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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File No. 0-2989
COMMERCE BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-0889454
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
1000 WALNUT, KANSAS CITY, MO 64106
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 234-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
$5 PAR VALUE COMMON STOCK
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ___X___
As of January 31, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1,240,000,000.
As of January 31, 1996, there were 36,805,139 shares of Registrant's $5 Par
Value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement with respect to the annual meeting
of shareholders to be held on April 17, 1996, are incorporated in Part III.
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1
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business ..................................................................... 3
2. Properties..................................................................... 4
3. Legal Proceedings.............................................................. 5
4. Submission of Matters to a Vote of Security Holders............................ 5
PART II
5. Market for the Registrant's Common Equity and Related Security Holder Matters.. 6
6. Selected Financial Data........................................................ 6
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 6
8. Financial Statements and Supplementary Data.................................... 7
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.................................................................... 7
PART III
10. Directors and Executive Officers of the Registrant............................. 7
11. Executive Compensation......................................................... 7
12. Security Ownership of Certain Beneficial Owners and Management................. 7
13. Certain Relationships and Related Transactions................................. 7
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 7
Signatures.......................................................................... 10
Financial Information............................................................... Appendix A
</TABLE>
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PART I
ITEM 1. BUSINESS
Commerce Bancshares, Inc. (the "Company"), a bank holding company as defined
in the Bank Holding Company Act of 1956, as amended, was incorporated under the
laws of Missouri on August 4, 1966. The Company presently owns or controls
substantially all of the outstanding capital stock of nine national banking
associations located in Missouri, one state bank and one national banking
association located in Illinois, one state bank and three national banking
associations in Kansas, and a credit card bank which is located in Nebraska and
is limited in its activities to the issuance of credit cards. The Company also
owns directly several non-banking subsidiaries which are engaged in owning real
estate and leasing the same to the Company's banking subsidiaries, underwriting
credit life and credit accident and health insurance, selling property and
casualty insurance (all such insurance relating to extensions of credit made by
the banking subsidiaries), providing venture capital through both a small
business investment corporation as well as a venture capital limited
partnership, (in which the Company has a 50% interest and which is managed by
the Company), and mortgage banking. The Company also owns second tier holding
companies which are the direct owners of several of the above mentioned banks.
The results of operations of each of the non-banking subsidiaries of the Company
are insignificant and do not materially affect the results of operation of the
Company.
As reflected on pages A-4 through A-7 of Appendix A, attached hereto, the loan
portfolio of the Company is well diversified. It does, however, contain certain
risks as discussed on pages A-7 and A-8. The Company is operating in a multi-
state environment that consists of a profitable blend of commercial, real
estate, and consumer lending activities.
Based on deposits, loans and assets of the banking subsidiaries at the close
of 1995, the Company was the third largest multi-bank holding company
headquartered in the State of Missouri. The banking subsidiaries of the Company
which are located in Missouri (which comprise 79.4% of the banking assets of the
Company) compete with approximately 500 Missouri banks together with savings and
loans and other financial institutions. The Illinois and Kansas subsidiary banks
meet the same or similar competition in their markets where over 900 Illinois
banks and over 500 Kansas banks operate. In addition, the three states are
served by numerous savings associations, credit unions, finance companies, and
other financial intermediaries offering similar products to the customer base.
Missouri, being centrally located in the United States, provides a natural
site for production and distribution facilities and also serves as a
transportation hub. The economy is well-diversified with many major industries
represented, such as automobile manufacturing, aircraft manufacturing, food
production and agricultural production together with related industries.
Missouri has a relatively balanced real estate market and the Missouri
unemployment rate is generally at or below the national average. There are no
significant economic problems in general for the communities served by the
Company. The adjacent states of Kansas and Illinois share many of the same
characteristics in the communities being served and their local economies are
generally stable and not abnormally weakened by the national economy.
In the banking industry, Missouri is unique with two Federal Reserve Banks,
located in St. Louis and Kansas City, which results in operating efficiencies
for the subsidiary banks and their customers. In addition, the banking
subsidiaries in Illinois are members of the Federal Reserve Bank of Chicago
which provides additional flexibility to the operations area.
The banking subsidiaries compete with other financial institutions engaged in
the business of making loans or accepting deposit accounts, such as savings and
loan associations, insurance companies, small loan companies, credit unions,
finance companies, and other banking intermediaries, some or all of which may be
located in the communities where the Company's banking subsidiaries are located.
Such competition is based primarily on rates and quality of service provided.
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The Company, as a bank holding company, is primarily regulated by the Board of
Governors of the Federal Reserve System. The subsidiary banks of the Company
(except Commerce Bank, Lawrence, KS and Commerce Bank, Bloomington, IL) are all
national banking associations and as such are primarily regulated by the
Comptroller of the Currency. The two state banks are regulated by state banking
authorities and the FDIC.
As discussed on pages A-1, A-2 and A-40 of Appendix A, attached hereto, the
Company completed several acquisitions of banks in Missouri, Illinois and Kansas
during 1995. They allowed the Company to enter several new markets (Bloomington
and Chillicothe, IL; Kennett, MO; and Wichita, KS). The Company also opened
several new full service branches and ATM locations in an ongoing effort to
service the customer base.
The Company also effected the merger of several bank charters in an effort to
improve customer service and minimize operating overhead. Commerce Bank, N.A.
(Leavenworth, KS) and Commerce Bank, N.A. (Kansas City, MO) were merged into
Commerce Bank, N.A. (Kansas City, KS). The main location of the surviving bank
was changed to Kansas City, MO. Commerce Bank (El Dorado, KS) along with its
wholly-owned subsidiary, ADC, Inc., was merged into Commerce Bank, N.A.
(Wichita, KS). ADC, Inc. was subsequently liquidated. Commerce Bank, N.A.
(Clayton, MO) was merged into Commerce Bank, N.A. (Poplar Bluff, MO) and the
main location of the surviving bank was changed to Clayton, MO. Incidental to
certain of the above transactions, selected second-tier holding companies were
dissolved. Additional mergers of banks owned by the Company are expected.
The Company and its subsidiaries employed 4,437 persons on a full-time basis
and 704 persons on a part-time basis at December 31, 1995.
The information required under the caption "Statistical Disclosure by Bank
Holding Companies" is included in the "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations" and the "Notes to
Financial Statements" sections of Appendix A, attached hereto. The following
schedule reflects the page number of Appendix A where the various captioned
information is shown.
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APPENDIX
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I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
Interest Differential A-12 through A-20
II. Investment Portfolio A-10 and A-11,
A-33 and A-34
III. Loan Portfolio
Types of Loans A-4
Maturities and Sensitivities of Loans to Changes in Interest Rates A-3 and A-4
Risk Elements A-7 and A-8
IV. Summary of Loan Loss Experience A-8 through A-10
V. Deposits A-3, A-12 through A-14
VI. Return on Equity and Assets A-1
VII. Short-Term Borrowings A-34
</TABLE>
ITEM 2. PROPERTIES
At December 31, 1995, Commerce Bank, N.A. (Kansas City, MO), through its
wholly-owned subsidiary, CB Building Corp. (CB Building) owned the Commerce
Trust Building, a 15-story office building located in downtown Kansas City,
Missouri, which was constructed in 1906 and contains net rentable space of
approximately 205,000 square feet. The building is presently 83% occupied. The
bank occupies approximately 48% of the total available space. CB Building also
owns the Commerce Bank Building, an 18-story office building in downtown Kansas
City, Missouri, which was opened in mid-1986 and has net rentable space of
approximately 384,000 square feet. The Company and Commerce Bank, N.A.,
presently occupy approximately 32% of the net rentable space and
4
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the building is presently 95% leased. In addition, CB Building also owns
parking garage facilities adjacent to the Commerce Trust Building and the
Commerce Bank Building.
Another subsidiary of the Company, Mid-America Financial Corp., through its
wholly-owned subsidiary, Delaware Redevelopment Corporation, owns the Executive
Plaza Building, a 9-story office building in Kansas City, Missouri, which opened
for occupancy in early 1974 and has net rentable space of approximately 180,000
square feet. The building is 100% leased and the bank occupies approximately 85%
of the available space.
The main banking offices of Commerce Bank, N.A. (Clayton, MO), are in a
15-story office building owned by a subsidiary of the bank and located in
Clayton, Missouri, in the St. Louis, Missouri area. The bank occupies
approximately 167,000 square feet of the 197,000 net rentable square footage in
the building and the building is presently 99% leased.
The main banking offices of Commerce Bank, N.A. (Peoria) are in a 17-story
office building owned by the bank and located in downtown Peoria, Illinois. The
building is presently 91% leased with the bank occupying approximately 32% of
the 224,000 net rentable square footage.
The main banking offices of Commerce Bank, N.A. (Wichita) are in a 10-story
office building owned by its wholly-owned subsidiary, Union Center, Inc., and is
located in downtown Wichita, Kansas. The building is presently 60% leased with
the bank occupying approximately 42% of the 191,000 net rentable square footage.
The main offices of the other subsidiary banks of the Company are owned by the
respective bank with the exception of Commerce Bank of Omaha, N.A., which leases
its main office. Additionally, an insignificant number of branch locations are
located in leased premises.
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is set forth under the caption
"Commitments and Contingencies" on page A-45 of Appendix A, attached hereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1995 to a vote of
security holders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company, each of whom is
elected annually, and there are no arrangements or understandings between any of
the persons so named and any other person pursuant to which such person was
elected as an executive officer.
NAME AND AGE POSITIONS WITH REGISTRANT
============ =========================
Jeffery D. Aberdeen, 42........ Controller of the Company since December, 1995.
Assistant Controller of the Company and
Controller of Commerce Bank, N.A. (Kansas City,
MO), a subsidiary of the Company, prior
thereto.
John O. Brown, 62.............. Vice Chairman of the Company and Commerce Bank,
N.A. (Kansas City, MO) since February, 1995.
Chairman of the Board of Commerce Bank, N.A.
(Kansas City, MO) prior thereto.
Kenneth L. Carter, 53.......... President and Chief Executive Officer of
Commerce Bank, N.A. (Springfield, MO), a
subsidiary of the Company.
A. Bayard Clark, 50............ Chief Financial Officer of the Company since
December, 1995. Executive Vice President of the
Company prior thereto.
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NAME AND AGE POSITIONS WITH REGISTRANT
============ =========================
David W. Kemper, 45............ Chairman of the Board of Directors of the
Company since November, 1991, Chief Executive
Officer of the Company since June, 1986, and
President of the Company since April, 1982.
Chairman of the Board and Chief Executive
Officer of Commerce Bank, N.A. (Clayton, MO), a
subsidiary of the Company, since January, 1985.
He is the son of James M. Kemper, Jr. (a
Director and former Chairman of the Board of
the Company) and the brother of Jonathan M.
Kemper, Vice Chairman of the Company.
Jonathan M. Kemper, 42......... Vice Chairman of the Company since November,
1991. Chairman of the Board and Chief Executive
Officer of Commerce Bank, N.A. (Kansas City,
MO) since February, 1995. President and Chief
Executive Officer of Commerce Bank, N.A.
(Kansas City, MO) prior thereto. He is the son
of James M. Kemper, Jr. (a Director and former
Chairman of the Board of the Company) and the
brother of David W. Kemper, Chairman,
President, and Chief Executive Officer of the
Company.
Charles G. Kim, 35............. Executive Vice President of the Company since
April, 1995. Prior thereto, he was Senior Vice
President of Commerce Bank, N.A. (Clayton, MO)
from April, 1993. Vice President of Commerce
Bank, N.A. (Clayton, MO) prior thereto.
David D. Kling, 49............. Executive Vice President of the Company.
Seth M. Leadbeater, 45......... President of Commerce Bank, N.A. (Clayton, MO)
since October, 1992. Prior thereto, he was
Executive Vice President of Commerce Bank, N.A.
(Clayton, MO) from April, 1991. Executive Vice
President of Commerce Bank, N.A. (Kansas City,
MO) prior thereto.
Peter F. Mackie, 55............ Vice President of the Company and Executive
Vice President of Commerce Bank, N.A. (Clayton,
MO).
Robert C. Matthews, Jr., 48.... Executive Vice President of the Company.
Michael J. Petrie, 39.......... Senior Vice President of the Company since
April, 1995. Prior thereto, he was Vice
President of the Company from April, 1993.
Prior thereto, he was Vice President of
Commerce Bank, N.A. (Kansas City, MO).
William A. Sullins, Jr., 57.... Vice Chairman of the Company since August,
1992. Vice Chairman of Commerce Bank, N.A.
(Clayton, MO) prior thereto.
William G. Watson, 47.......... Chairman of the Board and Chief Executive
Officer of Commerce Bank, N.A. (Wichita, KS),
a subsidiary of the Company, since April, 1995.
President and Chief Executive Officer of Union
Bancshares, Inc. prior thereto.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The information required by this item is set forth on page A of Appendix A,
attached hereto.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is set forth on page A-1 of Appendix A,
attached hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is set forth on pages A-1 through A-25
of Appendix A, attached hereto.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages A-26 through A-48
of Appendix A, attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Items 401 and 405 of Regulation S-K regarding
executive officers is included in Part I--Item 4 of this Form 10-K under the
caption "Executive Officers of the Registrant" and the caption "Election of
Directors" in the definitive proxy statement, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K regarding executive
compensation is included under the captions "Executive Compensation",
"Retirement Benefits", "Compensation Committee Report on Executive
Compensation", and "Compensation Committee Interlocks and Insider Participation"
in the definitive proxy statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is covered under the
caption "Voting Securities and Ownership Thereof by Certain Beneficial Owners
and Management" in the definitive proxy statement, which is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is covered under the
caption "Election of Directors" in the definitive proxy statement, which is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements--The Consolidated Balance Sheets, Consolidated
Statements of Income, Consolidated Statements of Cash Flows, Consolidated
Statements of Stockholders' Equity, Notes to Financial Statements and Summary
of Quarterly Statements of Income, all for the years ended or as of December
31, 1995, 1994 and 1993, are included in Appendix A, attached hereto.
(2) Financial Statement Schedules--All schedules are omitted as such
information is inapplicable or is included in the financial statements.
(3) Exhibits--The following exhibits, numbered as prescribed, of previously
filed information (except where indicated as included herein) are hereby
incorporated by reference.
3--Articles of Incorporation and By-Laws:
(a) Restated Articles of Incorporation as filed with the Secretary of
State of Missouri on October 8, 1986, were filed in annual report on Form
10-K dated March 30, 1987, and the same are hereby incorporated by
reference.
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(b) First Amendment to Restated Articles of Incorporation was filed in
quarterly report on Form 10-Q for the period ended June 30, 1987 and dated
July 30, 1987, and the same is hereby incorporated by reference.
(c) Second Amendment to Restated Articles of Incorporation was filed in
annual report on Form 10-K dated March 22, 1990, and the same is hereby
incorporated by reference.
(d) By-Laws as currently amended were filed in annual report on Form
10-K dated March 6, 1992, and the same are hereby incorporated by
reference.
(e) Amendment to Restated Articles of Incorporation to increase
authorized shares to 60,000,000 shares with a par value of $5.00 was
reported on Form 10-Q dated August 6, 1993, and the same is hereby
incorporated by reference.
4--Instruments defining the rights of security holders, including
indentures:
(a) Pursuant to paragraph 4(iii) of Item 601 Regulation S-K, Registrant
will furnish to the Commission upon request copies of long-term debt
instruments.
(b) Shareholder Rights Plan contained in a Rights Agreement dated
August 23, 1988, between Registrant and Morgan Shareholder Services Trust
Company (now First Chicago Trust Company of New York) was filed on Form 8-K
dated August 23, 1988, and the same is hereby incorporated by reference.
10--Material Contracts:
(a) Commerce Bancshares, Inc. Executive Incentive Compensation Plan--
Amendment and Restatement of December 3, 1993, was filed in quarterly
report on Form 10-Q dated August 5, 1994, and the same is hereby
incorporated by reference.
(b) Copy of Commerce Bancshares, Inc. Incentive Stock Option Plan as
adopted on April 16, 1986, was filed in annual report on Form 10-K dated
March 30, 1987, and the same is hereby incorporated by reference.
(c) Copy of Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option
Plan, and now captioned the Commerce Bancshares, Inc. 1996 Non-Qualified
Stock Option Plan, as amended and restated in its entirety on April 19,
1995, was filed in quarterly report on Form 10-Q dated August 9, 1995, and
the same is hereby incorporated by reference.
(d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee
Directors dated July 1, 1989 was filed on Form 10-Q for the quarterly
period ended June 30, 1989, and the same is hereby incorporated by
reference.
(e) Copy of Security Agreement with respect to Directors and Officers
Liability was filed in quarterly report on Form 10-Q dated July 30, 1986,
and the same is hereby incorporated by reference.
(f) Copy of Supplemental Retirement Income Plan established by Commerce
Bancshares, Inc. for James M. Kemper, Jr. was filed in annual report on
Form 10-K dated March 6, 1992, and the same is hereby incorporated by
reference.
(g) Copy of Agreement between Commerce Bancshares, Inc. and James M.
Kemper, Jr. relating to the provision of consulting and other services by
James M. Kemper, Jr. for Commerce Bancshares, Inc. was filed in annual
report on Form 10-K dated March 6, 1992, and the same is hereby
incorporated by reference.
(h) Copy of 1996 Incentive Stock Option Plan was filed in quarterly
report on Form 10-Q dated August 9, 1995, and the same is hereby
incorporated by reference.
(i) Commerce Executive Retirement Plan--included herein.
21--Subsidiaries of the Registrant--included herein
23--Independent Accountants' Consent--included herein
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24--Powers of Attorney (in the following form):
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby appoint J.
Daniel Stinnett and Jeffery D. Aberdeen, or either of them, attorney for the
undersigned to sign the Annual Report on Form 10-K of Commerce Bancshares, Inc.,
for the fiscal year ended December 31, 1995, together with any and all
amendments which might be required from time to time with respect thereto, to be
filed with the Securities and Exchange Commission under the Securities Exchange
Act of 1934, with respect to Commerce Bancshares, Inc., with full power and
authority in either of said attorneys to do and perform in the name of and on
behalf of the undersigned every act whatsoever necessary or desirable to be done
in the premises as fully and to all intents and purposes as the undersigned
might or could do in person.
IN WITNESS WHEREOF, the undersigned has executed these presents this 9th day
of February, 1996.
Signed by the following directors:
Messrs. Giorgio Balzer; Fred L. Brown; James B. Hebenstreit; David W. Kemper;
James M. Kemper, Jr.; Terry O. Meek; Benjamin F. Rassieur, Jr.; John H.
Robinson, Jr.; L. W. Stolzer; and Andrew C. Taylor.
27--Financial Data Schedule
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the last quarter of 1995.
9
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED THIS 8TH DAY OF MARCH, 1996.
Commerce Bancshares, Inc.
By:
s/J. Daniel Stinnett
-------------------------------------
J. Daniel Stinnett
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON THE 8TH DAY OF MARCH, 1996.
s/Jeffery D. Aberdeen
-------------------------------------
Jeffery D. Aberdeen
Controller
(Chief Accounting Officer)
s/A. Bayard Clark
-------------------------------------
A. Bayard Clark
Chief Financial Officer
David W. Kemper
(Chief Executive Officer)
Giorgio Balzer
Fred L. Brown
James B. Hebenstreit
James M. Kemper, Jr. A majority of the
Terry O. Meek Board of Directors*
Benjamin F. Rassieur, Jr.
John H. Robinson, Jr.
L. W. Stolzer
Andrew C. Taylor
- --------------
*David W. Kemper, Director and Chief Executive Officer, and the other Directors
of Registrant listed, executed a power of attorney authorizing J. Daniel
Stinnett, their attorney-in-fact, to sign this report on their behalf.
s/J. Daniel Stinnett
-------------------------------------
J. Daniel Stinnett, Attorney-in-Fact
10
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COMMERCE BANCSHARES, INC.
INDEX TO APPENDIX A
Containing all Financial Information and Supplementary Data
<TABLE>
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PAGES
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Common Stock Data Below
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Including Key Ratios and Five Year Summary of Selected
Financial Data A-1 through A-25
Statement of Management's Responsibility A-26
Independent Auditors' Report A-26
Summary of Significant Accounting Policies A-27
Consolidated Financial Statements:
Balance Sheets A-28
Statements of Income A-29
Statements of Cash Flows A-30
Statements of Stockholders' Equity A-31
Notes to Financial Statements--Including Parent Company Condensed
Financial Statements A-32 through A-47
Summary of Quarterly Statements of Income A-48
- ------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK DATA
Commerce Bancshares, Inc. (Parent)
The following table sets forth the high and low prices for the Company's common
stock (CBSH) and cash dividends paid for the periods indicated (restated for the
1995 stock dividend).
<TABLE>
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Cash
1995 High Low Dividends
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First Quarter $29.29 $25.71 $.171
Second Quarter 30.71 28.81 .171
Third Quarter 37.98 28.81 .171
Fourth Quarter 38.25 35.48 .171
1994
- -----------------------------------------------
First Quarter $29.71 $25.40 $.136
Second Quarter 29.59 26.53 .154
Third Quarter 30.39 26.76 .154
Fourth Quarter 29.25 25.71 .154
1993
- -----------------------------------------------
First Quarter $29.78 $26.91 $.121
Second Quarter 30.23 24.49 .136
Third Quarter 28.57 24.94 .136
Fourth Quarter 29.93 24.72 .136
</TABLE>
Commerce Bancshares, Inc. common shares are publicly traded in the over-the-
counter market on the NASDAQ National Market System. Prices reflected in the
table above are last-sale prices and represent actual transactions. The Company
had 5,941 shareholders of record as of December 31, 1995.
A
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
KEY RATIOS
The table below summarizes various key ratios for the last five years. The 1995
and 1994 equity ratios include the SFAS 115 adjustment for unrealized gains and
losses on available for sale investment securities.
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1995 1994 1993 1992 1991
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Ratios (based on average balance sheets):
Loans and leases to deposits 68.28% 61.07% 58.08% 57.71% 58.89%
Non-interest bearing deposits to total deposits 19.81 19.60 19.72 18.63 17.49
Equity to total assets 9.48 9.30 8.75 8.04 7.49
Return on total assets 1.21 1.21 1.14 1.04 .93
Return on stockholders' equity 12.72 13.05 12.99 12.88 12.43
Net yield on interest earning assets (on a
tax equivalent basis) 4.50 4.46 4.22 4.06 3.93
Cash dividend payout ratio 24.07 22.07 21.28 21.58 23.66
Efficiency ratio 62.60 65.10 64.58 65.35 65.00
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FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 355,745 $ 314,617 $ 284,524 $ 247,708 $ 222,650
Non-interest income 133,150 121,028 121,423 108,607 85,100
Net income 107,640 96,111 86,894 71,655 59,776
Net income per common and common
equivalent share* 2.85 2.72 2.49 2.21 1.92
Total assets 9,573,951 8,035,574 8,047,413 7,541,613 6,765,413
Long-term debt 14,562 6,487 6,894 7,267 38,106
Dividends per common share* .686 .599 .529 .478 .454
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</TABLE>
*Restated for 5% stock dividend distributed in December 1995
Consolidated net income for 1995 was $107.6 million compared to $96.1 million in
1994 and $86.9 million in 1993. Compared to 1994, net interest income increased
$41.1 million and non-interest income increased $12.1 million. These increases
were partially offset by increases of $23.4 million in other expense, $9.5
million in income taxes and $8.8 million in the provision for loan losses. In
addition, four acquisitions completed in 1995 contributed $6.4 million to net
income. The Company also benefited in 1995 from a significant refund and
reduction in FDIC insurance expense. The 1994 increase over 1993 was largely due
to a $30.1 million increase in net interest income and a $5.5 million decrease
in the provision for loan losses, partially offset by a $24.8 million increase
in other expense. Compared to 1992, net interest income increased $36.8 million,
non-interest income increased $12.8 million and the provision for loan losses
decreased $7.8 million. These increases to net income were partially offset by
increases of $31.9 million in other expense and $10.3 million in income taxes.
The Company's acquisition history for the past three years is summarized below:
<TABLE>
<CAPTION>
Date of Acquisition Asset Size
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Five bank charters during 1993 $431 million
Five bank charters during 1994 376 million
Cotton Exchange Bank (Kennett, Missouri) 3/1/95 63 million
The Peoples Bank (Bloomington, Illinois) 3/1/95 444 million
Union National Bank (Wichita, Kansas) 4/17/95 673 million
Chillicothe State Bank (Chillicothe, Illinois) 5/1/95 24 million
============================================================================================
</TABLE>
A-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Acquisitions during 1993 required common stock valued at $63.3 million and cash
of $1.2 million. Acquisitions during 1994 required treasury stock valued at
$44.5 million, newly issued common stock valued at $3.5 million and $2.7 million
in cash. Acquisitions during 1995 required treasury stock valued at $12.0
million, newly issued common stock valued at $75.7 million and cash of $94.1
million. On a pro forma basis, including consideration of the opportunity cost
from the funds used, the 1995 acquisitions would have lowered earnings per share
by $.14 for 1995, as presented in the financial statements note on Acquisitions.
Certain of these transactions have been recorded using the pooling of interests
method of accounting. However, prior year financial results have not been
restated for these poolings because those restated amounts do not differ
materially from the Company's historical operating results.
In April 1993, the Board of Directors declared a three for two stock split
effected in the form of a stock dividend. Certificates evidencing the dividend
were distributed to stockholders in May 1993. On December 2, 1994, the Board
declared a 5% stock dividend which was distributed on December 29, 1994. On
October 6, 1995, the Board declared a 5% stock dividend which was distributed on
December 15, 1995. All per share data in this report has been restated to
reflect the 1995 stock dividend.
More specific comments on these and various other aspects of the Company's
operations and financial condition are discussed below:
INTEREST RATE SENSITIVITY
The Company's Asset/Liability Management Committee monitors the interest rate
sensitivity of the Company's balance sheet on a monthly basis. The Company's
policy is to minimize the impact of changing rates on net interest income by
maintaining a reasonable balance of rate sensitive assets and liabilities. The
Company continually reviews the repricing characteristics of its assets and
liabilities and the rates paid and charged for deposits and loans. Deposit rates
are reviewed at least weekly and loan rates are monitored closely, particularly
on larger commercial relationships.
Interest rate risk is evaluated using various tools, including interest
sensitivity analysis and simulation techniques. The following schedule presents
the Company's interest sensitivity analysis as of December 31, 1995 and
identifies the repricing characteristics of the balance sheet and resulting
difference between assets and liabilities repricing within selected time
intervals. In this analysis the interest sensitivity position is balanced when
an equal amount of assets and liabilities reprice during a given time interval.
Excess assets or liabilities repricing in a given time period result in the
"Interest sensitivity GAP" shown at the bottom of the schedule. A positive gap
indicates that more assets than liabilities will reprice in a given time period,
while a negative gap indicates that more liabilities will reprice.
The schedule indicates that the Company is liability sensitive in time intervals
of less than one year and means that interest bearing liabilities can reprice
faster than earning assets. This would indicate that the net interest margin
should improve when interest rates decline and decline when interest rates
increase.
While this interest sensitivity analysis is a widely used measure of interest
rate risk, it provides an incomplete picture of the sensitivity position of the
Company and should be used only in conjunction with other factors of financial
performance. During 1994, as the federal funds and prime rates increased, rates
on retail deposits, especially non-maturity accounts, tended to rise much more
slowly due to lower funding demands and produced increases to the Company's net
interest margin. When demand for funds increased during 1995, deposit rates
increased even though overall prime and federal funds rates were declining, thus
causing downward pressure on the net interest margin. Accordingly, even though
the interest sensitivity analysis may be used as an indication of interest
margin direction and interest rate risk, it does not factor in all the variables
necessary to evaluate true interest rate risk.
A-2
<PAGE>
For these reasons, the Company also evaluates its interest rate risk position
using simulation models and other evaluation tools to monitor and manage its
balance sheet and related earnings potential. The Company has set policy limits
of interest rate risk to be assumed in the normal course of business and
continually prepares simulation models to monitor such limits. The Company has
been successful in meeting the interest rate sensitivity objectives set forth in
its policy and has been well within the policy limits all year.
The Company does not use off-balance-sheet derivative products to a significant
degree, but rather uses traditional methods of managing its assets and
liabilities while maintaining its normal high credit standards. Management
believes the Company is appropriately positioned for future interest rate
movements.
The following is an analysis of sensitivity gaps of interest earning assets and
interest bearing liabilities:
<TABLE>
<CAPTION>
REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1995
1-3 4-6 7-12 2-5 Over 5
(In thousands) Months Months Months Years Years Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and leases $ 2,804,242 $ 258,646 $ 842,296 $1,178,474 $234,155 $5,317,813
Investment securities 39,248 50,750 310,667 1,779,902 414,186 2,594,753
Federal funds sold and securities
purchased under agreements to resell 523,302 -- -- -- -- 523,302
- ------------------------------------------------------------------------------------------------------------------
Total interest earning assets 3,366,792 309,396 1,152,963 2,958,376 648,341 8,435,868
- ------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Time & C.D.'s under $100,000 609,318 513,967 500,194 609,431 20,480 2,253,390
Time & C.D.'s $100,000 & over 63,770 52,422 62,453 39,240 1,066 218,951
Interest bearing demand & savings 3,891,801 -- -- -- -- 3,891,801
Federal funds purchased and securities
sold under agreements to repurchase 362,903 -- -- -- -- 362,903
Long-term debt and other borrowings 121 119 244 10,853 3,225 14,562
- ------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 4,927,913 566,508 562,891 659,524 24,771 6,741,607
- ------------------------------------------------------------------------------------------------------------------
Interest sensitivity GAP $(1,561,121) $(257,112) $ 590,072 $2,298,852 $623,570 $1,694,261
==================================================================================================================
</TABLE>
INTEREST INCOME AND EARNING ASSETS
Average interest earning assets in 1995 were $8.01 billion compared to $7.12
billion in 1994 and $6.81 billion in 1993. Loans represented 64% of average
interest earning assets in 1995, investment securities represented 33% and
short-term federal funds sold and securities purchased under agreements to
resell represented 3%. Tax equivalent interest income was $636.0 million in
1995, $503.3 million in 1994 and $463.3 million in 1993. In 1995 compared to
1994, tax equivalent interest income increased $132.8 million due mainly to
increases in average balances invested in loans and the average tax equivalent
rates earned on loans. Average balances invested in business and personal
banking loans increased $311.3 million, or 22.4%, and $245.3 million, or 24.2%,
respectively. Excluding balances of banks acquired in 1994 and 1995, business
and personal banking loan average balances increased 13.2% and 10.7%,
respectively. Average tax equivalent rates earned on business and personal
banking loans increased 121 and 82 basis points, respectively. Compared to 1993,
1994 tax equivalent interest income increased $40.0 million, mainly due to a
$344.2 million increase in total average loans and a 77 basis point increase in
the average rate earned on business loans. Compared to 1992, tax equivalent
interest income increased $10.1 million, mainly due to an increase of $361.5
million in the average balances invested in loans and $426.3 million in
investment securities. Partially offsetting these effects were tax equivalent
rate
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
decreases of 75 basis points in loans and 44 basis points in investment
securities. The average tax equivalent rate on interest earning assets was 7.94%
in 1995, 7.07% in 1994 and 6.80% in 1993.
LOAN PORTFOLIO ANALYSIS
A breakdown of average balances invested in each category of loans appears on
page A-12. Classifications of consolidated loans by major category at December
31 for each of the past five years are as follows:
<TABLE>
<CAPTION>
Balance at December 31
- --------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Business $1,716,080 $1,393,979 $1,380,452 $1,221,525 $1,109,353
Real estate--construction 168,031 127,948 90,102 123,955 107,740
Real estate--business 695,558 586,769 533,467 453,226 389,940
Real estate--personal 983,249 813,134 734,771 666,074 573,422
Consumer 1,258,809 1,120,366 917,683 885,998 848,751
Credit card 496,086 390,466 367,600 336,637 298,921
- --------------------------------------------------------------------------------------------------
Total loans, net of unearned income $5,317,813 $4,432,662 $4,024,075 $3,687,415 $3,328,127
==================================================================================================
</TABLE>
The contractual maturities of loan categories at December 31, 1995, and a
breakdown of those loans between predetermined rate and floating rate loans are
as follows:
<TABLE>
<CAPTION>
Principal Payments Due
- --------------------------------------------------------------------------------------------------
In After One After
One Year Year Through Five
(In thousands) or Less Five Years Years Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business $1,227,959 $ 454,651 $ 33,470 $1,716,080
Real estate--construction 119,047 33,300 15,684 168,031
Real estate--business 263,886 357,350 74,322 695,558
Real estate--personal 98,158 229,827 655,264 983,249
- --------------------------------------------------------------------------------------------------
Total $1,709,050 $1,075,128 $778,740 3,562,918
==================================================================================================
Consumer (1) 1,258,809
Credit card (2) 496,086
- --------------------------------------------------------------------------------------------------
Total loans, net of unearned income $5,317,813
==================================================================================================
Loans with predetermined rate $ 762,647 $ 458,374 $218,629 $1,439,650
Loans with floating rate 946,403 616,754 560,111 2,123,268
- --------------------------------------------------------------------------------------------------
Total $1,709,050 $1,075,128 $778,740 $3,562,918
==================================================================================================
</TABLE>
(1) Consumer loans with floating rate totaled $517,349.
(2) Credit card loans with floating rate totaled $414,279.
The loan and lease portfolio has grown significantly over the past three years,
and the ratio of average loans outstanding to total deposits has grown from
58.1% in 1993 to 61.1% in 1994 and to 68.3% in 1995. Loans and leases
constituted 63.0% of total earning assets at December 31, 1995. Stronger loan
growth in major markets, accompanied by the impact of acquisitions in
Bloomington, Illinois, and Wichita, Kansas, exceeded overall deposit growth and
contributed to the increase in the ratio of average loans to total deposits.
While it is management's goal to deploy a larger portion of deposits in higher
yielding loan assets, this strategy is tempered in the current economic and
competitive environment. A stronger loan demand in 1995, coupled with improved
earnings and capitalization of the banking industry, has led to intense
competition for loan assets. Consolidations within the banking industry, coupled
with excess lending capacity and the demand for greater earnings, continue to
encourage less stringent underwriting standards, lower rates and longer term
fixed rate pricing options, and more liberal offering terms and conditions.
Given management's longer term commitment to asset quality and its strategy to
minimize the impact of changes in interest rate levels on net
A-4
<PAGE>
interest income, the loan portfolio has exhibited moderate levels of internal
growth in 1995.
Growth in the loan and lease portfolio has been impacted by the purchase of new
affiliate banks, along with aggressive solicitation of small and middle-market
companies within our primary trade territories. Loan balances of approximately
$680 million were acquired through bank acquisitions during 1995. The Company
currently generates approximately 34.8% of its loan and lease portfolio from its
St. Louis subsidiary bank and 23.7% from its Kansas City subsidiary bank. The
portfolio is diversified from a commercial and retail standpoint, with 48.5% in
loans to business and 51.5% in loans to individual consumers. Such a balanced
approach to loan portfolio management and an aversion toward credit
concentrations, from an industry, geographic and product perspective, have
enabled the Company to avoid problem loan levels and loan losses that
characterized the banking industry in the early 1990s.
BUSINESS LOANS - This group of loans (totaling $1.72 billion and 32.3% of total
loans at year end) is comprised primarily of loans to customers in the regional
trade area of the bank subsidiaries in the central Midwest, encompassing the
states of Missouri, Kansas, Illinois and adjacent Midwestern markets. The bank
subsidiaries generally do not participate in credits of large, publicly traded
companies unless operations are maintained in the local communities or regional
markets. The portfolio is diversified from an industry standpoint and includes
businesses engaged in manufacturing, wholesaling, retailing, agribusiness,
insurance, financial services, public utilities, and other service businesses.
Emphasis is upon middle-market and community businesses with known local
management and financial stability. Consistent with management's strategy and
emphasis upon relationship banking, most borrowing customers also maintain
deposit accounts and utilize other banking services. There were net loan charge-
offs in this category, as shown on page A-10, of $1.8 million in 1995 compared
to net recoveries of $29 thousand in 1994 and net charge-offs of $168 thousand
in 1993. Such losses continue to be below industry averages. Continued growth in
business loans will be based upon strong solicitation efforts in a highly
competitive market environment for quality loans. Asset quality is, in part, a
function of management's consistent application of conservative underwriting
standards. Therefore, portfolio growth in 1996 is dependent upon the strength of
the economy, the actions of the Federal Reserve with regard to targets for
economic growth and inflationary tendencies, and the competitive environment as
previously described.
On the basis of average balances, business loans for 1995 increased 22.4% over
1994 levels, which increased 8.7% over 1993 levels. Excluding loan balances of
banks acquired after January 1, 1994, average business loans increased 13.2% in
1995 compared to 1994. Non-accrual business loans increased to $9.9 million (.6%
of business loans) at December 31, 1995 compared to $5.2 million (.4% of
business loans) at December 31, 1994, and $6.3 million (.5% of business loans)
at December 31, 1993.
REAL ESTATE-CONSTRUCTION - The portfolio of loans in this category amounted to
$168.0 million at December 31, 1995 compared to $127.9 million at year end 1994
and $90.1 million at year end 1993. Such loans represented 3.2% of total loans
at December 31, 1995. Non-accrual loans in this category were $304 thousand at
year end 1995, $52 thousand at year end 1994 and none at year end 1993.
Management continues to maintain relatively low exposure in this category. The
portfolio consists of residential construction, commercial construction, and
land development loans, predominantly in the local markets of the Company's
banking subsidiaries. Commercial construction loans are for small and medium-
sized office and medical buildings, manufacturing and warehouse facilities,
strip shopping centers, and other commercial properties. Exposure to larger
speculative office and rental space is minimal. Residential construction and
land development loans are primarily located in Kansas City and
A-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
St. Louis metropolitan areas. The Company experienced no loan losses in 1995
compared to net recoveries of $3 thousand in 1994 and $496 thousand in 1993.
Management is not aware of any significant adverse exposure in this category.
REAL ESTATE-BUSINESS - This category includes mortgage loans secured by
commercial properties which are primarily located in the local and regional
trade territories of the customers of the affiliate banks. At December 31, 1995,
there were $695.6 million in balances outstanding secured by commercial
properties, which was 13.1% of total loans. Excluding loan balances of banks
acquired after January 1, 1994, average business real estate loans increased
10.0% in 1995 over 1994. Non-accrual balances have increased in 1995 to $3.4
million, or .5% of the loans in this category, compared to $3.3 million in 1994
and $5.6 million in 1993. The Company experienced net recoveries of $151
thousand in 1995 compared to net charge-offs of $580 thousand in 1994 and net
recoveries of $144 thousand in 1993. The economic conditions in local markets
are generally strong, positively impacting debt service capabilities and
collateral values for both owner-occupied and investment real estate.
Significant deterioration is not anticipated in 1996, given that the economy
performs at or near the Federal Reserve's target level for growth of 2.5%.
REAL ESTATE-PERSONAL - The mortgage loans in this category are extended,
predominantly, for owner-occupied residential properties. At December 31, 1995,
there were $983.2 million in loans outstanding, or 18.5% of total loans.
Excluding balances of banks acquired after January 1, 1994, average personal
real estate loans increased 7.5% in 1995 over 1994. The Company has not
experienced significant problem credits in this category recently as there were
net charge-offs of $109 thousand in 1995 compared to net recoveries of $30
thousand in 1994 and net charge-offs of $254 thousand in 1993. The non-accrual
balances of loans in this category were $2.4 million at December 31, 1995, or
.2% of the category, compared with $2.5 million at December 31, 1994 and $2.1
million at December 31, 1993. The five year history of net charge-offs on the
real estate-personal loan category reflects nominal losses and credit quality is
considered to be above average.
CONSUMER - The consumer loan portfolio consists of both secured and unsecured
loans to individuals for various personal reasons such as automobile financing,
securities purchases, home improvements, recreational and educational purposes.
This category also includes $155.4 million of home equity loan balances at
December 31, 1995, with an additional $260.2 million in unused lines of credit
that can be drawn at the discretion of the borrower. These home equity lines are
secured by first or second mortgages on residential property of the borrower.
Historically, the underwriting terms for the home equity line product have
generally limited borrowing availability such that, when combined with
outstanding loan balances of prior mortgage loans, it would not exceed 70% of
the appraised value of the real estate. In late 1994, based upon management's
perception of a stronger and more stable economic and real estate market
environment, the underwriting guidelines were changed and now permit borrowing
availability, in the aggregate, up to 80% of the appraised value of the
collateral property. Given reasonably stable real estate values over time, the
collateral margin improves with the regular amortization of prior mortgage
loans. Approximately 41% of the loans in the Consumer category are extended on a
floating interest rate basis. Total average loan balances for 1995 were $1.26
billion compared to $1.01 billion in 1994 and $920.2 million in 1993. Excluding
balances of banks acquired after January 1, 1994, average consumer loans
increased 10.7% in 1995 compared to 1994. Net charge-offs increased $3.6 million
in 1995 over 1994, but have been below .4% of consumer loans for each of the
past three years.
A-6
<PAGE>
CREDIT CARD - The credit card portfolio is concentrated within our regional
market. Approximately 57% of the households in Missouri that own a Commerce
Special Connections credit card also maintain a deposit relationship with a
subsidiary bank. Net charge-offs amounted to $9.7 million in 1995, which was a
$3.9 million increase over 1994. Such losses were attributable to higher
delinquencies and bankruptcies occurring during the second half of 1995 and were
noted as part of national trends throughout the industry. The net charge-off
ratios of 2.3% in 1995 and 1.6% in 1994 and 1993 are well below national
averages. The average balance in credit card loans for 1995 was $420.0 million
compared to $360.2 million in 1994 and $321.6 million in 1993. Excluding
balances of banks acquired after January 1, 1994, average credit card loans
increased 9.6% in 1995 compared to 1994. Approximately 84% of the outstanding
credit card loans have a floating interest rate. The Company has a variety of
credit card products, all of which offer ATM access to either advances against
the credit card account or transactions against related deposit accounts.
Continued growth is anticipated through targeted marketing and product design to
segmented groups. During 1996, a number of new products will be introduced to
fill in product line gaps for consumers, along with products aimed at the
corporate and small business markets. The Company continues to refrain from
national pre-approved mailing techniques which have caused some of the credit
card problems experienced by other banking companies. Current delinquency ratios
are in line with past charge-off results. Significant changes in loss trends,
when compared with 1995 results and with the results of other industry
providers, are not anticipated by management.
RISK ELEMENTS OF LOAN PORTFOLIO
Management reviews the loan portfolio continuously for evidence of problem
loans. During the ordinary course of business, management becomes aware of
borrowers that may not be able to meet the contractual requirements of loan
agreements. Such loans are placed under close supervision with consideration
given to placing the loan on non-accrual status, the need for additional
allowance for loan loss, and (if appropriate) partial or full charge-off. Those
loans on which management does not expect to collect payments consistent with
acceptable and agreed upon terms of repayment (generally, loans that are 90 days
past due as to principal and/or interest payments) are placed on non-accrual
status. After a loan is placed on non-accrual status, any interest previously
accrued but not yet collected is reversed against current income. Interest is
included in income subsequent to the date the loan is placed on non-accrual
status only as interest is received and so long as management is satisfied there
is no impairment of collateral values. The loan is returned to accrual status
only when the borrower has brought all past due principal and interest payments
current and, in the opinion of management, the borrower has demonstrated the
ability to make future payments of principal and interest as scheduled.
A schedule of non-performing assets according to risk category follows:
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual $16,234 $11,385 $14,328 $19,370 $25,780
Past due 90 days and still accruing interest 15,690 13,090 7,289 8,293 8,884
Real estate acquired in foreclosure 1,955 7,290 10,057 12,366 6,292
- --------------------------------------------------------------------------------------------------------
Total non-performing assets $33,879 $31,765 $31,674 $40,029 $40,956
========================================================================================================
Non-performing assets as a percentage of total loans .64% .72% .79% 1.09% 1.23%
========================================================================================================
</TABLE>
A-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The effect of non-accruing loans on interest income for 1995 is presented below:
<TABLE>
<CAPTION>
(In thousands)
- ----------------------------------------------------------------------------------
<S> <C>
Gross amount of interest that would have been recorded at original rate $2,178
Interest that was reflected in income 310
- ----------------------------------------------------------------------------------
Interest income not recognized $1,868
==================================================================================
</TABLE>
Included in the "Consumer" loans category is a home equity loan product, the
"Anytime Line", which had $155.4 million in loans outstanding and $260.2 million
in unused lines of credit at December 31, 1995. These loans, secured by real
estate, should be viewed together with the "Real Estate-Personal" category in
evaluating total loan balances supported by similar collateral. At December 31,
1995, the Company's mortgage banking subsidiary held residential real estate
loans of approximately $5.8 million at lower of cost or market, which are to be
resold to secondary markets within approximately three months. Management does
not believe the risk in real estate loans is abnormal at this time.
The Parent and a venture capital and investment banking subsidiary had debt and
equity investments with a carrying value of $5.0 million in 18 companies or
partnerships at December 31, 1995. A $30 million limited partnership venture
fund was organized by the Company in 1993 with 49% outside participation, which
is managed by a subsidiary. The Company's investment in this partnership was
approximately $5.0 million at December 31, 1995. Management believes the
potential for long-term gains in this type of investment activity outweighs the
potential risk of losses.
There were no loan concentrations of multiple borrowers in similar activities at
December 31, 1995 which exceeded 10% of total loans.
PROVISION FOR LOAN LOSSES
The loan loss provision in 1995 was $14.6 million compared to $5.8 million in
1994 and $11.4 million in 1993. The increase in 1995 was principally related to
increased losses in consumer and credit card loans. Net charge-offs were $16.2
million in 1995 compared to $7.4 million in 1994 and $6.4 million in 1993.
Management generally records the provision for loan losses, on an individual
bank basis, in amounts sufficient to result in an allowance for loan losses that
will cover current net charge-offs and risks believed to be inherent in the loan
portfolio of each bank. Amounts thus charged against current income are based on
such factors as past loan loss experience as related to current loan portfolio
mix, evaluation of actual and potential losses in the loan portfolio, prevailing
regional and national economic conditions that might have an impact on the
portfolio, regular reviews and examinations of the loan portfolio conducted by
internal loan reviewers supervised by the Parent, and reviews and examinations
by bank regulatory authorities. The balance in the allowance for loan losses is
reduced when a loan or part thereof is considered by management to be
uncollectible. Recoveries on loans previously charged off are added back to the
allowance. During periods of growth in the loan portfolio, a portion of the
provision is the result of management's desire to maintain a satisfactory
allowance to protect the Company from those losses which occur as a natural part
of doing business. The allowance for loan losses at December 31, 1995, was 1.85%
of loans and leases outstanding compared to 1.97% at year end 1994 and 2.13% at
year end 1993. The allowance for loan losses at year end covered non-performing
assets by 290.8%. Management believes that the allowance for loan losses, which
is a general reserve, is adequate to cover actual and potential losses in the
loan portfolio under current conditions.
As with any financial institution, poor economic conditions, high inflation,
high interest rates, or high unemployment may lead to increased losses in the
loan portfolio. Conversely, improvements in economic conditions tend to reduce
the amounts charged against the allowance. Management has
A-8
<PAGE>
established various controls in order to limit future losses at the lending
affiliates, such as: 1) a "watch list" of possible problem loans, 2) specific
loan retention limits in relation to the size of each affiliate, 3) fully
documented policy concerning loan administration (loan file documentation,
disclosures, approvals, etc.) and 4) a loan review staff employed by the Parent
which travels to subsidiary banks to audit for adherence to established Company
controls and to review the quality and anticipated collectibility of the
portfolio. Management determines which loans are possibly uncollectible or
represent a greater risk of loss and makes additional provision to expense, if
necessary, to state the allowance at a satisfactory level on an individual bank
basis.
A subsidiary bank is an issuer of Visa and MasterCard credit cards. Therefore,
the percentage of consumer loans outstanding which are generated through credit
card sales drafts and cash advances is significantly higher for Commerce than it
is for a banking group that does not issue credit cards. Also, because credit
card loans traditionally have a higher than average ratio of net charge-offs to
loans outstanding, management requires that a separate allowance for loan losses
on credit card loans be maintained which, on a consolidated basis, was $11.9
million or 2.46% of average credit card loans outstanding for the month of
December 1995. Net charge-offs related to credit cards were 2.30% of average
credit card loans for 1995 compared to 1.60% in 1994 and 1.62% in 1993.
Other than as previously noted, management is not aware of any significant risks
in the current loan portfolio due to concentrations of loans within any
particular industry, nor of any separate types of loans within a particular
category of non-performing loans, that are unusually significant as to possible
losses when compared to the entire loan portfolio. Other than for the credit
card risk mentioned above, management does not allocate the allowance for loan
losses. It is deemed to be a general reserve available for all types of loan
losses.
Based on current economic conditions, management considers the December 31, 1995
allowance adequate to cover the possible risk of loss in the areas described
above. Various appraisals and estimates of current value influence the
calculation of the required allowance at any point in time. If economic
conditions in the region deteriorate significantly, it is possible that
additional assets would be classified as non-performing, and accordingly,
additional provision for possible losses would be required. Such an event and
its duration cannot be predicted at this time.
A-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The schedule which follows summarizes the relationship between loan balances and
activity in the allowance for loan losses account:
<TABLE>
<CAPTION>
Years Ended December 31
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loans and leases outstanding
at end of period (A) $5,317,813 $4,432,662 $4,024,075 $3,687,415 $3,328,127
=============================================================================================================
Average loans and leases
outstanding (A) $5,161,552 $4,180,065 $3,835,834 $3,474,285 $3,259,219
=============================================================================================================
Allowance for loan losses:
Balance at beginning of period $ 87,179 $ 85,830 $ 77,149 $ 61,676 $ 58,947
- -------------------------------------------------------------------------------------------------------------
Additions to allowance through
charges to expense 14,629 5,845 11,381 19,146 19,021
- -------------------------------------------------------------------------------------------------------------
Other adjustments 12,932 2,953 3,661 4,507 (790)
- -------------------------------------------------------------------------------------------------------------
Recovery of loans previously charged off:
Business 1,632 2,540 3,690 1,841 1,209
Construction -- 3 508 52 40
Business real estate 542 663 562 2,584 1,301
Personal real estate 99 226 141 162 132
Consumer 2,633 2,259 2,528 2,193 2,096
Credit card 2,163 2,015 1,947 1,771 1,396
- -------------------------------------------------------------------------------------------------------------
Total recoveries 7,069 7,706 9,376 8,603 6,174
- -------------------------------------------------------------------------------------------------------------
Loans charged off:
Business 3,422 2,511 3,858 4,258 4,341
Construction -- -- 12 31 245
Business real estate 391 1,243 418 1,538 4,044
Personal real estate 208 196 395 351 380
Consumer 7,413 3,442 3,897 3,302 4,920
Credit card 11,838 7,763 7,157 7,303 7,746
- -------------------------------------------------------------------------------------------------------------
Total loans charged off 23,272 15,155 15,737 16,783 21,676
- -------------------------------------------------------------------------------------------------------------
Net loans charged off 16,203 7,449 6,361 8,180 15,502
- -------------------------------------------------------------------------------------------------------------
Balance at end of period $ 98,537 $ 87,179 $ 85,830 $ 77,149 $ 61,676
=============================================================================================================
Ratio of net charge-offs to average
loans and leases outstanding .31% .18% .17% .24% .48%
Ratio of allowance to loans and
leases at end of period 1.85% 1.97% 2.13% 2.09% 1.85%
Ratio of provision to average
loans and leases outstanding .28% .14% .30% .55% .58%
=============================================================================================================
</TABLE>
(A) Net of unearned income; before deducting allowance for loan losses.
INVESTMENT SECURITIES
PORTFOLIO ANALYSIS
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and classified substantially all of its investment portfolio as
available for sale. The Company's portfolio consists mainly of U.S. government
and federal agency securities and CMO's and asset-backed securities, which may
be sold in response to changes in interest rates, anticipated prepayments or
liquidity needs. At December 31, 1995, available for sale securities totaled
$2.55 billion, which included an unrealized gain in fair value of $43.4 million.
The amount of the related after tax unrealized gain reported in stockholders'
equity was $26.8 million. Non-marketable equity securities, which are carried at
cost (less allowances for other than temporary declines in value) are generally
held by the Parent and non-banking subsidiaries due to regulatory restrictions,
except for Federal Reserve Bank stock held by banking subsidiaries.
The average balances of investment securities (excluding the unrealized
gain/loss) were $2.65 billion in 1995 compared to $2.80 billion in 1994 and
$2.70 billion in 1993. The average tax equivalent yield was 6.23% in 1995, 5.88%
in 1994 and 5.76% in 1993. There was little change in tax equivalent interest
income earned on investment securi-
A-10
<PAGE>
ties in 1995 compared to 1994. Average balances invested in U.S. government and
federal agency securities decreased $370.6 million, partially offset by
increases in average balances invested in CMO's and asset-backed securities and
state and municipal obligations, and an increase of 33 basis points earned on
U.S. government and federal agency securities. In 1994, tax equivalent interest
income on investment securities increased $9.8 million over 1993. An increase of
$526.5 million in average balances invested in CMO's and asset-backed securities
and higher rates earned on U.S. government and federal agency securities
contributed to the increase. Partially offsetting this increase was a $420.9
million decrease in average balances invested in U.S. government and federal
agency securities. Management began reinvesting maturities of U.S. government
and federal agencies in CMO's and asset-backed securities in the latter part of
1993 in order to achieve a higher return on a portion of the investment
portfolio. In 1993 compared to 1992, tax equivalent interest income on
investment securities increased $14.5 million. This was mainly due to a $402.6
million increase in average balances invested in U.S. government and federal
agency securities. The increase was partially offset by a decrease of 51 basis
points in average rates earned on these securities.
Investment securities (excluding trading securities) at year end for the past
three years are shown below:
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortized Cost:
U.S. government and federal agency obligations $1,684,679 $1,845,149 $2,344,771
State and municipal obligations 124,352 57,014 42,228
CMO's and asset-backed securities 666,334 747,721 322,349
Other debt securities 11,011 46,574 56,553
Equity securities 55,599 40,494 34,559
- ------------------------------------------------------------------------------------
Total $2,541,975 $2,736,952 $2,800,460
====================================================================================
Fair Value:
U.S. government and federal agency obligations $1,707,111 $1,797,291 $2,409,546
State and municipal obligations 128,043 56,422 43,891
CMO's and asset-backed securities 670,522 692,822 321,093
Other debt securities 10,982 45,748 56,843
Equity securities 68,726 47,598 44,713
- ------------------------------------------------------------------------------------
Total $2,585,384 $2,639,881 $2,876,086
====================================================================================
</TABLE>
The 1995 fair values above include gross unrealized gains of $49.9 million which
are partially offset by gross unrealized losses of $6.5 million. Included are
net unrealized gains of $11.0 million on the investment portfolio of the Parent,
which consists primarily of equity securities, with gross unrealized gains of
$12.7 million partially offset by gross unrealized losses of $1.7 million.
A summary of maturities by category of investment securities and the weighted
average yield for each range of maturities as of December 31, 1995, is presented
in the financial statements note on Investment Securities on page A-33. The
weighted average yield for each range of maturities was calculated using the
yield on each security within that range weighted by the amortized cost of each
security at December 31, 1995. Yields on tax exempt securities have not been
adjusted for tax exempt status in that note. U.S. government and federal agency
securities comprise 66% of the investment portfolio at December 31, 1995, with a
weighted average yield of 6.11% and an average maturity of 2.2 years; CMO's and
asset-backed securities comprise 26% with a weighted average yield of 6.28% and
an average maturity of 4.6 years.
Other debt and equity securities above include Federal Reserve Bank stock and
other bonds, notes, corporate stock (held primarily by non-banking entities) and
debentures of immaterial amounts. The tax equivalent yield on these securities
in 1995 computed on average balances invested was approximately 5.17%.
A-11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
<TABLE>
<CAPTION>
Years Ended December 31
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994
============================================================================================================= Average
Average Average Balance
Interest Rates Interest Rates Five Year
(Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/ Compound
Balance Expense Paid Balance Expense Paid Growth Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and leases: (A)
Business (including foreign) (B) $1,703,933 $141,872 8.33% $1,392,650 $ 99,111 7.12% 9.93%
Construction and development 130,346 12,227 9.38 115,628 9,372 8.11 (1.34)
Real estate - business 693,539 61,958 8.93 538,793 43,256 8.03 13.40
Real estate - personal 954,956 74,571 7.81 759,338 53,473 7.04 11.19
Personal banking 1,258,729 110,202 8.76 1,013,462 80,513 7.94 7.67
Credit card 420,049 58,368 13.90 360,194 47,082 13.07 12.11
- ---------------------------------------------------------------------------------------------------------------------------
Total loans and leases 5,161,552 459,198 8.90 4,180,065 332,807 7.96 9.76
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,705,562 105,216 6.17 2,076,150 121,339 5.84 6.04
State & municipal obligations (B) 123,152 9,577 7.78 46,602 3,549 7.62 47.84
CMO's and asset-backed
securities 719,747 44,928 6.24 586,935 35,132 5.99 NA
Trading account securities 3,975 240 6.03 4,168 159 3.82 (1.95)
Other marketable securities (B) 66,368 4,110 6.19 69,870 4,191 6.00 (17.57)
Other non-marketable securities 26,407 685 2.59 20,424 631 3.09 7.95
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,645,211 164,756 6.23 2,804,149 165,001 5.88 12.22
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 205,547 12,075 5.87 132,672 5,457 4.11 (18.73)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,012,310 636,029 7.94 7,116,886 503,265 7.07 8.59
- ---------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (95,884) (86,664) 10.04
Unrealized loss on investment securities (13,983) (15,424) NA
Cash and due from banks 607,656 555,171 6.68
Land, buildings and equipment - net 205,702 194,159 3.39
Other assets 209,168 149,568 12.79
- ------------------------------------------------------ ---------- ----------
Total assets $8,924,969 $7,913,696 8.36%
====================================================== ========== ==========
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 312,049 7,954 2.55 $ 273,032 6,618 2.42 15.76%
Interest bearing demand 3,329,272 112,729 3.39 3,247,965 84,037 2.59 9.78
Time open & C.D.'s of less than
$100,000 2,206,655 118,267 5.36 1,826,661 77,884 4.26 6.06
Time open & C.D.'s of $100,000
and over 213,950 11,430 5.34 155,813 6,213 3.99 (5.68)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 6,061,926 250,380 4.13 5,503,471 174,752 3.18 7.78
- ---------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under agreements
to repurchase 442,413 23,792 5.38 287,642 10,384 3.61 8.09
Long-term debt and other borrowings (C) 16,195 1,146 7.08 7,129 542 7.60 (16.56)
- ---------------------------------------------------------------------------------------------------------------------------
Total borrowings 458,608 24,938 5.44 294,771 10,926 3.71 6.17
- ---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 6,520,534 275,318 4.22% 5,798,242 185,678 3.20% 7.66
- ---------------------------------------------------------------------------------------------------------------------------
Demand - non-interest bearing deposits 1,497,474 1,341,721 9.56
Other liabilities 60,527 37,515 (4.44)
Stockholders' equity 846,434 736,218 13.87
- ------------------------------------------------------ ---------- ----------
Total liabilities and equity $8,924,969 $7,913,696 8.36%
===========================================================================================================================
Net interest margin (T/E) $360,711 $317,587
===========================================================================================================================
Net yield on interest earning assets 4.50% 4.46%
===========================================================================================================================
Percentage increase in net interest
margin (T/E) over the prior year 13.58% 10.52%
===========================================================================================================================
</TABLE>
(A) Loans on non-accrual status are included in the computation of average
balances. Included in interest income above are loan fees and late charges, net
of amortization of deferred loan origination costs, which are immaterial. Credit
card income from merchant discounts and net interchange fees are not included in
loan income.
A-12
<PAGE>
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS (cont.)
<TABLE>
<CAPTION>
Years Ended December 31
- ---------------------------------------------------------------------------------------------
1993 1992
- ---------------------------------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
(Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and leases: (A)
Business (including
foreign) (B) $1,281,458 $ 81,416 6.35% $1,160,801 $ 78,418 6.76%
Construction and
development 102,825 7,746 7.53 115,019 8,692 7.56
Real estate--business 493,503 37,505 7.60 401,444 33,219 8.27
Real estate--personal 716,273 53,428 7.46 624,071 54,124 8.67
Personal banking 920,157 75,080 8.16 876,678 77,931 8.89
Credit card 321,618 44,141 13.72 296,272 44,726 15.10
- ---------------------------------------------------------------------------------------------
Total loans and leases 3,835,834 299,316 7.80 3,474,285 297,110 8.55
- ---------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal
agency 2,497,041 143,395 5.74 2,094,399 130,918 6.25
State & municipal
obligations (B) 41,141 3,181 7.73 26,566 2,246 8.45
CMO's and asset-backed
securities 60,425 3,552 5.88 -- -- --
Trading account securities 4,731 220 4.66 7,420 477 6.43
Other marketable
securities (B) 70,837 3,933 5.55 122,476 6,069 4.96
Other non-marketable
securities 21,024 924 4.39 17,996 959 5.33
- ---------------------------------------------------------------------------------------------
Total investment securities 2,695,199 155,205 5.76 2,268,857 140,669 6.20
- ---------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased
under agreements
to resell 282,625 8,735 3.09 422,732 15,379 3.64
- ---------------------------------------------------------------------------------------------
Total interest earning
assets 6,813,658 463,256 6.80 6,165,874 453,158 7.35
- ---------------------------------------------------------------------------------------------
Less allowance for loan
losses (83,767) (68,344)
Cash and due from banks 573,494 508,594
Land, buildings and
equipment--net 196,809 183,109
- ---------------------------------------- -----------
Other assets 149,909 132,021
Total assets $7,650,103 $6,921,254
======================================== ===========
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 248,681 6,012 2.42 $ 188,332 5,979 3.17
Interest bearing demand 3,124,098 78,995 2.53 2,788,635 88,330 3.17
Time open & C.D.'s of
less than $100,000 1,790,418 77,165 4.31 1,786,175 93,752 5.25
Time open & C.D.'s of
$100,000 and over 138,271 5,038 3.64 135,805 5,826 4.29
- ---------------------------------------------------------------------------------------------
Total interest bearing
deposits 5,301,468 167,210 3.15 4,898,947 193,887 3.96
- ---------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased
and securities sold
under agreements to
repurchase 318,951 8,141 2.55 271,181 8,071 2.98
Long-term debt and other
borrowings (C) 7,118 554 7.79 12,566 1,021 8.13
- ---------------------------------------------------------------------------------------------
Total borrowings 326,069 8,695 2.67 283,747 9,092 3.20
- ---------------------------------------------------------------------------------------------
Total interest bearing
liabilities 5,627,537 175,905 3.13% 5,182,694 202,979 3.92%
- ---------------------------------------------------------------------------------------------
Demand--non-interest
bearing deposits 1,302,634 1,121,481
Other liabilities 50,902 60,619
Stockholders' equity 669,030 556,460
- ---------------------------------------- -----------
Total liabilities and
equity $7,650,103 $6,921,254
============================================================================================
Net interest margin (T/E) $287,351 $250,179
============================================================================================
Net yield on interest
earning assets 4.22% 4.06%
============================================================================================
Percentage increase in net
interest margin (T/E) over the
prior year 14.86% 11.12%
============================================================================================
</TABLE>
(B) State and municipal interest income includes tax equivalent adjustments of
$3,075,000 in 1995, $1,097,000 in 1994, $944,000 in 1993, $641,000 in 1992 and
$462,000 in 1991. Business loan interest income includes tax free loan income of
$4,259,000 in 1995, $3,916,000 in 1994, $4,281,000 in 1993, $4,722,000 in 1992
and $6,019,000 in 1991, including tax equivalent adjustments of $1,438,000 in
1995, $1,378,000 in 1994, $1,517,000 in 1993, $1,644,000 in 1992 and $1,947,000
in 1991. Interest income on other marketable securities includes tax equivalent
adjustments of $513,000 in 1995, $509,000 in 1994, $382,000 in 1993, $252,000 in
1992 and $202,000 in 1991.
(C) Interest expense of $60,000, $14,000, $17,000, $66,000 and $125,000 which
was capitalized on construction projects in 1995, 1994, 1993, 1992 and 1991,
respectively, is not deducted from the interest expense shown above.
A-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS (cont.)
<TABLE>
<CAPTION>
Years Ended December 31
- ---------------------------------------------------------------------------------------------
1991 1990
- ---------------------------------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
(Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and leases: (A)
Business (including
foreign) (B) $1,056,376 $ 92,112 8.72% $1,061,471 $106,073 9.99%
Construction and
development 108,478 10,202 9.40 139,467 14,893 10.68
Real estate--business 390,611 38,190 9.78 369,897 38,949 10.53
Real estate--personal 570,654 56,996 9.99 561,860 58,356 10.39
Personal banking 869,369 89,039 10.24 869,899 97,277 11.18
Credit card 263,731 43,288 16.41 237,210 40,033 16.88
- ---------------------------------------------------------------------------------------------
Total loans and leases 3,259,219 329,827 10.12 3,239,804 355,581 10.98
- ---------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal
agency 1,654,517 131,738 7.96 1,271,841 109,336 8.60
State & municipal
obligations (B) 13,395 1,702 12.71 17,435 2,350 13.48
Trading account securities 5,433 357 6.57 4,386 348 7.93
Other marketable
securities (B) 294,895 18,784 6.37 174,436 14,063 8.06
Other non-marketable
securities 16,647 611 3.67 18,016 651 3.61
- ---------------------------------------------------------------------------------------------
Total investment securities 1,984,887 153,192 7.72 1,486,114 126,748 8.53
- ---------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell 489,869 28,434 5.80 579,754 47,330 8.16
- ---------------------------------------------------------------------------------------------
Total interest earning
assets 5,733,975 511,453 8.92 5,305,672 529,659 9.98
- ---------------------------------------------------------------------------------------------
Less allowance for loan
losses (59,441) (59,420)
Cash and due from banks 447,756 439,739
Land, buildings and
equipment--net 177,984 174,119
Other assets 117,905 114,604
- ---------------------------------------- ----------
Total assets $6,418,179 $5,974,714
======================================== ==========
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 148,972 7,260 4.87 $ 150,098 7,485 4.99
Interest bearing demand 2,379,299 120,358 5.06 2,087,613 128,069 6.13
Time open & C.D.'s of
less than $100,000 1,840,020 127,949 6.95 1,644,045 131,328 7.99
Time open & C.D.'s of
$100,000 and over 198,130 12,212 6.16 286,575 21,948 7.66
- ---------------------------------------------------------------------------------------------
Total interest bearing
deposits 4,566,421 267,779 5.86 4,168,331 288,830 6.93
- ---------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased
and securities sold
under agreements to
repurchase 293,986 15,016 5.11 299,876 22,230 7.41
Long-term debt and other
borrowings (C) 38,711 3,522 9.10 40,032 3,652 9.12
- ---------------------------------------------------------------------------------------------
Total borrowings 332,697 18,538 5.57 339,908 25,882 7.61
- ---------------------------------------------------------------------------------------------
Total interest bearing
liabilities 4,899,118 286,317 5.84% 4,508,239 314,712 6.98%
- ---------------------------------------------------------------------------------------------
Demand--non-interest
bearing deposits 968,123 948,420
Other liabilities 69,951 75,971
Stockholders' equity 480,987 442,084
- ---------------------------------------- ----------
Total liabilities and
equity $6,418,179 $5,974,714
=============================================================================================
Net interest margin (T/E) $225,136 $214,947
=============================================================================================
Net yield on interest
earning assets 3.93% 4.05%
=============================================================================================
Percentage increase in net
interest margin (T/E) over the
prior year 4.74% 1.83%
=============================================================================================
</TABLE>
See notes on pages A-12 and A-13.
A-14
<PAGE>
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E)
DUE TO VOLUMES AND RATES
<TABLE>
<CAPTION>
1995 vs 1994 1994 vs 1993
- -------------------------------------------------------------------------------------------------------------------------------
Increase or (Decrease) Increase or (Decrease)
Due to Change In Due to Change In
- -------------------------------------------------------------------------------------------------------------------------------
Total Total
(In thousands) Average Average Increase Average Average Increase
Volume Rate (B) (Decrease) Volume Rate (B) (Decrease)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VARIANCE IN INTEREST INCOME ON
Loans and leases:
Business (including foreign) (A) $ 21,504 $21,257 $ 42,761 $ 6,853 $10,842 $ 17,695
Construction and development 1,194 1,661 2,855 964 662 1,626
Real estate--business 12,426 6,276 18,702 3,442 2,309 5,751
Real estate--personal 13,772 7,326 21,098 3,213 (3,168) 45
Personal banking 19,474 10,215 29,689 7,614 (2,181) 5,433
Credit card 7,823 3,463 11,286 5,293 (2,352) 2,941
- -------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 76,193 50,198 126,391 27,379 6,112 33,491
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency (21,642) 5,519 (16,123) (27,349) 5,293 (22,056)
State & municipal obligations (A) 5,833 195 6,028 422 (54) 368
CMO's and asset-backed securities 7,955 1,841 9,796 35,132 (3,552) 31,580
Trading account securities (7) 88 81 (26) (35) (61)
Other marketable securities (A) (210) 129 (81) (54) 312 258
Other non-marketable securities 185 (131) 54 (26) (267) (293)
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities (7,886) 7,641 (245) 8,099 1,697 9,796
- -------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 2,981 3,637 6,618 (4,633) 1,355 (3,278)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 71,288 61,476 132,764 30,845 9,164 40,009
===============================================================================================================================
VARIANCE IN INTEREST EXPENSE ON
Interest bearing deposits:
Savings 944 392 1,336 589 17 606
Interest bearing demand 2,791 25,901 28,692 3,156 1,886 5,042
Time open & C.D.'s of less than $100,000 15,928 24,455 40,383 2,203 (1,484) 719
Time open & C.D.'s of $100,000 and over 2,231 2,986 5,217 812 363 1,175
- -------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 21,894 53,734 75,628 6,760 782 7,542
- -------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 5,485 7,923 13,408 (929) 3,172 2,243
Long-term debt and other borrowings 689 (85) 604 1 (13) (12)
- -------------------------------------------------------------------------------------------------------------------------------
Total borrowings 6,174 7,838 14,012 (928) 3,159 2,231
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 28,068 61,572 89,640 5,832 3,941 9,773
- -------------------------------------------------------------------------------------------------------------------------------
Change in net interest margin (T/E) $ 43,220 $ (96) $ 43,124 $ 25,013 $ 5,223 $ 30,236
===============================================================================================================================
</TABLE>
(A) Stated on a tax equivalent basis.
(B) Changes not solely due to volume or rate changes are allocated to rate.
Management believes this allocation method, applied on a consistent basis,
provides meaningful comparisons between the respective periods.
A-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E)
DUE TO VOLUMES AND RATES (cont.)
<TABLE>
<CAPTION>
1993 vs 1992 1992 vs 1991
- --------------------------------------------------------------------------------------------------------------------------------
Increase or (Decrease) Increase or (Decrease)
Due to Change In Due to Change In
- --------------------------------------------------------------------------------------------------------------------------------
Total Total
(In thousands) Average Average Increase Average Average Increase
Volume Rate (B) (Decrease) Volume Rate (B) (Decrease)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VARIANCE IN INTEREST INCOME ON
Loans and leases:
Business (including foreign) (A) $ 7,771 $ (4,773) $ 2,998 $ 8,659 $ (22,353) $(13,694)
Construction and development (922) (24) (946) 615 (2,125) (1,510)
Real estate--business 7,613 (3,327) 4,286 1,059 (6,030) (4,971)
Real estate--personal 7,994 (8,690) (696) 5,336 (8,208) (2,872)
Personal banking 3,865 (6,716) (2,851) 749 (11,857) (11,108)
Credit card 3,827 (4,412) (585) 5,340 (3,902) 1,438
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 30,148 (27,942) 2,206 21,758 (54,475) (32,717)
- --------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 25,165 (12,688) 12,477 35,015 (35,835) (820)
State & municipal obligations (A) 1,232 (297) 935 1,674 (1,130) 544
CMO's and asset-backed securities 3,552 -- 3,552 -- -- --
Trading account securities (173) (84) (257) 139 (19) 120
Other marketable securities (A) (1,097) (1,039) (2,136) (10,955) (1,760) (12,715)
Other non-marketable securities 161 (196) (35) 50 298 348
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 28,840 (14,304) 14,536 25,923 (38,446) (12,523)
- --------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell (5,100) (1,544) (6,644) (3,894) (9,161) (13,055)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 53,888 (43,790) 10,098 43,787 (102,082) (58,295)
================================================================================================================================
VARIANCE IN INTEREST EXPENSE ON
Interest bearing deposits:
Savings 1,913 (1,880) 33 1,917 (3,198) (1,281)
Interest bearing demand 10,067 (19,402) (9,335) 20,348 (52,376) (32,028)
Time open & C.D.'s of less than $100,000 1,437 (18,024) (16,587) (3,148) (31,049) (34,197)
Time open & C.D.'s of $100,000 and over 303 (1,091) (788) (3,655) (2,731) (6,386)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 13,720 (40,397) (26,677) 15,462 (89,354) (73,892)
- --------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 1,449 (1,379) 70 (1,169) (5,776) (6,945)
Long-term debt and other borrowings (443) (24) (467) (2,379) (122) (2,501)
- --------------------------------------------------------------------------------------------------------------------------------
Total borrowings 1,006 (1,403) (397) (3,548) (5,898) (9,446)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 14,726 (41,800) (27,074) 11,914 (95,252) (83,338)
- --------------------------------------------------------------------------------------------------------------------------------
Change in net interest margin (T/E) $39,162 $ (1,990) $ 37,172 $ 31,873 $ (6,830) $ 25,043
================================================================================================================================
</TABLE>
(A) Stated on a tax equivalent basis.
(B) Changes not solely due to volume or rate changes are allocated to rate.
Management believes this allocation method, applied on a consistent basis,
provides meaningful comparisons between the respective periods.
A-16
<PAGE>
ANALYSIS OF VARIANCE IN NET INTEREST MARGIN (T/E)
DUE TO VOLUMES AND RATES (cont.)
<TABLE>
<CAPTION>
1991 vs 1990 1990 vs 1989
- ------------------------------------------------------------------------------------------------------------------
Increase or (Decrease) Increase or (Decrease)
Due to Change In Due to Change In
- ------------------------------------------------------------------------------------------------------------------
Total Total
(In thousands) Average Average Increase Average Average Increase
Volume Rate (B) (Decrease) Volume Rate (B) (Decrease)
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
VARIANCE IN INTEREST INCOME ON
Loans and leases:
Business (including foreign) (A) $ (545) $(13,416) $(13,961) $ 5,841 $ (8,775) $ (2,934)
Construction and development (3,313) (1,378) (4,691) (544) (972) (1,516)
Real estate - business 2,190 (2,949) (759) 4,332 (1,694) 2,638
Real estate - personal 917 (2,277) (1,360) 2,588 1,287 3,875
Personal banking (60) (8,178) (8,238) 6,114 (730) 5,384
Credit card 4,479 (1,224) 3,255 3,992 200 4,192
- ------------------------------------------------------------------------------------------------------------------
Total loans and leases 3,668 (29,422) (25,754) 22,323 (10,684) 11,639
- ------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 32,910 (10,508) 22,402 16,015 1,949 17,964
State & municipal obligations (A) (545) (103) (648) (2,570) 186 (2,384)
Trading account securities 83 (74) 9 53 (23) 30
Other marketable securities (A) 9,198 (4,477) 4,721 (2,083) (2,122) (4,205)
Other non-marketable securities (49) 9 (40) (23) (251) (274)
- ------------------------------------------------------------------------------------------------------------------
Total investment securities 41,597 (15,153) 26,444 11,392 (261) 11,131
- ------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell (7,335) (11,561) (18,896) 9,523 (5,556) 3,967
- ------------------------------------------------------------------------------------------------------------------
Total interest income 37,930 (56,136) (18,206) 43,238 (16,501) 26,737
==================================================================================================================
VARIANCE IN INTEREST EXPENSE ON
Interest bearing deposits:
Savings (57) (168) (225) (1,636) 3 (1,633)
Interest bearing demand 18,290 (26,001) (7,711) 18,804 (7,415) 11,389
Time open & C.D.'s of less than $100,000 15,810 (19,189) (3,379) 27,113 (91) 27,022
Time open & C.D.'s of $100,000 and over (6,859) (2,877) (9,736) (4,067) (1,906) (5,973)
- ------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 27,184 (48,235) (21,051) 40,214 (9,409) 30,805
- ------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase (451) (6,763) (7,214) (6,749) (3,463) (10,212)
Long-term debt and other borrowings (120) (10) (130) 2,104 180 2,284
- ------------------------------------------------------------------------------------------------------------------
Total borrowings (571) (6,773) (7,344) (4,645) (3,283) (7,928)
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 26,613 (55,008) (28,395) 35,569 (12,692) 22,877
- ------------------------------------------------------------------------------------------------------------------
Change in net interest margin (T/E) $11,317 $ (1,128) $ 10,189 $ 7,669 $ (3,809) $ 3,860
==================================================================================================================
</TABLE>
(A) Stated on a tax equivalent basis.
(B) Changes not solely due to volume or rate changes are allocated to rate.
Management believes this allocation method, applied on a consistent basis,
provides meaningful comparisons between the respective periods.
A-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS
<TABLE>
<CAPTION>
Year Ended December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- -----------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Rates Rates Rates Rates
(Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/
Balance Paid Balance Paid Balance Paid Balance Paid
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and leases:
Business (including foreign) (A) $1,761 8.24% $1,802 8.24% $1,765 8.50% $1,485 8.32%
Construction and development 139 9.19 129 9.23 125 9.48 130 9.64
Real estate - business 713 8.84 728 8.83 716 9.14 615 8.91
Real estate - personal 990 7.93 996 7.94 984 7.76 848 7.57
Personal banking 1,306 8.82 1,312 8.86 1,282 8.78 1,132 8.52
Credit card 457 13.77 426 13.99 405 14.19 390 13.64
- -----------------------------------------------------------------------------------------------------------------------
Total loans and leases 5,366 8.90 5,393 8.89 5,277 8.98 4,600 8.80
- -----------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,669 6.17 1,632 6.20 1,722 6.19 1,803 6.12
State & municipal obligations (A) 133 8.00 144 7.77 141 7.94 73 7.07
CMO's and asset-backed securities 681 6.22 689 6.14 761 6.27 749 6.33
Trading account securities 5 5.83 4 5.49 3 7.45 3 5.65
Other marketable securities (A) 46 6.76 55 5.79 75 6.00 89 6.31
Other non-marketable securities 33 1.39 26 4.15 25 3.00 22 2.08
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities 2,567 6.23 2,550 6.24 2,727 6.27 2,739 6.18
- -----------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 366 5.81 301 5.80 86 6.20 65 6.14
- -----------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,299 7.94 8,244 7.96 8,090 8.04 7,404 7.80
- -----------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (98) (98) (98) (88)
Unrealized gain (loss) on
investment securities 28 17 (19) (84)
Cash and due from banks 645 640 589 555
Land, buildings and equipment -- net 210 210 209 194
Other assets 224 224 221 166
- -----------------------------------------------------------------------------------------------------------------------
Total assets $9,308 $9,237 $8,992 $8,147
=======================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 312 2.52 $ 323 2.54 $ 330 2.56 $ 283 2.58
Interest bearing demand 3,505 3.47 3,403 3.48 3,289 3.38 3,115 3.20
Time open & C.D.'s under $100,000 2,261 5.59 2,302 5.53 2,267 5.34 1,993 4.92
Time open & C.D.'s $100,000 & over 230 5.47 224 5.53 217 5.44 184 4.84
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING DEPOSITS 6,308 4.25 6,252 4.26 6,103 4.13 5,575 3.84
- -----------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under agreements to
repurchase 430 5.30 461 5.37 475 5.52 403 5.30
Long-term debt and other borrowings 15 7.41 16 7.27 18 7.42 16 6.14
- -----------------------------------------------------------------------------------------------------------------------
TOTAL BORROWINGS 445 5.37 477 5.43 493 5.59 419 5.34
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 6,753 4.33% 6,729 4.34% 6,596 4.24% 5,994 3.95%
- -----------------------------------------------------------------------------------------------------------------------
Demand - non-interest bearing deposits 1,569 1,559 1,494 1,365
Other liabilities 93 66 54 29
Stockholders' equity 893 883 848 759
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $9,308 $9,237 $8,992 $8,147
=======================================================================================================================
NET INTEREST MARGIN (T/E) $ 93 $ 92 $ 92 $ 84
=======================================================================================================================
NET YIELD ON INTEREST EARNING ASSETS 4.42% 4.42% 4.58% 4.61%
=======================================================================================================================
</TABLE>
(A) Includes tax equivalent calculations.
A-18
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS (cont.)
Year Ended December 31, 1994
- -----------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- -----------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Rates Rates Rates Rates
(Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/
Balance Paid Balance Paid Balance Paid Balance Paid
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and leases:
Business (including foreign) (A) $1,409 7.82% $1,409 7.35% $1,390 6.97% $1,362 6.27%
Construction and development 126 8.71 125 8.78 116 7.69 95 6.90
Real estate - business 566 8.76 540 8.16 523 7.73 526 7.39
Real estate - personal 798 7.21 760 6.99 742 6.96 736 7.00
Personal banking 1,094 8.19 1,035 8.03 987 7.76 936 7.76
Credit card 370 13.24 362 13.00 358 12.72 350 13.33
- -----------------------------------------------------------------------------------------------------------------------
Total loans and leases 4,363 8.41 4,231 8.08 4,116 7.77 4,005 7.53
- -----------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal agency 1,898 5.91 1,988 5.83 2,145 5.85 2,278 5.80
State & municipal obligations (A) 53 7.29 44 7.63 45 7.63 44 8.00
CMO's and asset-backed securities 736 6.16 636 5.96 556 5.88 417 5.86
Trading account securities 4 4.50 4 3.01 3 5.26 5 3.03
Other marketable securities (A) 74 6.44 72 5.52 64 6.31 69 5.74
Other non-marketable securities 20 2.57 21 2.23 21 (1.09) 21 8.67
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities 2,785 5.99 2,765 5.85 2,834 5.84 2,834 5.86
- -----------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 91 5.15 140 4.66 116 3.99 184 3.24
- -----------------------------------------------------------------------------------------------------------------------
Total interest earning assets 7,239 7.44 7,136 7.15 7,066 6.94 7,023 6.74
- -----------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (87) (87) (87) (86)
Unrealized gain (loss) on
investment securities (72) (39) (14) 66
Cash and due from banks 559 555 536 570
Land, buildings and equipment - net 193 193 195 196
Other assets 166 146 141 145
- -----------------------------------------------------------------------------------------------------------------------
Total assets $7,998 $7,904 $7,837 $7,914
=======================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 278 2.56 $ 275 2.43 $ 274 2.36 $ 266 2.34
Interest bearing demand 3,172 2.86 3,245 2.59 3,298 2.48 3,278 2.43
Time open & C.D.'s under $100,000 1,939 4.56 1,810 4.28 1,783 4.09 1,772 4.09
Time open & C.D.'s $100,000 & over 170 4.46 157 4.07 150 3.79 146 3.54
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING DEPOSITS 5,559 3.48 5,487 3.18 5,505 3.03 5,462 2.99
- -----------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under agreements
to repurchase 304 4.49 315 3.89 245 3.32 286 2.59
Long-term debt and other borrowings 7 7.79 8 7.11 7 7.77 7 7.79
- -----------------------------------------------------------------------------------------------------------------------
TOTAL BORROWINGS 311 4.56 323 3.97 252 3.44 293 2.71
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 5,870 3.54% 5,810 3.23% 5,757 3.05% 5,755 2.98%
- -----------------------------------------------------------------------------------------------------------------------
Demand - non-interest bearing
deposits 1,370 1,342 1,322 1,333
Other liabilities 30 27 26 66
Stockholders' equity 728 725 732 760
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $7,998 $7,904 $7,837 $7,914
=======================================================================================================================
NET INTEREST MARGIN (T/E) $ 83 $ 81 $ 79 $ 75
=======================================================================================================================
NET YIELD ON INTEREST EARNING ASSETS 4.56% 4.52% 4.45% 4.30%
=======================================================================================================================
</TABLE>
(A) Includes tax equivalent calculations.
A-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
QUARTERLY AVERAGE BALANCE SHEETS--AVERAGE RATES AND YIELDS (cont.)
<TABLE>
<CAPTION>
Year Ended December 31, 1993
- -----------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- -----------------------------------------------------------------------------------------------------------------
Average Average Average Average
Rates Rates Rates Rates
(Dollars in millions) Average Earned/ Average Earned/ Average Earned/ Average Earned/
Balance Paid Balance Paid Balance Paid Balance Paid
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and leases:
Business (including
foreign) (A) $1,323 6.25% $1,288 6.25% $1,273 6.49% $1,241 6.43%
Construction and development 88 7.36 92 7.76 103 7.49 129 7.53
Real estate--business 530 7.38 493 7.62 478 7.69 472 7.74
Real estate--personal 735 7.10 726 7.32 709 7.68 695 7.77
Personal banking 927 7.89 925 8.10 916 8.15 912 8.51
Credit card 337 13.27 322 13.36 310 13.94 317 14.38
- ----------------------------------------------------------------------------------------------------------------
Total loans and leases 3,940 7.57 3,846 7.70 3,789 7.90 3,766 8.05
- ----------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal
agency 2,404 5.81 2,537 5.70 2,552 5.75 2,496 5.80
State & municipal
obligations (A) 42 7.40 43 7.44 39 8.10 41 8.05
CMO's and asset-backed
securities 185 5.84 54 6.00 -- -- -- --
Trading account securities 6 4.31 4 4.47 4 4.83 5 5.06
Other marketable securities
(A) 64 2.80 67 5.55 76 5.79 76 5.06
Other non-marketable
securities 21 4.32 21 3.42 21 3.89 21 6.04
- ----------------------------------------------------------------------------------------------------------------
Total investment securities 2,722 5.75 2,726 5.71 2,692 5.77 2,639 5.81
- ----------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell 324 3.08 290 3.06 221 3.07 296 3.15
- ----------------------------------------------------------------------------------------------------------------
Total interest earning assets 6,986 6.65 6,862 6.72 6,702 6.89 6,701 6.95
- ----------------------------------------------------------------------------------------------------------------
Less allowance for loan
losses (86) (85) (83) (80)
Cash and due from banks 619 580 557 536
Land, buildings and
equipment--net 197 197 198 195
Other assets 155 147 141 157
- ----------------------------------------------------------------------------------------------------------------
Total assets $7,871 $7,701 $7,515 $7,509
================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 260 2.10 $ 262 2.44 $ 243 2.50 $ 229 2.67
Interest bearing demand 3,212 2.45 3,127 2.51 3,058 2.55 3,098 2.61
Time open & C.D.'s under
$100,000 1,768 4.19 1,778 4.23 1,791 4.33 1,826 4.49
Time open & C.D.'s $100,000
& over 142 3.63 138 3.59 137 3.65 136 3.71
- ----------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 5,382 3.04 5,305 3.11 5,229 3.19 5,289 3.29
- ----------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under agreements
to repurchase 318 2.54 337 2.58 311 2.57 310 2.52
Long-term debt and other
borrowings 7 7.84 7 7.67 7 7.78 7 7.86
- ----------------------------------------------------------------------------------------------------------------
Total borrowings 325 2.65 344 2.69 318 2.69 317 2.64
- ----------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 5,707 3.01% 5,649 3.08% 5,547 3.16% 5,606 3.25%
- ----------------------------------------------------------------------------------------------------------------
Demand--non-interest
bearing deposits 1,414 1,325 1,266 1,203
Other liabilities 51 47 46 60
Stockholders' equity 699 680 656 640
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $7,871 $7,701 $7,515 $7,509
================================================================================================================
Net interest margin (T/E) $ 74 $ 72 $ 71 $ 70
================================================================================================================
Net yield on interest
earning assets 4.19% 4.18% 4.27% 4.23%
================================================================================================================
</TABLE>
(A) Includes tax equivalent calculations.
A-20
<PAGE>
INTEREST EXPENSE AND
RELATED LIABILITIES
Total interest expense (net of capitalized interest) was $275.3 million in 1995,
$185.7 million in 1994, and $175.9 million in 1993. Total interest expense
increased 48.3% in 1995 over 1994. If banks acquired in 1994 and 1995 are
excluded, the increase would have been 29.5%. Average interest bearing
liabilities totaled $6.52 billion in 1995, $5.80 billion in 1994 and $5.63
billion in 1993. The average cost was 4.22% in 1995, 3.20% in 1994 and 3.13% in
1993. Interest expense on deposits increased $75.6 million in 1995 over 1994
mainly due to increases of 80 basis points in rates paid on interest bearing
demand deposits and 110 basis points in rates paid on time open and C.D.'s under
$100,000. In 1994 compared to 1993, interest expense on deposits increased $7.5
million because of increases of $123.9 million in average balances of interest
bearing demand deposits and $36.2 million in time open and C.D.'s under
$100,000. Additionally, average rates paid on interest bearing demand deposits
during 1994 increased 6 basis points. In 1993 compared to 1992, interest expense
on deposits decreased $26.7 million due to an overall drop in interest rates.
The average rates paid on interest bearing demand deposits decreased 64 basis
points and the average rates paid on time open and C.D.'s under $100,000
decreased 94 basis points. This effect was partially offset by a $335.5 million
increase in the average balance of interest bearing demand deposits.
The deposit mix has remained stable over the past several years; at year end
1995, 22% of total deposits were in non-interest bearing demand, 48% in interest
bearing demand and 28% in time open and C.D.'s under $100,000. Core deposits
(defined as all non-interest bearing and interest bearing deposits excluding
short-term C.D.'s of $100,000 and over) supported 93% of average earning assets
in 1995. Interest expense on federal funds purchased and securities sold under
agreements to repurchase increased $13.4 million in 1995 compared to 1994
because of increases in average rates paid and average balances borrowed.
Average balances by major deposit category for the last six years appear on
pages A-12 through A-14. The maturity schedule of time deposits of $100,000 and
over outstanding at December 31, 1995, appears on page A-3.
NET INTEREST INCOME
The net interest income for 1995 was $355.7 million in 1995, $314.6 million in
1994 and $284.5 million in 1993. As shown on pages A-12 and A-13, the dollar
difference between tax equivalent interest income and interest expense increased
in each of the last three years. The net yield on interest earning assets stated
as a percentage increased in each of the last three years for the reasons
described above.
NON-INTEREST INCOME
Non-interest income totaled $133.2 million in 1995, $121.0 million in 1994 and
$121.4 million in 1993. In 1995 compared to 1994, trust income increased $5.3
million, deposit account charges and other fees increased $4.7 million and
miscellaneous credit card income increased $4.0 million. These increases were
partially offset by a $1.5 million decrease in gains on securities transactions.
Excluding banks acquired in 1994 and 1995, total non-interest income (excluding
securities gains) increased 3.9% in 1995 compared to 1994. The slight decrease
in 1994 from 1993 was mainly due to a $5.1 million decrease in gains on
securities transactions and a $910 thousand decrease in net gains on the sales
of loans and foreclosed assets. These decreases were largely offset by a $3.3
million increase in miscellaneous credit card income, a $1.4 million increase in
miscellaneous fees and charges, and a $1.3 million fee collected in conjunction
with the pay-off of a specific loan. The increase in miscellaneous fees and
charges included increases in loan commitment fees and ATM fees. Most of the
$12.8 million increase in 1993 over 1992 was due to increases in fee income.
Deposit account charges and other fees increased $6.1 million, trust income
increased $2.3 million, miscellaneous credit card income increased $2.1 million
and
A-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
miscellaneous fees and charges increased $2.6 million. Net gains on the sales of
loans and foreclosed assets increased $3.3 million. These increases were
partially offset by a $3.8 million decrease in gains on securities transactions.
OTHER EXPENSE
Other expense totaled $305.5 million in 1995 compared to $282.1 million in 1994
and $257.3 million in 1993. The $23.4 million increase in 1995 over 1994 was
mainly due to a $13.8 million increase in salaries and employee benefits. If
expenses at banks acquired in 1994 and 1995 are excluded, salaries and employee
benefits increased $684 thousand in 1995 compared to 1994 with a decrease of 185
full-time equivalent employees. Partially offsetting this increase was a $6.5
million decrease in F.D.I.C. insurance expense due to decreased rates. In
addition, other operating expense increased $3.3 million in 1995 over 1994,
mainly due to a $5.6 million increase in goodwill and core deposit premium
amortization, partially offset by a $3.0 million decrease in charitable
contribution expense. Excluding expenses of banks acquired in 1994 and 1995,
total other expense decreased 4.1% in 1995 compared to 1994. The $24.8 million
increase in 1994 over 1993 was mainly due to a $9.7 million increase in salaries
and employee benefits (partly due to bank acquisitions) and a $6.1 million
increase in other operating expense. Salaries and employee benefits increased
because of merit and incentive raises, increases in benefit plan expense and
increases in payroll taxes. The increase in operating expense included an
increase of $3.4 million in charitable contribution expense and a $2.5 million
reserve established for a potential contingent liability. The $31.9 million
increase in 1993 over 1992 was mainly due to a $17.8 million increase in
salaries and employee benefits. In addition to merit and incentive increases,
full-time equivalent employees increased by over 450 during 1993, largely due to
acquisitions. Occupancy expense increased $3.4 million and other operating
expense increased $3.8 million, partly due to increased fees for professional
services.
Through the acquisition of Union National Bank in 1995, the Company acquired
certain deposits which totaled $246 million at December 31, 1995, which are
insured by the Savings Association Insurance Fund (SAIF). Based on current
rates, annual SAIF insurance premiums on these deposits are $560 thousand.
Congress has proposed legislation to recapitalize the SAIF. If legislation is
passed to do so, the Company will be required to pay a one-time assessment of as
much as $1.7 million.
INCOME TAXES
Income taxes for 1995 increased $9.5 million over 1994, $1.3 million over 1993
and $10.3 million over 1992, partially due to increases in taxable income. The
effective tax rate on income from operations was 36.2%, 34.9% and 36.7% in 1995,
1994 and 1993, respectively. The difference between these effective tax rates
and the statutory rate of 35% is mainly due to state and local income taxes and
non-deductible goodwill amortization, offset by tax exempt interest income on
state and political subdivision securities. The 1994 effective tax rate was also
reduced by certain non-recurring state tax credits and the contribution of an
appreciated asset.
LIQUIDITY AND CAPITAL RESOURCES
The liquid assets of the Parent consist primarily of available for sale
securities, which include readily marketable equity securities and commercial
paper, and securities purchased under agreements to resell. Total investment
securities and repurchase agreements were $79.1 million at cost and $90.1
million at fair value at December 31, 1995 ($10.0 million of which is pledged
under a self-insured officer and director liability program) compared to $118.8
million at cost and $122.8 million at fair value at December 31, 1994. Total
liabilities of the Parent at December 31, 1995 increased to $44.3 million
compared to $9.9 million at December 31, 1994 mainly because of a $31.0 million
liability recorded at year end 1995 for a significant treasury stock purchase
settling in 1996. The Parent had no short-term borrowings or long-term debt at
A-22
<PAGE>
December 31, 1995. Primary sources of funds for the Parent are dividends and
management fees from its subsidiary banks, which were $124.1 million and $13.0
million, respectively, in 1995. The Parent also collected $18.0 million from
subsidiary banks to reimburse data processing costs paid by the Parent. The
subsidiary banks may distribute dividends without prior regulatory approval from
1996 earnings subject to maintenance of minimum capital requirements. The
Parent's commercial paper, which management believes is readily marketable, has
a P1 rating from Moody's and an A1 rating from Standard & Poor's. The Company is
also rated A by Thomson BankWatch with a corresponding short-term rating of TBW-
1. This credit availability, along with available secured short-term borrowings
from affiliate banks, should provide adequate funds to meet any outstanding or
future commitments of the Parent. Management is not aware of any factors that
would cause these ratings to be adversely impacted.
The liquid assets held by bank subsidiaries also include available for sale
securities, which consist mainly of investments in U.S. government and federal
agency securities and mortgage-backed securities. The available for sale bank
portfolio totaled $2.50 billion at December 31, 1995, including an unrealized
net gain of $30.1 million. The Company (on a consolidated basis) continues to
maintain a sound equity to asset ratio at 9.48%, based on 1995 average balances.
At December 31, 1995, the Company and each of its banking subsidiaries met
minimum risk based capital requirements. Consolidated Tier I and Total capital
ratios were 12.51% and 13.73%, respectively, and the leverage ratio was 8.27%.
The cash flows from the operating, investing and financing activities of the
Company in 1995 resulted in a net increase in cash and due from banks of $209.0
million over the 1994 year end balance. The cash generated by operating
activities provides a high degree of liquidity. Most of the Company's investing
activities arise from customer lending and the investment of funds in available
for sale securities and short-term federal funds sold and repurchase agreements.
The liquidity needs arising from these activities are largely satisfied by
maturities of the same in addition to a major financing item, the customer
deposit base. The 1995 increase was due to $522.7 million in sales and
maturities of investment securities, net of purchases, a $265.7 million net
increase in savings and demand deposits and $195.3 million provided from ongoing
operating activities. Offsetting these cash inflows were cash outflows of $424.2
million in purchases of short-term federal funds sold and repurchase agreements,
net of maturities, and $222.7 million in additional loans made, net of
repayments. Future short-term liquidity needs for daily operations are not
expected to vary significantly and the Company maintains adequate liquidity to
meet that cash flow. The Company's sound equity base, along with its low debt
level, common and preferred stock availability, and excellent debt ratings,
provide several alternatives for future financing. Future acquisitions may
require partial funding through one or more of these options.
The 1994 increase in cash and due from banks of $31.0 million was due to
maturities of $299.4 million in short-term federal funds sold and repurchase
agreements, net of purchases, $217.3 million in sales and maturities of
investment securities, net of purchases, and $136.7 million provided from
operating activities. Offsetting these cash inflows were cash outflows of $279.0
million in additional loans made, net of repayments, a $252.1 million net
decrease in savings and demand deposits, and a $119.8 million net decrease in
borrowings of federal funds purchased and repurchase agreements. The 1993
decrease of $15.9 million in cash and due from banks was mainly caused by $180.9
million in additional loans made, net of repayments, and $166.3 million in
additional purchases of investment securities, net of maturities and sales,
partially offset by $215.1 million in maturities of federal funds sold and
securities purchased under agree-
A-23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
ments to resell, net of purchases, and cash provided from operating activities.
In 1993, proceeds from maturing securities were $280.3 million and proceeds from
sales of securities were $500.9 million. Most of these securities sales were of
U.S. government and federal agency securities that were sold shortly before
maturity in order to take advantage of market conditions.
During 1995, approximately $40.0 million was used to purchase treasury stock.
The purchases were partially offset by exercise of stock options by employees
and sales to affiliate outside directors (under a plan to invest their directors
fees in Company stock) which, on a combined basis, totaled sales of $4.1
million. Acquisitions during 1995 required treasury stock valued at $12.0
million and newly issued stock of $75.7 million. During 1994, approximately
$52.8 million was used to purchase treasury stock. Cash of $8.2 million was
received on exercise of stock options, sales to directors and sales to employee
benefit plans. In addition, bank acquisitions during 1994 required $44.5 million
in treasury stock and $3.5 million in newly issued stock. During 1993,
approximately $10.6 million was used to purchase treasury stock. Cash of $4.6
million was received on sales of treasury shares (excluding shares valued at
$63.3 million which were issued in acquisitions). In June 1995, the Board of
Directors authorized the Company to purchase up to 2,000,000 shares of common
stock, in either the open market or privately negotiated transactions, to be
used for employee benefit programs and stock dividends. At December 31, 1995,
the Company had acquired 1,455,000 shares under the 1995 authorization.
Various commitments and contingent liabilities arise in the normal course of
business which are properly not recorded on the balance sheet. The most
significant of these are loan commitments totaling $1.96 billion (excluding
approximately $1.82 billion in unused approved lines of credit related to credit
card loan agreements) and standby letters of credit, net of participations to
non-affiliated companies, totaling $121.5 million at December 31, 1995. The
Company has various other financial instruments with off-balance-sheet risk,
such as commercial letters of credit, foreign exchange contracts to purchase and
sell foreign currency, and an interest rate swap agreement. Management does not
anticipate any material losses arising from commitments and contingent
liabilities and believes there are no material commitments to extend credit that
represent risks of an unusual nature.
IMPACT OF RECENTLY ISSUED
ACCOUNTING STANDARDS
In 1995, the Company adopted Statements of Financial Accounting Standards No.
114 and 118, which require that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. The adoption of these statements did not have a material effect on the
financial statements, and the Company's previous approach to valuation of
impaired loans was not revised due to immateriality.
The Company will adopt SFAS No. 122 related to mortgage loan origination costs
in 1996; the impact of this statement is expected to be immaterial. Also, SFAS
No. 123, "Accounting for Stock-Based Compensation" will require pro forma
disclosures in 1996 of net income and earnings per share as if a new accounting
method based on the estimated fair value of employee stock options had been
adopted. The Company has not decided if the optional accounting treatment
proposed by SFAS No. 123 will be adopted.
EFFECTS OF INFLATION
The impact of inflation on financial institutions differs significantly from
that exerted on industrial entities. Financial institutions are not heavily
involved in large capital expenditures used in the production, acquisition or
sale of products. Therefore, the direct results of inflation are limited to
costs of goods and services used in operating the institution. There are,
however, indirect effects of
A-24
<PAGE>
inflation such as the impact that it has on the level of loan demand. An example
is the increased loan demand of customers requiring additional funds to maintain
capital assets and inventories to produce and sell goods to the buying public.
This demand is accelerated when customers increase borrowings for current
purchases to avoid expected future price increases. Financial institutions must
then meet this increased demand for loans by obtaining additional funds in the
form of deposits or by raising funds through borrowings.
Higher interest rates generally follow the rising demand of borrowers and the
corresponding increased funding requirements of financial institutions. Although
interest rates are viewed as the price of borrowing funds, the behavior of
interest rates differs significantly from the behavior of the prices of goods
and services. Prices of goods and services may be directly related to that of
other goods and services while the price of borrowing relates more closely to
the inflation rate in the prices of those goods and services. As a result, when
the rate of inflation slows, interest rates tend to decline while absolute
prices for goods and services remain at higher levels. Interest rates are also
subject to restrictions imposed through monetary policy, usury laws and other
artificial constraints. The rate of inflation has been relatively low over the
past few years.
GENERAL COMMENTS
With our country experiencing a period of relative economic growth, the banking
industry has been able to improve on its financial strength. Profit margins have
in general improved. Consumer confidence surveys seem to move up and down with
various events locally and around the world. Many consumers still have concerns
about how long this current economic climate will continue. Changes in the
political arena have occurred which are touted to be the signal for major
changes in federal policies and regulations which will affect us all.
Stockholders in most industries are continuing to pressure management for
economies of scale which frequently result in mergers and/or downsizing and
individuals are continually reminded that there are no guarantees of long-term
job security. Consumer uncertainty can lead to debt reduction and economic slow
down.
Those in the business of banking have to sort out what we expect to happen and
build plans to achieve the optimum return for stockholders along with
unquestioned security and stability for both stockholders and customers. Banks
must function within the boundaries established by banking regulations yet meet
the high expectations of investors. Some banks have developed strategies to spur
deposit growth in anticipation of future loan demand. Others are still
evaluating the changes in spending patterns and are waiting to see how loan
growth risks weigh against alternative investment options. Commerce looks upon
these parameters with optimism as part of the challenge to be a solid,
dependable partner in each community we serve while providing the right products
at the right prices. In 1996, Commerce will continue to focus on extending
markets with high-growth potential and improving our operating efficiencies in
Missouri, Illinois and Kansas. Commerce also continues to limit loan growth to
high quality, low risk credits while avoiding concentrations in any one
industry. Customer service remains a primary goal. Commerce strives to offer
sophisticated products designed on a personalized basis to meet our customers'
needs, while maintaining emphasis on credit quality, efficiency, and cost
control.
A-25
<PAGE>
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
Commerce Bancshares, Inc. and Subsidiaries
FINANCIAL STATEMENTS
Commerce Bancshares, Inc. is responsible for the preparation, integrity, and
fair presentation of its published financial statements. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on judgments and
estimates of management.
INTERNAL CONTROL STRUCTURE OVER
FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions over time, the
effectiveness of an internal control system may vary.
Management assessed its internal control structure over financial reporting as
of December 31, 1995. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control--
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that Commerce
Bank, N.A. (St. Louis), Commerce Bank, N.A. (Kansas City), Commerce Bank, N.A.
(Wichita), and Commerce Bank, N.A. (Springfield) maintained an effective
internal control structure over financial reporting as of December 31, 1995.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders as designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that Commerce Bank, N.A. (St. Louis), Commerce Bank, N.A. (Kansas City),
Commerce Bank, N.A. (Wichita), and Commerce Bank, N.A. (Springfield), subsidiary
insured depository institutions of Commerce Bancshares, Inc., complied, in all
significant respects, with the designated laws and regulations related to safety
and soundness for the year ended December 31, 1995.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Commerce Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Commerce
Bancshares, Inc. and Subsidiaries as of December 31, 1995, 1994 and 1993, and
the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commerce Bancshares,
Inc. and Subsidiaries at December 31, 1995, 1994 and 1993, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
January 31, 1996
Kansas City, Missouri
A-26
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATION The accompanying consolidated financial statements include the
accounts of Commerce Bancshares, Inc. (Parent) and its subsidiaries
(collectively, the Company) which are substantially wholly-owned. All
significant intercompany accounts and transactions are eliminated in
consolidation. Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates. The Company amortizes the cost in
excess of the fair value of net assets acquired in purchase business
combinations (goodwill) using the straight-line method over periods of 15-20
years. When facts and circumstances indicate potential impairment, the Company
evaluates the recoverability of asset carrying values, including goodwill, using
estimates of undiscounted future cash flows over remaining asset lives. Any
impairment loss is measured by the excess of carrying values over fair values.
Core deposit intangibles are amortized over a maximum of 10 years using
accelerated methods.
LOANS AND COMMITMENTS Interest on loans is credited to operating income based
upon the principal amount outstanding using primarily a simple interest
calculation. The accrual of interest on loans is discontinued when, in
management's judgment, the interest is uncollectible in the normal course of
business. Interest collected on non-accrual loans is recorded on a cash basis.
Loan and commitment fee income and related costs are deferred and amortized in
relation to the respective loan or commitment. The Company's adoption in 1995 of
Statements of Financial Accounting Standards No. 114 and 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures" did not
have a material impact on the Company's consolidated financial position or
results of operations.
SECURITIES Prior to 1994, investment securities were stated at cost, adjusted
for amortization of premiums and accretion of discounts. On January 1, 1994, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and classified most of its portfolio as available for sale.
Investment securities classified as available for sale are stated at fair value,
with the adjustment (net of tax) being reported as a separate component of
stockholders' equity. Any premiums or discounts on purchases in this category
are amortized as adjustments of the related interest income. Trading account
securities are carried at fair value with adjustments recorded in non-interest
income. Investments in equity securities without readily determinable fair
values are stated at cost, less allowances for other than temporary declines in
value.
LAND, BUILDINGS AND EQUIPMENT Land is stated at cost, and buildings and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed on a straight-line or declining balance method, depending on the type
of asset and the year of acquisition. Maintenance and repairs are charged to
expense as incurred.
PROVISION FOR LOAN LOSSES The provision for loan losses is based upon
management's estimate of the amount required to maintain an adequate allowance
for loan losses, on an individual subsidiary bank basis, reflective of the risks
in the loan portfolio. The estimate is based on reviews of the loan portfolio,
past loan loss experience, current economic conditions and such other factors
which, in the opinion of management, deserve current recognition.
INCOME TAXES The Parent and its eligible subsidiaries file consolidated income
tax returns. Certain items are treated differently for financial reporting
purposes than for income tax purposes. Deferred income taxes are provided in
recognition of these temporary differences, using the tax rates expected to be
in effect when the related temporary differences reverse.
INCOME PER COMMON SHARE Income per share data is based on the weighted average
number of common shares and common equivalent shares outstanding during each
year. All per share data in this report has been restated to reflect the 5%
stock dividend distributed on December 15, 1995.
A-27
<PAGE>
CONSOLIDATED BALANCE SHEETS
Commerce Bancshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
ASSETS
Loans and lease financing, net of unearned income $5,317,813 $4,432,662 $4,024,075
Allowance for loan losses (98,537) (87,179) (85,830)
- --------------------------------------------------------------------------------------------
NET LOANS AND LEASE FINANCING 5,219,276 4,345,483 3,938,245
- --------------------------------------------------------------------------------------------
Investment securities:
Held to maturity (fair value of
$2,857,453,000 in 1993) --- --- 2,781,827
Available for sale 2,552,264 2,621,342 ---
Trading account 9,369 5,539 5,170
Other non-marketable 33,120 18,539 18,633
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 2,594,753 2,645,420 2,805,630
- --------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 523,302 72,265 354,517
Cash and due from banks 774,852 565,805 534,785
Land, buildings and equipment - net 210,033 191,780 195,251
Customers' acceptance liability 9,435 15,213 14,274
Other assets 242,300 199,608 204,711
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $9,573,951 $8,035,574 $8,047,413
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - non-interest bearing $1,828,950 $1,448,422 $1,391,740
Savings and interest bearing demand 3,891,801 3,418,450 3,541,768
Time open and C.D.'s of less than $100,000 2,253,390 1,942,986 1,766,351
Time open and C.D.'s of $100,000 and over 218,951 180,572 139,611
- --------------------------------------------------------------------------------------------
TOTAL DEPOSITS 8,193,092 6,990,430 6,839,470
- --------------------------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 362,903 290,647 395,083
Long-term debt and other borrowings 14,562 6,487 6,894
Accrued interest, taxes and other liabilities 110,176 4,599 79,072
Acceptances outstanding 9,435 15,213 14,274
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,690,168 7,307,376 7,334,793
- --------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized and unissued 2,000,000 shares --- --- ---
Common stock, $5 par value
Authorized 60,000,000 shares; issued 37,565,369
shares in 1995, 33,970,106 shares in 1994 and
32,238,438 shares in 1993 187,827 169,851 161,192
Capital surplus 84,415 54,575 17,051
Retained earnings 618,388 576,331 545,424
Treasury stock of 861,951 shares in 1995, 401,087
shares in 1994 and 454,081 shares in 1993, at cost (32,980) (12,148) (8,982)
Unearned employee benefits (716) (295) (2,065)
Unrealized securities gain (loss) - net of tax 26,849 (60,116) ---
- --------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 883,783 728,198 712,620
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,573,951 $8,035,574 $8,047,413
============================================================================================
</TABLE>
See accompanying notes to financial statements.
A-28
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended December 31
- --------------------------------------------------------------------------------------------
(In thousands, except per share data) 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $457,760 $331,429 $297,798
Interest on investment securities 161,168 163,395 153,879
Interest on federal funds sold and securities purchased
under agreements to resell 12,075 5,457 8,735
- --------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 631,003 500,281 460,412
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Savings and interest bearing demand 120,683 90,655 85,007
Time open and C.D.'s of less than $100,000 118,267 77,884 77,165
Time open and C.D.'s of $100,000 and over 11,430 6,213 5,038
Interest on federal funds purchased and securities sold
under agreements to repurchase 23,792 10,384 8,141
Interest on long-term debt and other borrowings 1,086 528 537
- --------------------------------------------------------------------------------------------
Total interest expense 275,258 185,664 175,888
- --------------------------------------------------------------------------------------------
Net interest income 355,745 314,617 284,524
Provision for loan losses 14,629 5,845 11,381
- --------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 341,116 308,772 273,143
- --------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust income 33,454 28,180 27,645
Deposit account charges and other fees 44,658 39,971 40,237
Trading account profits and commissions 5,158 4,903 5,243
Net gains on securities transactions 897 2,354 7,481
Miscellaneous credit card income 23,341 19,318 16,054
Other income 25,642 26,302 24,763
- --------------------------------------------------------------------------------------------
Total non-interest income 133,150 121,028 121,423
- --------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and employee benefits 157,853 144,015 134,355
Net occupancy expense on bank premises 20,294 18,017 17,280
Equipment expense 14,256 13,159 12,216
Supplies and communication expense 24,139 19,633 19,068
Data processing expense 20,997 16,837 14,041
Federal deposit insurance expense 8,807 15,349 14,668
Marketing expense 11,611 10,833 7,527
Other operating expense 47,527 44,235 38,161
- --------------------------------------------------------------------------------------------
Total other expense 305,484 282,078 257,316
- --------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 168,782 147,722 137,250
Less income taxes 61,142 51,611 50,356
- --------------------------------------------------------------------------------------------
Net income $107,640 $ 96,111 $ 86,894
============================================================================================
Net income per common and common equivalent share $ 2.85 $ 2.72 $ 2.49
============================================================================================
Weighted average common and common
equivalent shares outstanding 37,802 35,397 34,911
Cash dividends per common share $ .686 $ .599 $ .529
============================================================================================
</TABLE>
See accompanying notes to financial statements.
A-29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended December 31
- -------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 107,640 $ 96,111 $ 86,894
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 14,629 5,845 11,381
Provision for depreciation and amortization 31,173 25,741 24,831
Accretion of investment security discounts (5,656) (1,704) (503)
Amortization of investment security premiums 24,596 32,057 33,048
Provision for deferred income taxes 3,549 (6,651) (4,840)
Net gains on securities transactions (897) (2,354) (7,481)
Net (increase) decrease in trading account securities (4,859) 2,182 12,368
(Increase) decrease in interest receivable 19 (10,309) (303)
Increase (decrease) in interest payable 10,863 5,033 (3,029)
Other changes, net 14,204 (9,203) (1,657)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 195,261 136,748 150,709
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net cash received (paid) in acquisitions (33,226) 13,031 14,969
Proceeds from sales of held to maturity securities --- --- 500,882
Proceeds from maturities of held to maturity securities --- --- 280,291
Purchases of held to maturity securities --- --- (947,517)
Proceeds from sales of available for sale securities 917,063 808,253 ---
Proceeds from maturities of available for sale securities 535,722 230,303 ---
Purchases of available for sale securities (930,080) (821,250) ---
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell (424,202) 299,393 215,075
Net increase in loans (222,684) (278,953) (180,867)
Purchases of premises and equipment (25,798) (19,057) (15,979)
Sales of premises and equipment 8,673 8,789 3,380
- -------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (174,532) 240,509 (129,766)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing demand,
savings and interest bearing demand deposits 265,672 (252,099) 161,922
Net increase (decrease) in time open and C.D.'s 53,208 91,804 (141,579)
Net decrease in federal funds purchased and
securities sold under agreements to repurchase (59,843) (119,777) (32,425)
Repayment of long-term debt (8,805) (438) (373)
Purchases of treasury stock (40,024) (52,755) (10,629)
Sales of treasury stock to employee benefit plans --- 5,599 2,228
Exercise of stock options by employees 3,294 1,756 1,587
Sales of treasury stock under directors stock purchase plan 855 797 813
Cash dividends paid on common stock (26,039) (21,124) (18,358)
- -------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 188,318 (346,237) (36,814)
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 209,047 31,020 (15,871)
Cash and cash equivalents at beginning of year 565,805 534,785 550,656
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 774,852 $ 565,805 $ 534,785
=======================================================================================================
</TABLE>
See accompanying notes to financial statements.
A-30
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Unearned Net
Common Capital Retained Treasury Employee Unrealized
(In thousands) Stock Surplus Earnings Stock Benefits Gain (Loss) Total
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 $161,192 $ 26,375 $456,484 $(37,021) $(3,312) $ -- $ 603,718
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 86,894 86,894
Purchase of treasury stock (10,629) (10,629)
Sale of stock to the employee benefit plans 933 1,295 2,228
Cash dividends paid ($.529 per share) (18,358) (18,358)
Exercise of stock options (185) 2,000 1,815
Sale of stock under directors
stock purchase plan 273 540 813
Pooling acquisitions, net (16,380) 20,404 22,238 26,262
Purchase acquisitions 5,861 12,496 18,357
Issuance of stock under restricted
stock award plan 118 99 (217) --
Restricted stock award amortization 89 89
ESOP benefit earned 56 1,375 1,431
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 161,192 17,051 545,424 (8,982) (2,065) -- 712,620
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 96,111 96,111
1/1/94 adoption of SFAS 115--
net unrealized gain on
available for sale securities 47,116 47,116
Change in unrealized gain (loss) on
available for sale securities (107,232) (107,232)
Purchase of treasury stock (52,793) (52,793)
Sale of stock to the employee
benefit plans 184 5,415 5,599
Cash dividends paid ($.599 per share) (21,124) (21,124)
Exercise of stock options (1,222) 3,137 1,915
Sale of stock under directors
stock purchase plan 797 797
Purchase acquisitions 571 2,519 40,207 43,297
Issuance of stock under restricted
stock award plan 15 71 (86) --
5% stock dividend 8,088 35,992 (44,080) --
Restricted stock award amortization 106 106
ESOP benefit earned 36 1,750 1,786
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 169,851 54,575 576,331 (12,148) (295) (60,116) 728,198
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 107,640 107,640
Change in unrealized gain (loss) on
available for sale securities 86,927 86,927
Purchase of treasury stock (71,368) 33 (71,335)
Cash dividends paid ($.686 per share) (26,039) (26,039)
Exercise of stock options (2,800) 6,757 3,957
Sale of stock under directors
stock purchase plan (1) 856 855
Purchase acquisitions (435) 5,315 4,880
Pooling acquisition, net 13,371 (4,872) 32,360 7,625 38 48,522
Issuance of stock under restricted
stock award plan 4 628 (632) --
5% stock dividend, net 4,605 37,944 (71,904) 29,355 --
Restricted stock award amortization 178 178
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $187,827 $ 84,415 $618,388 $(32,980) $ (716) $ 26,849 $ 883,783
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
A-31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Commerce Bancshares, Inc. and Subsidiaries
ACCOUNTING POLICIES
The summary of significant accounting policies of Commerce Bancshares, Inc. and
Subsidiaries (Company) appears on page A-27 and is an integral part of the
financial statements. Certain reclassifications were made to the 1994 and 1993
financial statements to conform to current year presentation.
================================================================================
LOANS, LEASES AND ALLOWANCE FOR LOSSES
Major classifications of loans and leases at December 31, 1995, 1994 and 1993
are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------
<S> <C> <C> <C>
Business $1,716,080 $1,393,979 $1,380,452
Real estate--construction 168,031 127,948 90,102
Real estate--business 695,558 586,769 533,467
Real estate--personal 983,249 813,134 734,771
Consumer 1,258,809 1,120,366 917,683
Credit card 496,086 390,466 367,600
- -----------------------------------------------------------------
Total loans and leases $5,317,813 $4,432,662 $4,024,075
=================================================================
</TABLE>
Loans to directors and executive officers of the Parent and its significant
subsidiaries and to their associates are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(In thousands) Deductions
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at Amounts Amounts Balance at
January 1, 1995 Additions Collected Written Off December 31, 1995
- ------------------------------------------------------------------------
$105,434 $426,450 $396,360 -- $135,524
</TABLE>
Management believes all loans to directors and executive officers have been made
in the ordinary course of business with normal credit terms, including interest
rate and collateralization, and do not represent more than a normal risk of
collection. There were no outstanding loans at December 31, 1995, to principal
holders of the Company's common stock.
The Company's lending activity is generally centered in Missouri and its
contiguous states. The Company maintains a diversified portfolio with no
significant industry concentrations of credit risk. Loans and loan
commitments are extended under the Company's normal credit standards, controls,
and monitoring features. Most credit commitments are short term in nature, and
maturities generally do not exceed five years. Credit terms typically provide
for floating rates of interest, and fixed rates are generally not set for more
than three to five years. Collateral is commonly required and would include
such assets as marketable securities and cash equivalent assets, accounts
receivable and inventory, equipment, other forms of personal property, and real
estate. At December 31, 1995, unfunded loan commitments totaled $1,960,458,000
(excluding $1,820,391,000 in unused approved lines of credit related to credit
card loan agreements) which could be drawn by customers subject to certain
review and terms of agreement.
A summary of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
- --------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $87,179 $85,830 $77,149
- --------------------------------------------------------------------------
Additions:
Provision for loan losses charged to expense 14,629 5,845 11,381
Allowance for loan losses of acquired banks 12,932 2,953 3,661
- --------------------------------------------------------------------------
Total additions 27,561 8,798 15,042
==========================================================================
Deductions:
Loan losses 23,272 15,155 15,737
Less recoveries on loans 7,069 7,706 9,376
- --------------------------------------------------------------------------
Net loan losses 16,203 7,449 6,361
- --------------------------------------------------------------------------
Balance, December 31 $98,537 $87,179 $85,830
==========================================================================
</TABLE>
A-32
<PAGE>
Impaired loans include all non-accrual loans and loans 90 days delinquent and
still accruing. Total impaired loans at December 31, 1995 approximate 1% of
total loans. The net amount of interest income recorded on such loans during
their impairment period was insignificant. The Company ceased recognition of
interest income on loans with a book value of $16,234,000, $11,385,000 and
$14,328,000 at December 31, 1995, 1994 and 1993, respectively. The interest
income not recognized on these loans was $1,868,000, $2,051,000 and $2,047,000
during 1995, 1994 and 1993, respectively. Loans over 90 days delinquent and
still accruing interest amounted to $15,690,000, $13,090,000 and $7,289,000 at
December 31, 1995, 1994 and 1993, respectively. Real estate and other assets
acquired in foreclosure amounted to approximately $3,900,000, $8,300,000 and
$11,000,000 at December 31, 1995, 1994 and 1993, respectively.
================================================================================
INVESTMENT SECURITIES
A summary of the available for sale investment securities by maturity groupings
as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Weighted
Par Amortized Fair Average
(Dollars in thousands) Value Cost Value Yield
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and federal agency obligations:
Within 1 year $ 333,062 $ 334,627 $ 335,758 5.85%
After 1 but within 5 years 1,333,099 1,342,356 1,363,300 6.17
After 5 but within 10 years 7,250 7,108 7,432 6.96
After 10 years 588 588 621 7.37
- -------------------------------------------------------------------------------------------------------------
Total U.S. government and federal agency obligations $1,673,999 1,684,679 1,707,111 6.11%
=============================================================================================================
State and municipal obligations:
Within 1 year $ 26,862 27,399 27,522 5.68%
After 1 but within 5 years 57,690 58,231 59,959 5.43
After 5 but within 10 years 34,034 33,975 35,540 5.42
After 10 years 4,637 4,747 5,022 5.78
- -------------------------------------------------------------------------------------------------------------
Total state and municipal obligations $ 123,223 124,352 128,043 5.49%
=============================================================================================================
CMO's and asset-backed securities $ 668,188 666,334 670,522 6.28%
=============================================================================================================
Other debt securities:
Within 1 year 9,895 9,875
After 1 but within 5 years 1,096 1,088
After 5 but within 10 years 10 9
After 10 years 10 10
- -------------------------------------------------------------------------------------------------------------
Total other debt securities 11,011 10,982
=============================================================================================================
Equity securities 22,479 35,606
=============================================================================================================
Total available for sale investment securities $2,508,855 $2,552,264
=============================================================================================================
</TABLE>
The unrealized gains and losses by type as of December 31,
1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Available for Sale Available for Sale Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
(In thousands) Gains Losses Gains Losses Gains Losses
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government and federal
agency obligations $24,172 $1,740 $ 2,585 $ 50,442 $64,798 $ 23
State and municipal obligations 3,735 44 82 674 1,665 2
CMO's and asset-backed securities 7,119 2,931 541 55,440 591 1,847
Other debt securities 5 34 19 846 293 3
Equity securities 14,901 1,774 9,233 2,129 10,521 367
- ---------------------------------------------------------------------------------------------------------------------
Total $49,932 $6,523 $12,460 $109,531 $77,868 $2,242
=====================================================================================================================
</TABLE>
A-33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
Commerce Bancshares, Inc. and Subsidiaries
Proceeds from sales of investment securities during 1995 were $917,063,000, with
gross gains of $3,188,000 and gross losses of $2,291,000 realized on those
sales. Proceeds from sales of investment securities during 1994 were
$808,253,000. Gross gains of $2,742,000 and gross losses of $388,000 were
realized on those sales. Proceeds from sales of investment securities during
1993 were $500,882,000 with gross gains of $7,668,000 and gross losses of
$187,000 realized on those sales.
Investment securities with a par value of $1,081,509,000, $1,071,004,000 and
$473,596,000 were pledged at December 31, 1995, 1994 and 1993, respectively, to
secure public deposits and for other purposes as required by law. Except for
U.S. government and federal agency obligations, no investment in a single issuer
exceeds 10% of stockholders' equity.
================================================================================
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment consist of the following at December 31, 1995,
1994 and 1993:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 52,146 $ 46,481 $ 44,563
Buildings and improvements 244,413 215,357 206,165
Equipment 119,366 103,603 94,897
- ------------------------------------------------------------------------------
Total 415,925 365,441 345,625
Less accumulated depreciation and amortization 205,892 173,661 150,374
- ------------------------------------------------------------------------------
Net land, buildings and equipment $210,033 $191,780 $195,251
- ------------------------------------------------------------------------------
</TABLE>
Depreciation expense of $19,578,000, $18,243,000 and $17,803,000 for 1995, 1994
and 1993, respectively, was included in net occupancy expense on bank premises,
equipment expense and other operating expense in the Consolidated Statements of
Income. Repairs and maintenance expense of $11,182,000, $9,945,000 and
$8,195,000 for 1995, 1994 and 1993, respectively, was included in net occupancy
expense on bank premises, equipment expense and other operating expense.
================================================================================
BORROWINGS
Short-term borrowings of the Company consisted of federal funds purchased and
securities sold under agreements to repurchase by subsidiary banks of the
following:
<TABLE>
<CAPTION>
- ------------------------------------------------------ ------------------------
(Dollars in thousands) For the Year December 31
- ------------------------------------------------------ ------------------------
Maximum
Weighted Average Outstanding Weighted
Average Balance at any Average Balance
Year Rate Outstanding Month End Rate Outstanding
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 5.4% $442,413 $589,270 4.8% $362,903
1994 3.6 287,642 388,187 4.5 290,647
1993 2.6 318,951 538,933 2.6 395,083
- -------------------------------------------------------------------------------------------
</TABLE>
Long-term debt of the Company was $14,562,000 at December 31, 1995, including
$9,200,000 borrowed from the Federal Home Loan Bank by a subsidiary bank
acquired in 1995. Such borrowings carry an average rate of 6.4%, and require
payments of $6,200,000 and $3,000,000 in 1997 and 1998, respectively.
None of the Company's borrowings have any related compensating balance
requirements which restrict the usage of Company assets. However, regulations of
the Federal Reserve System require reserves to be maintained by all banking
institutions according to the types and amounts of certain deposit liabilities.
These requirements restrict usage of a portion of the amounts shown as
consolidated "Cash and due from banks" from everyday usage in operation of the
banks. The minimum reserve requirements for the subsidiary banks at December 31,
1995 totaled $182,599,000.
Cash payments for interest on deposits and borrowings during 1995, 1994 and 1993
on a consolidated basis amounted to $264,503,000, $180,645,000 and $178,919,000,
respectively.
A-34
<PAGE>
INCOME TAXES
Total income taxes for 1995, 1994 and 1993 were allocated as shown in the
following tables:
Income tax expense from operations for the years ended December 31, 1995, 1994
and 1993 consists of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(In thousands) Current Deferred Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1995:
U.S. Federal $52,639 $ 3,549 $56,188
State and local 4,954 --- 4,954
- ---------------------------------------------------------------------------------------------------------------
$57,593 $ 3,549 $61,142
===============================================================================================================
Year ended December 31, 1994:
U.S. Federal $54,113 $ (6,651) $47,462
State and local 4,149 --- 4,149
- ---------------------------------------------------------------------------------------------------------------
$58,262 $ (6,651) $51,611
===============================================================================================================
Year ended December 31, 1993:
U.S. Federal $49,956 $ (4,840) $45,116
State and local 5,240 --- 5,240
- ---------------------------------------------------------------------------------------------------------------
$55,196 $ (4,840) $50,356
===============================================================================================================
</TABLE>
Income tax expense (benefits) allocated directly to stockholders' equity for the
years ended December 31, 1995, 1994 and 1993 consists of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gain (loss) on securities available for sale $53,447 $(36,887) $ ---
Compensation expense for tax purposes in
excess of amounts recognized for financial
reporting purposes (324) (114) (228)
Deductible dividends paid on unallocated shares
held by the ESOP --- (36) (56)
- ---------------------------------------------------------------------------------------------------------------
Income tax expense (benefits) allocated to stockholders' equity $53,123 $(37,037) $ (284)
===============================================================================================================
</TABLE>
Actual income tax expense differs from the amounts computed by applying the U.S.
Federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $59,073 $ 51,703 $48,038
Increase (reduction) in income taxes resulting from:
Amortization of goodwill 1,444 724 797
Tax exempt income (2,829) (1,392) (1,610)
Tax deductible dividends on allocated
shares held by the Company's ESOP (665) (567) (530)
State and local income taxes, net of
Federal income tax benefit 3,631 2,159 3,406
Other, net 488 (1,016) 255
- ---------------------------------------------------------------------------------------------------------------
Total income tax expense $61,142 $ 51,611 $50,356
===============================================================================================================
</TABLE>
A-35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
Commerce Bancshares, Inc. and Subsidiaries
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995,
1994 and 1993 are presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C> <C>
Loans, principally due to allowance for
loan losses $41,956 $42,037 $40,498
Unrealized loss on securities
available for sale - 36,887 -
Foreclosed property, due to
writedowns for financial reporting purposes 629 1,424 1,142
Unearned fee income, due to earlier
recognition for tax purposes 1,630 1,544 1,419
Deferred compensation, principally due
to accrual for financial reporting purposes 930 715 543
Accrued expenses, principally due to accrual
for financial reporting purposes 2,645 1,737 704
Net operating loss carryforwards of
acquired companies 572 780 706
Other 503 219 185
- ---------------------------------------------------------------------------
Total gross deferred tax assets 48,865 85,343 45,197
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Investment securities, principally due
to discount accretion 2,338 713 312
Capitalized interest 952 1,321 857
Unrealized gain on securities
available for sale 16,560 - -
Land, buildings and equipment, principally
due to write-up in value in purchase
accounting entries for financial reporting 19,426 17,311 19,656
Core deposit intangible, principally due to
purchase accounting entries for
financial reporting 9,979 3,786 4,185
Pension benefit obligation, due to
recognition of the excess pension
asset for financial reporting purposes 2,725 3,025 3,311
Other 4 12 33
- ---------------------------------------------------------------------------
Total gross deferred tax liabilities 51,984 26,168 28,354
- ---------------------------------------------------------------------------
Net deferred tax asset (liability) $(3,119) $59,175 $16,843
- ---------------------------------------------------------------------------
</TABLE>
Cash payments of income taxes, net of refunds and interest received, amounted to
$52,268,000, $56,887,000 and $54,644,000 on a consolidated basis during 1995,
1994 and 1993, respectively. The Parent made cash payments of income taxes of
$2,211,000 in 1993, and had net receipts of $3,010,000 in 1995 and $4,170,000 in
1994 from tax benefits.
A-36
<PAGE>
EMPLOYEE BENEFIT PLANS
Employee benefits charged to operating expenses aggregated $21,207,000,
$20,036,000 and $16,658,000 for 1995, 1994 and 1993, respectively. These
benefits include payroll taxes, group insurance and retirement plans.
Substantially all of the Company's employees are covered by a noncontributory
defined benefit pension plan. Participants are fully vested after five years of
service and the benefits are based on years of participation and average
annualized earnings. The Company's funding policy is to contribute funds to a
trust as necessary to provide for current service and for any unfunded accrued
actuarial liabilities over a reasonable period. To the extent that these
requirements are fully covered by assets in the trust, a contribution may not be
made in a particular year. The following items are components of the net pension
cost for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 2,311 $ 2,183 $ 1,737
Interest cost on projected benefit obligation 3,152 3,080 2,843
Actual plan assets value (increase) decrease (8,219) 1,287 (4,123)
Net amortization and deferral 3,695 (5,732) (355)
- ----------------------------------------------------------------------------
Net periodic pension cost $ 939 $ 818 $ 102
============================================================================
</TABLE>
The following table sets forth the pension plan's funded status, using a
valuation date of September 30, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $36,186,000 in 1995, $34,754,000 in
1994 and $35,213,000 in 1993 $(36,495) $(35,429) $(35,609)
Additional benefits based on estimated
future salary levels (11,499) (7,986) (5,037)
- ---------------------------------------------------------------------------------------
Projected benefit obligation (47,994) (43,415) (40,646)
Plan assets at fair value 54,642 49,943 54,930
- ---------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 6,648 6,528 14,284
Unrecognized net loss from past experience
different from that assumed and effects of
change in assumptions 7,475 7,790 1,151
Prior service benefit not yet recognized in
net pension cost (1,965) (583) (243)
Unrecognized net transition asset being
recognized over 15 years (4,468) (5,106) (5,745)
- ---------------------------------------------------------------------------------------
Prepaid pension cost included in other assets $ 7,690 $ 8,629 $ 9,447
- ---------------------------------------------------------------------------------------
</TABLE>
The discount rate used to determine the actuarial present value of the projected
benefit obligation was 7.75% for 1995 and 7.00% for 1994 and 1993. The rate of
increase in future compensation levels was 5.00% for all three years presented.
The long-term rate of return used was 8.00% for 1995, 7.00% for 1994 and 7.50%
for 1993. At December 31, 1995, approximately 80% of plan assets were invested
in U.S. government bonds and corporate equities.
In addition to the pension plan, substantially all of the Company's employees
are covered by a contributory defined contribution plan, the Participating
Investment Plan. Under the plan, the Company makes matching contributions,
which aggregated $2,352,000 in 1995, $838,000 in 1994 and $755,000 in 1993.
A-37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
Commerce Bancshares, Inc. and Subsidiaries
The Company formed an employee stock ownership plan (ESOP) in 1987 and borrowed
funds from an unaffiliated lender to acquire shares for the ESOP. The unpaid
balance of the loan, which was $1,750,000 at December 31, 1993, was included in
other liabilities in the accompanying balance sheet. The unpaid balance
represented unearned compensation and was recorded as a reduction of
stockholders' equity in the accompanying 1993 balance sheet. The remaining
balance of the loan was repaid in December 1994, and the ESOP assets were merged
into the Participating Investment Plan. The Company's contributions to the ESOP
charged to salaries and employee benefits aggregated $368,000, $1,359,000 and
$1,376,000 in 1995, 1994 and 1993, respectively.
- --------------------------------------------------------------------------------
STOCK OPTION PLANS, RESTRICTED STOCK AWARDS AND DIRECTORS STOCK PURCHASE PLAN*
The Company has reserved 5,328,750 shares of its common stock for issuance under
various stock option plans offered to certain key employees of the Company and
its subsidiaries. Options are granted, by action of the Board of Directors, to
acquire stock at fair market value at the date of the grant, for a term of 5 to
10 years. At December 31, 1995, 3,192,545 shares remain available for option
grants under these programs. The following table summarizes option activity over
the last three years and current options outstanding.
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
- ------------------------------------------------------------------------
<S> <C> <C>
Outstanding -- December 31, 1992 819,347 $9.52 to $22.68
Granted 238,967 26.53 to 29.18
Canceled (2,067) 21.16
Exercised (139,286) 9.52 to 22.68
- ------------------------------------------------------------------------
Outstanding -- December 31, 1993 916,961 $11.19 to $29.18
Granted 252,898 28.34
Canceled (5,346) 21.16 to 29.18
Exercised (136,078) 12.09 to 21.16
- ------------------------------------------------------------------------
Outstanding -- December 31, 1994 1,028,435 $11.19 to $29.18
Granted 295,375 27.62 to 29.29
Canceled (23,600) 27.62 to 29.29
Exercised (224,276) 11.19 to 29.29
- ------------------------------------------------------------------------
Outstanding -- December 31, 1995 1,075,934 $13.98 to $29.29
========================================================================
</TABLE>
<TABLE>
<CAPTION>
Shares Price
------- ----------------
<S> <C> <C> <C>
Options exercisable: December 31, 1995 694,094 $13.98 to $29.29
Additional options become exercisable: During 1996 181,425 26.53 to 29.29
During 1997 129,127 27.62 to 29.29
During 1998 71,288 27.62 to 29.29
</TABLE>
The options expire as follows: 115,743 in 1996; 220,535 in 2002; 221,707 in
2003; 233,387 in 2004 and 284,562 in 2005.
The Company has a restricted stock award plan under which 165,375 shares of
common stock are reserved at December 31, 1995. The plan allows for awards to
key employees, by action of the Board of Directors, with restrictions as to
transferability, sale, pledging, or assigning, among others, prior to the end of
the restriction period. The restriction period may not exceed 10 years. The
Company issued awards totaling 21,932 shares in 1995, 3,031 shares in 1994 and
7,442 shares in 1993, resulting in deferred compensation amounts of $632,000,
$86,000 and $217,000, respectively. Approximately $178,000, $106,000 and $89,000
was amortized to salaries expense in 1995, 1994 and 1993, respectively.
Unamortized deferred compensation of $716,000, $295,000 and $315,000 has been
recorded as a reduction of stockholders' equity at December 31, 1995, 1994 and
1993, respectively.
A-38
<PAGE>
The Company has a directors stock purchase plan whereby outside directors of the
Company and its subsidiaries may elect to use their directors' fees to purchase
Company stock at market value each month-end. Remaining shares reserved for this
plan total 10,216 at December 31, 1995. Shares purchased each year and the
average price of such purchases for the last three years are as follows:
<TABLE>
<CAPTION>
Shares Price
------------------------
<S> <C> <C>
1995 26,616 $32.15
------------------------
1994 28,629 $27.84
------------------------
1993 30,140 $26.95
------------------------
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" will require pro forma disclosures in 1996 of net income and
earnings per share as if a new accounting method based on the estimated fair
value of employee stock options had been adopted. The Company has not yet
decided if the optional accounting treatment proposed by SFAS No. 123 will be
adopted.
*All share and per share amounts in this note have been restated for the 5%
stock dividend distributed on the $5 par common stock in December 1995.
- --------------------------------------------------------------------------------
COMMON STOCK
Under a Rights Agreement with First Chicago Trust Company of New York, as Rights
Agent, dated August 23, 1988, certain rights have attached to the common stock.
Under certain circumstances relating to the acquisition of, or tender offer for,
a specified percentage of the Company's outstanding common stock, holders of the
common stock may exercise the rights and purchase shares of Series A Preferred
Stock or, at a discount, common stock of the Company or an acquiring company.
In June 1995, the Board of Directors authorized the Company to purchase up to
2,000,000 shares of common stock, in either the open market or privately
negotiated transactions, in order to provide future funding for employee benefit
programs and stock dividends. This action began after the completion of the
stock repurchase program authorized in 1994. Approximately 1,455,000 shares have
been acquired under the 1995 approval through December 31, 1995.
On December 15, 1995, the Company distributed its second consecutive 5% stock
dividend on the $5 par common stock. All per share data in this report has been
restated to reflect the stock dividend. The table below is a summary of share
activity in 1995.
<TABLE>
<CAPTION>
Issued Treasury
Shares Shares
-----------------------------------------------------------------
<S> <C> <C>
December 31, 1994 33,970,106 401,087
Purchases of treasury stock - 2,029,398
Sales under employee and director plans - (262,878)
Issuance in acquisitions, net 2,674,299 (430,221)
5% stock dividend 920,964 (875,435)
-----------------------------------------------------------------
December 31, 1995 37,565,369 861,951
=================================================================
</TABLE>
A-39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
Commerce Bancshares, Inc. and Subsidiaries
ACQUISITIONS
During 1995, the Company acquired four banks with an aggregate purchase price of
$181.8 million. Three of the acquisitions were accounted for under the purchase
method of accounting and one was accounted for as a pooling of interests. The
Company issued common stock valued at $82.8 million in its acquisition of The
Peoples Bank of Bloomington, Illinois, in March 1995 in a transaction recorded
under the pooling of interests method of accounting. The Peoples Bank had assets
of $444 million at the date of acquisition. Union National Bank of Wichita,
Kansas, was acquired for cash of $86.7 million in April 1995 in a transaction
accounted for under the purchase method of accounting. Union National Bank had
assets of $673 million at the acquisition date. In March and May 1995, the
Company acquired the Cotton Exchange Bank in Kennett, Missouri, and the
Chillicothe State Bank in Chillicothe, Illinois. Aggregate consideration paid in
these two transactions, which were accounted for using the purchase method,
consisted of cash of $7.4 million and treasury stock valued at $4.9 million.
Total goodwill and core deposit intangible assets recorded by the Company in
connection with the three purchase acquisitions was $64.9 million.
During 1994, the Company acquired five banks in transactions which were all
accounted for as purchases. The aggregate purchase price of these acquisitions
was $50.7 million, and included treasury stock valued at $44.5 million, new
common stock valued at $3.5 million, and $2.7 million of cash. Total assets of
acquired banks aggregated $376 million. Goodwill and core deposit intangible
assets recorded as a result of these acquisitions was $11.6 million.
During 1993, the Company acquired five banks, three of which were accounted for
as purchases and two of which were accounted for as poolings. Total
consideration paid by the Company consisted of cash of $1.2 million and common
stock valued at $63.3 million. Total assets of acquired banks aggregated $429
million. In connection with the purchase acquisitions, the Company recorded
goodwill and core deposit intangible assets aggregating $4.5 million.
Financial statements for periods prior to the consummation of acquisitions
accounted for as poolings have not been restated because such restated amounts
do not differ materially from the Company's historical financial statements.
The following schedule summarizes pro forma consolidated financial data as if
the 1994 and 1995 acquisitions had been consummated on January 1, 1994:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1995 1994
- ------------------------------------------------------------------
<S> <C> <C>
Net interest income plus non-interest income $497,653 $497,697
Net income 103,909 101,737
Net income per share 2.71 2.58
==================================================================
</TABLE>
A-40
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of estimated fair values
for financial instruments held by the Company. Fair value estimates, methods and
assumptions are set forth below.
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The carrying amounts for federal funds sold and securities purchased under
agreements to resell approximate fair value because they generally mature in 90
days or less and present little or no risk. The fair values of the debt and
equity instruments in the held to maturity, available for sale and trading
sections of the investment security portfolio are estimated based on prices
published in financial newspapers or bid quotations received from securities
dealers. The fair value of those equity investments for which a market source is
not readily available is estimated at carrying value. Carrying value and
estimated fair value of these investments are shown below:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------------------
(In thousands) Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Held to maturity $ -- $ -- $ -- $ -- $2,781,827 $2,857,453
Available for sale 2,552,264 2,552,264 2,621,342 2,621,342 -- --
Trading account 9,369 9,369 5,539 5,539 5,170 5,170
Other non-marketable 33,120 33,120 18,539 18,539 18,633 18,633
Federal funds sold and securities
purchased under agreements
to resell 523,302 523,302 72,265 72,265 354,517 354,517
- -----------------------------------------------------------------------------------------------------------
</TABLE>
A breakdown of investment securities by category and maturity is provided in the
financial statements note on Investment Securities. The above fair value
estimates are based on the value of one unit without regard to any premium or
discount that may result from concentrations of ownership, possible tax
ramifications or estimated transaction costs.
LOANS
Fair values are estimated for various groups of loans segregated by 1) type of
loan, 2) fixed/adjustable interest terms and 3) performing/non-performing
status.
The fair value of performing loans, except student, home equity and credit card
loans, is calculated by discounting scheduled cash flows through contractual
maturity using market rates that reflect credit and interest rate risk. The cash
flows through maturity for individual loans are aggregated for the Company's
asset/liability analysis. Rate forecasts are purchased from an outside company
specializing in rate forecasting. Discount rates are computed for each loan
category using these rate forecasts adjusted by the Company's interest spread
and other considerations management deems necessary. Student loans, included in
the Consumer category, are valued under the Company's current contract with
SALLIE MAE. The home equity loans, also included in the Consumer category,
reprice monthly and their fair value approximates carrying value. Fair value of
non-accrual loans approximates their carrying value, because such loans are
recorded at the appraised or estimated recoverable value of the collateral or
the underlying cash flow.
Estimated fair value of credit card loans approximates the existing balances
outstanding at year end because management believes the current credit card
yield is equal to the current market rate for similar instruments. This estimate
does not include the additional value that relates to future cash flows from new
loans generated from existing card holders over the estimated life of the
customer relationship.
A-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
Commerce Bancshares, Inc. and Subsidiaries
The following table represents the carrying value and calculated fair value of
loans:
<TABLE>
<CAPTION>
(Dollars in thousands) Average Estimated
Carrying Historical Discount Estimated
December 31, 1995 Amount(A) Yield(B) Rate Fair Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business $1,704,657 8.14% 7.83% $1,711,086
Real estate--construction 167,914 9.03 8.84 167,494
Real estate--business 692,253 8.72 8.90 687,443
Real estate--personal 980,631 7.97 6.94 995,866
Consumer 1,247,200 9.22 9.82(C) 1,245,824
Credit card 496,086 12.21 12.21 496,086
Non-accrual 16,234 -- -- 16,234
December 31, 1994
- -----------------------------------------------------------------------------------
Business 1,387,067 8.05 8.37 1,388,098
Real estate--construction 128,173 8.92 9.66 127,585
Real estate--business 583,517 8.57 9.23 579,260
Real estate--personal 810,674 7.24 6.98 808,780
Consumer 1,108,934 8.97 9.34(C) 1,110,008
Credit card 390,466 12.03 12.03 390,466
Non-accrual 11,385 -- -- 11,385
December 31, 1993
- -----------------------------------------------------------------------------------
Business 1,372,065 6.00 6.28 1,374,726
Real estate--construction 90,341 6.92 7.27 90,342
Real estate--business 528,215 7.35 7.39 528,977
Real estate--personal 733,301 6.89 6.62 737,534
Consumer 907,751 8.60 8.11(C) 916,689
Credit card 367,600 11.91 11.91 367,600
Non-accrual 14,328 -- -- 14,328
- -----------------------------------------------------------------------------------
</TABLE>
(A) "Carrying Amount" excludes deferred or unamortized fees and costs related to
the loan transaction.
(B) "Average Historical Yield" is the weighted average stated interest rate per
the loan agreement on principal outstanding at year end, excluding any fees
that may also be collected.
(C) The discount rate shown relates to the loan principal in the Consumer
category other than the student loan principal which was valued as discussed
above.
DEPOSITS
Statement 107 specifies that the fair value of deposits with no stated maturity
is equal to the amount payable on demand. Such deposits include savings and
interest and non-interest bearing demand deposits. The fair value of
certificates of deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the three-month Treasury indices and
yield curves supplied by an external company specializing in rate forecasting.
Discount rates are computed for each deposit category using these rate forecasts
adjusted by the Company's interest spread and other considerations management
deems necessary.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------------
(In thousands) Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $1,828,950 $1,828,950 $1,448,422 $1,448,422 $1,391,740 $1,391,740
Savings 305,323 305,323 275,429 275,429 261,650 261,650
Interest bearing demand 3,586,478 3,586,478 3,143,021 3,143,021 3,280,118 3,280,118
Time open and certificates
of deposit:
Maturing in less than 1 year 1,775,924 1,779,138 1,460,209 1,449,293 1,365,536 1,367,385
Maturing in 1 year and over 696,417 706,659 663,349 624,829 540,426 544,275
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds.
A-42
<PAGE>
BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
mature or reprice within 90 days; therefore, their fair value approximates
carrying value. The fair value of long-term debt is estimated by discounting
contractual maturities using an estimate of the current market rate for similar
instruments.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------------
(In thousands) Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased and
securities sold under agreements
to repurchase $362,903 $362,903 $290,647 $290,647 $395,083 $395,083
Long-term debt 14,562 15,533 6,487 7,794 6,894 8,690
- ---------------------------------------------------------------------------------------------------------
</TABLE>
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amounts for accrued interest receivable and payable approximate
fair value due to their short-term nature and lack of anticipated credit
concerns.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair value of letters of credit and commitments to extend credit is based on
the fees currently charged to enter into similar agreements. The aggregate of
these fees is not material.
Foreign exchange contracts are generally executed at a customer's request and an
offsetting contract is executed, eliminating the Company's exposure. An interest
rate swap contract was entered into by the Company to limit its interest rate
risk on a single group of customer credits. The fair value of these contracts is
determined by contacting appropriate brokers for the current cost of selling,
purchasing or closing out the various contracts. The fair values of the foreign
exchange contracts and interest rate swap are not material.
These instruments are also referenced in either the financial statements notes
on Financial Instruments with Off-Balance-Sheet Risk or Loans, Leases and
Allowance for Losses.
LIMITATIONS
Fair value estimates are made at a specific point in time based on relevant
market information. They do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for many of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, risk characteristics and economic
conditions. These estimates are subjective, involve uncertainties and cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
A-43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
Commerce Bancshares, Inc. and Subsidiaries
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company engages in various transactions with off-balance-sheet risk in the
normal course of business to meet customer financing needs. The Company uses the
same credit policies in making the commitments and conditional obligations
described below as it does for on-balance-sheet instruments. Issuance of standby
and commercial letters of credit beneficially assist customers engaged in a wide
range of commercial enterprise and international trade. Standby letters of
credit serve as payment assurances to a third party in the event the bank's
customer fails to perform its financial and/or contractual obligations. Most
expire over the next 12 months and are secured by 1) a line of credit with, 2) a
certificate of deposit held by, 3) marketable securities held by, or 4) a deed
of trust held by a banking subsidiary. At December 31, 1995, standby letters of
credit outstanding of the banking subsidiaries amounted to $121,477,000, net of
$1,785,000 participated to non-affiliated companies. Commercial letters of
credit generally finance the purchase of imported goods and provide a payment
engagement against presentation of documents meeting the terms and conditions
set forth in the letter of credit instrument. There were $23,928,000 outstanding
commercial letters of credit at December 31, 1995. Losses arising from these
transactions have not been and are not expected to be material.
Commerce Bank, N.A. (Kansas City) and Commerce Bank, N.A. (St. Louis) enter into
foreign exchange contracts to purchase and sell foreign currency. Most of the
contracts offset each other and risk arises only if one of the contracts is not
performed and the currency must be bought or sold at the prevailing market rate.
Commerce Bank, N.A. (St. Louis) has entered into an interest rate swap contract
to limit its interest rate risk on a single group of customer credits. The
notional value of these contracts was $221,371,000 at December 31, 1995. The
current credit exposure (or replacement cost) across all off-balance-sheet
derivative contracts covered by the risk-based capital standards was $3,854,000
at December 31, 1995.
See financial statements note on Loans, Leases and Allowance for Losses for a
discussion of unfunded loan commitments.
================================================================================
REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory actions by regulators that could have a direct
material effect on the Company's financial statements. The regulations require
the Company to meet specific capital adequacy guidelines that involve
quantitative measures of the Company's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Company's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Tier I capital to
total average assets (leverage ratio), and minimum ratios of Tier I and Total
capital to risk-weighted assets (as defined). The minimum required leverage
ratio is 4%, the minimum Tier I capital ratio is 4%, and the minimum Total
capital ratio is 8%. The Company's actual capital amounts and ratios at the last
three year ends are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Risk-Weighted Assets $6,045,112 $5,090,588 $4,621,407
Tier I Capital $ 756,452 $ 744,592 $ 676,334
Total Capital $ 829,784 $ 807,213 $ 733,634
Tier I Capital Ratio 12.51% 14.63% 14.63%
Total Capital Ratio 13.73% 15.86% 15.87%
Leverage Ratio 8.27% 9.29% 8.64%
- ------------------------------------------------------------------
</TABLE>
Management believes that, at December 31, 1995, the Company meets all capital
requirements to which it is subject.
A-44
<PAGE>
COMMITMENTS AND CONTINGENCIES
The Company leases certain premises and equipment, all of which were classified
as operating leases. The rent expense under such arrangements amounted to
$2,079,000, $1,619,000 and $1,257,000 for 1995, 1994 and 1993, respectively. A
summary of minimum lease commitments follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(In thousands) Type of Property
- ------------------------------------------------------------------------
Year Ended Real Total
December 31 Property Equipment Commitments
- ------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 2,025 $323 $ 2,348
1997 1,839 281 2,120
1998 1,749 132 1,881
1999 1,599 -- 1,599
2000 1,446 -- 1,446
After 20,999 -- 20,999
- ------------------------------------------------------------------------
Total minimum lease payments $30,393
========================================================================
</TABLE>
All leases expire prior to 2055. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by leases on other
properties; thus, the future minimum lease commitments will not be less than the
amounts shown for 1996.
The Company incurred expense of $8,648,000 in 1995, $7,139,000 in 1994 and
$6,304,000 in 1993 under an agreement to outsource certain data processing
services. Future payments will adjust for inflation and transaction volume.
The Company owns approximately 51% interest in a venture capital partnership,
with an original commitment to fund $15,456,000 over the ten-year life of the
partnership. Contributions to the partnership were $3,030,000 in 1995,
$1,515,000 in 1994 and $1,821,000 in 1993.
In the normal course of business, the Company had certain lawsuits pending at
December 31, 1995. In the opinion of management, after consultation with legal
counsel, none of these suits will have a significant effect on the financial
condition and results of operations of the Company.
A-45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
Commerce Bancshares, Inc. and Subsidiaries
PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are the condensed financial statements of Commerce Bancshares, Inc.
(Parent only) for the periods indicated:
<TABLE>
<CAPTION>
(In thousands) December 31
- ---------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment in consolidated subsidiaries:
Banks $794,826 $575,344 $627,355
Non-banks 24,081 23,215 26,323
Receivables from subsidiaries, net of borrowings 8,498 7,139 386
Cash 396 93 197
Securities purchased under agreements to resell 42,168 76,672 20,309
Investment securities:
Held to maturity (fair value of $39,429,000
in 1993) --- --- 32,426
Available for sale 39,872 40,302 ---
Other non-marketable 8,019 5,856 4,726
Other assets 10,255 9,515 9,754
- ---------------------------------------------------------------------------------------------
Total assets $928,115 $738,136 $721,476
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued taxes
and other liabilities $ 44,332 $ 9,938 $ 8,856
- ---------------------------------------------------------------------------------------------
Total liabilities 44,332 9,938 8,856
- ---------------------------------------------------------------------------------------------
Stockholders' equity 883,783 728,198 712,620
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $928,115 $738,136 $721,476
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In thousands) For the Years Ended December 31
- ---------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends received:
Bank subsidiaries $124,129 $129,104 $ 33,238
Non-bank subsidiaries --- 3,795 2,800
Earnings of consolidated subsidiaries, net of dividends (13,057) (34,827) 52,898
Interest on investment securities 2,992 1,871 1,401
Interest on securities purchased
under agreements to resell 228 565 174
Management fees charged subsidiaries 13,024 12,867 11,233
Data processing fees charged subsidiaries 18,030 16,817 14,216
Net gains on securities transactions 226 442 2,609
Other income 201 23 149
- ---------------------------------------------------------------------------------------------
Total income 145,773 130,657 118,718
- ---------------------------------------------------------------------------------------------
EXPENSE
Salaries and employee benefits 19,992 19,118 17,365
Advertising expense 207 440 72
External data processing expense 8,658 7,143 5,677
Other expense 10,354 10,876 10,162
- ---------------------------------------------------------------------------------------------
Total expense 39,211 37,577 33,276
- ---------------------------------------------------------------------------------------------
Income tax expense (benefit) (1,078) (3,031) (1,452)
- ---------------------------------------------------------------------------------------------
Net income $107,640 $ 96,111 $ 86,894
=============================================================================================
</TABLE>
A-46
<PAGE>
<TABLE>
<CAPTION>
(In thousands) For the Years Ended December 31
- --------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 107,640 $ 96,111 $ 86,894
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings of consolidated subsidiaries, net of dividends 13,057 34,827 (52,898)
Other adjustments, net 3,521 1,441 (3,985)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 124,218 132,379 30,011
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash paid in acquisitions (94,102) - -
Increase in investment in subsidiaries, net (4,283) (433) (1,668)
(Increase) decrease in receivables
from subsidiaries, net of borrowings (1,359) (6,753) 7,459
Proceeds from sales of investment securities 12,943 3,634 5,308
Proceeds from maturities of investment securities 263,557 58,503 168,043
Purchases of investment securities (271,748) (65,423) (168,016)
Net (increase) decrease in securities purchased
under agreements to resell 34,504 (56,363) (15,309)
Net (purchases) sales of equipment (1,513) 79 (1,607)
- --------------------------------------------------------------------------------------------------------
Net cash used by investing activities (62,001) (66,756) (5,790)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchases of treasury stock (40,024) (52,755) (10,629)
Sales of treasury stock 4,149 8,152 4,628
Cash dividends paid on common stock (26,039) (21,124) (18,358)
- --------------------------------------------------------------------------------------------------------
Net cash used by financing activities (61,914) (65,727) (24,359)
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 303 (104) (138)
Cash at beginning of year 93 197 335
- --------------------------------------------------------------------------------------------------------
Cash at end of year $ 396 $ 93 $ 197
========================================================================================================
</TABLE>
Dividends paid by the Parent were substantially provided from subsidiary bank
dividends. The subsidiary banks may distribute dividends without prior
regulatory approval from 1996 earnings subject to maintenance of minimum capital
requirements.
The Parent charges fees to its subsidiaries for management services provided,
which are allocated to the subsidiaries based primarily on total average assets.
The Parent also charges data processing fees, which are allocated to the
subsidiaries based on transaction volume.
The Parent makes advances to certain non-banking subsidiaries and subsidiary
bank holding companies. Advances are made to the Parent by certain subsidiary
bank holding companies for investment in temporary liquid securities. Interest
on such advances is based on market rates.
At December 31, 1995, the Parent had a line of credit for general corporate
purposes of $20,000,000 with a subsidiary bank. At December 31, 1995, the Parent
had no borrowings from the subsidiary.
Investment securities held by the Parent, which consist primarily of common
stock and commercial paper, included an unrealized gain in fair value of
$10,968,000 at December 31, 1995. The corresponding net of tax unrealized gain
included in stockholders' equity was $6,851,000. Also included in stockholders'
equity was the unrealized net of tax gain in fair value of investment securities
held by subsidiaries, which amounted to $19,998,000 at December 31, 1995.
Under a security agreement related to self-insurance for officer and director
liability, $10,000,000 in market value of the Parent company's investment
securities were pledged at December 31, 1995.
A-47
<PAGE>
SUMMARY OF QUARTERLY STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
For the Quarter Ended
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share data) 12/31/95 9/30/95 6/30/95 3/31/95
- ------------------------------------------------------------------------------------
Interest income $164,672 $164,091 $160,644 $141,596
Interest expense (73,603) (73,590) (69,756) (58,309)
- ------------------------------------------------------------------------------------
Net interest income 91,069 90,501 90,888 83,287
Non-interest income 36,469 34,194 31,899 30,588
Salaries and employee benefits (39,901) (41,156) (39,650) (37,146)
Other expense (38,384) (35,849) (38,934) (34,464)
Provision for loan losses (5,939) (3,927) (1,930) (2,833)
- ------------------------------------------------------------------------------------
Income before income taxes 43,314 43,763 42,273 39,432
Income taxes (15,066) (16,153) (15,514) (14,409)
- ------------------------------------------------------------------------------------
Net income $ 28,248 $ 27,610 $ 26,759 $ 25,023
====================================================================================
Net income per common and
common equivalent share* $ .75 $ .72 $ .70 $ .68
====================================================================================
Weighted average common and
common equivalent shares outstanding* 37,912 38,276 38,426 36,576
====================================================================================
For the Quarter Ended
- ------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/94 9/30/94 6/30/94 3/31/94
- ------------------------------------------------------------------------------------
Interest income $134,878 $127,860 $121,491 $116,052
Interest expense (52,400) (47,274) (43,731) (42,259)
- ------------------------------------------------------------------------------------
Net interest income 82,478 80,586 77,760 73,793
Non-interest income 30,431 30,101 32,550 27,946
Salaries and employee benefits (35,280) (35,489) (37,239) (36,007)
Other expense (37,709) (34,498) (35,208) (30,648)
Provision for loan losses (2,051) (276) (2,063) (1,455)
- ------------------------------------------------------------------------------------
Income before income taxes 37,869 40,424 35,800 33,629
Income taxes (13,597) (15,215) (11,216) (11,583)
- ------------------------------------------------------------------------------------
Net income $ 24,272 $ 25,209 $ 24,584 $ 22,046
====================================================================================
Net income per common and
common equivalent share* $ .69 $ .71 $ .69 $ .63
====================================================================================
Weighted average common and
common equivalent shares outstanding* 35,393 35,300 35,603 35,293
====================================================================================
For the Quarter Ended
- ------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/93 9/30/93 6/30/93 3/31/93
- ------------------------------------------------------------------------------------
Interest income $116,471 $115,443 $114,332 $114,166
Interest expense (43,366) (43,900) (43,685) (44,937)
- ------------------------------------------------------------------------------------
Net interest income 73,105 71,543 70,647 69,229
Non-interest income 32,372 29,964 29,835 29,252
Salaries and employee benefits (34,047) (33,673) (33,710) (32,925)
Other expense (33,333) (30,321) (30,332) (28,975)
Provision for loan losses (2,140) (2,559) (3,059) (3,623)
- ------------------------------------------------------------------------------------
Income before income taxes 35,957 34,954 33,381 32,958
Income taxes (12,901) (13,489) (12,019) (11,947)
- ------------------------------------------------------------------------------------
Net income $ 23,056 $ 21,465 $ 21,362 $ 21,011
====================================================================================
Net income per common and
common equivalent share* $ .65 $ .61 $ .62 $ .61
====================================================================================
Weighted average common and
common equivalent shares outstanding* 35,211 35,190 34,631 34,601
====================================================================================
</TABLE>
*Restated for stock dividend distributed December 1995
A-48
<PAGE>
INDEX TO EXHIBITS
-----------------
3 - Articles of Incorporation and By-Laws
(a) Restated Articles of Incorporation as filed with the Secretary of State
of Missouri on October 8, 1986, were filed in annual report on Form 10-K
dated March 30, 1987, and the same are hereby incorporated by reference.
(b) First Amendment to Restated Articles of Incorporation was filed in
quarterly report on Form 10-Q for the period ended June 30, 1987 and dated
July 30, 1987, and the same is hereby incorporated by reference.
(c) Second Amendment to Restated Articles of Incorporation was filed in
annual report on Form 10-K dated March 22, 1990, and the same is hereby
incorporated by reference.
(d) By-Laws as currently amended were filed in annual report on Form 10-K
dated March 6, 1992, and the same are hereby incorporated by reference.
(e) Amendment to Restated Articles of Incorporation to increase authorized
shares to 60,000,000 shares with a par value of $5.00 was reported on Form
10-Q dated August 6, 1993, and the same is hereby incorporated by
reference.
4 - Instruments defining the rights of security holders, including indentures
(a) Pursuant to paragraph 4(iii) of Item 601 Regulation S-K, Registrant
will furnish to the Commission upon request copies of long-term debt
instruments.
(b) Shareholder Rights Plan contained in a Rights Agreement dated August
23, 1988, between Registrant and Morgan Shareholder Services Trust Company
(now First Chicago Trust Company of New York) was filed on Form 8-K dated
August 23, 1988, and the same is hereby incorporated by reference.
10 - Material Contracts
(a) Commerce Bancshares, Inc. Executive Incentive Compensation Plan -
Amendment and Restatement of December 3, 1993, was filed in quarterly
report on Form 10-Q dated August 5, 1994, and the same is hereby
incorporated by reference.
(b) Copy of Commerce Bancshares, Inc. Incentive Stock Option Plan as
adopted on April 16, 1986, was filed in annual report on Form 10-K dated
March 30, 1987, and the same is hereby incorporated by reference.
<PAGE>
(c) Copy of Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan,
and now captioned the Commerce Bancshares, Inc. 1996 Non-Qualified Stock
Option Plan, as amended and restated in its entirety on April 19, 1995, was
filed in quarterly report on Form 10-Q dated August 9, 1995, and the same
is hereby incorporated by reference.
(d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee
Directors dated July 1, 1989 was filed on Form 10-Q for the quarterly
period ended June 30, 1989, and the same is hereby incorporated by
reference.
(e) Copy of Security Agreement with respect to Directors and Officers
Liability was filed in quarterly report on Form 10-Q dated July 30, 1986,
and the same is hereby incorporated by reference.
(f) Copy of Supplemental Retirement Income Plan established by Commerce
Bancshares, Inc. for James M. Kemper, Jr. was filed in annual report on
Form 10-K dated March 6, 1992, and the same is hereby incorporated by
reference.
(g) Copy of Agreement between Commerce Bancshares, Inc. and James M.
Kemper, Jr. relating to the provision of consulting and other services by
James M. Kemper, Jr. for Commerce Bancshares, Inc. was filed in annual
report on Form 10-K dated March 6, 1992, and the same is hereby
incorporated by reference.
(h) Copy of 1996 Incentive Stock Option Plan was filed in quarterly report
on Form 10-Q dated August 9, 1995, and the same is hereby incorporated by
reference.
(i) Commerce Executive Retirement Plan
21 - Subsidiaries of the Registrant
23 - Independent Accountants' Consent
24 - Powers of Attorney
27 - Financial Data Schedule
<PAGE>
Exhibit 10(i)
CERTIFICATION
I, T. Alan Peschka, Secretary of Commerce Bancshares, Inc.,
do hereby certify that the following resolution was adopted by
the Board of Commerce Bancshares, Inc. at a Directors meeting
duly held on August 4, 1995.
WHEREAS, Commerce Bancshares, Inc. (the "Company") has
determined that section 40 l(a)( 17) of the Internal Revenue
Code, as amended by the Omnibus Budget Reconciliation Act of
1993, limits the amount of retirement income payable under
the Commerce Bancshares, Inc. Restated Retirement Plan to
certain executives of the Company; and
WHEREAS, it is the intent of the Company to replace the
retirement income lost to such executives by reason of such
amendment to the Internal Revenue Code;
NOW, THEREFORE, BE IT RESOLVED, effective as of January
1, 1995, the Company hereby adopts and establishes an
unfunded nonqualified retirement plan maintained primarily
for the purpose of providing deferred compensation to a
select group of management or highly compensated employees,
to be known as the Commerce Executive Retirement Plan. the
terms of which are set out in the attachment hereto.
EXECUTIVE RETIREMENT PLAN
I. Definitions
Except as specifically provided herein, all terms used in
this Plan shall have the definitions assigned to them under
the Commerce Bancshares, Inc. Restated Retirement Plan
("Commerce Retirement Plan") as in effect on January l, 1995
and as amended from time to time.
"OBRA Compensation Limit" shall mean the annual limitation
on compensation under Code section 401(a)(17), effective for
Plan Years beginning after 1993, as adjusted for increases
in the cost of living.
"Participant" shall mean an Employee who is a participant in
the Commerce Retirement Plan, who is an executive of an
Employer and who is designated as a Participant in this Plan
by the Chief Executive Officer of the Company. The Chief
<PAGE>
Executive Officer may be designated as a Participant by the
Board of Directors or the Compensation Committee of the
Board of Directors. Participants are listed on Appendix A.
"Plan" shall mean the "Commerce Executive Retirement Plan"
set out herein, effective January 1, 1995 and as amended
from time to time.
"TRA Compensation Limit" shall mean the annual limitation on
compensation under Code section 401 (a)( 17), adjusted for
increases in the cost of living, as if the Omnibus Budget
Reconciliation Act of 1993 had not been enacted. The
Retirement Committee shall determine the adjustments for
increases in the cost of living for years beginning after
1995 in accordance with the methods used by the Secretary of
the Treasury for determining such increases prior to 1994;
provided that the adjustment for years beginning after 1995
shall be determined by the Retirement Committee using the
Consumer Price Index for the 12-month period ending on
October 31 of the preceding Plan Year.
"Total Earnings" shall mean "Earnings" as defined in Section
1.1(k) of the Commerce Retirement Plan, but determined by
applying the IRA Compensation Limit rather than the OBRA
Compensation Limit for Plan Years beginning after 1993, and
determined without regard to any election by the Participant
to defer all or part of his bonus or other compensation
payable in a Plan Year beginning after 1994 under a
nonqualified deferred compensation plan maintained by an
Employer.
II. Benefits
A. Retirement Benefits: If the Participant terminates
employment with an Employer on or after his completion
of five Years of Service, he shall be entitled to a
monthly retirement benefit in the form of an annuity
payable for the Participant's lifetime, commencing as
of his actual retirement date or his Normal Retirement
Date, whichever is later. The amount of the benefit
shall be equal to I minus 2, where:
1. Is the monthly benefit that would be payable to
the Participant in the form of a single life
annuity commencing at the later of his actual
retirement date or his Normal Retirement Date
under Section 4.0 of the Commerce Retirement Plan,
but calculated as follows:
<PAGE>
(a) using the Participant's Total Earnings, as
defined in Part I above, instead of
"Earnings" as defined in Section 1.1(k) of
the Commerce Retirement Plan; and
(b) without regard to the last sentence of
Section 4.0(a)(i) of the Commerce Retirement
Plan or the last sentence of Section
4.0(a)(ii)(A) of the Commerce Retirement
Plan.
2. Is the monthly benefit actually payable to the
Participant in the form of a single life annuity
commencing at the later of his actual retirement
date or Normal Retirement Date under Section 4.0
of the Commerce Retirement Plan.
If payment of the benefit determined under this
Section is made in a form of annuity other than an
annuity for the Participant's lifetime, the
monthly benefit payable under this Plan shall be
determined using the Actuarial Equivalent factors
specified in Section 1.1(b) of the Commerce
Retirement Plan. If payment begins prior to the
Participant's Normal Retirement Date, the benefit
shall be reduced for early payment as provided
under Section 4.3, 4.4, or 4.8(a)(ii), as
applicable, of the Commerce Retirement Plan.
B. Time and Form of Payment of Retirement Benefits:
1 . Payment under this Plan shall begin on the first
anniversary of the date payment begins under the
Commerce Retirement Plan.
2. Payment under this Plan shall be made in the same
form of payment the Participant is receiving under
the Commerce Retirement Plan.
(a) If payment under this Plan is to be made in
the form of a monthly benefit, the benefit
under this Plan shall be calculated as if
payment had begun at the time payment began
under the Commerce Retirement Plan. On the
date payment begins under this Plan, the
Participant shall receive a single sum cash
distribution equal to the sum of the twelve
monthly payments that would have been paid
under this Plan had payment begun at the same
<PAGE>
time payment began under the Commerce
Retirement Plan, plus the monthly payment due
under this Plan on the date payment begins.
Thereafter, payments under this Plan shall be
made monthly.
(b) If payment under this Plan is to be made
under the single sum cash distribution option
described in Section 4.5(a)(ii)(C) of the
Commerce Retirement Plan, the retirement
benefit under this Plan shall be the
Actuarial Value of the retirement benefit
under this Plan determined as of the date
payment is made under this Plan.
C. Pre-retirement Death Benefits: If a pre-retirement
death benefit is payable under Section.7 of the
Commerce Retirement Plan with respect to the
Participant, a pre-retirement death benefit shall also
be payable under this Plan. The pre-retirement death
benefit payable under this Plan shall be equal to 1
minus 2, where:
l. Is the monthly pre-retirement death benefit that
would be payable to the Participant's Beneficiary
under Section 4.7 of the Commerce Retirement Plan
if the Participant's monthly retirement benefit
had been calculated under Section A 1 of Part II
of this Plan as of the date of the Participant's
death or, if earlier, his termination of
employment; and
2. Is the monthly pre-retirement death benefit
actually payable to the Participant's Beneficiary
under Section 4.7 of the Commerce Retirement Plan.
If payment of the pre-retirement death benefit
determined under this Section prior to the
Participant's Normal Retirement Date, the benefit shall
be reduced for early payment as provided under Section
4.3, 4.4, or 4.8(a)(iv), as applicable, of the Commerce
Retirement Plan
If the Participant dies before payment of his
retirement benefit begins under this Plan and if no
Beneficiary survives him, the pre-retirement death
benefit, if any, payable under this Section shall be
paid to the Participant's estate in a single sum cash
distribution. Payment shall be made within a reasonable
<PAGE>
period of time following the Participant's death. The
amount of such distribution shall be equal to 45% of
the Actuarial Value of the monthly benefit payable at
the Participant's Normal Retirement Date under this
Plan as determined under Section A of Part II.
If the Participant's Beneficiary survives him but dies
before the date payment of the retirement the benefit
begins, no pre-retirement death benefit will be payable
under this Plan .
D. Time and Form of Payment of Pre-Retirement Death
Benefits
l. Payment under this Plan shall begin on the first
anniversary of the date payment begins under the
Commerce Retirement Plan.
2. Payment under this Plan shall be made in the same
form of payment the Beneficiary is receiving under
the Commerce Retirement Plan.
(a) If payment under this Plan is to be made in
the form of a monthly benefit, the benefit
under this Plan shall be calculated as if
payment had begun at the time payment began
under the Commerce Retirement Plan. On the
date payment begins under this Plan, the
Beneficiary shall receive a single sum cash
distribution equal to the sum of the twelve
monthly payments that would have been paid
under this Plan had payment begun at the same
time payment began under the Commerce
Retirement Plan, plus the monthly payment due
under this Plan on the date payment begins.
Thereafter, payments shall be made monthly.
(b) If payment under this Plan is to be made
under the single sum cash distribution option
described in Section 4.8(a)(iv) of the
Commerce Retirement Plan, the pre-retirement
death benefit under this Plan shall be the
Actuarial Value of the pre-retirement death
benefit under this Plan determined as of the
date payment is made under this Plan.
E. Vesting: Forfeiture: Except as otherwise provided
herein, benefits are 100% vested and nonforfeitable
upon Participant's completion of five Years of Service.
<PAGE>
Notwithstanding any provision of this Plan to the
contrary, a Participant, his surviving spouse, and his
beneficiaries shall forfeit all rights to any benefits
not yet paid under this Plan in the event that the
Retirement Committee, in its discretion, determines
that:
l . The Participant, without the prior written consent
of the Company, is in violation of the terms of
any non-compete agreement in effect between the
Participant and the Employer; or
2. The Participant is discharged from an Employer for
dishonesty or for violating the Company's written
code of ethics, if any; or
3. The Participant is found, by his own written
admission or by a final court determination, to
have committed an illegal act classified as a
felony under applicable law. Payment of benefits
otherwise due with respect to the Participant
under this Plan shall be suspended during any
period while felony charges against the
Participant are pending.
F. Termination of Participation: The Chief Executive
Officer of the Company may terminate a Participant's
eligibility to participate in this Plan at any time.
The Participant shall be notified in writing of such
termination of eligibility and his name shall be
removed from Appendix A. A Participant whose
eligibility is terminated by the Chief Executive
Officer shall accrue no additional benefits under this
Plan after the date his eligibility ends, but, except
as otherwise provided in Section E of this Part II,
such Participant shall retain his rights to all
benefits earned under this Plan as of the date his
eligibility ends.
III. General Provisions
A. Unsecured Right The right of the Participant, his
spouse, his Beneficiary, his estate, or any other
claimant to receive any amount under this Plan shall be
an unsecured claim against the general assets of the
Company. No Participant, spouse, Beneficiary, estate,
or other claimant shall have any rights in or against
any specific assets of the Company. The Participant's
benefits under this Plan may not in any way be
<PAGE>
encumbered or assigned by the Participant or any other
person.
B. Amendment: Termination: This Plan may be amended or
terminated at any time by resolution of the Board of
Directors of the Company. However, no amendment shall
divest the Participant of any benefit which has accrued
under this Plan at the time of the amendment, or of any
rights to which the Participant would have been
entitled had the Plan terminated on the date of the
amendment. However, no further benefits shall accrue
hereunder after the Plan is terminated.
C. Administration: The Retirement Committee appointed
under Section 7.1 of the Commerce Retirement Plan shall
administer this Plan. The Retirement Committee shall
have the same powers, rights, discretion and authority
with respect to this Plan granted to it with respect to
the Commerce Retirement Plan under Article VII thereof.
In addition, the Retirement Committee shall have the
sole and absolute right, power and discretion to
construe and interpret the provisions of this Plan, to
decide all questions of eligibility to participate in
the Plan, to determine the amount, manner and time of
payment of any benefits to any Participant or
Beneficiary; to determine the right of any person to a
benefit, and to resolve all questions arising in the
administration, interpretation and application of the
Plan, including resolving any ambiguities from such
administration, interpretation and application of the
plan.
D. Claims: The provisions of Section 10.6 of the Commerce
Retirement Plan are incorporated herein by this
reference.
E. Governing Law: Any questions arising under the Plan
shall be determined under the laws of the state of
Missouri.
F. No Right to Retention: Nothing in this Plan shall give
the Participant right to be retained in the employment
of an Employer or affect the right of an Employer to
dismiss the Participant.
IN WITNESS WHEREOF, I have hereunto affixed my name as
Secretary and have caused the corporate seal to be affixed hereto
this 30th day of November, 1995.
<PAGE)
(SEAL) /s/T. Alan Peschka
Secretary
<PAGE>
Exhibit 21
The consolidated subsidiaries of the Registrant at March 1, 1996 were as
follows:
State or Other
Jurisdiction of
Name Location Incorporation
Commerce Bank, National Association Kansas City, MO United States
CB Building Corp. Kansas City, MO Missouri
Tower Redevelopment
Corporation Kansas City, MO Missouri
Twin City Development
Company, Inc. Kansas City, KS Kansas
Commerce Bank of Joplin,
National Association Joplin, MO United States
Commerce Bank, National Association Springfield, MO United States
Commerce Bank of St. Joseph,
National Association St. Joseph, MO United States
Commerce Bank, National Association Columbia, MO United States
Commerce Bank of Hannibal,
National Association Hannibal, MO United States
Commerce Bank of Lebanon,
National Association Lebanon, MO United States
Commerce Bank, National Association Clayton, MO United States
County Realty Corp. Clayton, MO Missouri
Commerce Brokerage
Services, Inc. Clayton, MO Missouri
Commerce Bank of Barry County,
National Association Cassville, MO United States
Commerce Bank of Omaha,
National Association Omaha, NE United States
Commerce Bank, National Association Peoria, IL United States
Commerce Bank, National Association Hays, KS United States
Commerce Bank, National Association Manhattan, KS United States
Commerce Bank Lawrence, KS Kansas
Commerce Bank Bloomington, IL Illinois
Commerce Bank, National Association Wichita, KS United States
Union Center, Inc. Wichita, KS Kansas
Mid-America Financial Corp. Kansas City, MO Missouri
Delaware Redevelopment
Corporation Kansas City, MO Missouri
CBI Insurance Company Kansas City, MO Arizona
Capital for Business, Inc. Kansas City, MO Missouri
Commerce Property and Casualty
Agency, Inc. Kansas City, MO Missouri
Commerce Mortgage Corp. Kansas City, MO Missouri
CFB Venture Fund I, Inc. Clayton, MO Missouri
CFB Partners, Inc. Kansas City, MO Missouri
CBI-Illinois, Inc. Kansas City, MO Delaware
CBI-Kansas, Inc. Kansas City, MO Kansas
CBI-Central Kansas, Inc. Kansas City, MO Kansas
UBI Financial Services, Inc. Wichita, KS Kansas
<PAGE>
Exhibit 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Commerce Bancshares, Inc.:
We consent to incorporation by reference in Registration Statements No. 33-
28294, No. 33-82692, No. 33-8075, No. 33-78344, No. 33-61499 and No. 33-
61501, each on Form S-8 of Commerce Bancshares, Inc. of our report dated
January 31, 1996, relating to the consolidated balance sheets of Commerce
Bancshares, Inc. and Subsidiaries as of December 31, 1995, 1994 and 1993 and
the related statements of income, cash flows and stockholders' equity for the
years then ended, which report appears in the December 31, 1995 annual report
on Form 10-K of Commerce Bancshares, Inc.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
March 6, 1996
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby
appoint J. Daniel Stinnett and Jeffery D. Aberdeen, or either of them, attorney
for the undersigned to sign the Annual Report on Form 10-K of Commerce
Bancshares, Inc. for the fiscal year ended December 31, 1995, together with any
and all amendments which might be required from time to time with respect
thereto, to be filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, with respect to Commerce Bancshares, Inc.,
with full power and authority in either of said attorneys to do and perform in
the name of and on behalf of the undersigned every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person.
IN WITNESS WHEREOF, the undersigned has executed these presents this 9th
day of February, 1996.
s/Giorgio Balzer
s/Fred L. Brown
s/James B. Hebenstreit
s/David W. Kemper
s/James M. Kemper, Jr.
s/Terry O. Meek
s/Benjamin F. Rassieur, Jr.
s/John H. Robinson, Jr.
s/L. W. Stolzer
s/Andrew C. Taylor
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Commerce Bancshares, Inc. 12/31/95 Form 10-K and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 774,852
<INT-BEARING-DEPOSITS> 0<F1>
<FED-FUNDS-SOLD> 523,302
<TRADING-ASSETS> 9,369
<INVESTMENTS-HELD-FOR-SALE> 2,552,264<F2>
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,317,813<F3>
<ALLOWANCE> 98,537
<TOTAL-ASSETS> 9,573,951
<DEPOSITS> 8,193,092
<SHORT-TERM> 362,903
<LIABILITIES-OTHER> 119,611
<LONG-TERM> 14,562
0
0
<COMMON> 187,827
<OTHER-SE> 695,956
<TOTAL-LIABILITIES-AND-EQUITY> 9,573,951
<INTEREST-LOAN> 457,760
<INTEREST-INVEST> 160,928<F4>
<INTEREST-OTHER> 12,075
<INTEREST-TOTAL> 631,003
<INTEREST-DEPOSIT> 250,380
<INTEREST-EXPENSE> 275,258
<INTEREST-INCOME-NET> 355,745
<LOAN-LOSSES> 14,629
<SECURITIES-GAINS> 897
<EXPENSE-OTHER> 305,484
<INCOME-PRETAX> 168,782
<INCOME-PRE-EXTRAORDINARY> 107,640
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,640
<EPS-PRIMARY> 2.85
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.50<F5>
<LOANS-NON> 16,234
<LOANS-PAST> 15,690
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 87,179
<CHARGE-OFFS> 23,272
<RECOVERIES> 7,069
<ALLOWANCE-CLOSE> 98,537
<ALLOWANCE-DOMESTIC> 98,537
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Certificates of deposit of $248,000 are included in Investments-Held-
For-Sale.
<F2>Excludes non-marketable investment securities of $33,120,000.
<F3>Gross of allowance for loan losses.
<F4>Excludes interest of $240,000 on trading account securities.
<F5>Yield is computed on a tax equivalent basis.
</FN>
</TABLE>
