- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JUNE 30, 1996 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 (ZIP CODE) OFFICES) (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 August 2, 1996, the registrant had outstanding 35,762,025 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 June 30, 1996 and December 31, 1995 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: Comparison of Key Ratios and Selected Market Data Schedule 2: Consolidated Balance Sheets Schedule 3: Consolidated Statements of Income Schedule 4: Statements of Changes in Stockholders' Equity Schedule 5: Consolidated Statements of Cash Flows Schedule 6: Notes to Consolidated Financial Statements Schedule 7: Management's Discussion and Analysis of Financial Condition and Results of Operations PART II: OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On June 7, 1996, the Company approved an Amended and Restated Shareholders Rights Agreement dealing with the Preferred Stock Purchase Rights ("Rights") which were declared as a dividend for each share of Common Stock, $5.00 par value of the Company ("Common Stock") on August 23, 1988. The material changes made to such Rights are as follows: (1) the threshold at which an acquiring person will trigger the Rights was lowered from 20% to 15%; (2) the Agreement was extended until 2006, (3) the Rights were adjusted and a dividend declared and distribution made to increase the number of rights to one Right per share of Common Stock outstanding, (4) a business combination will trigger the Rights only in the event that the acquiring person has control of the Board of Directors of the Company at the time of the transaction, and (5) in addition, at any time after the Rights are triggered, but before an acquiring person acquires beneficial ownership of more than 50%, the Board of Directors has the option to exchange the Rights for other securities of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of Commerce Bancshares, Inc. was held on April 17, 1996. Proxies for the meeting were solicited pursuant to Regulation 14 of the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's nominees as listed in the proxy statement. The five nominees for the five directorships (constituting one-third of the Board of Directors) being elected at this meeting received the following votes: <TABLE> <CAPTION> VOTES NAME OF DIRECTOR VOTES FOR ABSTAIN ---------------- ---------- ------- <S> <C> <C> W. Thomas Grant II..................................... 29,283,093 136,936 James B. Hebenstreit................................... 29,299,391 120,638 James M. Kemper, Jr.................................... 29,280,589 139,440 John H. Robinson, Jr................................... 29,279,257 140,772 Dolph C. Simons, Jr.................................... 29,286,348 133,681 </TABLE> At the same meeting, the shareholders approved, as set forth in the proxy statement for the meeting, the adoption of an amendment to the Articles of Incorporation to increase the authorized shares of Common Stock from 60,000,000 shares with a par value of $5.00 per share to 80,000,000 shares with a par value of $5.00 per 1
share. The amendment to the Articles of Incorporation was approved with a vote of 26,730,493 shares (representing 90.8% of the shares present or represented and entitled to vote) voting in favor; 2,287,753 shares voting against; 345,783 shares abstaining; and 56,000 shares representing broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (3) Articles of Incorporation and By-Laws: (a) Restated Articles of Incorporation, as amended (b) Restated By-Laws (4) Instruments defining the rights of security holders, including indentures: (b) Shareholder Rights Plan contained in an Amended and Restated Rights Agreement was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. (c) Form of Rights Certificate and Election to Exercise was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. (d) Form of Certificate of Designation of Preferred Stock was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference. (27) Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter ended June 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Commerce Bancshares, Inc. /s/ J. Daniel Stinnett By __________________________________ J. Daniel Stinnett Vice President & Secretary Date: August 9, 1996 /s/ Jeffery D. Aberdeen By __________________________________ Jeffery D. Aberdeen Controller (Chief Accounting Officer) Date: August 9, 1996 2
SCHEDULE 1 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES COMPARISON OF KEY RATIOS AND SELECTED MARKET DATA (UNAUDITED) COMPARISON OF KEY RATIOS <TABLE> <CAPTION> 1996 1995 ----- ----- <S> <C> <C> RATIOS--THREE MONTHS ENDED JUNE 30: (Based on average balance sheets): Loans to deposits................................................. 66.95% 69.46% Non-interest bearing deposits to total deposits................... 19.02 19.67 Equity to loans................................................... 16.63 16.07 Equity to deposits................................................ 11.14 11.16 Equity to total assets............................................ 9.47 9.43 Return on total assets............................................ 1.25 1.19 Return on realized stockholders' equity........................... 13.32 12.50 Return on total stockholders' equity.............................. 13.18 12.66 RATIOS--SIX MONTHS ENDED JUNE 30: (Based on average balance sheets): Loans to deposits................................................. 66.69% 67.95% Non-interest bearing deposits to total deposits................... 19.21 19.67 Equity to loans................................................... 16.83 16.27 Equity to deposits................................................ 11.23 11.06 Equity to total assets............................................ 9.50 9.38 Return on total assets............................................ 1.20 1.22 Return on realized stockholders' equity........................... 12.98 12.50 Return on total stockholders' equity.............................. 12.67 12.99 (Based on end-of-period data): Tier I capital ratio.............................................. 13.32 12.60 Total capital ratio............................................... 14.50 13.81 Leverage ratio.................................................... 8.52 8.55 Efficiency ratio.................................................. 62.29 63.58 </TABLE> SELECTED MARKET DATA* JUNE 30, 1996 <TABLE> <CAPTION> COMMERCE BANK PRIMARY MARKET LOCATIONS SITES ASSETS DEPOSITS LOANS -------------- ----- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> St. Louis Region........................ 72 $3,115,031 $2,716,252 $1,830,448 Kansas City Region...................... 61 2,813,071 2,147,433 1,426,324 Springfield/Joplin...................... 34 1,021,993 934,661 639,658 Peoria/Bloomington...................... 23 924,567 755,053 421,234 Wichita................................. 22 747,240 598,545 364,878 Columbia................................ 17 369,505 338,866 286,699 St. Joseph.............................. 3 313,232 274,309 188,669 Manhattan/Hays.......................... 8 259,072 221,095 106,318 </TABLE> - -------- *Balances have not been reduced for inter-company activity. 3
SCHEDULE 2 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> JUNE 30 DECEMBER 31 1996 1995 ----------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> ASSETS Loans, net of unearned income.......................... $5,269,915 $5,317,813 Allowance for loan losses.............................. (98,667) (98,537) ---------- ---------- NET LOANS.......................................... 5,171,248 5,219,276 ---------- ---------- Investment securities: Available for sale................................... 2,652,762 2,552,264 Trading account...................................... 13,956 9,369 Other non-marketable................................. 32,915 33,120 ---------- ---------- TOTAL INVESTMENT SECURITIES........................ 2,699,633 2,594,753 ---------- ---------- Federal funds sold and securities purchased under agreements to resell.................................. 378,295 523,302 Cash and due from banks................................ 654,830 774,852 Land, buildings and equipment--net..................... 206,842 210,033 Customers' acceptance liability........................ 1,732 9,435 Other assets........................................... 210,389 242,300 ---------- ---------- TOTAL ASSETS....................................... $9,322,969 $9,573,951 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing demand.......................... $1,560,726 $1,828,950 Savings and interest bearing demand.................. 3,964,674 3,891,801 Time open and C.D.'s of less than $100,000........... 2,198,986 2,253,390 Time open and C.D.'s of $100,000 and over............ 224,127 218,951 ---------- ---------- TOTAL DEPOSITS..................................... 7,948,513 8,193,092 Federal funds purchased and securities sold under agreements to repurchase.............................. 436,992 362,903 Long-term debt and other borrowings.................... 14,349 14,562 Accrued interest, taxes and other liabilities.......... 49,173 110,176 Acceptances outstanding................................ 1,732 9,435 ---------- ---------- TOTAL LIABILITIES.................................. 8,450,759 8,690,168 ---------- ---------- Stockholders' equity: Preferred stock, $1 par value. Authorized and unissued 2,000,000 shares............ -- -- Common stock, $5 par value. Authorized 80,000,000 shares; issued 37,565,369 shares............................................. 187,827 187,827 Capital surplus...................................... 81,368 84,415 Retained earnings.................................... 660,697 618,388 Treasury stock of 1,424,063 shares in 1996 and 861,951 shares in 1995, at cost..................... (52,765) (32,980) Unearned employee benefits........................... (737) (716) Unrealized securities gain (loss)--net of tax........ (4,180) 26,849 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY......................... 872,210 883,783 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $9,322,969 $9,573,951 ========== ========== </TABLE> See accompanying notes to financial statements. 4
SCHEDULE 3 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> FOR THE THREE FOR THE SIX MONTHS ENDED JUNE MONTHS ENDED JUNE 30 30 ----------------- ----------------- 1996 1995 1996 1995 -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans................. $113,910 $117,699 $229,426 $217,115 Interest on investment securities.......... 39,732 41,611 78,408 82,808 Interest on federal funds sold and securities purchased under agreements to resell.................................... 6,064 1,334 13,946 2,317 -------- -------- -------- -------- TOTAL INTEREST INCOME.................. 159,706 160,644 321,780 302,240 -------- -------- -------- -------- INTEREST EXPENSE Interest on deposits: Savings and interest bearing demand...... 31,825 29,777 64,136 56,190 Time open and C.D.'s of less than $100,000................................ 29,682 30,168 60,866 54,355 Time open and C.D.'s of $100,000 and over.................................... 2,984 2,943 6,045 5,146 Interest on federal funds purchased and securities sold under agreements to repurchase................................ 5,067 6,530 10,848 11,804 Interest on long-term debt and other borrowings................................ 233 338 456 570 -------- -------- -------- -------- TOTAL INTEREST EXPENSE................. 69,791 69,756 142,351 128,065 -------- -------- -------- -------- NET INTEREST INCOME.................... 89,915 90,888 179,429 174,175 Provision for loan losses.................. 5,428 1,930 10,981 4,763 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........................... 84,487 88,958 168,448 169,412 -------- -------- -------- -------- NON-INTEREST INCOME Trust income............................... 8,845 7,929 17,938 15,703 Deposit account charges and other fees..... 13,800 11,120 26,212 21,246 Trading account profits and commissions.... 1,432 1,346 3,158 2,714 Net gains on securities transactions....... 690 241 1,914 427 Miscellaneous credit card income........... 6,279 5,466 12,046 10,265 Other income............................... 7,614 5,797 14,188 12,132 -------- -------- -------- -------- TOTAL NON-INTEREST INCOME.............. 38,660 31,899 75,456 62,487 -------- -------- -------- -------- OTHER EXPENSE Salaries and employee benefits............. 41,154 39,650 82,311 76,796 Net occupancy expense on bank premises..... 5,261 5,034 10,653 9,888 Equipment expense.......................... 3,885 3,457 7,438 6,707 Supplies and communication expense......... 6,279 6,005 12,333 11,310 Data processing expense.................... 5,236 4,955 10,167 9,846 Federal deposit insurance expense.......... 283 4,312 436 8,246 Marketing expense.......................... 2,458 2,408 6,054 4,401 Other operating expense.................... 14,409 12,763 28,181 23,000 -------- -------- -------- -------- TOTAL OTHER EXPENSE.................... 78,965 78,584 157,573 150,194 -------- -------- -------- -------- Income before income taxes................. 44,182 42,273 86,331 81,705 Less income taxes.......................... 15,264 15,514 30,130 29,923 -------- -------- -------- -------- NET INCOME............................. $ 28,918 $ 26,759 $ 56,201 $ 51,782 ======== ======== ======== ======== Net income per common and common equivalent share..................................... $ .79 $ .70 $ 1.53 $ 1.38 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding............. 36,586 38,426 36,807 37,506 ======== ======== ======== ======== Cash dividends per common share............ $ .190 $ .171 $ .380 $ .342 ======== ======== ======== ======== </TABLE> See accompanying notes to financial statements. 5
SCHEDULE 4 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES 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, 1996. 37,565,369 $187,827 $84,415 $618,388 $(32,980) $(716) $ 26,849 $883,783 Net income............. 56,201 56,201 Year-to-date change in fair value of investment securities. (31,029) (31,029) Purchase of treasury stock................. (25,871) (25,871) Sales under option and benefit plans......... (3,038) 5,952 2,914 Issuance of stock under restricted stock award plan.................. (9) 134 (125) -- Restricted stock award amortization.......... 104 104 Cash dividends paid ($.380 per share) .... (13,892) (13,892) ---------- -------- ------- -------- -------- ----- -------- -------- BALANCE JUNE 30, 1996... 37,565,369 $187,827 $81,368 $660,697 $(52,765) $(737) $ (4,180) $872,210 ========== ======== ======= ======== ======== ===== ======== ======== Balance January 1, 1995. 33,970,106 $169,851 $54,575 $576,331 $(12,148) $(295) $(60,116) $728,198 Net income............. 51,782 51,782 Year-to-date change in fair value of investment securities. 78,705 78,705 Purchase of treasury stock................. (17,289) 7 (17,282) Sales under option and benefit plans......... (1,915) 4,378 2,463 Purchase acquisition... (435) 5,315 4,880 Pooling acquisition, net................... 2,674,299 13,371 (4,872) 32,360 7,625 38 48,522 Issuance of stock under restricted stock award plan.................. 2 604 (606) -- Restricted stock award amortization.......... 65 65 Cash dividends paid ($.342 per share)..... (13,123) (13,123) ---------- -------- ------- -------- -------- ----- -------- -------- Balance June 30, 1995... 36,644,405 $183,222 $47,355 $647,350 $(11,515) $(829) $ 18,627 $884,210 ========== ======== ======= ======== ======== ===== ======== ======== </TABLE> See accompanying notes to financial statements. 6
SCHEDULE 5 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED JUNE 30 -------------------- 1996 1995 --------- --------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES: Net income............................................... $ 56,201 $ 51,782 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.............................. 10,981 4,763 Provision for depreciation and amortization............ 15,263 14,787 Accretion of investment security discounts............. (2,826) (2,870) Amortization of investment security premiums........... 11,400 13,152 Net gains on sales of investment securities (A)........ (1,914) (427) Net increase in trading account securities............. (8,794) (3,496) (Increase) decrease in interest receivable............. (1,739) 9,537 Increase (decrease) in interest payable................ (4,433) 2,772 Other changes, net..................................... 23,089 933 --------- --------- Net cash provided by operating activities............ 97,228 90,933 --------- --------- INVESTING ACTIVITIES: Net cash paid in acquisitions............................ -- (33,226) Cash paid in sale of branch.............................. (13,595) -- Proceeds from sales of investment securities (A)......... 352,418 443,501 Proceeds from maturities of investment securities (A).... 176,897 316,130 Purchases of investment securities (A)................... (685,165) (267,741) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell......... 145,007 (126,750) Net (increase) decrease in loans......................... 34,452 (309,348) Purchases of premises and equipment...................... (9,663) (11,717) Sales of premises and equipment.......................... 3,064 3,766 --------- --------- Net cash provided by investing activities............ 3,415 14,615 --------- --------- FINANCING ACTIVITIES: Net decrease in non-interest bearing demand, savings and interest bearing demand deposits.................... (185,290) (288,256) Net increase (decrease) in time open and C.D.'s.......... (41,173) 110,150 Net increase in federal funds purchased and securities sold under agreements to repurchase................................ 74,089 110,326 Repayment of long-term debt.............................. (244) (5,572) Purchases of treasury stock.............................. (56,492) (17,117) Exercise of stock options by employees................... 2,337 2,179 Cash dividends paid on common stock...................... (13,892) (13,123) --------- --------- Net cash used by financing activities................ (220,665) (101,413) --------- --------- Increase (decrease) in cash and cash equivalents..... (120,022) 4,135 Cash and cash equivalents at beginning of year........... 774,852 565,805 --------- --------- Cash and cash equivalents at June 30................. $ 654,830 $ 569,940 ========= ========= </TABLE> - -------- (A) Available for sale and other non-marketable securities, excluding trading account securities. Cash payments of income taxes for the six month period were $34,344,000 in 1996 and $16,027,000 in 1995. Interest paid on deposits and borrowings for the six month period was $146,642,000 in 1996 and $125,293,000 in 1995. See accompanying notes to financial statements. 7
SCHEDULE 6 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) 1. PRINCIPLES OF CONSOLIDATION AND PRESENTATION The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 1995 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 1995 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 SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 --------------- --------------- 1996 1995 1996 1995 ------- ------- ------- ------- <S> <C> <C> <C> <C> Balance, beginning of period.................... $98,666 $92,055 $98,537 $87,179 ------- ------- ------- ------- Additions: Provision for loan losses..................... 5,428 1,930 10,981 4,763 Allowance for loan losses of acquired banks... -- 8,195 -- 12,932 ------- ------- ------- ------- Total additions............................. 5,428 10,125 10,981 17,695 ------- ------- ------- ------- Deductions: Loan losses................................... 7,280 4,969 14,597 9,173 Less recoveries on loans...................... 1,853 2,010 3,746 3,520 ------- ------- ------- ------- Net loan losses............................. 5,427 2,959 10,851 5,653 ------- ------- ------- ------- Balance, June 30................................ $98,667 $99,221 $98,667 $99,221 ======= ======= ======= ======= </TABLE> At June 30, 1996, interest income was not being recognized on an accrual basis for loans with an outstanding balance of $17,100,000. 3. INVESTMENT SECURITIES Investment securities, at fair value, consist of the following at June 30, 1996 and December 31, 1995 (in thousands): <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1996 1995 ---------- ------------ <S> <C> <C> Available for sale: U.S. government and federal agency obligations.............. $1,811,650 $1,707,111 State and municipal obligations.............. 118,882 128,043 CMO's and asset-backed securities............... 642,526 670,522 Other debt securities..... 36,367 10,982 Equity securities......... 43,337 35,606 Trading account securities.. 13,956 9,369 Other non-marketable securities................. 32,915 33,120 ---------- ---------- Total investment securities............. $2,699,633 $2,594,753 ========== ========== </TABLE> 4. INCOME PER COMMON SHARE Income per share data is based on the weighted average number of common shares and common equivalent shares outstanding during the interim periods. All per share data in this report has been restated to reflect the 5% stock dividend distributed on December 15, 1995. 8
SCHEDULE 7 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1996 (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 1995 Annual Report on Form 10-K. Results of operations for the six month period ended June 30, 1996 are not necessarily indicative of results to be attained for any other period. SUMMARY The Company's consolidated net income for the first six months of 1996 totaled $56.2 million; a $4.4 million or 9% increase over the same period in 1995. Earnings per share increased to $1.53 in the first six months of 1996 compared to $1.38 in the first six months of 1995. Net interest income increased $5.3 million and non-interest income increased $13.0 million, partially offset by increases of $7.4 million in other expense and $6.2 million in the provision for loan losses. When the effects of the four banks acquired in March through May of 1995 are excluded, non-interest income increased by 17%, while other expense, excluding intangible amortization and F.D.I.C. insurance reductions, increased only 5%. Return on average assets for the first six months of 1996 was 1.20% compared to 1.22% in the first six months of 1995. Return on average stockholders' equity for the first six months of 1996 was 12.67% compared to 12.99% for the first six months of 1995. This decrease was partially due to the unrealized loss in fair value of available for sale investment securities during the first six months of 1995. The Company's efficiency ratio (other expense/net interest income plus non-interest income excluding net gains on securities transactions) was 62.29% for the first six months of 1996 compared to 63.58% for the first six months of 1995. Consolidated net income increased $2.2 million over the second quarter of 1995 mainly due to a $6.8 million increase in non-interest income partially offset by a $3.5 million increase in the provision for loan losses. Net income increased $1.6 million over the first quarter of 1996 mainly due to a $1.9 million increase in non-interest income. Earnings per share was $.79 in the second quarter of 1996, a 12.9% increase over the second quarter of 1995 and a 6.8% increase over the first quarter of 1996. In the second quarter of 1996, ten affiliate banks in Missouri, Kansas and Illinois were merged to form two banks, thus better serving those customers at over 100 sites in Missouri/Kansas and over 20 sites in Illinois. The Company sold a branch in Illinois in March 1996 and a branch in Missouri in August 1996. These sales did not have a material effect on the financial statements of the Company. INTEREST INCOME AND EARNING ASSETS Total interest income increased $19.5 million, or 6.5%, compared to the first six months of 1995 mainly due to an increase of $661.1 million in average earning asset balances, (which caused an increase of $27.0 million in tax equivalent interest income). Excluding banks acquired in 1995, total interest income increased 1.2% in the first six months of 1996 over the same period in 1995. The average tax equivalent yield was 7.75% for the first six months of 1996 and 7.93% for the first six months of 1995. Loans, the highest yielding category of earning assets, were 63% of average earning assets for the first six months of 1996. Loan interest income increased $12.3 million, or 5.7%, over the first six months of 1995 due to 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D.) an increase of $359.6 million in average loan balances. Most of the increase in average balances is attributable to bank acquisitions. Interest income on investment securities decreased $4.4 million from the first six months of 1995 mainly due to a decrease of $114.8 million in average balances invested in CMO's and asset-backed securities. Interest income on federal funds sold and securities purchased under agreements to resell increased $11.6 million over the first six months of 1995 mainly due to an increase of $440.9 million in average balances invested. The average tax equivalent yield was 7.72% in the second quarter of 1996 compared to 8.04% in the second quarter of 1995 and 7.79% in the first quarter of 1996. Total interest income decreased $938 thousand from the second quarter of 1995 mainly due to lower average tax equivalent yields earned on loans partially offset by an increase in average balances invested in federal funds sold and resell agreements. Total interest income decreased $2.4 million from the first quarter of 1996 due to lower average balances invested in federal funds sold and resell agreements and lower average rates earned on loans, partially offset by higher average balances invested in U.S. government and federal agency securities. Summaries of average earning assets and liabilities and the corresponding average rates earned/paid appear on pages 12 through 15. RISK ELEMENTS OF LOAN PORTFOLIO Non-performing assets include impaired loans (non-accrual loans and loans 90 days delinquent and still accruing interest) and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment (generally, loans that are 90 days past due as to principal and/or interest payments). These loans were made primarily to borrowers in Missouri, Kansas and Illinois. The following table presents non-performing assets. <TABLE> <CAPTION> JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (DOLLARS IN THOUSANDS) <S> <C> <C> Non-accrual loans........................ $17,100 $16,234 Past due 90 days and still accruing interest................................ 16,862 15,690 ------- ------- Total impaired loans..................... 33,962 31,924 Foreclosed real estate................... 1,603 1,955 ------- ------- Total non-performing assets.......... $35,565 $33,879 ======= ======= Non-performing assets to total loans..... .67% .64% Non-performing assets to total assets.... .38% .35% </TABLE> 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 $513.4 million at June 30, 1996. 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 $11.0 million, or 2.2% of credit card loans at June 30, 1996. The risk presented by the above loans and foreclosed real estate is not considered by management to be materially adverse in relation to normal credit risks generally taken by lenders. PROVISION 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 10
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, 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 $6.2 million compared to the first six months of 1995, increased $3.5 million over the second quarter of 1995 and decreased $125 thousand compared to the first quarter of 1996. The allowance for loan losses as a percentage of loans outstanding was 1.87% at June 30, 1996, compared to 1.85% at year-end 1995 and 1.83% at June 30, 1995. 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 $10.9 million for the first six months of 1996 compared to $5.7 million for the first six months of 1995. Net charge-offs were $5.4 million for the second quarter of 1996 compared to $3.0 million for the second quarter of 1995 and $5.4 million for the first quarter of 1996. INTEREST EXPENSE AND RELATED LIABILITIES Total interest expense (net of capitalized interest) increased $14.3 million, or 11.2%, compared to the first six months of 1995 due mainly to higher average interest-bearing liabilities. The average cost of funds was 4.16% for the first six months of 1996 and 4.10% for the first six months of 1995. Excluding banks acquired in 1995, total interest expense increased 4.3% in the first six months of 1996 compared to the first six months of 1995. Average core deposits (deposits excluding short-term certificates of deposit over $100,000) for the first six months of 1996 were $7.87 billion, an increase of 9.7% over the same period last year. Core deposits supported 94% of average earning assets in 1996. Interest on deposits increased $15.4 million over the first six months of 1995. Interest expense on the Company's Premium Money Market deposits and long-term C.D.'s of less than $100,000 increased $10.2 million and $7.0 million, respectively, due mainly to higher average balances. Interest expense on federal funds purchased and securities sold under agreements to repurchase decreased $956 thousand from the first six months of 1995 due to a decrease in average rates paid. Total interest expense in the second quarter of 1996 was unchanged from the second quarter of 1995, as rate decreases were offset by increases in balances, and was $2.8 million lower than the first quarter of 1996 due to lower average rates paid on deposits. The average cost of funds was 4.09% for the second quarter of 1996 compared to 4.24% for the second quarter of 1995 and 4.22% for the first quarter of 1996. NON-INTEREST INCOME Non-interest income increased $13.0 million in the first six months of 1996 compared to the first six months of 1995. Deposit account charges and other fees increased $5.0 million partially due to fee restructuring and added cash management fees. In addition, trust income increased $2.2 million, miscellaneous credit card income increased $1.8 million and gains on securities transactions increased $1.5 million. Excluding banks acquired in 1995, total non-interest income (excluding securities gains) increased $9.0 million in the first six months of 1996 compared to the first six months of 1995. Non-interest income increased $6.8 million over the second quarter of 1995 due to increases of $2.7 million in deposit account charges and other fees, $916 thousand in trust income and $862 thousand in gains on loan sales. Compared to the first quarter of 1996, non-interest income increased $1.9 million, with increases of $1.4 million in deposit account charges and other fees and $692 thousand in gains on loan sales. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D.) AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS SIX MONTHS ENDED JUNE 30, 1996 AND 1995 <TABLE> <CAPTION> SIX MONTHS 1996 SIX MONTHS 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: Business (including foreign) (A).......... $1,684,056 $ 66,226 7.91% $1,625,307 $ 67,851 8.42% Construction and development........... 170,460 7,462 8.80 127,071 6,026 9.56 Real estate--business.. 701,763 30,148 8.64 665,806 29,838 9.04 Real estate--personal.. 985,777 38,817 7.92 916,550 34,875 7.67 Personal banking....... 1,259,151 54,539 8.71 1,207,634 51,852 8.66 Credit card............ 498,535 32,942 13.29 397,803 27,460 13.92 ---------- -------- ----- ---------- -------- ----- Total loans......... 5,299,742 230,134 8.73 4,940,171 217,902 8.89 ---------- -------- ----- ---------- -------- ----- Investment securities: U.S. government & federal agency........ 1,751,479 53,544 6.15 1,761,859 53,783 6.16 State & municipal obligations (A)....... 119,157 4,705 7.94 107,391 4,071 7.64 CMO's and asset-backed securities............ 640,239 20,105 6.32 755,081 23,595 6.30 Trading account securities (A)........ 7,389 201 5.46 3,261 106 6.54 Other marketable securities (A)........ 41,197 1,399 6.83 82,007 2,508 6.17 Other non-marketable securities............ 34,178 254 1.49 23,320 298 2.58 ---------- -------- ----- ---------- -------- ----- Total investment securities......... 2,593,639 80,208 6.22 2,732,919 84,361 6.22 ---------- -------- ----- ---------- -------- ----- Federal funds sold and securities purchased under agreements to resell... 516,512 13,946 5.43 75,660 2,317 6.18 ---------- -------- ----- ---------- -------- ----- Total interest earning assets..... 8,409,893 324,288 7.75 7,748,750 304,580 7.93 -------- ----- -------- ----- Less allowance for loan losses................. (98,638) (93,529) Unrealized gain (loss) on investment securities............. 33,304 (51,000) Cash and due from banks. 636,617 572,182 Land, buildings and equipment--net......... 209,111 201,222 Other assets............ 202,212 193,907 ---------- ---------- Total assets........ $9,392,499 $8,571,532 ========== ========== LIABILITIES AND EQUITY: Interest bearing deposits: Savings................ $ 305,777 3,623 2.38 $ 306,510 3,898 2.56 Interest bearing demand................ 3,651,096 60,513 3.33 3,202,548 52,292 3.29 Time open & C.D.'s of less than $100,000.... 2,229,595 60,866 5.49 2,130,456 54,355 5.14 Time open & C.D.'s of $100,000 and over..... 233,295 6,045 5.21 200,886 5,146 5.17 ---------- -------- ----- ---------- -------- ----- Total interest bearing deposits... 6,419,763 131,047 4.11 5,840,400 115,691 3.99 ---------- -------- ----- ---------- -------- ----- Borrowings: Federal funds purchased and securities sold under agreements to repurchase............ 455,409 10,848 4.79 439,118 11,804 5.42 Long-term debt and other borrowings...... 14,615 521 7.17 16,957 575 6.84 ---------- -------- ----- ---------- -------- ----- Total borrowings.... 470,024 11,369 4.86 456,075 12,379 5.47 ---------- -------- ----- ---------- -------- ----- Total interest bearing liabilities........ 6,889,787 142,416 4.16% 6,296,475 128,070 4.10% -------- ----- -------- ----- Non-interest bearing demand deposits........ 1,526,573 1,429,960 Other liabilities....... 83,955 41,122 Stockholders' equity.... 892,184 803,975 ---------- ---------- Total liabilities and equity......... $9,392,499 $8,571,532 ========== ========== Net interest margin (T/E).................. $181,872 $176,510 ======== ======== Net yield on interest earning assets......... 4.35% 4.59% ===== ===== </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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995 <TABLE> <CAPTION> 1996 VS 1995 ---------------------------- 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: Business (including foreign) (A)................. $ 2,472 $(4,097) $(1,625) Construction and development..................... 2,063 (627) 1,436 Real estate--business............................ 1,616 (1,306) 310 Real estate--personal............................ 2,640 1,302 3,942 Personal banking................................. 2,218 469 2,687 Credit card...................................... 6,973 (1,491) 5,482 ------- ------- ------- Total loans.................................... 17,982 (5,750) 12,232 ------- ------- ------- Investment securities: U.S. government & federal agency................. (318) 79 (239) State & municipal obligations (A)................ 447 187 634 CMO's and asset-backed securities................ (3,598) 108 (3,490) Trading account securities (A)................... 134 (39) 95 Other marketable securities (A).................. (1,252) 143 (1,109) Other non-marketable securities.................. 139 (183) (44) ------- ------- ------- Total investment securities.................... (4,448) 295 (4,153) ------- ------- ------- Federal funds sold and securities purchased under agreements to resell............................. 13,468 (1,839) 11,629 ------- ------- ------- Total interest income.......................... 27,002 (7,294) 19,708 ------- ------- ------- VARIANCE IN INTEREST EXPENSE ON: Interest bearing deposits: Savings.......................................... (9) (266) (275) Interest bearing demand.......................... 10,498 (2,277) 8,221 Time open & C.D.'s of less than $100,000......... 2,641 3,870 6,511 Time open & C.D.'s of $100,000 and over.......... 839 60 899 ------- ------- ------- Total interest bearing deposits................ 13,969 1,387 15,356 ------- ------- ------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase.................. 124 (1,080) (956) Long-term debt and other borrowings.............. (80) 26 (54) ------- ------- ------- Total borrowings............................... 44 (1,054) (1,010) ------- ------- ------- Total interest expense......................... 14,013 333 14,346 ------- ------- ------- Change in net interest margin (T/E)............... $12,989 $(7,627) $ 5,362 ======= ======= ======= Percentage increase in net interest margin (T/E) over the same period of the prior year........... 3.04% ======= </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.) AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS THREE MONTHS ENDED JUNE 30, 1996 AND MARCH 31, 1996 <TABLE> <CAPTION> SECOND QUARTER 1996 FIRST QUARTER 1996 ------------------------------- ------------------------------- 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: Business (including foreign) (A).......... $1,686,451 $32,884 7.84% $1,681,661 $33,342 7.97% Construction and development........... 169,600 3,674 8.71 171,320 3,788 8.89 Real estate--business.. 702,606 15,107 8.65 700,920 15,041 8.63 Real estate--personal.. 990,822 19,287 7.83 980,732 19,530 8.01 Personal banking....... 1,253,783 27,076 8.69 1,264,519 27,463 8.74 Credit card............ 502,800 16,234 12.99 494,270 16,708 13.60 ---------- ------- ----- ---------- ------- ----- Total loans......... 5,306,062 114,262 8.66 5,293,422 115,872 8.80 ---------- ------- ----- ---------- ------- ----- Investment securities: U.S. government & federal agency........ 1,789,272 27,311 6.14 1,713,686 26,233 6.16 State & municipal obligations (A)....... 117,785 2,348 8.02 120,529 2,357 7.87 CMO's and asset-backed securities............ 632,794 9,942 6.32 647,684 10,163 6.31 Trading account securities (A)........ 7,861 113 5.78 6,917 88 5.09 Other marketable securities (A)........ 45,595 734 6.47 36,799 665 7.27 Other non-marketable securities............ 33,940 173 2.05 34,416 81 .95 ---------- ------- ----- ---------- ------- ----- Total investment securities......... 2,627,247 40,621 6.22 2,560,031 39,587 6.22 ---------- ------- ----- ---------- ------- ----- Federal funds sold and securities purchased under agreements to resell................. 453,629 6,064 5.38 579,395 7,882 5.47 ---------- ------- ----- ---------- ------- ----- Total interest earning assets..... 8,386,938 160,947 7.72 8,432,848 163,341 7.79 ------- ----- ------- ----- Less allowance for loan losses................. (99,054) (98,222) Unrealized gain on investment securities.. 14,220 52,388 Cash and due from banks. 615,730 657,504 Land, buildings and equipment--net......... 208,242 209,980 Other assets............ 196,892 207,532 ---------- ---------- Total assets........ $9,322,968 $9,462,030 ========== ========== LIABILITIES AND EQUITY: Interest bearing deposits: Savings................ $ 305,729 1,789 2.35 $ 305,825 1,834 2.41 Interest bearing demand................ 3,664,421 30,036 3.30 3,637,771 30,477 3.37 Time open & C.D.'s of less than $100,000.... 2,213,390 29,682 5.39 2,245,800 31,184 5.58 Time open & C.D.'s of $100,000 and over..... 234,170 2,984 5.13 232,420 3,061 5.30 ---------- ------- ----- ---------- ------- ----- Total interest bearing deposits... 6,417,710 64,491 4.04 6,421,816 66,556 4.17 ---------- ------- ----- ---------- ------- ----- Borrowings: Federal funds purchased and securities sold under agreements to repurchase............ 429,469 5,067 4.75 481,349 5,781 4.83 Long-term debt and other borrowings...... 14,470 263 7.32 14,760 258 7.02 ---------- ------- ----- ---------- ------- ----- Total borrowings.... 443,939 5,330 4.83 496,109 6,039 4.90 ---------- ------- ----- ---------- ------- ----- Total interest bearing liabilities........ 6,861,649 69,821 4.09% 6,917,925 72,595 4.22% ------- ----- ------- ----- Non-interest bearing demand deposits........ 1,507,302 1,545,844 Other liabilities....... 71,369 96,541 Stockholders' equity.... 882,648 901,720 ---------- ---------- Total liabilities and equity......... $9,322,968 $9,462,030 ========== ========== Net interest margin (T/E).................. $91,126 $90,746 ======= ======= Net yield on interest earning assets......... 4.37% 4.33% ===== ===== </TABLE> - -------- (A) Stated on a tax equivalent basis using a federal income tax rate of 35%. 14
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E) DUE TO VOLUMES AND RATES THREE MONTHS ENDED JUNE 30, 1996 AND MARCH 31, 1996 <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: Business (including foreign) (A)................. $ 95 $ (553) $ (458) Construction and development..................... (38) (76) (114) Real estate--business............................ 36 30 66 Real estate--personal............................ 201 (444) (243) Personal banking................................. (233) (154) (387) Credit card...................................... 288 (762) (474) ------- ------- ------- Total loans.................................... 349 (1,959) (1,610) ------- ------- ------- Investment securities: U.S. government & federal agency................. 1,158 (80) 1,078 State & municipal obligations (A)................ (54) 45 (9) CMO's and asset-backed securities................ (234) 13 (221) Trading account securities (A)................... 12 13 25 Other marketable securities (A).................. 159 (90) 69 Other non-marketable securities.................. (1) 93 92 ------- ------- ------- Total investment securities.................... 1,040 (6) 1,034 ------- ------- ------- Federal funds sold and securities purchased under agreements to resell............................. (1,708) (110) (1,818) ------- ------- ------- Total interest income.......................... (319) (2,075) (2,394) ------- ------- ------- VARIANCE IN INTEREST EXPENSE ON: Interest bearing deposits: Savings.......................................... (1) (44) (45) Interest bearing demand.......................... 578 (1,019) (441) Time open & C.D.'s of less than $100,000......... (449) (1,053) (1,502) Time open & C.D.'s of $100,000 and over.......... 19 (96) (77) ------- ------- ------- Total interest bearing deposits................ 147 (2,212) (2,065) ------- ------- ------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase.................. (637) (77) (714) Long-term debt and other borrowings.............. (5) 10 5 ------- ------- ------- Total borrowings............................... (642) (67) (709) ------- ------- ------- Total interest expense......................... (495) (2,279) (2,774) ------- ------- ------- Change in net interest margin (T/E)............... $ 176 $ 204 $ 380 ======= ======= ======= Percentage increase in net interest margin (T/E) over the prior quarter.......................................................... .42% ======= </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. 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D.) OTHER EXPENSE Other expense increased $7.4 million in the first six months of 1996 compared to the first six months of 1995. Salaries and benefits increased $5.5 million in this comparison partly as a result of staff at banks acquired in 1995. Excluding employees at banks acquired in 1995, full-time equivalent employees decreased slightly in the first six months of 1996 compared to the first six months of 1995. In addition, marketing expense increased $1.7 million, supplies and communication expense increased $1.0 million and amortization of goodwill and core deposit premium increased $1.0 million. These effects were partially offset by a $7.8 million decrease in F.D.I.C. insurance expense due to a decrease in the assessment rate. Excluding the expenses of banks acquired in 1995, total other expense decreased $2.1 million in the first six months of 1996 compared to the same period in 1995. Other expense increased $381 thousand compared to the second quarter of 1995. Various increases, including a $1.5 million increase in salaries and employee benefits, were largely offset by a $4.0 million reduction in F.D.I.C. insurance expense. Compared to the first quarter of 1996, other expense increased $357 thousand. A $1.1 million reduction in marketing expense partially offset increases in other categories. LIQUIDITY AND CAPITAL RESOURCES The liquid assets of the Parent company consist primarily of short-term investments and equity securities, most of which are readily marketable. The fair value of these investments was $73.5 million at June 30, 1996 compared to $90.1 million at December 31, 1995. Included in the fair values were unrealized net gains of $11.9 million at June 30, 1996 and $11.0 million at December 31, 1995. The Parent company liabilities totaled $40.9 million at June 30, 1996, compared to $44.3 million at December 31, 1995. The 1995 liabilities included a $31.0 million liability recorded at year end 1995 for a significant treasury stock purchase settling in 1996. The 1996 liabilities included $29.9 million advanced mainly 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 affiliate banks or long-term debt during 1996. 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 $2.95 billion at June 30, 1996 and $3.03 billion at December 31, 1995. The available for sale bank portfolio included an unrealized net loss in fair value of $26.2 million at June 30, 1996 compared to an unrealized net gain of $30.1 million at December 31, 1995. In February 1996, 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 June 30, 1996, the Company had acquired 697,496 shares under this authorization. The Company (on a consolidated basis) had an equity to asset ratio of 9.50% based on 1996 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> JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (DOLLARS IN THOUSANDS) <S> <C> <C> Risk-Adjusted Assets...................... $5,895,369 $6,045,112 Tier I Capital............................ 785,507 756,452 Total Capital............................. 854,911 829,784 Tier I Capital Ratio...................... 13.32% 12.51% Total Capital Ratio....................... 14.50% 13.73% Leverage Ratio............................ 8.52% 8.27% </TABLE> 16
The Company's cash and cash equivalents (defined as "Cash and due from banks") were $654.8 million at June 30, 1996, a decrease of $120.0 million from December 31, 1995. Contributing to the net cash outflow were a net decrease of $185.3 million in demand deposits and $56.5 million in purchases of treasury stock. In addition, purchases of investment securities were $685.2 million, partially offset by $529.3 million in proceeds realized from sales and maturities. Partially offsetting these net outflows were a $145.0 million net decrease in short-term investments in federal funds sold and resell agreements and $97.2 million generated from operating activities. Total assets and core deposits decreased slightly, $251.0 million and $247.2 million, respectively, compared to December 31, 1995 balances. The Company has various commitments and contingent liabilities which are properly not reflected on the balance sheet. Loan commitments (excluding lines of credit related to credit card loan agreements) totaled approximately $2.01 billion, standby letters of credit totaled $130.1 million, and commercial letters of credit totaled $30.8 million at June 30, 1996. 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 $152.3 million at June 30, 1996. The current credit exposure (or replacement cost) across all off-balance-sheet derivative contracts covered by the risk-based capital standards was $4.8 million at June 30, 1996. 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. 17
INDEX TO EXHIBITS 3 - Articles of Incorporation and By-Laws: (a) Restated Articles of Incorporation, as amended (b) Restated By-Laws 4 - Instruments defining the rights of security holders, including indentures: (b) Shareholder Rights Plan contained in an Amended and Restated Rights Agreement filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference (c) Form of Rights Certificate and Election to Exercise was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference (d) Form of Certificate of Designation of Preferred Stock was filed on Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated by reference 27 - Financial Data Schedule