- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q ----------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-2989 COMMERCE BANCSHARES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MISSOURI 43-0889454 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1000 WALNUT, KANSAS CITY, MO 64106 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (816) 234-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes------- No ------- As of November 3, 1995, the registrant had outstanding 35,927,900 shares of its $5 par value common stock, registrant's only class of common stock. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION In the opinion of management, the consolidated financial statements of Commerce Bancshares, Inc. and Subsidiaries as of September 30, 1995 and December 31, 1994 and the related notes include all material adjustments which were regularly recurring in nature and necessary for fair presentation of the financial condition and the results of operations for the periods shown. The consolidated financial statements of Commerce Bancshares, Inc. and Subsidiaries and management's discussion and analysis of financial condition and results of operations are presented in the schedules as follows: Schedule 1: Consolidated Balance Sheets Schedule 2: Consolidated Statements of Income Schedule 3: Consolidated Statements of Changes in Stockholders' Equity Schedule 4: Consolidated Statements of Cash Flows Schedule 5: Notes to Consolidated Financial Statements Schedule 6: Management's Discussion and Analysis of Financial Condition and Results of Operations Schedule 7: Comparison of Key Ratios and Selected Bank Data PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter ended September 30, 1995. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCE BANCSHARES, INC. /s/ T. Alan Peschka By __________________________________ T. Alan Peschka Vice President & Secretary Date: November 10, 1995 /s/ Charles E. Templer By __________________________________ Charles E. Templer Treasurer & Controller (Chief Accounting Officer) Date: November 10, 1995 1
SCHEDULE 1 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 31 1995 1994 ------------ ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> ASSETS Loans and lease financing, net of unearned............ $5,465,995 $4,432,662 Allowance for loan losses............................. (98,295) (87,179) ---------- ---------- NET LOANS AND LEASE FINANCING..................... 5,367,700 4,345,483 ---------- ---------- Investment securities: Available for sale.................................. 2,528,148 2,621,342 Trading account..................................... 7,584 5,539 Other non-marketable................................ 26,863 18,539 ---------- ---------- TOTAL INVESTMENT SECURITIES....................... 2,562,595 2,645,420 ---------- ---------- Federal funds sold and securities purchased under agreements to resell................................. 194,425 72,265 Cash and due from banks............................... 568,591 565,805 Land, buildings and equipment--net.................... 209,265 191,780 Customers' acceptance liability....................... 5,136 15,213 Other assets.......................................... 247,577 199,608 ---------- ---------- TOTAL ASSETS...................................... $9,155,289 $8,035,574 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand--non-interest bearing........................ $1,443,352 $1,448,422 Savings and interest bearing demand................. 3,725,926 3,418,450 Time open and C.D.'s of less than $100,000.......... 2,286,211 1,942,986 Time open and C.D.'s of $100,000 and over........... 229,919 180,572 ---------- ---------- TOTAL DEPOSITS.................................... 7,685,408 6,990,430 Federal funds purchased and securities sold under agreements to repurchase............................. 501,659 290,647 Long-term debt and other borrowings................... 15,663 6,487 Accrued interest, taxes and other liabilities......... 59,027 4,213 Acceptances outstanding............................... 5,136 15,213 Minority interest in subsidiaries..................... 296 386 ---------- ---------- TOTAL LIABILITIES................................. 8,267,189 7,307,376 ---------- ---------- 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 36,644,405 shares in 1995 and 33,970,106 shares in 1994...... 183,222 169,851 Capital surplus..................................... 47,116 54,575 Retained earnings................................... 668,490 576,331 Treasury stock of 685,539 shares in 1995 and 401,087 shares in 1994, at cost............................ (22,232) (12,148) Unearned employee benefits.......................... (818) (295) Unrealized securities gain (loss)--net of tax....... 12,322 (60,116) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY........................ 888,100 728,198 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $9,155,289 $8,035,574 ========== ========== </TABLE> See accompanying notes to financial statements. 2
SCHEDULE 2 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ----------------------------------------- 1995 1994 1995 1994 ---------- ------------------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans and leases............................. $ 120,608 $ 85,844 $ 337,723 $ 239,343 Interest on investment securities... 39,089 40,369 121,897 121,788 Interest on federal funds sold and securities purchased under agreements to resell............... 4,394 1,647 6,711 4,272 ---------- --------- --------- --------- TOTAL INTEREST INCOME........... 164,091 127,860 466,331 365,403 ---------- --------- --------- --------- INTEREST EXPENSE Interest on deposits: Savings and interest bearing demand........................... 31,891 22,889 88,081 66,016 Time open and C.D.'s of less than $100,000......................... 32,072 19,549 86,427 55,610 Time open and C.D.'s of $100,000 and over......................... 3,121 1,611 8,267 4,299 Interest on federal funds purchased and securities sold under agreements to repurchase........... 6,235 3,086 18,039 6,939 Interest on long-term debt and other borrowings......................... 271 139 841 400 ---------- --------- --------- --------- TOTAL INTEREST EXPENSE.......... 73,590 47,274 201,655 133,264 ---------- --------- --------- --------- NET INTEREST INCOME............. 90,501 80,586 264,676 232,139 Provision for loan losses........... 3,927 276 8,690 3,794 ---------- --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 86,574 80,310 255,986 228,345 ---------- --------- --------- --------- NON-INTEREST INCOME Trust income........................ 8,638 6,825 24,341 21,147 Deposit account charges and other fees............................... 11,807 10,053 33,053 29,644 Trading account profits and commissions........................ 1,134 1,135 3,848 3,514 Net gains on securities transactions....................... 243 1,032 670 2,353 Miscellaneous credit card income.... 5,725 4,776 15,990 12,916 Other income........................ 6,647 6,280 18,779 21,023 ---------- --------- --------- --------- TOTAL NON-INTEREST INCOME....... 34,194 30,101 96,681 90,597 ---------- --------- --------- --------- OTHER EXPENSE Salaries and employee benefits...... 41,156 35,489 117,952 108,735 Net occupancy expense on bank premises........................... 5,369 4,747 15,257 13,357 Equipment expense................... 3,579 3,266 10,286 9,603 Supplies and communication expense.. 6,304 4,771 17,614 14,290 Federal deposit insurance expense... (339) 3,814 7,907 11,438 Marketing expense................... 3,718 2,842 8,119 6,568 Other operating expense............. 17,218 15,058 50,064 45,098 ---------- --------- --------- --------- TOTAL OTHER EXPENSE............. 77,005 69,987 227,199 209,089 ---------- --------- --------- --------- Income before income taxes.......... 43,763 40,424 125,468 109,853 Less income taxes................... 16,153 15,215 46,076 38,014 ---------- --------- --------- --------- NET INCOME...................... $ 27,610 $ 25,209 $ 79,392 $ 71,839 ========== ========= ========= ========= Net income per common and common equivalent share................... $ .76 $ .75 $ 2.21 $ 2.13 ========== ========= ========= ========= Weighted average common and common equivalent shares outstanding...... 36,453 33,619 35,967 33,713 ========== ========= ========= ========= Dividends per common share.......... $ .180 $ .162 $ .540 $ .467 ========== ========= ========= ========= </TABLE> See accompanying notes to financial statements. 3
SCHEDULE 3 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> NUMBER UNEARNED NET OF SHARES COMMON CAPITAL RETAINED TREASURY EMPLOYEE UNREALIZED ISSUED STOCK SURPLUS EARNINGS STOCK BENEFITS GAIN (LOSS) TOTAL ---------- -------- ------- -------- -------- -------- ----------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE JANUARY 1, 1995. 33,970,106 $169,851 $54,575 $576,331 $(12,148) $ (295) $(60,116) $728,198 Net income............. 79,392 79,392 Year-to-date change in fair value of investment securities. 72,400 72,400 Purchases of 912,848 treasury shares....... (29,076) (29,076) Sales of 177,536 treasury shares under various stock option plans................. (2,156) 5,432 3,276 Issuance of 176,854 treasury shares in purchase acquisition.. (435) 5,315 4,880 Retirement of treasury shares................ (286,967) (1,435) (7,190) 8,625 -- Issuance of new shares in pooling acquisition........... 2,961,266 14,806 2,318 32,360 38 49,522 Purchase of 33,600 treasury shares in pooling acquisition... (1,000) (1,000) Issuance of 20,639 treasury shares under restricted stock award plan, net of reversals............. 4 620 (624) -- Restricted stock award amortization.......... 101 101 Cash dividends paid ($.540 per share)..... (19,593) (19,593) ---------- -------- ------- -------- -------- ------- -------- -------- BALANCE SEPTEMBER 30, 1995................... 36,644,405 $183,222 $47,116 $668,490 $(22,232) $ (818) $ 12,322 $888,100 ========== ======== ======= ======== ======== ======= ======== ======== Balance January 1, 1994. 33,850,360 $169,252 $52,915 $501,500 $ (8,982) $(2,065) $ -- $712,620 Net income............. 71,839 71,839 1/1/94 adoption of SFAS 115-adjustment of investment securities to fair value......... 47,116 47,116 Year-to-date change in fair value of investment securities. (79,622) (79,622) Purchases of 1,433,771 treasury shares....... (42,678) (42,678) Sales of 149,256 treasury shares to the employee benefit plans................. 269 4,116 4,385 Sales of 122,784 treasury shares under various stock option plans................. (1,126) 2,930 1,804 Issuance of 959,910 treasury shares in purchase acquisitions. (24) 23,802 23,778 Issuance of new shares in purchase acquisition........... 119,746 599 3,116 (156) 3,559 Issuance of 2,887 treasury shares under restricted stock award plan.................. 15 71 (86) -- ESOP benefit allocation............ 27 375 402 Restricted stock award amortization.......... 78 78 Cash dividends paid ($.467 per share)..... (15,696) (15,696) ---------- -------- ------- -------- -------- ------- -------- -------- Balance September 30, 1994................... 33,970,106 $169,851 $55,192 $557,487 $(20,741) $(1,698) $(32,506) $727,585 ========== ======== ======= ======== ======== ======= ======== ======== </TABLE> See accompanying notes to financial statements. 4
SCHEDULE 4 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> FOR THE NINE MONTHS ENDED SEPTEMBER 30 ------------------ 1995 1994 -------- -------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES: Net income................................................ $ 79,392 $ 71,839 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses............................... 8,690 3,794 Provision for depreciation and amortization............. 23,012 19,051 Accretion of investment security discounts.............. (4,346) (842) Amortization of investment security premiums............ 19,845 23,211 Net gains on sales of investment securities (A)......... (670) (2,353) Net (increase) decrease in trading account securities... (2,586) 1,740 (Increase) decrease in interest receivable.............. 1,214 (2,593) Increase in interest payable............................ 8,802 281 Other changes, net...................................... 4,592 12,769 -------- -------- Net cash provided by operating activities............. 137,945 126,897 -------- -------- INVESTING ACTIVITIES: Net cash received (paid) in acquisitions.................. (33,226) 10,911 Proceeds from sales of investment securities (A).......... 585,688 590,707 Proceeds from maturities of investment securities (A)..... 407,470 186,011 Purchases of investment securities (A).................... (460,174) (640,357) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell............................... (95,325) 256,107 Net increase in loans..................................... (365,305) (222,283) Purchases of premises and equipment....................... (17,549) (16,036) Sales of premises and equipment........................... 6,386 8,199 -------- -------- Net cash provided by investing activities............. 27,965 173,259 -------- -------- FINANCING ACTIVITIES: Net decrease in non-interest bearing demand, savings and interest bearing demand deposits..................... (285,801) (292,742) Net increase in time open and C.D.'s...................... 97,049 81,734 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase........... 78,913 (72,870) Repayment of long-term debt............................... (7,691) (284) Purchases of treasury stock............................... (28,923) (42,640) Sales of treasury stock to employee benefit plans......... -- 4,385 Exercise of stock options by employees.................... 2,922 1,645 Cash dividends paid on common stock....................... (19,593) (15,696) -------- -------- Net cash used by financing activities................. (163,124) (336,468) -------- -------- Increase (decrease) in cash and cash equivalents...... 2,786 (36,312) Cash and cash equivalents at beginning of year............ 565,805 534,785 -------- -------- Cash and cash equivalents at September 30............. $568,591 $498,473 ======== ======== </TABLE> - -------- (A) Available for sale and other non-marketable securities, excluding trading account securities. Cash payments of income taxes for the nine month period were $27,295,000 in 1995 and $40,390,000 in 1994. Interest paid on deposits and borrowings for the nine month period was $192,967,000 in 1995 and $132,983,000 in 1994. See accompanying notes to financial statements. 5
SCHEDULE 5 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1995 (UNAUDITED) 1. PRINCIPLES OF CONSOLIDATION AND PRESENTATION The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 1994 data to conform to current year presentation. The significant accounting policies followed in the preparation of the quarterly financial statements are the same as those disclosed in the 1994 Annual Report to stockholders to which reference is made. 2. ALLOWANCE FOR LOAN LOSSES The following is a summary of the allowance for loan losses (in thousands): <TABLE> <CAPTION> FOR THE FOR THE THREE MONTHS NINE MONTHS ENDED SEPTEMBER ENDED SEPTEMBER 30 30 --------------- --------------- 1995 1994 1995 1994 ------- ------- ------- ------- <S> <C> <C> <C> <C> Balance, beginning of period............. $99,221 $86,039 $87,179 $85,830 ------- ------- ------- ------- Additions: Provision for loan losses.............. 3,927 276 8,690 3,794 Allowance for loan losses of acquired banks................................. -- 745 12,932 2,328 ------- ------- ------- ------- Total additions...................... 3,927 1,021 21,622 6,122 ------- ------- ------- ------- Deductions: Loan losses............................ 6,653 3,341 15,826 11,153 Less recoveries on loans............... 1,800 2,627 5,320 5,547 ------- ------- ------- ------- Net loan losses...................... 4,853 714 10,506 5,606 ------- ------- ------- ------- Balance, September 30.................... $98,295 $86,346 $98,295 $86,346 ======= ======= ======= ======= </TABLE> At September 30, 1995, interest income was not being recognized on an accrual basis for loans totaling approximately $12,494,000. 3. INVESTMENT SECURITIES Investment securities, at fair value, consist of the following at September 30, 1995 and December 31, 1994 (in thousands): <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 1995 31 1994 ------------ ---------- <S> <C> <C> Available for sale: U.S. government and federal agency obligations. $1,637,381 $1,797,291 Obligations of states and political subdivisions.................................. 142,126 56,422 CMO's and asset-backed securities.............. 678,525 692,822 Other debt securities.......................... 31,415 45,748 Equity securities.............................. 38,701 29,059 Trading account securities....................... 7,584 5,539 Other non-marketable securities.................. 26,863 18,539 ---------- ---------- Total investment securities.................. $2,562,595 $2,645,420 ========== ========== </TABLE> 6
4. ACQUISITION ACTIVITY Effective March 1, 1995, the Company acquired the Cotton Exchange Bank in Kennett, Missouri, for 176,854 shares of treasury stock and $4.1 million in cash, using the "purchase" method of accounting. The Peoples Bank of Bloomington, Illinois, was acquired March 1, 1995, for accounting purposes in a pooling transaction in which 2,961,266 shares of new common stock were issued. At acquisition date, these banks had combined assets of $510 million, loans of $262 million and deposits of $362 million. They did not have a material impact on the earnings per share of the Company. Therefore, prior year statements were not restated for these transactions. On April 17, 1995, the Company acquired the Union National Bank in Wichita, Kansas, for cash of $86.7 million. The Chillicothe State Bank in Chillicothe, Illinois, was acquired on May 1, 1995, for $3.3 million in cash. At acquisition date, these banks had combined assets of $697 million, loans of $416 million and deposits of $522 million. They were accounted for as "purchases" and did not have a material effect on the earnings per share of the Company. 7
SCHEDULE 6 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEPTEMBER 30, 1995 (UNAUDITED) The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 1994 Annual Report on Form 10-K. Results of operations for the nine month period ended September 30, 1995 are not necessarily indicative of results to be attained for any other period. SUMMARY The Company's consolidated net income for the first nine months of 1995 totaled $79.4 million; $7.6 million greater than the same period for 1994. Net interest income increased $32.5 million and non-interest income increased $6.1 million, offset by increases of $18.1 million in other expense, $8.1 million in income taxes and $4.9 million in provision for loan losses. Net income for the third quarter of 1995 was $2.4 million greater than the third quarter of 1994 due to increases of $9.9 million in net interest income and $4.1 million in non-interest income, partially offset by increases of $7.0 million in other expense and $3.7 million in provision for loan losses. Net income for the third quarter of 1995 was $851 thousand greater than the second quarter of 1995 due to an increase of $2.3 million in non-interest income and a $1.6 million decrease in other expense, partially offset by a $2.0 million increase in provision for loan losses. The Company is continually evaluating acquisition opportunities, and frequently conducts due diligence activities in connection with possible acquisitions both on an assisted and unassisted basis. Acquisition candidates that may be under consideration at any time include depository institutions, thrift or savings type associations and related companies. They are generally based in markets in which the Company presently operates or in markets in proximity to one of the Company's existing markets. On March 1, 1995, the Company acquired the Cotton Exchange Bank in Kennett, Missouri, for 176,854 shares of treasury stock and $4.1 million in cash, using the purchase method of accounting. The Peoples Bank of Bloomington, Illinois, was acquired effective March 1, 1995 for accounting purposes, in a pooling transaction in which 2,961,266 shares of new stock were issued. These acquisitions brought $510 million in assets to the balance sheet of the organization but did not have a material impact on the earnings per share of the Company. Two additional acquisitions were completed in the second quarter of 1995. Union National Bank of Wichita, Kansas, was acquired on April 17, 1995, for cash of $86.7 million and increased assets by approximately $673 million. Chillicothe State Bank of Chillicothe, Illinois, was purchased on May 1, 1995, for $3.3 million in cash and brought $24 million in assets to the organization. These acquisitions did not have a material impact on the earnings per share of the Company. As of July 1, the Commerce Bank locations in the Kansas City metropolitan area have merged together to form one bank, thus better serving those customers at approximately 50 sites on both sides of the Missouri-Kansas state line. INTEREST INCOME AND EARNING ASSETS Total interest income increased $100.9 million, or 27.6%, compared to the first nine months of 1994 due to an increase of 99 basis points in average tax equivalent rates earned and an increase of $840.0 million in average earning asset balances, (which caused an increase of $50.4 million in tax equivalent interest income). Excluding banks acquired after January 1, 1994, total interest income increased $48.7 million, or 13.6%, in the first nine months of 1995 over the same period in 1994. Compared to the third quarter of 1994, interest income increased $36.2 million due to an increase of $1.11 billion in average earning asset balances and an increase of 81 basis 8
points in tax equivalent rates earned. Total interest income increased $3.4 million over the second quarter of 1995 mainly due to a $153.7 million increase in average earning asset balances. The average tax equivalent yield was 7.94% for the first nine months of 1995, 6.95% for the first nine months of 1994, 7.96% for the third quarter of 1995, 7.15% for the third quarter of 1994 and 8.04% for the second quarter of 1995. Loans, the highest yielding category of earning assets, were 64% of average earning assets for the first nine months of 1995. Loan and lease interest income increased $98.4 million over the first nine months of 1994 due to an increase of $974.5 million in average loan balances and an increase of 109 basis points in average tax equivalent rates earned. Increases in business loan rates accounted for a significant portion of the rate increase. The 1995 to 1994 year to year comparative increase was $63.5 million when the effect of 1994 and 1995 acquisitions is excluded. Loan and lease interest income increased $34.8 million over the third quarter of 1994 due to an increase of $1.16 billion in average balances and an increase of 81 basis points in average tax equivalent rates earned. Compared to the second quarter of 1995, loan interest income increased $2.9 million mainly due to a $115.8 million increase in average loan balances. Interest income on investment securities increased $109 thousand over the first nine months of 1994 due to an increase in average tax equivalent rates earned (mainly on U.S. government and federal agency securities and CMO's and asset-backed securities) and an increase in average balances invested in CMO's and asset-backed securities and state and municipal obligations, partially offset by a decrease in average balances invested in U. S. government and federal agency securities. If the effect of 1994 and 1995 acquisitions is excluded, investment securities interest income decreased $15.9 million in 1995 compared to 1994. Interest income on investment securities decreased $1.3 million from the third quarter of 1994 mainly due to a decrease in the average balance invested in U.S. government and federal agency securities. Compared to the second quarter of 1995, securities interest decreased $2.5 million mainly due to decreases in average balances invested in U.S. government and federal agency securities and CMO's and asset-backed securities. The unrealized loss in fair value of available for sale investment securities improved from a $97.1 million loss at December 31, 1994, to an unrealized gain of $19.9 million at September 30, 1995. The amount of the related after tax unrealized gain reported in stockholders' equity at September 30, 1995, was $12.3 million. Interest income on federal funds sold and securities purchased under agreements to resell increased $2.4 million over the first nine months of 1994 due to an increase of 203 basis points in average rates earned. Compared to the third quarter of 1994, federal funds sold and resell agreement interest income increased $2.7 million mainly due to an increase of $160.3 million in average balances invested. Federal funds sold and resell agreement interest income increased $3.1 million compared to the second quarter of 1995 mainly due to a $214.2 million increase in average balances invested. Summaries of average earning assets and liabilities and the corresponding average rates earned/paid appear on pages 10 through 13. RISK ELEMENTS OF LOAN PORTFOLIO The loan portfolio contained loans on non-accrual status of $12.5 million at September 30, 1995, compared to $11.4 million at December 31, 1994. These loans were placed on non-accrual status because 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). Loans which were 90 days past due and still accruing interest amounted to $17.5 million at September 30, 1995, and were made primarily to borrowers in Missouri and the surrounding region. The subsidiary banks issue Visa and MasterCard credit cards, and the balance of these consumer loans generated through credit card sales drafts and cash advances was $438.0 million at September 30, 1995. Because credit card loans traditionally have a higher than average ratio of net charge-offs to loans outstanding, management requires that a specific allowance for losses on credit card loans be maintained, which was $10.9 million, or 2.5% of credit card loans at September 30, 1995. Included in the "Personal" loan category is a home equity loan product, the "Anytime Line", which had $155.3 million in loans outstanding and $255.6 million in unused lines of credit at September 30, 1995. At September 30, 1995, a mortgage banking subsidiary held residential real estate loans of $5.6 million at lower of cost or market, which are to be resold to secondary markets within approximately three months. Foreclosed real estate amounted to approximately $1.6 million at September 30, 1995. The risk presented by the above loans and foreclosed real estate is not considered by management to be materially adverse in relation to normal credit risks generally taken by lenders. 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D.) AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 <TABLE> <CAPTION> NINE MONTHS 1995 NINE MONTHS 1994 ------------------------------- ------------------------------- INTEREST AVG. RATES INTEREST AVG. RATES AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ BALANCE EXPENSE PAID BALANCE EXPENSE PAID ---------- -------- ---------- ---------- -------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> ASSETS: Loans and leases: Business (including foreign) (A).......... $1,684,814 $105,286 8.36% $1,387,165 $ 71,342 6.88% Construction and development........... 127,554 9,015 9.45 112,067 6,602 7.88 Real estate--business.. 686,887 46,057 8.96 529,627 30,759 7.76 Real estate--personal.. 943,148 54,792 7.77 746,115 38,970 6.98 Personal banking....... 1,242,857 81,159 8.73 986,310 57,942 7.85 Credit card............ 407,452 42,495 13.94 356,972 34,742 13.01 ---------- -------- ----- ---------- -------- ----- Total loans and leases.............. 5,092,712 338,804 8.89 4,118,256 240,357 7.80 ---------- -------- ----- ---------- -------- ----- Investment securities: U.S. government & federal agency........ 1,717,948 79,266 6.17 2,136,137 93,062 5.82 State & municipal obligations (A)....... 119,846 6,897 7.69 44,324 2,569 7.75 CMO's and asset-backed securities............ 732,843 34,256 6.25 536,774 23,710 5.91 Trading account securities (A)........ 3,549 163 6.15 4,295 116 3.60 Other marketable securities (A)........ 73,005 3,315 6.07 68,583 2,995 5.84 Other non-marketable securities............ 24,227 570 3.15 20,601 502 3.26 ---------- -------- ----- ---------- -------- ----- Total investment securities.......... 2,671,418 124,467 6.23 2,810,714 122,954 5.85 ---------- -------- ----- ---------- -------- ----- Federal funds sold and securities purchased under agreements to resell................. 151,419 6,711 5.93 146,608 4,272 3.90 ---------- -------- ----- ---------- -------- ----- Total interest earning assets...... 7,915,549 469,982 7.94 7,075,578 367,583 6.95 -------- ----- -------- ----- Less allowance for loan losses................. (95,202) (86,564) Unrealized gain (loss) on investment securities............. (27,932) 3,832 Cash and due from banks. 595,039 553,814 Land, buildings and equipment--net......... 204,251 194,491 Other assets............ 204,167 144,008 ---------- ---------- Total assets......... $8,795,872 $7,885,159 ========== ========== LIABILITIES AND EQUITY: Interest bearing deposits: Savings................ $ 312,118 5,970 2.56 $ 271,529 4,828 2.38 Interest bearing demand................ 3,270,040 82,111 3.36 3,273,557 61,188 2.50 Time open & C.D.'s of less than $100,000.... 2,188,292 86,427 5.28 1,788,788 55,610 4.16 Time open & C.D.'s of $100,000 and over..... 208,684 8,267 5.30 150,903 4,299 3.81 ---------- -------- ----- ---------- -------- ----- Total interest bearing deposits.... 5,979,134 182,775 4.09 5,484,777 125,925 3.07 ---------- -------- ----- ---------- -------- ----- Borrowings: Federal funds purchased and securities sold under agreements to repurchase............ 446,388 18,039 5.40 282,040 6,939 3.29 Long-term debt and other borrowings...... 16,694 871 6.98 7,318 413 7.53 ---------- -------- ----- ---------- -------- ----- Total borrowings..... 463,082 18,910 5.46 289,358 7,352 3.40 ---------- -------- ----- ---------- -------- ----- Total interest bearing liabilities. 6,442,216 201,685 4.19% 5,774,135 133,277 3.09% -------- ----- -------- ----- Demand--non-interest bearing deposits....... 1,473,457 1,332,318 Other liabilities....... 49,512 39,871 Stockholders' equity.... 830,687 738,835 ---------- ---------- Total liabilities and equity.............. $8,795,872 $7,885,159 ========== ========== Net interest margin (T/E).................. $268,297 $234,306 ======== ======== Net yield on interest earning assets......... 4.53% 4.43% ===== ===== </TABLE> - -------- (A) Stated on a tax equivalent basis using a federal income tax rate of 35%. 10
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E) DUE TO VOLUMES AND RATES NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 <TABLE> <CAPTION> 1995 VS 1994 ----------------------------- INCREASE OR (DECREASE) DUE TO CHANGE IN ----------------- TOTAL AVERAGE AVERAGE INCREASE VOLUME RATE (B) (DECREASE) ------- -------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) <S> <C> <C> <C> VARIANCE IN INTEREST INCOME ON: Loans and leases: Business (including foreign) (A)................. $14,722 $19,222 $33,944 Construction and development..................... 913 1,500 2,413 Real estate--business............................ 9,127 6,171 15,298 Real estate--personal............................ 10,286 5,536 15,822 Personal banking................................. 15,063 8,154 23,217 Credit card...................................... 4,912 2,841 7,753 ------- ------- ------- Total loans and leases......................... 55,023 43,424 98,447 ------- ------- ------- Investment securities: U.S. government & federal agency................. (18,219) 4,423 (13,796) State & municipal obligations (A)................ 4,377 (49) 4,328 CMO's and asset-backed securities................ 8,661 1,885 10,546 Trading account securities (A)................... (20) 67 47 Other marketable securities (A).................. 193 127 320 Other non-marketable securities.................. 88 (20) 68 ------- ------- ------- Total investment securities.................... (4,920) 6,433 1,513 ------- ------- ------- Federal funds sold and securities purchased under agreements to resell............................. 265 2,174 2,439 ------- ------- ------- Total interest income.......................... 50,368 52,031 102,399 ------- ------- ------- VARIANCE IN INTEREST EXPENSE ON: Interest bearing deposits: Savings.......................................... 723 419 1,142 Interest bearing demand.......................... 50 20,873 20,923 Time open & C.D.'s of less than $100,000......... 11,786 19,031 30,817 Time open & C.D.'s of $100,000 and over.......... 1,494 2,474 3,968 ------- ------- ------- Total interest bearing deposits................ 14,053 42,797 56,850 ------- ------- ------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase.................. 4,159 6,941 11,100 Long-term debt and other borrowings.............. 528 (70) 458 ------- ------- ------- Total borrowings............................... 4,687 6,871 11,558 ------- ------- ------- Total interest expense......................... 18,740 49,668 68,408 ------- ------- ------- Change in net interest margin (T/E)............... $31,628 $ 2,363 $33,991 ======= ======= ======= Percentage increase in net interest margin (T/E) over the same period of the prior year........... 14.51% ======= </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. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D.) AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS THREE MONTHS ENDED SEPTEMBER 30, 1995 AND JUNE 30, 1995 <TABLE> <CAPTION> THIRD QUARTER 1995 SECOND QUARTER 1995 ------------------------------- ------------------------------- INTEREST AVG. RATES INTEREST AVG. RATES AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ BALANCE EXPENSE PAID BALANCE EXPENSE PAID ---------- -------- ---------- ---------- -------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> ASSETS: Loans and leases: Business (including foreign) (A).... ..... $1,801,888 $37,435 8.24% $1,764,666 $37,405 8.50% Construction and development........... 128,504 2,989 9.23 124,676 2,948 9.48 Real estate--business.. 728,362 16,219 8.83 715,818 16,320 9.14 Real estate--personal.. 995,477 19,917 7.94 983,982 19,047 7.76 Personal banking....... 1,312,154 29,307 8.86 1,282,396 28,074 8.78 Credit card............ 426,435 15,035 13.99 405,447 14,343 14.19 ---------- ------- ----- ---------- ------- ----- Total loans and leases.............. 5,392,820 120,902 8.89 5,276,985 118,137 8.98 ---------- ------- ----- ---------- ------- ----- Investment securities: U.S. government & federal agency........ 1,631,558 25,483 6.20 1,721,733 26,572 6.19 State & municipal obligations (A)....... 144,350 2,826 7.77 141,060 2,792 7.94 CMO's and asset-backed securities............ 689,092 10,661 6.14 760,937 11,902 6.27 Trading account securities (A)........ 4,116 57 5.49 3,286 61 7.45 Other marketable securities (A)........ 55,294 807 5.79 74,764 1,118 6.00 Other non-marketable securities............ 26,011 272 4.15 25,030 187 3.00 ---------- ------- ----- ---------- ------- ----- Total investment securities.......... 2,550,421 40,106 6.24 2,726,810 42,632 6.27 ---------- ------- ----- ---------- ------- ----- Federal funds sold and securities purchased under agreements to resell................. 300,467 4,394 5.80 86,232 1,334 6.20 ---------- ------- ----- ---------- ------- ----- Total interest earning assets...... 8,243,708 165,402 7.96 8,090,027 162,103 8.04 ------- ----- ------- ----- Less allowance for loan losses................. (98,493) (98,541) Unrealized gain (loss) on investment securities............. 17,452 (18,714) Cash and due from banks. 640,008 589,434 Land, buildings and equipment--net......... 210,210 208,561 Other assets............ 224,352 220,970 ---------- ---------- Total assets......... $9,237,237 $8,991,737 ========== ========== LIABILITIES AND EQUITY: Interest bearing deposits: Savings................ $ 323,151 2,072 2.54 $ 329,934 2,101 2.56 Interest bearing demand................ 3,402,823 29,819 3.48 3,289,088 27,676 3.38 Time open & C.D.'s of less than $100,000.... 2,302,078 32,072 5.53 2,266,837 30,168 5.34 Time open & C.D.'s of $100,000 and over..... 224,026 3,121 5.53 217,137 2,943 5.44 ---------- ------- ----- ---------- ------- ----- Total interest bearing deposits.... 6,252,078 67,084 4.26 6,102,996 62,888 4.13 ---------- ------- ----- ---------- ------- ----- Borrowings: Federal funds purchased and securities sold under agreements to repurchase............ 460,691 6,235 5.37 474,654 6,530 5.52 Long-term debt and other borrowings...... 16,177 296 7.27 18,425 341 7.42 ---------- ------- ----- ---------- ------- ----- Total borrowings..... 476,868 6,531 5.43 493,079 6,871 5.59 ---------- ------- ----- ---------- ------- ----- Total interest bearing liabilities. 6,728,946 73,615 4.34% 6,596,075 69,759 4.24% ------- ----- ------- ----- Demand--non-interest bearing deposits....... 1,559,033 1,494,111 Other liabilities....... 66,018 53,525 Stockholders' equity.... 883,240 848,026 ---------- ---------- Total liabilities and equity.............. $9,237,237 $8,991,737 ========== ========== Net interest margin (T/E).................. $91,787 $92,344 ======= ======= Net yield on interest earning assets......... 4.42% 4.58% ===== ===== </TABLE> - ------- (A) Stated on a tax equivalent basis using a federal income tax rate of 35%. 12
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E) DUE TO VOLUMES AND RATES THREE MONTHS ENDED SEPTEMBER 30, 1995 AND JUNE 30, 1995 <TABLE> <CAPTION> CURRENT QUARTER VS PRIOR QUARTER ----------------------------- INCREASE OR (DECREASE) DUE TO CHANGE IN ----------------- TOTAL AVERAGE AVERAGE INCREASE VOLUME RATE (B) (DECREASE) ------- -------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) <S> <C> <C> <C> VARIANCE IN INTEREST INCOME ON: Loans and leases: Business (including foreign) (A).................. $ 797 $ (767) $ 30 Construction and development...................... 91 (50) 41 Real estate--business............................. 289 (390) (101) Real estate--personal............................. 225 645 870 Personal banking.................................. 659 574 1,233 Credit card....................................... 751 (59) 692 ------ ------- ------ Total loans and leases.......................... 2,812 (47) 2,765 ------ ------- ------ Investment securities: U.S. government & federal agency.................. (1,407) 318 (1,089) State & municipal obligations (A)................. 66 (32) 34 CMO's and asset-backed securities................. (1,135) (106) (1,241) Trading account securities (A).................... 16 (20) (4) Other marketable securities (A)................... (294) (17) (311) Other non-marketable securities................... 7 78 85 ------ ------- ------ Total investment securities..................... (2,747) 221 (2,526) ------ ------- ------ Federal funds sold and securities purchased under agreements to resell.............................. 3,350 (290) 3,060 ------ ------- ------ Total interest income........................... 3,415 (116) 3,299 ------ ------- ------ VARIANCE IN INTEREST EXPENSE ON: Interest bearing deposits: Savings........................................... (44) 15 (29) Interest bearing demand........................... 1,238 905 2,143 Time open & C.D.'s of less than $100,000.......... 499 1,405 1,904 Time open & C.D.'s of $100,000 and over........... 95 83 178 ------ ------- ------ Total interest bearing deposits................. 1,788 2,408 4,196 ------ ------- ------ Borrowings: Federal funds purchased and securities sold under agreements to repurchase......................... (262) (33) (295) Long-term debt and other borrowings............... (42) (3) (45) ------ ------- ------ Total borrowings................................ (304) (36) (340) ------ ------- ------ Total interest expense.......................... 1,484 2,372 3,856 ------ ------- ------ Change in net interest margin (T/E)................ $1,931 $(2,488) $ (557) ====== ======= ====== Percentage decrease in net interest margin (T/E) from the prior quarter............................ (.60)% ====== </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. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D.) PROVISION FOR LOAN LOSSES Management records the provision for loan losses, on an individual bank basis, in amounts that result in an allowance for loan losses sufficient to cover all potential net charge-offs and risks believed to be inherent in the loan portfolio of each bank. Management's evaluation includes such factors as past loan loss experience 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 Commerce Bancshares, Inc. (Parent), reviews and examinations by bank regulatory authorities, and other factors that management believes deserve current recognition. As a result of these factors, the provision for loan losses increased $4.9 million compared to the first nine months of 1994, increased $3.7 million over the third quarter of 1994 and increased $2.0 million over the second quarter of 1995. The allowance for loan losses as a percentage of loans and leases outstanding was 1.80% at September 30, 1995, compared to 1.97% at year-end 1994 and 1.99% at September 30, 1994. Management believes that the allowance for loan losses, which is a general reserve, is adequate to cover actual and potential losses in the loan portfolio under current conditions. Other than as previously noted, management is not aware of any significant risks in the current loan portfolio due to concentrations of loans within any particular industry, nor of any separate types of loans within a particular category of non-performing loans that are unusually significant as to possible loan losses when compared to the entire loan portfolio. Net charge-offs on loans totaled $10.5 million for the first nine months of 1995 compared to net charge-offs of $5.6 million for the first nine months of 1994, $4.9 million for the third quarter of 1995, $714 thousand for the third quarter of 1994 and $3.0 million for the second quarter of 1995. INTEREST EXPENSE AND RELATED LIABILITIES Total interest expense (net of capitalized interest) increased $68.4 million, or 51.3%, compared to the first nine months of 1994 due mainly to increases in average rates paid. Excluding banks acquired after January 1, 1994, total interest expense increased $42.9 million, or 32.8%, in the first nine months of 1995 compared to the first nine months of 1994. Total interest expense increased $26.3 million and $3.8 million over the 1994 third and 1995 second quarters, respectively, due to increases in both average rates paid and average balances of interest bearing liabilities. The average cost of funds was 4.19% for the first nine months of 1995, 3.09% for the first nine months of 1994, 4.34% for the third quarter of 1995, 3.23% for the third quarter of 1994 and 4.24% for the second quarter of 1995. Average core deposits (deposits excluding short-term certificates of deposit over $100,000) for the first nine months of 1995 were $7.4 billion, an increase of 8.8% over the same period last year. Core deposits supported 93% of average earning assets in 1995. Interest on deposits increased $56.9 million over the first nine months of 1994. Average rates paid on time open and certificates of deposit under $100,000 increased 112 basis points and rates paid on interest bearing demand deposits increased 86 basis points. A significant portion of the increase in average deposits was due to acquisitions in 1994 and 1995; if their effect is excluded, deposit interest expense increased $35.1 million in 1995 compared to 1994. Deposit interest expense increased $23.0 million over the third quarter of 1994 and increased $4.2 million over the second quarter of 1995 mainly due to increases in average balances and average rates paid on time open and certificates of deposit under $100,000 and interest bearing demand deposits. Interest expense on federal funds purchased and securities sold under agreements to repurchase increased $11.1 million over the first nine months of 1994 and increased $3.1 million over the third quarter of 1994 due to increases in average rates paid and average balances borrowed. Compared to the second quarter of 1995, interest expense on federal funds purchased and securities sold under agreements to repurchase decreased $295 thousand because of lower borrowings. NON-INTEREST INCOME Non-interest income increased $6.1 million compared to the first nine months of 1994. Miscellaneous credit card income increased $3.1 million, deposit account charges and other fees increased $3.4 million and trust income increased $3.2 million. These increases were partially offset by a $1.7 million decrease in gains on 14
securities transactions and a $2.2 million decrease in miscellaneous other income (which included a $1.9 million decrease in gains on loan and lease sales and $1.1 million in fees collected in 1994 in conjunction with the payoff of a specific loan). During the first nine months of 1995, the affiliate banks sold securities from the available for sale category for proceeds of $574.3 million and realized net gains of $306 thousand. The Parent and a non-bank subsidiary sold securities for proceeds of $11.4 million, realizing net gains of $364 thousand. During the first nine months of 1994, the affiliate banks sold securities from the available for sale category for proceeds of $585.6 million and realized net gains of $1.6 million. The Parent and a non-bank subsidiary sold equity securities for proceeds of $5.0 million and realized net gains of $793 thousand. Excluding banks acquired after January 1, 1994, total non-interest income (excluding securities gains) increased $1.3 million compared to the first nine months of 1994. Most of the above mentioned 1995 over 1994 increase in deposit account charges and other fees and trust income was due to activity at recently acquired banks. Compared to the third quarter of 1994, non-interest income increased $4.1 million mainly due to an increase of $1.8 million in trust income and an increase of $1.8 million in deposit account charges and other fees. Compared to the second quarter of 1995, non-interest income increased $2.3 million due to increases of $687 thousand in deposit account charges and other fees, $709 thousand in trust income and $850 thousand in miscellaneous other income. OTHER EXPENSE Other expense increased $18.1 million compared to the first nine months of 1994 due to an increase of $9.2 million in salaries and employee benefits, a $3.3 million increase in supplies and communication expense, a $1.9 million increase in net occupancy expense on bank premises, and a $5.0 million increase in other operating expense. The increase in operating expense included increases in various outside fees and goodwill/core deposit premium amortization, partially offset by a decrease in charitable contribution expense and a potential contingent liability reserve established in 1994. The above net increases were partially offset by a $3.5 million decrease in F.D.I.C. insurance expense due to a decrease in the assessment rate. A portion of the above increases was due to expenses at acquired banks. Excluding the expenses of banks acquired after January 1, 1994, total other expense decreased $7.3 million in the first nine months of 1995 compared to the same period in 1994. Excluding the 1994 and 1995 acquisitions, salaries and employee benefits declined by $708 thousand with a decrease of 218 full-time equivalent employees. Compared to the third quarter of 1994, other expense increased $7.0 million mainly due to a $5.7 million increase in salaries and employee benefits and a $2.2 million increase in other operating expense, partially offset by a $4.2 million decrease in F.D.I.C. insurance expense. Compared to the second quarter of 1995, other expense decreased $1.6 million mainly due to decreases of $4.7 million in F.D.I.C. insurance expense and $1.6 million in expense on repossessed and foreclosed assets, partially offset by increases of $1.5 million in salaries and employee benefits and $1.3 million in marketing expense. INCOME TAXES Income tax expense increased $8.1 million compared to the first nine months of 1994, increased $938 thousand compared to the third quarter of 1994 and increased $639 thousand compared to the second quarter of 1995 due to increases in taxable income. LIQUIDITY AND CAPITAL RESOURCES The liquid assets of the Parent company consist primarily of short-term investments, U.S. government and federal agency securities and equity securities, most of which are readily marketable. The fair value of these investments was $71.6 million at September 30, 1995 compared to $122.8 million at December 31, 1994. Cash requirements for bank acquisitions during the first nine months of 1995 caused most of the decrease. The Parent company liabilities totaled $61.9 million at September 30, 1995, compared to $9.9 million at December 31, 1994. This increase was mainly due to transfers of funds from subsidiary bank holding companies in order to combine resources for short-term investment in liquid assets. The Parent company had no short-term borrowings from 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D.) affiliate banks or long-term debt at September 30, 1995. The Parent company's commercial paper, which management believes is readily marketable, has a P1 rating from Moody's and an A1 rating from Standard & Poor's. The Company is also rated A by Thomson BankWatch with a corresponding short-term rating of TBW-1. This credit availability should provide adequate funds to meet any outstanding or future commitments of the Parent. The liquid assets held by bank subsidiaries include federal funds sold and securities purchased under agreements to resell and available for sale securities, which consist mainly of U.S. government and federal agency securities and CMO's and asset-backed securities. These liquid assets had a fair value of $2.65 billion at September 30, 1995, compared to $2.64 billion at December 31, 1994. The available for sale bank portfolio included an unrealized net gain of $7.7 million at September 30, 1995. 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. This action began after the completion of the stock repurchase program authorized in 1994. It reflects the Company's view that the stock is undervalued and that such purchases will enhance long-term shareholder value and provide future funding for stock acquisitions and employee benefit programs. The Company acquired 351,383 such shares through September 30, 1995. The Company (on a consolidated basis) had an equity to asset ratio of 9.44% based on 1995 average balances. As shown in the following table, the Company's capital exceeded the minimum risk-based capital and leverage requirements of the regulatory agencies: <TABLE> <CAPTION> SEPTEMBER 30, SEPTEMBER 30, 1995 1994 ------------- ------------- (DOLLARS IN THOUSANDS) <S> <C> <C> Risk-Adjusted Assets.......................... $6,082,967 $5,007,576 Tier I Capital................................ 772,217 720,838 Total Capital................................. 845,749 782,410 Tier I Capital Ratio.......................... 12.69% 14.39% Total Capital Ratio........................... 13.90% 15.62% Leverage Ratio................................ 8.50% 9.14% </TABLE> The Company's cash and cash equivalents (defined as "Cash and due from banks") were $568.6 million at September 30, 1995, an increase of $2.8 million over December 31, 1994. Contributing to the net cash inflow were proceeds of $993.2 million realized from sales and maturities of investment securities, offset by purchases of $460.2 million. In addition, $137.9 million were generated from operating activities. Partially offsetting these net inflows were a $285.8 million net decrease in savings and demand deposits and a $365.3 million net increase in additional loans made, net of repayments. The Company has various commitments and contingent liabilities which are properly not reflected on the balance sheet. Loan commitments (excluding lines of credit related to credit card loan agreements) totaled approximately $1.85 billion, standby letters of credit totaled $126.8 million, and commercial letters of credit totaled $30.9 million at September 30, 1995. The Company has little risk exposure in off-balance-sheet derivative contracts. The notional value of these contracts (interest rate and foreign exchange rate contracts) was $158.7 million at September 30, 1995. The current credit exposure (or replacement cost) across all off-balance-sheet derivative contracts covered by the risk-based capital standards was $3.6 million at September 30, 1995. Management does not anticipate any material losses to arise from these contingent items and believes there are no material commitments to extend credit that represent risks of an unusual nature. 16
SCHEDULE 7 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES COMPARISON OF KEY RATIOS AND SELECTED BANK DATA (UNAUDITED) COMPARISON OF KEY RATIOS <TABLE> <CAPTION> 1995 1994 ----- ----- <S> <C> <C> RATIOS--THREE MONTHS ENDED SEPTEMBER 30: (Based on average balance sheets): Return on total assets.......................................... 1.19% 1.27% Return on realized stockholders' equity......................... 12.58 13.36 Return on total stockholders' equity............................ 12.40 13.80 RATIOS--NINE MONTHS ENDED SEPTEMBER 30: (Based on average balance sheets): Loans and leases to deposits.................................... 68.33% 60.41% Non-interest bearing deposits to total deposits................. 19.77 19.54 Equity to loans and leases...................................... 16.31 17.94 Equity to deposits.............................................. 11.15 10.84 Equity to total assets.......................................... 9.44 9.37 Return on total assets.......................................... 1.21 1.22 Return on realized stockholders' equity......................... 12.53 13.05 Return on total stockholders' equity............................ 12.78 13.00 </TABLE> SELECTED BANK DATA* SEPTEMBER 30, 1995 <TABLE> <CAPTION> COMMERCE BANK LOANS AND PRIMARY LOCATIONS SITES ASSETS DEPOSITS LEASES - ----------------- ----- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> St. Louis, MO........................... 54 $2,649,720 $2,294,654 $1,773,041 Kansas City Metro, MO/KS................ 53 2,585,291 2,018,125 1,327,158 Wichita, KS............................. 21 761,535 606,344 424,188 Springfield, MO......................... 20 712,231 636,892 483,224 Peoria, IL.............................. 11 493,170 431,261 261,126 Bloomington, IL......................... 12 454,306 313,950 237,845 Columbia, MO............................ 15 368,684 337,519 280,699 St. Joseph, MO.......................... 3 321,642 272,318 195,773 Poplar Bluff, MO........................ 7 233,288 210,242 151,990 Joplin, MO.............................. 7 147,600 133,269 97,561 Manhattan, KS........................... 5 145,634 122,291 69,591 Hays, KS................................ 3 101,175 91,382 41,722 Lebanon, MO............................. 3 100,403 91,914 53,920 Hannibal, MO............................ 2 86,788 70,730 46,419 Cassville, MO........................... 3 80,649 73,698 41,354 Lawrence, KS............................ 6 66,540 60,597 38,124 Omaha, NE............................... 1 4,182 1,200 3,296 </TABLE> - -------- *Balances have not been reduced for inter-company activity. OTHER OPERATING SUBSIDIARIES CBI Insurance Company CFB Venture Fund I, Inc. Commerce Property and Casualty Agency, Inc. Mid-America Financial Corp. Commerce Mortgage Corp. 17