) Copy of Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan, and now captioned the Commerce Bancshares, Inc. 1996 Non-Qualified Stock Option Plan, as amended and restated in its entirety on April 19, 1995, was filed in quarterly report on Form 10-Q dated August 9, 1995, and the same is hereby incorporated by reference. (d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors dated July 1, 1989 was filed on Form 10-Q for the quarterly period ended June 30, 1989, and the same is hereby incorporated by reference. (e) Copy of Security Agreement with respect to Directors and Officers Liability was filed in quarterly report on Form 10-Q dated July 30, 1986, and the same is hereby incorporated by reference. (f) 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. (g) Copy of Agreement between Commerce Bancshares, Inc. and James M. Kemper, Jr. relating to the provision of consulting and other services by James M. Kemper, Jr. for Commerce Bancshares, Inc. was filed in annual report on Form 10-K dated March 6, 1992, and the same is hereby incorporated by reference. (h) Copy of 1996 Incentive Stock Option Plan was filed in quarterly report on Form 10-Q dated August 9, 1995, and the same is hereby incorporated by reference. (i) Commerce Executive Retirement Plan 21 - Subsidiaries of the Registrant 23 - Independent Accountants' Consent 24 - Powers of Attorney 27 - Financial Data Schedule