- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 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 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 1, 1996, the registrant had outstanding 35,652,693 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, 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 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (10) Material Contracts: (a) Commerce Bancshares, Inc. Incentive Stock Option Plan amended and restated as of October 4, 1996 (b) Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan amended and restated as of October 4, 1996 (c) Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan amended and restated as of October 4, 1996 (d) Commerce Bancshares, Inc. Restricted Stock Plan amended and restated as of October 4, 1996 (e) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors amended and restated October 4, 1996 (f) Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated October 4, 1996 (g) Form of Severance Agreement between Commerce Bancshares, Inc. and certain of its executive officers entered into as of October 4, 1996 (27) Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter ended September 30, 1996. 1
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: November 8, 1996 /s/ Jeffery D. Aberdeen By __________________________________ Jeffery D. Aberdeen Controller (Chief Accounting Officer) Date: November 8, 1996 2
SCHEDULE 1 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES COMPARISON OF KEY RATIOS (UNAUDITED) <TABLE> <CAPTION> 1996 1995 ----- ----- <S> <C> <C> RATIOS--THREE MONTHS ENDED SEPTEMBER 30: (Based on average balance sheets): Loans to deposits............................................... 67.15% 69.04% Non-interest bearing deposits to total deposits................. 19.71 19.96 Equity to loans................................................. 16.59 16.38 Equity to deposits.............................................. 11.14 11.31 Equity to total assets.......................................... 9.48 9.56 Return on total assets.......................................... 1.32 1.19 Return on realized stockholders' equity......................... 13.95 12.58 Return on total stockholders' equity............................ 13.95 12.40 RATIOS--NINE MONTHS ENDED SEPTEMBER 30: (Based on average balance sheets): Loans to deposits............................................... 66.85% 68.33% Non-interest bearing deposits to total deposits................. 19.38 19.77 Equity to loans................................................. 16.75 16.31 Equity to deposits.............................................. 11.20 11.15 Equity to total assets.......................................... 9.49 9.44 Return on total assets.......................................... 1.24 1.21 Return on realized stockholders' equity......................... 13.30 12.53 Return on total stockholders' equity............................ 13.09 12.78 (Based on end-of-period data): Tier I capital ratio............................................ 13.37 12.69 Total capital ratio............................................. 14.52 13.90 Leverage ratio.................................................. 8.69 8.50 Efficiency ratio................................................ 61.75 62.99 </TABLE> 3
SCHEDULE 2 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 31 1996 1995 ------------ ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> ASSETS Loans, net of unearned income......................... $5,390,915 $5,317,813 Allowance for loan losses............................. (98,366) (98,537) ---------- ---------- NET LOANS......................................... 5,292,549 5,219,276 ---------- ---------- Investment securities: Available for sale.................................. 2,621,282 2,552,264 Trading account..................................... 5,255 9,369 Other non-marketable................................ 39,383 33,120 ---------- ---------- TOTAL INVESTMENT SECURITIES....................... 2,665,920 2,594,753 ---------- ---------- Federal funds sold and securities purchased under agreements to resell................................. 343,090 523,302 Cash and due from banks............................... 700,632 774,852 Land, buildings and equipment--net.................... 208,342 210,033 Goodwill and core deposit premium--net................ 90,774 101,184 Customers' acceptance liability....................... 2,332 9,435 Other assets.......................................... 110,470 141,116 ---------- ---------- TOTAL ASSETS...................................... $9,414,109 $9,573,951 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing demand......................... $1,727,129 $1,828,950 Savings and interest bearing demand................. 3,941,168 3,891,801 Time open and C.D.'s of less than $100,000.......... 2,160,900 2,253,390 Time open and C.D.'s of $100,000 and over........... 210,665 218,951 ---------- ---------- TOTAL DEPOSITS.................................... 8,039,862 8,193,092 Federal funds purchased and securities sold under agreements to repurchase............................. 414,855 362,903 Long-term debt and other borrowings................... 14,233 14,562 Accrued interest, taxes and other liabilities......... 53,891 110,176 Acceptances outstanding............................... 2,332 9,435 ---------- ---------- TOTAL LIABILITIES................................. 8,525,173 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..................................... 81,260 84,415 Retained earnings................................... 684,756 618,388 Treasury stock of 1,810,202 shares in 1996 and 861,951 shares in 1995, at cost.................... (66,026) (32,980) Unearned employee benefits.......................... (802) (716) Unrealized securities gain--net of tax.............. 1,921 26,849 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY........................ 888,936 883,783 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $9,414,109 $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 MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 --------------------- ------------------- 1996 1995 1996 1995 ---------- ---------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans.......... $ 115,074 $ 120,608 $ 344,500 $ 337,723 Interest on investment securities... 40,827 39,089 119,235 121,897 Interest on federal funds sold and securities purchased under agreements to resell............... 5,246 4,394 19,192 6,711 ---------- ---------- --------- --------- TOTAL INTEREST INCOME........... 161,147 164,091 482,927 466,331 ---------- ---------- --------- --------- INTEREST EXPENSE Interest on deposits: Savings and interest bearing demand........................... 32,025 31,891 96,161 88,081 Time open and C.D.'s of less than $100,000......................... 29,411 32,072 90,277 86,427 Time open and C.D.'s of $100,000 and over......................... 2,848 3,121 8,893 8,267 Interest on federal funds purchased and securities sold under agreements to repurchase........... 5,102 6,235 15,950 18,039 Interest on long-term debt and other borrowings......................... 232 271 688 841 ---------- ---------- --------- --------- TOTAL INTEREST EXPENSE.......... 69,618 73,590 211,969 201,655 ---------- ---------- --------- --------- NET INTEREST INCOME............. 91,529 90,501 270,958 264,676 Provision for loan losses........... 6,082 3,927 17,063 8,690 ---------- ---------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 85,447 86,574 253,895 255,986 ---------- ---------- --------- --------- NON-INTEREST INCOME Trust income........................ 9,328 8,638 27,266 24,341 Deposit account charges and other fees............................... 14,409 11,807 40,621 33,053 Trading account profits and commissions........................ 1,316 1,134 4,474 3,848 Net gains on securities transactions....................... 90 243 2,004 670 Credit card transaction fees........ 6,312 5,725 18,358 15,990 Other income........................ 8,994 6,647 23,182 18,779 ---------- ---------- --------- --------- TOTAL NON-INTEREST INCOME....... 40,449 34,194 115,905 96,681 ---------- ---------- --------- --------- OTHER EXPENSE Salaries and employee benefits...... 40,971 41,156 123,282 117,952 Net occupancy expense on bank premises........................... 5,619 5,369 16,272 15,257 Equipment expense................... 3,648 3,579 11,086 10,286 Supplies and communication expense.. 6,274 6,304 18,607 17,614 Data processing expense............. 5,227 5,360 15,394 15,206 Federal deposit insurance expense... 1,661 (339) 2,097 7,907 Marketing expense................... 3,415 3,718 9,469 8,119 Other operating expense............. 13,262 11,858 41,443 34,858 ---------- ---------- --------- --------- TOTAL OTHER EXPENSE............. 80,077 77,005 237,650 227,199 ---------- ---------- --------- --------- Income before income taxes.......... 45,819 43,763 132,150 125,468 Less income taxes................... 14,964 16,153 45,094 46,076 ---------- ---------- --------- --------- NET INCOME...................... $ 30,855 $ 27,610 $ 87,056 $ 79,392 ========== ========== ========= ========= Net income per common and common equivalent share................... $ .85 $ .72 $ 2.38 $ 2.10 ========== ========== ========= ========= Weighted average common and common equivalent shares outstanding...... 36,313 38,276 36,641 37,765 ========== ========== ========= ========= Cash dividends per common share..... $ .190 $ .171 $ .570 $ .514 ========== ========== ========= ========= </TABLE> See accompanying notes to financial statements. 5
SCHEDULE 4 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> NET NUMBER OF UNEARNED UNREALIZED SHARES COMMON CAPITAL RETAINED TREASURY EMPLOYEE GAIN ISSUED STOCK SURPLUS EARNINGS STOCK BENEFITS (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 $883,783 Net income............. 87,056 87,056 Year-to-date change in fair value of investment securities. (24,928) (24,928) Purchase of treasury stock................. (39,746) 24 (39,722) Sales under option and benefit plans......... (3,138) 6,426 3,288 Issuance of stock under restricted stock award plan.................. (17) 274 (257) -- Restricted stock award amortization.......... 147 147 Cash dividends paid ($.570 per share)..... (20,688) (20,688) ---------- -------- ------- -------- -------- ----- -------- -------- BALANCE SEPTEMBER 30, 1996................... 37,565,369 $187,827 $81,260 $684,756 $(66,026) $(802) $ 1,921 $888,936 ========== ======== ======= ======== ======== ===== ======== ======== Balance January 1, 1995. 33,970,106 $169,851 $54,575 $576,331 $(12,148) $(295) $(60,116) $728,198 Net income............. 79,392 79,392 Year-to-date change in fair value of investment securities. 72,400 72,400 Purchase of treasury stock................. (29,081) 7 (29,074) Sales under option and benefit plans......... (2,156) 5,430 3,274 Purchase acquisitions.. (435) 5,315 4,880 Pooling acquisition, net................... 2,674,299 13,371 (4,872) 32,360 7,625 38 48,522 Issuance of stock under restricted stock award plan.................. 4 627 (631) -- Restricted stock award amortization.......... 101 101 Cash dividends paid ($.514 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 ========== ======== ======= ======== ======== ===== ======== ======== </TABLE> See accompanying notes to financial statements. 6
SCHEDULE 5 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> FOR THE NINE MONTHS ENDED SEPTEMBER 30 -------------------- 1996 1995 --------- --------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES: Net income............................................... $ 87,056 $ 79,392 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.............................. 17,063 8,690 Provision for depreciation and amortization............ 23,085 23,012 Accretion of investment security discounts............. (4,327) (4,346) Amortization of investment security premiums........... 17,162 19,845 Net gains on sales of investment securities (A)........ (2,004) (670) Net (increase) decrease in trading account securities............................................ 4,791 (2,586) Decrease in interest receivable........................ 7,431 1,214 Increase (decrease) in interest payable................ (1,874) 8,802 Other changes, net..................................... 12,452 4,592 --------- --------- Net cash provided by operating activities............ 160,835 137,945 --------- --------- INVESTING ACTIVITIES: Net cash paid in acquisitions............................ -- (33,226) Cash paid in sale of branches............................ (38,134) -- Proceeds from sales of investment securities (A)......... 546,664 585,688 Proceeds from maturities of investment securities (A).... 292,541 407,470 Purchases of investment securities (A)................... (964,682) (460,174) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell......... 180,212 (95,325) Net increase in loans.................................... (99,820) (365,305) Purchases of premises and equipment...................... (19,512) (17,549) Sales of premises and equipment.......................... 6,529 6,386 --------- --------- Net cash provided (used) by investing activities..... (96,202) 27,965 --------- --------- FINANCING ACTIVITIES: Net decrease in non-interest bearing demand, savings and interest bearing demand deposits.................... (21,902) (285,801) Net increase (decrease) in time open and C.D.'s.......... (80,182) 97,049 Net increase in federal funds purchased and securities sold under agreements to repurchase................................ 51,952 78,913 Repayment of long-term debt.............................. (369) (7,691) Purchases of treasury stock.............................. (70,325) (28,923) Exercise of stock options by employees................... 2,661 2,922 Cash dividends paid on common stock...................... (20,688) (19,593) --------- --------- Net cash used by financing activities................ (138,853) (163,124) --------- --------- Increase (decrease) in cash and cash equivalents..... (74,220) 2,786 Cash and cash equivalents at beginning of year........... 774,852 565,805 --------- --------- Cash and cash equivalents at September 30............ $ 700,632 $ 568,591 ========= ========= </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 $50,398,000 in 1996 and $27,295,000 in 1995. Interest paid on deposits and borrowings for the nine month period was $213,614,000 in 1996 and $192,967,000 in 1995. See accompanying notes to financial statements. 7
SCHEDULE 6 COMMERCE BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 NINE MONTHS ENDED ENDED SEPTEMBER 30 SEPTEMBER 30 --------------- --------------- 1996 1995 1996 1995 ------- ------- ------- ------- <S> <C> <C> <C> <C> Balance, beginning of period............ $98,667 $99,221 $98,537 $87,179 ------- ------- ------- ------- Additions: Provision for loan losses.............. 6,082 3,927 17,063 8,690 Allowance for loan losses of acquired banks................................. -- -- -- 12,932 ------- ------- ------- ------- Total additions...................... 6,082 3,927 17,063 21,622 ------- ------- ------- ------- Deductions: Loan losses............................ 8,032 6,653 22,629 15,826 Less recoveries on loans............... 1,649 1,800 5,395 5,320 ------- ------- ------- ------- Net loan losses...................... 6,383 4,853 17,234 10,506 ------- ------- ------- ------- Balance, September 30................... $98,366 $98,295 $98,366 $98,295 ======= ======= ======= ======= </TABLE> At September 30, 1996, interest income was not being recognized on an accrual basis for loans with an outstanding balance of $11,829,000. 3. INVESTMENT SECURITIES Investment securities, at fair value, consist of the following at September 30, 1996 and December 31, 1995 (in thousands): <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 31 1996 1995 ------------ ----------- <S> <C> <C> Available for sale: U.S. government and federal agency obligations.................................. $1,765,849 $1,707,111 State and municipal obligations............... 113,725 128,043 CMO's and asset-backed securities............. 652,668 670,522 Other debt securities......................... 46,359 10,982 Equity securities............................. 42,681 35,606 Trading account securities..................... 5,255 9,369 Other non-marketable securities................ 39,383 33,120 ---------- ---------- Total investment securities................. $2,665,920 $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 SEPTEMBER 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 nine month period ended September 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 nine months of 1996 totaled $87.1 million; a $7.7 million or 9.7% increase over the same period in 1995. Earnings per share increased 13.3% to $2.38 in the first nine months of 1996 compared to $2.10 in the first nine months of 1995. Net interest income increased $6.3 million and non-interest income increased $19.2 million, partially offset by increases of $10.5 million in other expense and $8.4 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 18.3%, while other expense, excluding intangible amortization and F.D.I.C. insurance reductions, increased only 4.6%. Return on average assets for the first nine months of 1996 was 1.24% compared to 1.21% in the first nine months of 1995. Return on average stockholders' equity for the first nine months of 1996 was 13.09% compared to 12.78% for the first nine months of 1995. The Company's efficiency ratio (other expense/net interest income plus non-interest income excluding net gains on securities transactions) was 61.75% for the first nine months of 1996 compared to 62.99% for the first nine months of 1995. Consolidated net income increased $3.2 million over the third quarter of 1995 mainly due to a $6.3 million increase in non-interest income partially offset by a $3.1 million increase in other expense and a $2.2 million increase in the provision for loan losses. Net income increased $1.9 million over the second quarter of 1996 mainly due to increases of $1.6 million in net interest income and $1.8 million in non-interest income, partially offset by an increase of $1.1 million in other expense. Earnings per share was $.85 in the third quarter of 1996, an 18.1% increase over the third quarter of 1995 and a 7.6% increase over the second quarter of 1996. In the second quarter of 1996, ten affiliate banks in Missouri, Kansas and Illinois were merged to form two banks. The effects of these mergers will enable the Company to reduce overhead costs while expanding services to customers. Additionally, customers will gain access to additional banking facilities in portions of Missouri, Kansas and Illinois. The Company sold an Illinois branch in March 1996 and a Missouri branch 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 $16.6 million, or 3.6%, compared to the first nine months of 1995 mainly due to an increase of $477.5 million in average earning asset balances, (which caused an increase of $29.0 million in tax equivalent interest income), partly offset by a decrease of 19 basis points in average tax equivalent rates earned. Excluding banks acquired in 1995, total interest income increased .4% in the first nine months of 1996 over the same period in 1995. The average tax equivalent yield was 7.75% for the first nine months of 1996 and 7.94% for the first nine months of 1995. 9
Loans were 63% of average earning assets and yielded an average tax equivalent rate of 8.71% for the first nine months of 1996. Loan interest income increased $6.8 million, or 2.0%, over the first nine months of 1995. This increase was mainly due to an increase of $97.2 million in average credit card loan balances, partially offset by a decline of 46 basis points in average tax equivalent rates earned on business loans. Interest income on investment securities decreased $2.7 million from the first nine months of 1995 mainly due to a decrease of $84.7 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 $12.5 million over the first nine months of 1995 mainly due to an increase of $321.1 million in average balances invested. The average tax equivalent yield was 7.73% in the third quarter of 1996 compared to 7.96% in the third quarter of 1995 and 7.72% in the second quarter of 1996. Total interest income decreased $2.9 million from the third quarter of 1995 mainly due to both lower average tax equivalent yields earned and lower average balances invested in loans. Total interest income increased $1.4 million over the second quarter of 1996 due to higher average tax equivalent rates earned, mainly in loans, partially offset by lower average balances invested, mainly in federal funds sold and resell agreements. Summaries of average earning assets and liabilities and the corresponding average rates earned/paid appear on pages 14 through 17. INTEREST EXPENSE AND RELATED LIABILITIES Total interest expense (net of capitalized interest) increased $10.3 million, or 5.1%, compared to the first nine months of 1995 due mainly to higher average interest-bearing liabilities. The average cost of funds was 4.13% for the first nine months of 1996 and 4.19% for the first nine months of 1995. Excluding banks acquired in 1995, total interest expense increased 1.2% in the first nine months of 1996 compared to the first nine months of 1995. Average core deposits (deposits excluding short-term certificates of deposit over $100,000) for the first nine months of 1996 were $7.85 billion, an increase of 6.8% over the same period last year. Core deposits supported 94% of average earning assets in 1996. Interest on deposits increased $12.6 million over the first nine 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 $13.1 million and $6.9 million, respectively, due mainly to higher average balances. Interest expense on federal funds purchased and securities sold under agreements to repurchase decreased $2.1 million from the first nine months of 1995 due to a decrease in average rates paid. Total interest expense in the third quarter of 1996 was $4.0 million lower than the third quarter of 1995, as rate decreases were partially offset by increases in average deposits. Interest expense was $173 thousand lower than the second quarter of 1996 due to lower average deposits and borrowings and lower average rates paid on deposits. The average cost of funds was 4.09% for the second and third quarters of 1996 compared to 4.34% for the third quarter of 1995. 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 for the periods indicated. 10
<TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (IN THOUSANDS) <S> <C> <C> Non-accrual loans.............................. $11,829 $16,234 Past due 90 days and still accruing interest... 24,593 15,690 ------- ------- Total impaired loans........................... 36,422 31,924 Foreclosed real estate......................... 985 1,955 ------- ------- Total non-performing assets.................. $37,407 $33,879 ======= ======= Non-performing assets to total loans........... .69% .64% Non-performing assets to total assets.......... .40% .35% </TABLE> Non-accrual loans at September 30, 1996 are comprised of both secured and unsecured loans to businesses and individuals. Loans past due 90 days but still accruing interest are comprised of $9.2 million in business loans, $792 thousand in construction and development loans, $1.4 million in business real estate loans, $2.4 million in personal real estate loans, $4.8 million in personal banking loans and $5.9 million in credit card loans. Foreclosed properties at September 30, 1996 are mainly comprised of individual family dwellings and are not considered a significant risk element to the balance sheet. The subsidiary banks issue Visa and MasterCard credit cards, and the balance of these consumer loans was $527.6 million at September 30, 1996. During 1996 the banking industry has experienced increasing credit losses on these loans primarily due to easing of bankruptcy laws and general economic conditions, and net charge-offs at major banks this year have ranged from 3.5% to over 5% of credit card loans. The Company has also experienced an increase in credit losses on credit card loans due to these same factors, however, net charge-off experience through the first nine months has averaged 2.78% of outstanding credit card loans, which is significantly lower than industry averages. 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 $12.3 million, or 2.3% of credit card loans at September 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. ALLOWANCE 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. (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 $8.4 million compared to the first nine months of 1995, increased $2.2 million over the third quarter of 1995 and increased $654 thousand compared to the second quarter of 1996. The allowance for loan losses as a percentage of loans outstanding was 1.82% at September 30, 1996, compared to 1.85% at year-end 1995 and 1.80% at September 30, 1995. Net charge-offs on loans totaled $17.2 million for the first nine months of 1996 compared to $10.5 million for the first nine months of 1995. Net charge- offs were $6.4 million for the third quarter of 1996 compared to $4.9 million for the third quarter of 1995 and $5.4 million for the second quarter of 1996. 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. 11
NON-INTEREST INCOME <TABLE> <CAPTION> INCREASE (DECREASE) ------------------------------------------- QUARTER QUARTER ENDED ENDED NINE MONTHS 9/30/96 9/30/96 ENDED 9/30/96 COMPARED TO COMPARED COMPARED TO QUARTER QUARTER NINE MONTHS ENDED ENDED ENDED 9/30/95 9/30/95 6/30/96 ------------- ------------- ------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Trust income...................... $ 2,925 12.0% $ 690 8.0% $ 483 5.5% Deposit account charges and other fees............................. 7,568 22.9 2,602 22.0 609 4.4 Trading account profits and commissions...................... 626 16.3 182 16.0 (116) (8.1) Net gains on securities transactions..................... 1,334 199.1 (153) (63.0) (600) (87.0) Credit card transaction fees...... 2,368 14.8 587 10.3 33 .5 Other income...................... 4,403 23.5 2,347 35.3 1,380 18.1 ------- ------ ------ Total non-interest income......... $19,224 19.9% $6,255 18.3% $1,789 4.6% ======= ====== ====== </TABLE> The increase in deposit account charges and other fees in the first nine months of 1996 compared with 1995 was partially due to fee restructuring and added cash management fees. Income on trust fees was reflective of increased new business coupled with improvement in market value on assets upon which some fees are based. Credit card fees are reflective of increased merchant and cardholder sales upon which transaction fee income is based. Included in the other income category was an increase in gains on sales of branches and fixed assets of $2.6 million. The quarterly comparisons to the third quarter of 1995 and the second quarter of 1996 also include increases in gains on sales of branches and fixed assets of $1.6 million and $1.7 million, respectively. Excluding banks acquired in 1995, total non-interest income (excluding securities gains) increased $15.4 million, or 17.0%, in the first nine months of 1996 compared to the first nine months of 1995. OTHER EXPENSE Other expense increased $10.5 million in the first nine months of 1996 compared to the first nine months of 1995. Salaries and benefits increased $5.3 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 1.9% in the first nine months of 1996 compared to the first nine months of 1995. In addition, marketing expense increased $1.4 million, occupancy expense on bank premises increased $1.0 million, and expense on foreclosed real estate increased $2.2 million. These effects were partially offset by a $5.8 million decrease in F.D.I.C. insurance expense due to a decrease in the assessment rate. In the third quarter of 1996, the Company accrued $1.3 million for a one time charge in connection with the recapitalization of the SAIF fund. Excluding the expenses of banks acquired in 1995, total other expense increased only $565 thousand in the first nine months of 1996 compared to the same period in 1995. Other expense increased $3.1 million compared to the third quarter of 1995 mainly due to increases of $1.8 million in foreclosed real estate expense and $2.0 million in F.D.I.C. insurance expense. Compared to the second quarter of 1996, other expense increased $1.1 million partly due to increases of $1.4 million in F.D.I.C. insurance expense and $957 thousand in marketing expense. LIQUIDITY AND CAPITAL RESOURCES The liquid assets of the Parent consist primarily of short-term investments and equity securities, most of which are readily marketable. The fair value of these investments was $84.4 million at September 30, 1996 compared to $90.1 million at December 31, 1995. Included in the fair values were unrealized net gains of $13.4 million at September 30, 1996 and $11.0 million at December 31, 1995. The Parent's liabilities totaled $63.3 million at September 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 $51.1 million advanced mainly from subsidiary bank holding companies in order to 12
combine resources for short-term investment in liquid assets. The Parent had no short-term borrowings from affiliate banks or long-term debt during 1996. The Parent's commercial paper, which management believes is readily marketable, has a P1 rating from Moody's and an A1 rating from Standard & Poor's. The Company is also rated A by Thomson BankWatch with a corresponding short-term rating of TBW-1. This credit availability should provide adequate funds to meet any outstanding or future commitments of the Parent. The liquid assets held by bank subsidiaries include federal funds sold and securities purchased under agreements to resell and available for sale 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 $2.87 billion at September 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 $16.9 million at September 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 September 30, 1996, the Company had acquired 1,099,063 shares under this authorization. The Company (on a consolidated basis) had an equity to asset ratio of 9.49% 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> SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (DOLLARS IN THOUSANDS) <S> <C> <C> Risk-Adjusted Assets........................... $5,976,262 $6,045,112 Tier I Capital................................. 798,846 756,452 Total Capital.................................. 867,729 829,784 Tier I Capital Ratio........................... 13.37% 12.51% Total Capital Ratio............................ 14.52% 13.73% Leverage Ratio................................. 8.69% 8.27% </TABLE> The Company's cash and cash equivalents (defined as "Cash and due from banks") were $700.6 million at September 30, 1996, a decrease of $74.2 million from December 31, 1995. Contributing to the net cash outflow were a net decrease of $102.1 million in deposits, $70.3 million in purchases of treasury stock and $99.8 million in additional loans made, net of repayments. In addition, purchases of investment securities were $964.7 million, partially offset by $839.2 million in proceeds realized from sales and maturities. Partially offsetting these net outflows were a $180.2 million net decrease in short-term investments in federal funds sold and resell agreements and $160.8 million generated from operating activities. Total assets and core deposits decreased slightly, $159.8 million and $150.6 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 $2.12 billion, standby letters of credit totaled $135.1 million, and commercial letters of credit totaled $25.4 million at September 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 $132.8 million at September 30, 1996. The current credit exposure (or replacement cost) across all off-balance-sheet derivative contracts covered by the risk-based capital standards was $4.4 million at September 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. 13
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 <TABLE> <CAPTION> NINE MONTHS 1996 NINE 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).......... $1,679,242 $ 99,356 7.90% $1,684,814 $105,286 8.36% Construction and development........... 168,404 11,027 8.75 127,554 9,015 9.45 Real estate--business.. 709,032 45,755 8.62 686,887 46,057 8.96 Real estate--personal.. 985,649 57,969 7.86 943,148 54,792 7.77 Personal banking....... 1,253,995 81,473 8.68 1,242,857 81,159 8.73 Credit card............ 504,691 49,968 13.23 407,452 42,495 13.94 ---------- -------- ----- ---------- -------- ----- Total loans.......... 5,301,013 345,548 8.71 5,092,712 338,804 8.89 ---------- -------- ----- ---------- -------- ----- Investment securities: U.S. government & federal agency........ 1,766,554 81,207 6.14 1,717,948 79,266 6.17 State & municipal obligations (A)....... 117,649 6,929 7.87 119,846 6,897 7.69 CMO's and asset-backed securities............ 648,127 30,462 6.28 732,843 34,256 6.25 Trading account securities (A)........ 6,125 208 4.54 3,549 163 6.15 Other marketable securities (A)........ 45,299 2,252 6.64 73,005 3,315 6.07 Other non-marketable securities............ 35,721 834 3.12 24,227 570 3.15 ---------- -------- ----- ---------- -------- ----- Total investment securities.......... 2,619,475 121,892 6.22 2,671,418 124,467 6.23 ---------- -------- ----- ---------- -------- ----- Federal funds sold and securities purchased under agreements to resell................. 472,554 19,192 5.42 151,419 6,711 5.93 ---------- -------- ----- ---------- -------- ----- Total interest earning assets...... 8,393,042 486,632 7.75 7,915,549 469,982 7.94 -------- ----- -------- ----- Less allowance for loan losses................. (98,490) (95,202) Unrealized gain (loss) on investment securities............. 22,239 (27,932) Cash and due from banks. 632,272 595,039 Land, buildings and equipment--net......... 208,819 204,251 Other assets............ 197,889 204,167 ---------- ---------- Total assets......... $9,355,771 $8,795,872 ========== ========== LIABILITIES AND EQUITY: Interest bearing deposits: Savings................ $ 302,599 5,415 2.39 $ 312,118 5,970 2.56 Interest bearing demand................ 3,650,900 90,746 3.32 3,270,040 82,111 3.36 Time open & C.D.'s of less than $100,000.... 2,211,055 90,277 5.45 2,188,292 86,427 5.28 Time open & C.D.'s of $100,000 and over..... 228,950 8,893 5.19 208,684 8,267 5.30 ---------- -------- ----- ---------- -------- ----- Total interest bearing deposits.... 6,393,504 195,331 4.08 5,979,134 182,775 4.09 ---------- -------- ----- ---------- -------- ----- Borrowings: Federal funds purchased and securities sold under agreements to repurchase............ 445,091 15,950 4.79 446,388 18,039 5.40 Long-term debt and other borrowings...... 14,764 792 7.16 16,694 871 6.98 ---------- -------- ----- ---------- -------- ----- Total borrowings..... 459,855 16,742 4.86 463,082 18,910 5.46 ---------- -------- ----- ---------- -------- ----- Total interest bearing liabilities. 6,853,359 212,073 4.13% 6,442,216 201,685 4.19% -------- ----- -------- ----- Non-interest bearing demand deposits........ 1,536,578 1,473,457 Other liabilities ...... 77,752 49,512 Stockholders' equity.... 888,082 830,687 ---------- ---------- Total liabilities and equity.............. $9,355,771 $8,795,872 ========== ========== Net interest margin (T/E).................. $274,559 $268,297 ======== ======== Net yield on interest earning assets......... 4.37% 4.53% ===== ===== </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 NINE MONTHS ENDED SEPTEMBER 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)................ $ (286) $ (5,644) $(5,930) Construction and development.................... 2,890 (878) 2,012 Real estate--business........................... 1,485 (1,787) (302) Real estate--personal........................... 2,472 705 3,177 Personal banking................................ 728 (414) 314 Credit card..................................... 10,148 (2,675) 7,473 ------- -------- ------- Total loans................................... 17,437 (10,693) 6,744 ------- -------- ------- Investment securities: U.S. government & federal agency................ 2,245 (304) 1,941 State & municipal obligations (A)............... (127) 159 32 CMO's and asset-backed securities............... (3,964) 170 (3,794) Trading account securities (A).................. 119 (74) 45 Other marketable securities (A)................. (1,259) 196 (1,063) Other non-marketable securities................. 271 (7) 264 ------- -------- ------- Total investment securities................... (2,715) 140 (2,575) ------- -------- ------- Federal funds sold and securities purchased under agreements to resell............................ 14,243 (1,762) 12,481 ------- -------- ------- Total interest income......................... 28,965 (12,315) 16,650 ------- -------- ------- VARIANCE IN INTEREST EXPENSE ON: Interest bearing deposits: Savings......................................... (182) (373) (555) Interest bearing demand......................... 14,311 (5,676) 8,635 Time open & C.D.'s of less than $100,000........ 1,060 2,790 3,850 Time open & C.D.'s of $100,000 and over......... 805 (179) 626 ------- -------- ------- Total interest bearing deposits............... 15,994 (3,438) 12,556 ------- -------- ------- Borrowings: Federal funds purchased and securities sold under agreements to repurchase................. (416) (1,673) (2,089) Long-term debt and other borrowings............. (101) 22 (79) ------- -------- ------- Total borrowings.............................. (517) (1,651) (2,168) ------- -------- ------- Total interest expense........................ 15,477 (5,089) 10,388 ------- -------- ------- Change in net interest margin (T/E).............. $13,488 $ (7,226) $ 6,262 ======= ======== ======= Percentage increase in net interest margin (T/E) over the same period of the prior year.......... 2.33% ======= </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
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS THREE MONTHS ENDED SEPTEMBER 30, 1996 AND JUNE 30, 1996 <TABLE> <CAPTION> THIRD QUARTER 1996 SECOND 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).......... $1,669,718 $33,130 7.89% $1,686,451 $32,884 7.84% Construction and development........... 164,337 3,565 8.63 169,600 3,674 8.71 Real estate--business.. 723,412 15,607 8.58 702,606 15,107 8.65 Real estate--personal.. 985,396 19,152 7.73 990,822 19,287 7.83 Personal banking....... 1,243,795 26,934 8.61 1,253,783 27,076 8.69 Credit card............ 516,869 17,026 13.10 502,800 16,234 12.99 ---------- ------- ----- ---------- ------- ----- Total loans.......... 5,303,527 115,414 8.66 5,306,062 114,262 8.66 ---------- ------- ----- ---------- ------- ----- Investment securities: U.S. government & federal agency........ 1,796,376 27,663 6.13 1,789,272 27,311 6.14 State & municipal obligations (A)....... 114,666 2,224 7.72 117,785 2,348 8.02 CMO's and asset-backed securities............ 663,732 10,357 6.21 632,794 9,942 6.32 Trading account securities (A)........ 3,624 7 .77 7,861 113 5.78 Other marketable securities (A)........ 53,414 853 6.35 45,595 734 6.47 Other non-marketable securities............ 38,773 580 5.95 33,940 173 2.05 ---------- ------- ----- ---------- ------- ----- Total investment securities.......... 2,670,585 41,684 6.21 2,627,247 40,621 6.22 ---------- ------- ----- ---------- ------- ----- Federal funds sold and securities purchased under agreements to resell... 385,594 5,246 5.41 453,629 6,064 5.38 ---------- ------- ----- ---------- ------- ----- Total interest earning assets...... 8,359,706 162,344 7.73 8,386,938 160,947 7.72 ------- ----- ------- ----- Less allowance for loan losses................. (98,197) (99,054) Unrealized gain on investment securities.. 350 14,220 Cash and due from banks. 623,676 615,730 Land, buildings and equipment--net......... 208,241 208,242 Other assets............ 189,337 196,892 ---------- ---------- Total assets......... $9,283,113 $9,322,968 ========== ========== LIABILITIES AND EQUITY: Interest bearing deposits: Savings................ $ 296,312 1,792 2.41 $ 305,729 1,789 2.35 Interest bearing demand................ 3,650,512 30,233 3.29 3,664,421 30,036 3.30 Time open & C.D.'s of less than $100,000.... 2,174,378 29,411 5.38 2,213,390 29,682 5.39 Time open & C.D.'s of $100,000 and over..... 220,355 2,848 5.14 234,170 2,984 5.13 ---------- ------- ----- ---------- ------- ----- Total interest bearing deposits.... 6,341,557 64,284 4.03 6,417,710 64,491 4.04 ---------- ------- ----- ---------- ------- ----- Borrowings: Federal funds purchased and securities sold under agreements to repurchase............ 424,679 5,102 4.78 429,469 5,067 4.75 Long-term debt and other borrowings...... 15,059 271 7.16 14,470 263 7.32 ---------- ------- ----- ---------- ------- ----- Total borrowings..... 439,738 5,373 4.86 443,939 5,330 4.83 ---------- ------- ----- ---------- ------- ----- Total interest bearing liabilities. 6,781,295 69,657 4.09% 6,861,649 69,821 4.09% ------- ----- ------- ----- Non-interest bearing demand deposits........ 1,556,370 1,507,302 Other liabilities....... 65,481 71,369 Stockholders' equity.... 879,967 882,648 ---------- ---------- Total liabilities and equity.............. $9,283,113 $9,322,968 ========== ========== Net interest margin (T/E).................. $92,687 $91,126 ======= ======= Net yield on interest earning assets......... 4.41% 4.37% ===== ===== </TABLE> - -------- (A) Stated on a tax equivalent basis using a federal income tax rate of 35%. 16
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E) DUE TO VOLUMES AND RATES THREE MONTHS ENDED SEPTEMBER 30, 1996 AND JUNE 30, 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> <C> VARIANCE IN INTEREST INCOME ON: Loans: Business (including foreign) (A).............. $(330) $ 576 $ 246 Construction and development.................. (115) 6 (109) Real estate--business......................... 452 48 500 Real estate--personal......................... (107) (28) (135) Personal banking.............................. (218) 76 (142) Credit card................................... 459 333 792 ----- ------ ------ Total loans................................. 141 1,011 1,152 ----- ------ ------ Investment securities: U.S. government & federal agency.............. 110 242 352 State & municipal obligations (A)............. (63) (61) (124) CMO's and asset-backed securities............. 491 (76) 415 Trading account securities (A)................ (62) (44) (106) Other marketable securities (A)............... 127 (8) 119 Other non-marketable securities............... 25 382 407 ----- ------ ------ Total investment securities................. 628 435 1,063 ----- ------ ------ Federal funds sold and securities purchased under agreements to resell.................... (917) 99 (818) ----- ------ ------ Total interest income....................... (148) 1,545 1,397 ----- ------ ------ VARIANCE IN INTEREST EXPENSE ON: Interest bearing deposits: Savings....................................... (56) 59 3 Interest bearing demand....................... 651 (454) 197 Time open & C.D.'s of less than $100,000...... (486) 215 (271) Time open & C.D.'s of $100,000 and over....... (168) 32 (136) ----- ------ ------ Total interest bearing deposits............. (59) (148) (207) ----- ------ ------ Borrowings: Federal funds purchased and securities sold under agreements to repurchase............... (71) 106 35 Long-term debt and other borrowings........... 11 (3) 8 ----- ------ ------ Total borrowings............................ (60) 103 43 ----- ------ ------ Total interest expense...................... (119) (45) (164) ----- ------ ------ Change in net interest margin (T/E)............ $ (29) $1,590 $1,561 ===== ====== ====== Percentage increase in net interest margin (T/E) over the prior quarter.................. 1.71% ====== </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. 17