SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
Commission File No. 0-2989
Commerce Bancshares, Inc.
1000 Walnut, Kansas City, MO 64106
(816) 234-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes þ No o
As of August 6, 2002, the registrant had outstanding 64,839,871 shares of its $5 par value common stock, registrant’s only class of common stock.
TABLE OF CONTENTS
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
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See accompanying notes to consolidated financial statements.
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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 2001 data to conform to current year presentation. Results of operations for the three and six month periods ended June 30, 2002, are not necessarily indicative of results to be attained for any other period.
The significant accounting policies followed in the preparation of the quarterly financial statements are the same as those disclosed in the 2001 Annual Report on Form 10-K.
The following is a summary of the allowance for loan losses.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investment securities, at fair value, consist of the following at June 30, 2002, and December 31, 2001.
Equity securities included investments in short term mutual funds of $13,473,000 at June 30, 2002, and $176,067,000 at December 31, 2001.
The following table presents information about the Company’s intangible assets which are being amortized in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, discussed in note 9 below.
Aggregate amortization expense was $668,000 and $755,000, respectively, for the three month periods ended June 30, 2002 and 2001, and $1,392,000 and $1,506,000, respectively, for the corresponding six month periods.
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As required by SFAS 142, the Company discontinued recording goodwill amortization effective January 1, 2002. The following tables compare results of operations as if no goodwill amortization had been recorded in 2001.
During the six month period ended June 30, 2002, the Company sold several bank branches. Goodwill and other intangible assets of $1,300,000 were written off in these transactions.
5. Common Stock
The shares used in the calculation of basic and diluted income per share are shown below.
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6. Comprehensive Income
The Company’s only component of other comprehensive income during the periods presented below was the unrealized holding gains and losses on available for sale investment securities.
7. Segments
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The Consumer segment includes the retail branch network, consumer finance, bankcard, student loans and discount brokerage services. The Commercial segment provides corporate lending, leasing, and international services, as well as business, government deposit and cash management services. The Money Management segment provides traditional trust and estate tax planning services, and advisory and discretionary investment management services.
The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments.
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Beginning in 2002, the Company implemented a new funds transfer pricing method to value funds used (e.g., loans, fixed assets, cash, etc.) and funds provided (deposits, borrowings, and equity) by the business segments and their components. This new process assigns a specific value to each new source or use of funds with a maturity, based on current LIBOR interest rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are assigned to LIBOR based funding pools. Previous methodology used funding pools based on average rates to assign and determine value. The new method should provide a more accurate means of valuing fund sources and uses in a varying interest rate environment. The change in profitability methods mainly affected the Consumer segment and had the effect of lowering the cost of funds allocation to the Consumer segment by $30.6 million and $62.2 million, respectively, in the three and six month periods ended June 30, 2002. Segment results for the prior periods in the table above were not restated for the change in the profitability measurement method.
8. Derivative Instruments
The Company uses derivative instruments, on a limited basis, primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. The Company has three interest rate swaps which were designated as fair value hedges of certain fixed rate loans. Through its International Department, the Company enters into foreign exchange contracts consisting mainly of contracts to purchase or deliver foreign currency transactions for customers at a specific future date. Also, mortgage loan commitments and forward sales contracts are derived from the Company’s mortgage banking operation in which fixed rate personal real estate loans are originated and sold to other institutions.
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The Company’s usage of derivative instruments is detailed below.
9. Impact of Recently Issued Accounting Standards
Effective January 1, 2002, the Company adopted Statement of Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. It also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.
The Statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of January 1, 2002. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Statement allows until June 30, 2002, to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of January 1, 2002. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. This second step is required to be completed as soon as possible, but no later than the end of 2002. Any transitional impairment loss must be recognized as the cumulative effect of a change in accounting principle in the Company’s 2002 consolidated statement of income.
The Company identified its reporting units as its three reportable segments of Consumer, Commercial, and Money Management. It completed the first step in the transitional goodwill impairment valuation, which was to compare the fair value of its reporting units with the carrying amount of the reporting units. Because the fair value of the reporting units exceeded the carrying value of the units, no indication of reporting unit goodwill impairment existed. As a result, performance of the second step of the transitional impairment test described above was not necessary, and no impairment loss will be recognized as a cumulative effect of a change in accounting principle in the Company’s 2002 consolidated statement of income.
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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 2001 Annual Report on Form 10-K. Results of operations for the three and six month periods ended June 30, 2002, are not necessarily indicative of results to be attained for any other period.
FORWARD LOOKING INFORMATION
This report may contain “forward-looking statements” that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as “expects”, “anticipates”, “believes”, “estimates”, variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company’s market area, and competition with other entities that offer financial services.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those which are both most important to the portrayal of the Company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting policy relates to the allowance for loan losses and involves significant management valuation judgments. The Company performs periodic and systematic detailed reviews of its lending portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company’s estimate of the collectability of the loan portfolio. Further discussion of the methodologies used in establishing this reserve is contained in the Provision and Allowance for Loan Losses section of this report. In addition, see the Summary of Significant Accounting Policies note to consolidated financial statements in the 2001 Annual Report on Form 10-K for further discussion.
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SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS
Summary
Consolidated net income for the second quarter of 2002 was $50.1 million, a $4.3 million or 9.4% increase over the second quarter of 2001. Diluted earnings per share increased 10.3% to $.75 for the second quarter of 2002, compared to $.68 for the second quarter of 2001. The increase in net income was mainly the result of an increase in net interest income, coupled with a lower provision for loan losses. Stable interest rates, growth in overall earning assets, and continued repricing of certificate of deposit accounts contributed to the improvement in the net interest margin in the current quarter. Non-interest income decreased 1.2%, while non-interest expense increased 1.1% compared to the second quarter of last year. Return on average assets for the current
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Consolidated net income for the first six months of 2002 was $97.0 million, an 8.2% increase over the first six months of 2001. Diluted earnings per share was $1.46 compared to $1.34 for the first six months of last year, an increase of 9.0%. Net interest income rose $10.4 million, or 4.4%, while the provision for loan losses declined $3.5 million. Non-interest income, excluding gains and losses on securities transactions, grew 2.6%, and non-interest expense, excluding goodwill amortization, increased 4.4%. The efficiency ratio for the first six months of 2002 was 58.72% compared to 58.35% in 2001.
The Company’s most recent bank acquisition was effective March 1, 2001, when Centennial Bank was acquired. The bank was located in the metropolitan St. Louis area, and at acquisition had assets of $254 million, loans of $189 million, and deposits of $216 million. The Company issued common stock valued at $34.4 million as consideration in the transaction. The acquisition was accounted for as a pooling of interests; however, the Company’s financial statements were not restated since restated amounts did not differ materially from the Company’s historical results.
Net Interest Income
The following table summarizes the changes in net interest income on a fully tax equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate. Management believes this allocation method, applied on a consistent basis, provides meaningful comparisons between the respective periods.
Analysis of Changes in Net Interest Income
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Net interest income for the second quarter of 2002 was $124.4 million, a 5.7% increase over the second quarter of 2001, and for the first six months was $245.0 million, a 4.4% increase over last year. For the quarter, the net interest rate margin was 4.47% compared with 4.44% last year, while the six month margin was 4.40% in 2002 and 4.52% in 2001.
Total interest income in the current quarter decreased $29.9 million compared to the second quarter of 2001. During the second half of 2001, the Federal Reserve aggressively reduced interest rate levels, however, since January 1, 2002, the Federal Reserve has not changed the federal funds target rate, nor has the prime rate changed. As a result of these rate changes, during the second half of 2001 interest rates on large sections of the Company’s business, business real estate, home equity, and credit card loan portfolios repriced downward, causing a decline in interest income. Average rates on loans declined 167 basis points from the second quarter of 2001. Also, average loan balances decreased $201.3 million, or 2.6%, from the second quarter of 2001, contributing to the decrease in interest income. Partially offsetting the effects of lower loan balances and lower interest rates was an increase of $1.23 billion, or 55.9%, in investment securities balances. The average tax equivalent yield on interest earning assets was 5.85% for the second quarter of 2002 compared to 7.27% last year.
Compared to the first six months of 2001, total interest income decreased $67.3 million. The decline reflects the same trends noted above in the quarterly comparison, with declines in average overall yields and loan balances partly offset by higher balances in investment securities. Average tax equivalent yields on interest earning assets for the six months were 5.87% in 2002 and 7.58% in 2001.
For the three months ended June 30, 2002, total interest expense (net of capitalized interest) decreased $36.6 million compared to the same quarter last year. This was due mainly to the reduction in deposit rates (as described above) in all interest bearing deposit categories, which decreased 171 basis points overall. In addition, average rates paid on overnight borrowings and other debt declined 243 basis points. The average cost of funds was 1.59% for the second quarter of 2002, compared to 3.36% for the second quarter of 2001.
Total interest expense decreased $77.7 million in the first six months of 2002 compared to 2001. Average rates paid on deposit balances declined 188 basis points, and rates paid on other borrowings declined 289 basis points. Higher balances in certificates of deposit of over $100,000, money market accounts, and borrowings from the Federal Home Loan Bank (FHLB) partly offset the effect of the decline in rates. The overall average cost of funds for the six month period decreased from 3.65% in 2001 to 1.68% in 2002.
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Summaries of average assets and liabilities and the corresponding average rates earned/paid are located at the end of this discussion.
Non-Interest Income
Non-interest income for the six months ended June 30, 2002, increased $1.4 million over the same period last year. Deposit account charges and other fees increased $3.3 million, or 8.1%, over the first six months of 2001, mainly due to growth in corporate cash management fees. Credit card transaction fees rose $710 thousand, mainly due to higher cardholder and debit card fees, partly offset by lower merchant fees. Trading revenue rose by $441 thousand, or 5.9% over the prior six month period. Trust fees decreased $779 thousand, mainly due to large, one-time, probate fees in 2001 and declining asset valuations. Mortgage banking revenue declined $1.5 million, resulting from lower gains on sales of mortgage loans and fair value adjustments on mortgage commitments and related contracts. Securities transactions resulted in net losses of $292 thousand in the first six months of 2002, due mainly to a $700 thousand loss relating to a venture capital investment. During the first six months of 2001, bank portfolio gains of $4.8 million were partly offset by venture capital investment losses of $3.1 million.
Other non-interest income grew $1.3 million, or 4.9%, over the first six months of 2001 mainly as a result of growth in brokerage related fees (fees from annuity, mutual fund and money market sweep sales), in addition to gains on bank branch and facility sales. These increases were partly offset by a loss incurred from a venture capital partnership. Total brokerage related fees grew $1.7 million, or 32%, mainly on stronger sales in all three areas. During the first six months of 2002, the Company sold its minority interest in a community bank, two bank branches in rural Kansas, and a banking facility in the St. Louis area for gains of $1.5 million, $1.7 million, and $701 thousand, respectively. In comparison, a gain of $1.5 million was recorded in the same period in 2001 on the sale of a banking facility in the St. Louis area. Also, income from a venture capital partnership investment declined $1.9 million as a result of investment losses realized by the partnership this year and non-recurring income of $1.5 million recognized last year due to partnership restructuring.
For the second quarter of 2002, non-interest income totaled $69.8 million compared with $70.7 million in the same quarter of last year, a decrease of $860 thousand, or 1.2%. Excluding securities transactions, non-interest income was essentially flat compared with the prior year. Trust fees decreased $1.0 million and deposit account charges increased $1.4 million as a result of the same trends as noted above in the six month comparisons. Credit card transaction fees rose $534 thousand, or 3.9%, due to debit card fee growth of 18.3%, partly offset by lower merchant fees, which were constrained by a combination of lower retail sales and lower profit margins. Trading revenue exceeded results in the second quarter of last year by 6.9%. Mortgage banking
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Other non-interest income declined $860 thousand, or 6.5%, from the second quarter of 2001. This decrease was mainly the result of the venture capital partnership transactions, partly offset by the gains on the bank branch and facility sales, as discussed in the six month comparison above.
Non-Interest Expense
Non-interest expense rose $7.2 million, or 3.3%, over the first six months of 2001. Salaries and employee benefits increased $8.0 million, or 6.9%, due to higher medical and pension plan costs, salary merit increases, and higher incentive expense. Full-time equivalent employees totaled 5,021 and 5,113 at June 30, 2002 and 2001, respectively. Occupancy, equipment, supplies and communication, and data processing costs showed solid expense control. Data processing and software costs increased mainly due to a final contract termination payment of $1.7 million in the second quarter to an outside service provider as part of a project to internalize the mainframe computer operation. Even with this payment, outside data processing and software costs grew only $682 thousand as cost efficiencies from this project began to be realized. Goodwill amortization, which amounted to $2.3 million in the first six months of 2001, was discontinued in 2002, as required by a recent accounting pronouncement.
For the three months ended June 30, 2002, non-interest expense increased $1.3 million, or 1.1%, compared to the second quarter of 2001. Salaries and employee benefits increased $2.3 million, or 3.9%, as a result of higher medical and pension plan costs. Occupancy expense rose $657 thousand, or 8.7%, due to increases in rent and depreciation expense on premises. Smaller increases occurred in the equipment, marketing and data processing expense categories, with a decrease in supplies and communication expense. Goodwill amortization, which was discontinued as mentioned above, decreased $1.1 million. Other non-interest expense declined $773 thousand from the second quarter of 2001, mainly due to charges of $1.5 million recorded in 2001 related to partnership restructuring expense referred to previously, but were partly offset by higher professional fees and sales tax expense in the current quarter.
The efficiency ratio was 57.74% in the second quarter of 2002 compared to 58.17% (excluding the partnership restructuring adjustments) in the second quarter of 2001 and 59.72% in the first quarter of 2002.
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Provision and Allowance for Loan Losses
The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of an allocated and an unallocated component. To determine the allocated component of the allowance, the Company combines estimates of the reserves needed for loans evaluated on an individual basis with estimates of reserves needed for pools of loans with similar risk characteristics. This process uses tools such as the “watch loan list”, loss experience, and migration models. To mitigate the imprecision in the estimation of the allocated component, specifically calculated reserve amounts are supplemented by an unallocated component. The unallocated component includes management’s determination of the amounts necessary to offset credit risk issues associated with loan concentrations, economic uncertainties, industry concerns, adverse market changes in estimated or appraised collateral values, and other subjective factors.
The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses rests upon various judgments and assumptions made by management. Factors that influence these judgments include past loan loss experience, current loan portfolio composition and characteristics, trends in portfolio risk ratings, levels of non-performing assets, prevailing regional and national economic conditions, and the Company’s ongoing specific loan evaluation process, including that of its regulators.
Net loan charge-offs were $14.1 million in the first six months of 2002, a $3.3 million decrease from the same period in the prior year. The decline resulted from lower charge-offs on credit card, personal banking, and business loans, in addition to higher credit card recoveries. Total net charge-offs for the first six months of 2002 were .37% of total average loans, compared to .44% for the same period in 2001.
Net loan charge-offs for the second quarter of 2002 amounted to $6.7 million compared to $7.4 million in the first quarter of 2002 and $8.0 million in the second quarter of last year. The ratio of net charge-offs to average loans was .35% in the current quarter compared with .39% in the first quarter of 2002 and .40% in the second quarter of 2001. The decrease in net loan charge-offs in the current quarter compared to the first quarter of this year resulted from higher recoveries on business, business real estate and credit card loans and lower charge-offs on personal banking loans. Compared to the second quarter of 2001, the reduction in net charge-offs was the result of lower losses on credit card loans of $1.0 million. Lower delinquency rates, improved underwriting controls and fewer bankruptcies on credit card and personal banking loans were responsible for lower credit losses. For the second quarter of 2002, net charge-offs on average credit card loans amounted to 3.60% compared with 3.58% in the first quarter of this year and 4.41% in the second quarter of 2001. Personal banking loan net charge-offs were .37% of average personal loans this quarter compared to .43% in the first quarter this year.
The provision for loan losses was $14.1 million in the first six months of 2002 compared to $17.5 million in the same period in 2001. The provision for loan losses for the second quarter of 2002 totaled $6.7 million, down from $7.4 million in the first quarter of 2002 and $8.0 million in the second quarter of 2001.
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The allowance for loan losses at June 30, 2002, was $130.0 million, or 1.68% of total loans, and represented 450% of total non-performing assets. The Company considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at June 30, 2002.
Risk Elements of Loan Portfolio
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans 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. These generally are loans that are 90 days past due as to principal and/or interest payments, unless both well-secured and in the process of collection, or are 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as non-accrual. Those loans, anticipated to be collected, are included in the totals below for loans past due 90 days and still accruing interest.
Income Taxes
The Company’s income tax expense was $45.9 million in the first six months of 2002 and $45.0 million in the first six months of 2001, resulting in effective tax rates of 32.1% and 33.4%, respectively. The effective tax rate for the second quarter of 2002 was 32.8% compared with 31.4% in the first quarter of 2002 and 33.3% in the second quarter of 2001. The lower effective tax rates in 2002 compared with 2001 were impacted by both the elimination of non-deductible goodwill amortization, and the additional accrual of state and Federal rehabilitation credits to be received on the renovation of a downtown Kansas City office building.
FINANCIAL CONDITION
Balance Sheet
Total assets of the Company were $12.3 billion at June 20, 2002 compared to $12.9 billion at December 31, 2001, a decrease of 4.6%. Earning assets at June 30, 2002 totaled $11.4 billion, composed of loans (68%), investment securities (32%) and short term investments in federal funds sold and securities purchased under agreements to resell.
During the first six months of 2002, loans increased $90.7 million, or 1.2%, over balances at December 31, 2001. The increase was the result of higher personal banking, construction, and business loans, but partly offset by lower real estate loans. The region’s economy remains sluggish and customers with lines of credit to finance inventories and receivables have been slow to add new debt. The same remains true for other commercial lending activities. Personal real estate loans decreased $49.7 million from the year end balance, continuing the trend whereby principal amortization, coupled with lower origination of variable rate loans, resulted in lower loan balances. Long term fixed rate real estate loans originated by the Company are routinely sold to the secondary market. During the first six months of 2002, personal loans, mainly automobile lending, grew $115.4 million. The completion of major incentive programs offered by the auto companies over the last six months allowed the Company to offer more competitive products and increase loan balances.
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Available for sale investment securities decreased $194.3 million at June 30, 2002, compared to December 31, 2001. Most of the decrease resulted from lower amounts invested in short term mutual funds by bank subsidiaries. The proceeds were used mainly to make new loans and reduce outstanding debt. The total investment securities portfolio amounted to $3.54 billion at June 30, 2002, and was comprised mainly of U.S. government and agencies (33%), mortgage-backed (38%), and other asset-backed (22%) investment securities.
Total deposits decreased $197.9 million at June 30, 2002, compared to December 31, 2001. Non-interest bearing demand deposits declined $241.9 million, mainly in business deposits. Interest bearing deposits rose $44.0 million due to growth in money market accounts and short term certificates of deposit of $100,000 and over, partly offset by lower long term retail certificates of deposit.
During the first half of 2002, borrowings decreased $467.8 million from 2001 year end balances. Short term borrowings of federal funds purchased and securities sold under agreements to repurchase declined $416.0 million, and a $50.0 million advance from the FHLB was repaid.
Liquidity and Capital Resources
Liquidity represents the Company’s ability to obtain cost-effective funding to meet the needs of customers as well as the Company’s financial obligations. Liquidity can be provided through the subsidiary banks’ sale and maturity of federal funds sold and securities purchased under agreements to resell, in addition to their available for sale investment securities portfolio. These liquid assets had a fair value of $3.25 billion at June 30, 2002, which included $581.5 million pledged to secure public deposits, discount window borrowings, and other purposes as required by law. Within the next twelve months, approximately $319.7 million, or 10%, of the banks’ available for sale portfolio will mature. The available for sale bank portfolio included an unrealized net gain in fair value of $87.0 million at June 30, 2002 compared to an unrealized net gain of $29.4 million at December 31, 2001. Liquidity can also be obtained through secured advances from the FHLB, of which certain subsidiary banks are members. These borrowings are generally secured by residential mortgages and mortgage-backed securities. Advances outstanding amounted to $375.1 million at December 31, 2001 and $324.9 million at June 30, 2002. Most of the advances are payable during 2002 and 2003. An additional $120.2 million is available under the FHLB lines of credit.
The liquid assets of the Parent consist primarily of U.S. federal agency securities, commercial paper, securities purchased under agreements to resell, and marketable corporate stock, including investments in mutual funds. The fair value of these assets was $223.7 million at June 30, 2002 compared to $175.2 million at December 31, 2001. Included in the fair values were unrealized net gains of $31.2 million at June 30, 2002, and $32.6 million at December 31, 2001. The Parent’s liabilities totaled $8.8 million at June 30, 2002, compared to $13.4 million at December 31, 2001. The Parent had no short-term borrowings from affiliate banks or long-term debt during 2002. 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’s commercial paper is unissued, however, this credit availability should provide adequate funds to meet any outstanding or future commitments of the Parent.
In February 2002, the Board of Directors re-approved a plan to authorize the Company to purchase up to 3 million shares of common stock. During the first six months of 2002, the Company purchased approximately 540 thousand shares at an average cost of $44.29. The Company has routinely used these reacquired shares to fund annual stock dividends and various stock option programs.
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The Company had an equity to asset ratio of 10.80% based on 2002 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.
The following is a discussion of cash flows; these amounts are based on cash flows that exclude changes resulting from bank acquisitions and branch dispositions. The Company’s cash and cash equivalents (defined as “Cash and due from banks” on the accompanying balance sheets) were $610.6 million at June 30, 2002, a decrease of $213.6 million from December 31, 2001. Contributing to the net cash outflow were a net decrease of $416.0 million in borrowings of federal funds purchased and repurchase agreements, and a decrease of $192.0 million in deposits. Loan balances, net of repayments, increased $114.8 million. In addition, FHLB debt of $50.0 million was repaid. These cash outflows were partly offset by a decrease of $338.9 million in short-term investments in federal funds sold and securities purchased under agreements to resell, $239.9 million in maturities and sales of investment securities (net of purchases), and $74.7 million generated from operating activities.
The Company has various commitments and contingent liabilities which, in accordance with generally accepted accounting principles, are properly not reflected on the balance sheet. These include loan commitments (excluding derivative instruments and lines of credit related to credit cards) totaling approximately $3.05 billion, standby letters of credit totaling $314.5 million, and commercial letters of credit totaling $31.9 million at June 30, 2002.
Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company mainly uses earnings simulation models to analyze net interest sensitivity to movement in interest rates. The table below shows the effect that gradual rising and/or falling interest rates over a twelve month period would have on the Company’s net interest income, given a static balance sheet.
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As reported in the previous quarter, during the second half of 2001, increased liquidity resulting from a decline in loans and an increase in both deposits and short term borrowings was invested in fixed rate investment securities. While lower funding costs coupled with higher investment securities yields resulted in growth in net interest income, the Company became less asset-sensitive mainly because of the growth in fixed rate investment securities. Since December 2001, the Company’s risk position has become more neutral. The investment securities portfolio has experienced normal maturities of fixed rate bonds and variable rate loans have shown some growth, especially in the second quarter. Also, as interest rates rise in the future, rates on student loans, which vary with certain indices, will now reprice upward. Finally, over the last six months, deposit growth occurred in several non-maturity categories. These deposits normally do not reprice immediately or in the same manner as other interest rates change. All these factors resulted in reduced interest rate risk and a slight increase in the overall asset sensitivity of the Company’s balance sheet.
For further discussion of the Company’s market risk, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Sensitivity included in the Company’s 2001 Annual Report on Form 10-K.
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Six Months Ended June 30, 2002 and 2001
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Three Months Ended June 30, 2002 and 2001
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The annual meeting of shareholders of Commerce Bancshares, Inc. was held on April 17, 2002. 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:
(a) Exhibits.
(b) No reports on Form 8-K were filed during the quarter ended June 30, 2002.
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.
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