<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 1999
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.
As of February 18, 2000, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $1,687,000,000.
As of February 18, 2000, there were 61,856,051 shares of Registrant's $5
par value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Shareholders for the fiscal year ended December 31,
1999 is incorporated in Part I, Part II, and Part IV of the Form 10-K.
Portions of the definitive proxy statement with respect to the annual
meeting of shareholders to be held on April 19, 2000, are incorporated in Part
III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
Item 1. Business
General
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 all
of the outstanding capital stock of one national banking association
headquartered in Missouri, one national banking association headquartered in
Illinois, one national bank 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 or through its banking subsidiaries, various
non-banking subsidiaries which are engaged in owning real estate which is
leased to the Company's banking subsidiaries, underwriting credit life and
credit accident and health insurance, selling property and casualty insurance
(relating to extensions of credit made by the banking subsidiaries), providing
venture capital, brokerage services, and mortgage banking. The Company also
owns two second tier holding companies which are the direct owners of several
of the above mentioned banks. The table setting forth the names and locations
of the Company's subsidiaries is included as Exhibit 21 hereto.
The Company is the largest bank holding company headquartered in Missouri.
Its principal offices are at 1000 Walnut, Kansas City, Missouri (telephone
number 816-234-2000). At December 31, 1999, the Company had consolidated
assets of $11.4 billion, consolidated loans of $7.6 billion, and consolidated
deposits of $9.2 billion.
The Company's Missouri bank charter comprises approximately 84% of the
banking assets of the Company. 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.
The Company regularly evaluates the potential acquisition of, and holds
discussions with, various financial institutions eligible for bank holding
company ownership or control. As a general rule, the Company publicly
announces any material acquisitions when a definitive agreement has been
reached.
Operating Segments
The Company is managed in three operating segments. The Consumer segment
includes the retail branch network, consumer installment lending, bankcard,
student lending, and discount brokerage services. It contributed 41% of the
Company's 1999 pre-tax net income. The Commercial segment provides corporate
lending, leasing, and international services, as well as business, government
deposit and cash management services. It also contributed 41% of the Company's
pre-tax income. The Money Management segment provides traditional trust and
estate tax planning services, and advisory and discretionary investment
management services. This segment also operates a family of mutual funds
available for sale to both trust and general retail customers. This segment
contributed 10% of the Company's pre-tax income. At December 31, 1999, the
segment managed investments with a market value of $9.8 billion and
administered an additional $7.4 billion in non-managed assets.
Competition
The Company has locations in regional markets throughout Missouri, Kansas
and central Illinois, where the Company faces intense competition from
hundreds of financial service providers. The Company competes with national
and state banks for deposits, loans and trust accounts, and with savings and
loan associations and credit unions for deposits. In addition, the Company
competes with other financial intermediaries such as securities brokers and
dealers, personal loan companies, insurance companies, finance companies, and
certain governmental agencies.
1
<PAGE>
Supervision and Regulation
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
subsidiary in Illinois is a member of the Federal Reserve Bank of Chicago
which provides additional flexibility to the operations area.
The Company, as a bank holding company, is primarily regulated by the Board
of Governors of the Federal Reserve System under the Bank Holding Company Act
of 1956. The Company's four banking subsidiaries are organized as national
banking associations and are subject to regulation, supervision and
examination by the Office of the Comptroller of the Currency. All banks are
also subject to regulation by the Federal Deposit Insurance Corporation.
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength to each of its bank subsidiaries and to commit resources to
support each bank subsidiary in circumstances when it might not otherwise do
so. In addition, there are numerous other federal and state laws and
regulations which control the activities of the Company and its banking
subsidiaries, including requirements and limitations relating to capital and
reserve requirements, permissible investments and lines of business,
transactions with affiliates, loan limits, mergers and acquisitions, issuance
of securities, dividend payments, and extensions of credit. Information
regarding capital adequacy standards of the Federal Banking regulators is
discussed on page 52 of the 1999 Annual Report to Shareholders. Information
regarding affiliate bank dividend restrictions is on page 57 of the 1999
Annual Report to Shareholders.
These laws and regulations are under constant review by various agencies
and legislatures, and are subject to sweeping change. Most recently was the
passage of the Financial Services Modernization Act of 1999, which gives banks
the opportunity to offer certain additional products, such as insurance and
bond underwriting. In addition, the Federal Reserve impacts the conditions
under which the Company operates by its influence over interest rates and
credit conditions. The effects of the foregoing on the economic condition of
the Company cannot be predicted with certainty.
Employees
The Company and its subsidiaries employed 4,586 persons on a full-time
basis and 815 persons on a part-time basis at December 31, 1999.
Statistical Disclosure
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 the 1999 Annual Report to Shareholders as
indicated below and is hereby incorporated by reference. The following
schedule reflects the page number of the Annual Report where the various
captioned information is shown.
<TABLE>
<CAPTION>
Annual Report
Page
-------------
<C> <S> <C>
I. Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential......... 22, 36-39
II. Investment Portfolio..................................... 30, 46-47
III. Loan Portfolio
Types of Loans.......................................... 27
Maturities and Sensitivities of Loans to Changes in
Interest Rates........................................... 27
Risk Elements........................................... 29-30
IV. Summary of Loan Loss Experience.......................... 23-24
V. Deposits................................................. 34, 36-37
VI. Return on Equity and Assets.............................. 21
VII. Short-Term Borrowings.................................... 47
</TABLE>
2
<PAGE>
Item 2. Properties
The Missouri, Illinois, and Kansas-chartered bank subsidiaries maintain
their main offices in various office buildings listed below. These are owned
by the bank subsidiary or a subsidiary of the bank. The banks lease unoccupied
premises to the public. The buildings are located in the downtown areas of the
cities they serve.
<TABLE>
<CAPTION>
Net rentable % occupied % occupied
Building square footage in total by bank
-------- -------------- ---------- ----------
<S> <C> <C> <C>
922 Walnut
Kansas City, MO..................... 205,000 46% 39%
1000 Walnut
Kansas City, MO..................... 384,000 79 44
720 Main
Kansas City, MO..................... 180,000 98 84
8000 Forsyth
Clayton, MO......................... 197,000 90 88
416 Main
Peoria, IL.......................... 224,000 87 25
150 N. Main
Wichita, KS......................... 191,000 76 49
</TABLE>
The Nebraska credit card bank leases its offices in Omaha, Nebraska.
Additionally, certain other credit card functions operate out of leased
offices in downtown Kansas City. The Company also has approximately 190 branch
locations in Missouri, Illinois and Kansas which are owned or leased.
Item 3. Legal Proceedings
The information required by this item is set forth under the caption
"Commitments and Contingencies" on page 55 of the Annual Report to
Shareholders for the fiscal year ended December 31, 1999, and is hereby
incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 1999 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.
<TABLE>
<CAPTION>
Name and Age Positions with Registrant
------------ -------------------------
<C> <S>
Jeffery D. Aberdeen, 46... Controller of the Company since December, 1995.
Assistant Controller of the Company and
Controller of Commerce Bank, N.A. (Missouri), a
subsidiary of the Company, prior thereto.
Andrew F. Anderson, 48.... Senior Vice President of the Company since
October, 1998. Chairman of the Board, President
and Chief Executive Officer of Commerce Bank,
N.A. (Illinois), a subsidiary of the Company,
since August, 1995. President and Chief
Executive Officer of The Peoples Bank of
Bloomington, IL prior thereto.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Name and Age Positions with Registrant
------------ -------------------------
<C> <S>
Kevin G. Barth, 39.......... Senior Vice President of the Company and
Executive Vice President of Commerce Bank, N.A.
(Missouri) since October, 1998. Officer of
Commerce Bank, N.A. (Missouri) prior thereto.
A. Bayard Clark, 54......... Chief Financial Officer, Executive Vice
President and Treasurer of the Company since
December, 1995. Executive Vice President of the
Company prior thereto.
Sara E. Foster, 39.......... Senior Vice President of the Company since
December, 1997. Vice President of the Company
prior thereto.
David W. Kemper, 49......... 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 President of Commerce
Bank, N.A. (Missouri). He is the son of James
M. Kemper, Jr. (a former 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, 46...... Vice Chairman of the Company since November,
1991 and Vice Chairman of Commerce Bank, N.A.
(Missouri) since December, 1997. Prior thereto,
he was Chairman of the Board, Chief Executive
Officer, and President of Commerce Bank, N.A.
(Missouri). He is the son of James M. Kemper,
Jr. (a former 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, 39.......... Executive Vice President of the Company since
April, 1995. Prior thereto, he was Senior Vice
President of Commerce Bank, N.A. (Clayton, MO),
a former subsidiary of the Company.
Seth M. Leadbeater, 49...... Executive Vice President of the Company since
October, 1998. Executive Vice President of
Commerce Bank, N.A. (Missouri) since December
1997. Prior thereto, he was President of
Commerce Bank, N.A. (Clayton, MO).
Robert C. Matthews, Jr., 52. Executive Vice President of the Company since
December, 1989. Executive Vice President of
Commerce Bank, N.A. (Missouri) since December,
1997.
Michael J. Petrie, 43....... Senior Vice President of the Company since
April, 1995. Prior thereto, he was Vice
President of the Company.
Robert J. Rauscher, 42...... Senior Vice President of the Company since
October, 1997. Senior Vice President of
Commerce Bank, N.A. (Missouri) prior thereto.
V. Raymond Stranghoener, 48. Senior Vice President of the Company since
February, 2000. Prior to his employment with
the Company in October, 1999, he was employed
at BankAmerica Corp., his most recent title
being National Executive of the Bank of America
Private Bank Wealth Strategies Group. He joined
Boatmen's Trust Company in 1993, which
subsequently merged with BankAmerica Corp.
William A. Sullins, Jr., 61. Vice Chairman of the Company since August,
1992. Vice Chairman of Commerce Bank, N.A.
(Missouri) since December, 1997. Vice Chairman
of Commerce Bank, N.A. (Clayton, MO) prior
thereto.
</TABLE>
4
<PAGE>
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 20 of the Annual
Report to Shareholders for the fiscal year ended December 31, 1999, and is
hereby incorporated by reference.
Item 6. Selected Financial Data
The information required by this item is set forth on page 21 of the Annual
Report to Shareholders for the fiscal year ended December 31, 1999, and is
hereby incorporated by reference.
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 21 through 39
of the Annual Report to Shareholders for the fiscal year ended December 31,
1999, and is hereby incorporated by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is set forth on pages 32 through 34,
44, 54 and 55 of the Annual Report to Shareholders for the fiscal year ended
December 31, 1999, and is hereby incorporated by reference.
Item 8. Financial Statements and Supplementary Data
The information required by this item is set forth on pages 40 through 60
of the Annual Report to Shareholders for the fiscal year ended December 31,
1999, and is hereby incorporated by reference.
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 Item 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.
5
<PAGE>
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,
Statements of Stockholders' Equity, Notes to Financial Statements
and Summary of Quarterly Statements of Income
(2) Financial Statement Schedules--All schedules are omitted as such
information is inapplicable or is included in the financial
statements.
(3) Exhibits:
3--Articles of Incorporation and By-Laws:
(a) Restated Articles of Incorporation, as amended, were filed
in quarterly report on Form 10-Q dated August 10, 1999, and
the same are hereby incorporated by reference.
(b) Restated By-Laws were filed in quarterly report on Form 10-Q
dated August 9, 1996, and the same are 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 an Amended and Restated
Rights Agreement was filed on Form 8-A12G/A dated June 7,
1996, and the same is hereby incorporated by reference.
(c) Form of Rights Certificate and Election to Exercise was
filed on Form 8-A12G/A dated June 7, 1996, and the same is
hereby incorporated by reference.
(d) Form of Certificate of Designation of Preferred Stock was
filed on Form 8-A12G/A dated June 7, 1996, and the same is
hereby incorporated by reference.
10--Material Contracts (Each of the following is a management
contract or compensatory plan arrangement):
(a) Commerce Bancshares, Inc. Executive Incentive Compensation
Plan amended and restated as of December 31, 1999.
(b) Commerce Bancshares, Inc. Incentive Stock Option Plan
amended and restated as of October 4, 1996 was filed in
quarterly report on Form 10-Q dated November 8, 1996, and
the same is hereby incorporated by reference.
(c) Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option
Plan amended and restated as of October 4, 1996 was filed in
quarterly report on Form 10-Q dated November 8, 1996, and
the same is hereby incorporated by reference.
(d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-
Employee Directors amended and restated as of October 4,
1996 was filed in quarterly report on Form 10-Q dated
November 8, 1996, and the same is hereby incorporated by
reference.
(e) 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.
(f) Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan
amended and restated as of October 4, 1996 was filed in
quarterly report on Form 10-Q dated November 8, 1996, and
the same is hereby incorporated by reference.
(g) Commerce Executive Retirement Plan was filed in annual
report on Form 10-K dated March 8, 1996, and the same is
hereby incorporated by reference.
6
<PAGE>
(h) Commerce Bancshares, Inc. Restricted Stock Plan amended and
restated as of February 4, 2000.
(i) Form of Severance Agreement between Commerce Bancshares,
Inc. and certain of its executive officers entered into as
of October 4, 1996 was filed in quarterly report on Form 10-
Q dated November 8, 1996, and the same is hereby
incorporated by reference.
(j) Trust Agreement for the Commerce Bancshares, Inc. Executive
Incentive Compensation Plan.
13--Annual Report to Security Holders
21--Subsidiaries of the Registrant
23--Independent Accountants' Consent
24--Powers of Attorney (in the following form):
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do 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, 1999, 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 have executed these presents
this 4th day of February, 2000.
Signed by the following directors:
Messrs. Giorgio Balzer; Fred L. Brown; James B. Hebenstreit;
David W. Kemper; Jonathan M. Kemper; Mary Ann Krey; Terry O. Meek;
Benjamin F. Rassieur III; John H. Robinson, Jr.; L. W. Stolzer;
William A. Sullins, Jr.; and Robert H. West.
27--Financial Data Schedule (filed only with electronic
transmission)
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the last quarter of 1999.
7
<PAGE>
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 10th day of
March, 2000.
Commerce Bancshares, Inc.
/s/ J. Daniel Stinnett
By: _________________________________
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 10th day of March, 2000.
/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)
Georgio Balzer
Fred L. Brown
James B. Hebenstreit A majority of the
Jonathan M. Kemper Board of Directors*
Mary Ann Krey
Terry O. Meek
Benjamin F. Rassieur III
John H. Robinson, Jr.
L. W. Stolzer
William A. Sullins, Jr.
Robert H. West
- --------
*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
8
<PAGE>
INDEX TO EXHIBITS
3 -- Articles of Incorporation and By-Laws:
(a) Restated Articles of Incorporation, as amended, were filed
in quarterly report on Form 10-Q dated August 10, 1999, and
the sale are hereby incorporated by reference.
(b) Restated By-Laws were filed in quarterly report on Form 10-Q
dated August 9, 1996, and the same are hereby incoporated
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 an Amended and
Restated Rights Agreement was filed on Form 8-A12G/A
dated June 7, 1996, and the same is hereby incorporated
by reference.
(c) Form of Rights Certificate and Election to Exercise was
filed on Form 8-A12G/A dated June 7, 1996, and the same is
hereby incorporated by reference.
(d) Form of Certificate of Designation of Preferred Stock was
filed on Form 8-A12G/A dated June 7, 1996, and the same is
hereby incorporated by reference.
10 - Material Contracts (Each of the following is a management contract
or a compensatory plan arragement):
(a) Commerce Bancshares, Inc. Executive Incentive Compensation
Plan amended and restated as of December 31, 1999.
(b) Commerce Bancshares, Inc. Incentive Stock Option Plan
amended and restated as of October 4, 1996 was filed in
quarterly report on Form 10-Q dated November 8, 1996, and
the same is hereby incorporated by reference.
(c) Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option
Plan amended and restated as of October 4, 1996 was filed
in quarterly report on Form 10-Q dated November 8, 1996,
and the same is hereby incoporated by reference.
(d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-
Employee Directors amended and restated as of October 4,
1996 was filed in quarterly report on Form 10-Q dated
November 8, 1996, and the same is hereby incorporated by
reference.
(e) 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.
(f) Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan
amended and restated as of October 4, 1996 was filed in
quarterly report on Form 10-Q dated November 8, 1996, and
the same is hereby incorporated by reference.
(g) Commerce Executive Retirement Plan was filed in annual
report on Form 10-K dated March 8, 1996, and the same
is hereby incorporated by reference.
(h) Commerce Bancshares, Inc. Restricted Stock Plan amended
and restated as of February 4, 2000.
(i) Form of Severance Agreement between Commerce Bancshares,
Inc. and certain of its executive officers entered into
as of October 4, 1996 was filed in quarterly report on
Form 10-Q dated November 8, 1996, and the same is
hereby incorporated by reference.
(j) Trust Agreement for the Commerce Bancshares, Inc.
Executive Incentive Compensation Plan
13 - Annual Report to Security Holders
21 - Subsidiaries of the Registrant
23 - Independent Accountants' Consent
24 - Powers of Attorney
27 - Financial Data Schedule
<PAGE>
EXHIBIT 10(A)
COMMERCE BANCSHARES, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
AMENDMENT AND RESTATEMENT AS OF DECEMBER 31, 1999
1. PURPOSE
The policy of Commerce Bancshares, Inc. ("Commerce") is to
compensate its officers based on performance. The purpose of
this Executive Incentive Compensation Plan ("Plan") is to provide
incentive compensation awards to those individuals whose
management efforts reflect a desire to meet commonly agreed upon
objectives or to those who by their superior performance directly
contribute to the profitability of Commerce and to encourage the
retention of outstanding contributors.
2. ADMINISTRATION
The Plan shall be administered by the Compensation and
Benefits Committee of the Board of Directors ("Board") of
Commerce, which shall consist solely of two or more directors who
are "non-employee directors" under Rule 16b-3(b)(3) promulgated
under the Securities Exchange Act of 1934, as amended, or any
successor provision thereto. The Committee shall have authority
in its sole discretion to interpret the Plan, establish rules and
procedures thereunder, and make all determinations, including the
determination of incentive compensation awards eligible to be
deferred under the Plan. All determinations made by the
Committee shall be final and binding.
3. ELIGIBLE PARTICIPANTS
All chief executive officers, Chairmen of the Board,
Presidents, and Vice Presidents of Commerce or any of its
affiliated banks or subsidiary companies shall be eligible to
participate in the Plan, together with such other officers of
Commerce and its affiliated banks and subsidiary companies as the
Committee shall determine. Directors who are not officers or
employees of Commerce, an affiliated bank, or a subsidiary
company, are not eligible to participate in the Plan.
4. DETERMINATION OF AWARD
The Board of Commerce shall at its sole discretion approve
the amount of the aggregate incentive compensation awards to be
granted based on the recommendations of the Committee. Incentive
compensation awards made under this Plan shall be determined with
reference to performance during the preceding year. The
incentive compensation awards to be made to the Chairman of the
Board, President and/or Chief Executive Officer of Commerce shall
be determined by the Committee and all other awards to be made
under this Plan may be determined by the Committee or, should the
Committee so direct, by a committee consisting of the Chief
Executive Officer, a Vice Chairman designated by the Chief
Executive Officer, and the chief human resources officer.
<PAGE>
5. PAYMENT OF INCENTIVE AWARD
Incentive compensation awards are generally determined and
made on or before the date of the annual meeting of shareholders
of Commerce. The normal method of payment will be in the form of
cash and awards will be paid as soon as practicable after the
awards are determined; provided, that the recipient of an award
shall not have elected to defer receipt of the incentive
compensation award as hereinafter provided.
6. DEFERRAL OPTIONS
a. Eligible employees who are members of a select group of
management or highly compensated employees, as selected
by the Commerce Director of Human Resources in his or
her discretion, may elect to defer all or a portion of
an incentive compensation award until the earlier to
occur of retirement, death, or termination. A deferral
must be expressed either as "all" or as a specified
dollar amount. Any incentive compensation award above
the specified amount will be paid in cash, and if the
award is less than the amount deferred, the total award
will be deferred. The granting of an incentive
compensation award is discretionary and neither
delivery of deferral election materials nor an election
to defer shall affect entitlement to such an award.
All deferral elections made under the Plan are
irrevocable. It is intended that this arrangement
qualify as, and shall be administered to qualify as
being unfunded and being primarily for the purpose of
providing deferred compensation for a select group of
management or highly compensated employees.
b. In order to ensure that elections to defer
incentive compensation awards are effective under
applicable tax laws, all persons eligible to
participate in this Plan will be given the
opportunity to defer payment of all or a portion of
an incentive compensation award. An election to
defer must be made in a written form satisfactory
to Commerce and must be received by the Commerce
Director of Human Resources on or before the last
business day of the year preceding the year for
which performance is measured to determine the
granting of an incentive compensation award
c. An eligible employee in electing a deferred payment
shall also elect the accounts, from among the accounts
that Commerce makes available to the participating
employee, to which the relevant portion of the award
deferral will be credited. Credits to available
accounts for deferral of an incentive compensation
award shall be determined from time to time based upon
hypothetical measuring investments (the "Measuring
Investments") for each account; one of which shall
consist of a Company Stock Account and there shall be
such other accounts determined from time to time by the
Director of Human Resources in his or her discretion.
Such accounts are bookkeeping accounts only and are
maintained for the sole purpose of determining the
amount payable by Commerce to the eligible employee
based upon the hypothetical performance of the
Measuring Investments for each such account, determined
as if the account had assets invested in the Measuring
Investments for such account. No assets shall be
segregated for the
<PAGE>
benefit of an eligible employee and the bookkeeping
account shall not represent assets set aside for the
benefit of an eligible employee.
With the exception of the Commerce Stock Account,
an eligible employee may elect to transfer credits
between accounts, and the amount credited to all
such accounts shall be determined from time to
time, all pursuant to non-discriminatory rules,
procedures and deadlines set by the Commerce
Director of Human Resources, which rules,
procedures, and deadlines may be amended from time
to time in such officer's discretion (the
"Administrative Rules"). Except as set forth in
the following paragraph, however, an eligible
employee may elect to transfer credits into the
Commerce Stock Account, but not out of the
Commerce Stock Account. Any election to transfer
a credit to the Commerce Stock Account or among
the other accounts (a "Transfer Election") must be
received by the Commerce Director of Human
Resources by the date set by the Commerce Director
of Human Resources and must be in a written form
satisfactory to such officer, in each case
pursuant to the Administrative Rules. Any
transfer to the Commerce Stock Account shall be
based upon the last sale price of Commerce Stock
as reported by the National Association of
Security Dealers National Market System on the
trading day determined in accordance with the
Administrative Rules. The credit transferred from
any other account shall be based upon the amount
credited to such account as of the date determined
in accordance with the Administrative Rules.
Notwithstanding the above, an eligible employee
may make a one-time election to remove any or all
amounts out of the Commerce Stock Account (a
"Diversification Election") as of February 17,
2000. Such Diversification Election must be made
at the time and in the manner determined pursuant
to the Administrative Rules. Any transfer from
the Commerce Stock Account shall be based upon the
last sale price of Commerce Stock as reported by
the National Association of Security Dealers
National Market System on the trading day
determined in accordance with the Administrative
Rules. The amount transferred from the Commerce
Stock Account pursuant to the Diversification
Election shall be based upon the number of units
credited to such account as of the date determined
in accordance with the Administrative Rules.
d. The accounts made available for the deferral of incentive
compensation awards are bookkeeping accounts. The amount
credited to each account, including any hypothetical earnings,
gains or losses, will be determined in accordance with the
Administrative Rules, based on the investment performance of the
Measuring Investments for such Account. The timing and manner of
making credits or debits to each account shall be determined in
accordance with the Administrative Rules.
e. Commerce shall provide periodically to each participant
(but not less frequently than once per calendar year) a
statement setting forth the balance to the credit of
such participant in each of the accounts.
<PAGE>
f. Amounts deferred under the provisions of this Plan will
be disbursed to participants in accordance with the
following:
(1) An amount equal to the amounts credited to
accounts other than the Commerce Stock Account
will be paid by Commerce in a single distribution
as soon as reasonably practicable after
retirement, disability, death or other termination
of employment, except that a participant may elect
to instead have payment made in up to ten annual
equal installments or in such installments after
receiving a lump sum payment of a portion of the
payment due. Annual installments will be paid in
an amount, less applicable withholding taxes,
determined by multiplying the balance in the
Discretionary Account by a fraction, the numerator
of which is one (1) and the denominator of which
is a number equal to remaining unpaid annual
installments.
(2) If a participant dies after the commencement of
payments from such participant's accounts other
than the Commerce Stock Account, the designated
beneficiary shall receive the remaining
installments over the elected installment period.
(3) With respect to a participant's Commerce Stock
Account, upon such participant's disability,
death, retirement, or other termination of
employment, Commerce shall transfer to such
participant a number of shares of Commerce stock,
and cash for any fractional shares, equal to the
units credited to the participant's Commerce Stock
Account. No payment, however, shall be made with
respect to the Commerce Stock Account until
arrangements satisfactory to Commerce shall have
been made to provide for payment to Commerce of
federal, state, local, and payroll withholding
taxes attributable to such payment.
(4) Each participant shall have the right at any time
to designate any person or persons as beneficiary
or beneficiaries (both principal as well as
contingent) to whom payment under this Plan shall
be made in the event of death prior to complete
distribution to the participant of the amounts due
under this Plan. Any beneficiary designation may
be changed by a participant by the filing of such
change in writing on a form prescribed by
Commerce. The filing of a new beneficiary
designation form will cancel all beneficiary
designations previously filed and will apply to
all deferrals in the account. If a beneficiary
has not been designated or if all designated
beneficiaries predecease the participant, then any
amounts payable to the beneficiary shall be paid
to the participant's estate in one lump sum.
(5) If there is any change in the number or class of
shares of Commerce stock through the declaration
of stock dividend or other extraordinary dividends
or recapitalization resulting in stock splits or
combinations or exchanges of such shares or in the
event of similar corporate transactions, each
participant's Commerce Stock Account shall be
equitably adjusted to
<PAGE>
reflect any such change in the number or class of
issued shares of common stock of Commerce or to
reflect such similar corporate transaction.
(6) The Human Resources/Salary Committee of Commerce,
upon 30 days written notice, may approve a
"hardship" request for distribution of a deferred
award. Unless the participant presents proof
satisfactory to such committee of financial need,
requests for hardship distribution will be denied.
Each request will be evaluated on the basis of
uniformly applied criteria.
7. AMENDMENT AND TERMINATION OF PLAN
The Board of Directors may at its discretion and at any time
amend the Plan in whole or in part. The Committee may terminate
the Plan in its entirety at any time, and, upon such termination
or such later date or dates, each participant shall: receive, in
a single distribution, the shares and cash for the fractions
thereof of Commerce Stock credited to the Commerce Stock Account;
and shall be paid, in a single distribution or over such period
of time as determined by the Committee, an amount equal to the
then remaining amount credited to such participant's accounts
other than the Commerce Stock Account.
8. MISCELLANEOUS
a. A participant under this Plan is merely a general unsecured
creditor and nothing contained in this Plan shall create a trust
of any kind or a fiduciary relationship between Commerce and the
participant or the participant's estate. Nothing contained
herein shall be construed as conferring upon the participant the
right to continued employment with Commerce or its subsidiaries
or to an incentive compensation award. Except as otherwise
provided by applicable law, benefits payable under this Plan may
not be assigned or hypothecated, and no such benefits shall be
subject to legal process or attachment for the payment of any
claim of any person entitled to receive the same.
b. The amendment of the Plan to allow a Commerce Stock deferral
option shall become effective on the date the shareholders of
Commerce approve the same. Subject to such approval, an employee
having a deferred option may elect (but prior to June 30, 1994)
to transfer his balance in the Treasury Bill Account and/or the
Treasury Note Account as of April 1, 1994 to the Commerce Stock
Account with the number of units credited to his account
determined as provided in Section 6d hereof but based on the last
sale price as of the last day in March 1994 on which a trade of
Commerce Stock is reported. An employee who in 1993 deferred a
potential incentive compensation award with respect to
performance in 1994 and elected either a Treasury Bill Account or
a Treasury Note Account may elect prior to June 30, 1994 to defer
such award for 1994 to the Common Stock Account.
c. Notwithstanding any other provision herein, Commerce may
establish a trust subject to the claims of the general creditors
of Commerce (a "rabbi trust") and
<PAGE>
deposit amounts into the rabbi trust. Although any payments
from the rabbi trust to a participant shall discharge Commerce's
obligation to the extent of payment made, this plan is unfunded
and no participant shall have an interest in any rabbi trust asset.
<PAGE>
EXHIBIT 10(H)
AMENDED AND RESTATED
COMMERCE BANCSHARES, INC.
RESTRICTED STOCK PLAN
This Restricted Stock Plan originally adopted by Commerce
Bancshares, Inc. on the 4th day of October, 1991 is restated with
all amendments as of February 4, 2000.
1. DEFINITIONS.
a. "Company" shall mean Commerce Bancshares, Inc., a
Missouri corporation.
b. "Common Stock" shall mean shares of the Company's
$5 par value common stock.
c. "Subsidiary" shall mean any corporation in which the
Company owns or hereafter owns, directly or indirectly,
stock possessing not less than 50% of the total
combined voting power of all classes of stock in such
corporation.
d. "Restricted Stock Awards" or "Awards" shall mean Awards
of Common Stock granted pursuant to the Plan.
e. "Plan" means the Commerce Bancshares, Inc. Restricted
Stock Plan as described herein.
f. "Committee" means the Compensation and Benefits
Committee of the Board of Directors of the Company,
which shall consist solely of two or more directors who
are "non-employee directors" under Rule 16b-3(b)(3)
promulgated under the Securities Exchange Act of 1934,
as amended, or any successor provision thereto.
g. "Participant" means individual to whom an award is
granted.
h. "Restriction Period" means the duration of time over
which a Restricted Stock Award is to vest as determined
by the Committee.
i. "Qualifying Retirement" shall mean retirement of a
Participant who has (i) attained the age of 60 and (ii) agreed to
the terms of the covenant not to compete set forth in the
Agreement.
j. "Agreement" shall mean the Commerce Bancshares,
Inc. Restricted Stock Award Agreement.
<PAGE>
2. PURPOSE.
The purpose of the Plan is to promote the interests of the
Company and its shareholders by providing a means through the
grant of Awards hereunder for the Company to retain and attract
personnel who contribute to the growth and development of the
Company and its Subsidiaries by providing additional incentive to
such personnel by offering a greater interest in the continued
success of the Company through increased stock ownership.
3. STOCK SUBJECT TO PLAN.
Subject to the provisions of Section 7 hereof, the total
number of shares of Common Stock subject to Restricted Stock
Awards under the Plan shall not exceed 100,000 shares. Shares
subject to Awards under the Plan may be either authorized and
unissued shares or issued shares which are reacquired by the
Company and held in its treasury. Shares which have been awarded
but which have been forfeited pursuant to Section 6(d) hereof
shall be added to the shares otherwise available for Awards under
the Plan.
4. ADMINISTRATION.
The Plan shall be administered by the Committee which shall
have full authority in its sole discretion to determine the
employees of the Company and its Subsidiaries to whom Awards
shall be granted, the number of shares subject to each such
Award, the time or times at which restrictions relative to such
Awards shall otherwise lapse or expire and the time or times when
Awards may be granted. All questions of interpretation and
application of the Plan and of any Awards granted pursuant hereto
shall be determined by the Committee. No member of the Committee
shall be liable for any action, determination or interpretation
under any provision of the Plan or otherwise if done in good
faith and any decision made or action taken by the Committee
arising out of or in connection with the construction,
administration, interpretation and effect of the Plan shall be
within the absolute discretion of the Committee and shall be
conclusive and binding upon all persons.
5. ELIGIBILITY.
The Committee may select from among the officers, executives
and management personnel of the Company or its Subsidiaries those
individuals to whom an Award shall be granted, giving
consideration to the duties of the respective employees, their
contributions to the Company and its Subsidiaries, and such other
factors as the Committee shall deem relevant to accomplish the
purpose of this Plan. No member of the Committee and no member
of the Board of Directors of the Company, unless such director is
also an officer or employee of the Company or any Subsidiary,
shall be eligible to receive any Restricted Stock Award under
this Plan.
<PAGE>
6. GRANT OF RESTRICTED STOCK AWARDS.
Each Restricted Stock Award shall be evidenced by one or
more stock certificates registered in the name of the Participant
and an agreement to be entered into by the Participant and the
Company, the terms and conditions of which may include but are
not limited to the following:
a. Number of Shares: The agreement shall state the total
number of shares of Common Stock to which it pertains.
b. Restriction Period: The Restriction Period for any
Award granted under the Plan shall be determined by the
Committee and shall have a duration of not more than
ten years from the date the Award is granted. An Award
is considered to be vested when the restriction period
lapses. Upon vesting, the certificate representing
such Award shall be delivered to the Participant
together with stock power. Restricted Stock Awards may
have different Restriction Periods and an Award may
provide varying Restriction Periods so as to permit the
vesting of an Award in installments in the discretion
of the Committee.
c. Transfer Restrictions: A Participant shall be required
to deposit the certificate or certificates for all
shares of Common Stock received pursuant to an Award
together with stock powers or other instruments of
transfer appropriately endorsed in blank with the
Secretary of the Company. Such shares shall not be
sold, exchanged, assigned, transferred, discounted,
pledged or otherwise disposed of during the Restriction
Period. The shares shall be released from the
restrictions described herein, in whole or in
installments, at such date or dates as may be
determined by the Committee at the time of the Award,
and a Participant's right to have an Award released
from the transfer restrictions shall accrue only if the
Participant shall have remained in the continuous
employment of the Company since the date of the Award.
d. Termination of Employment: In the event that a Partici
pant's employment terminates by reason of death or the
disability (as determined by the Participant
establishing his eligibility to receive Social Security
disability benefits) of the Participant, the
Restriction Period shall be deemed to lapse as of the
date of death or disability on that part of the Award
which equals the portion of the Restriction Period,
measured in full and partial months, completed before
the date of death or disability, and the shares of
Common Stock constituting such portion of the Award
shall be distributed pursuant to subsection (h) hereof
in the event of the Participant's death or to the
Participant in the event of disability. The Committee
shall in its sole discretion determine any effect of
approved leaves of absence and all other matters
relating to "continuous employment," and any such
determination shall be final and conclusive.
Employment by the Company shall be deemed to include
employment by and to continue during any period in
which a Participant is in the employment of a
Subsidiary.
<PAGE>
In the event that a Participant's termination of
employment prior to the end of the Restriction Period
constitutes a Qualifying Retirement, and if the
Participant complies with the terms of the covenant not
to compete set forth in the Agreement, then, on the
date on which the Restriction Period ends, Participant
shall become fully vested in the part of an Award which
equals the portion of the Restriction Period (measured
in full and partial months) completed before the date
of Qualifying Retirement and shares of Common Stock
constituting such portion of the Award shall be
delivered to Participant as soon as reasonably
practicable thereafter. In such case, the Participant
shall forfeit the remainder of the Award at the time of
the Qualifying Retirement. The sale or transfer
restrictions shall continue to apply until the end of
the Restriction Period and the portion of the Award
that will vest upon the date the Restriction Period
ends shall be forfeited if the Participant violates the
covenant not to compete. If the Participant dies or
becomes disabled (as determined by the Participant
establishing his eligibility to receive Social Security
disability benefits) after the date of his Qualifying
Retirement, but prior to end of the Restriction Period,
and if Participant has not violated the terms of the
covenant not to compete as set forth in the Agreement,
Participant will immediately vest in the portion that
Participant would otherwise receive under this
paragraph and shares of Common Stock constituting such
portion shall be distributed pursuant to subsection (h)
hereof in the event of Participant's death or to
Participant in the event of disability.
e. Assignability: Except as provided in subsection (h) of
this Section, no benefit payable under or interest in
the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or charge and any such attempted
action shall be void and no such benefit or interest
shall be in any manner liable for or subject to debts,
contracts, liabilities, engagements, or torts of any
Participant or beneficiary.
f. Rights as a Stockholder: The Participant shall have
the right to receive cash dividends during the
Restriction Period, to vote Common Stock subject to an
Award and to enjoy all other stockholder rights except
that (i) the Participant shall not be entitled to
delivery of the stock certificate until the Restriction
Period shall have lapsed and (ii) the Participant may
not sell, transfer, pledge, exchange, hypothecate or
otherwise dispose of the Stock during the Restriction
Period.
g. Change in Control: Notwithstanding any other provision
of the Plan to the contrary, in the event of a Change
in Control the restrictions applicable to any
Restricted Stock Award shall lapse, and such Restricted
Stock Award shall become free of all restrictions and
become fully vested and transferable.
For purposes of the Plan, a "Change in Control" shall
mean the happening of any of the following events:
(i) any Person is or becomes the "beneficial owner"
(within the meaning of Rule 13d-3 promulgated
under Section 13 of the Securities Exchange Act of
1934
<PAGE>
(the "Exchange Act"), directly or indirectly,
of securities of the Company (not including in the
securities beneficially owned by such Person any
securities acquired directly from the Company or
its affiliates other than in connection with the
acquisition by the Company or its affiliates of a
business) representing 20% or more of either the
then outstanding shares of common stock of the
Company or the combined voting power of the
Company's then outstanding securities; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors
then serving: individuals who, on August 2, 1996,
constitute the Board and any new director (other
than a director whose initial assumption of office
is in connection with an actual or threatened
election contest, including but not limited to a
consent solicitation, relating to the election of
directors of the Company) whose appointment or
election by the Board or nomination for election
by the Company's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on
August 2, 1996 or whose appointment, election or
nomination for election was previously so
approved; or
(iii) there is consummated a merger or
consolidation of the Company (or any direct or
indirect subsidiary of the Company) with any other
corporation, other than (i) a merger or
consolidation which would result in the voting
securities of the Company outstanding immediately
prior to such merger or consolidation continuing
to represent (either by remaining outstanding or
by being converted into voting securities of the
surviving entity or any parent thereof), in
combination with the ownership of any trustee or
other fiduciary holding securities under an
employee benefit plan of the Company, at least 80%
of the combined voting power of the voting
securities of the Company or such surviving entity
or any parent thereof outstanding immediately
after such merger or consolidation, or (ii) a
merger or consolidation effected to implement a
recapitalization of the Company (or similar
transaction) in which no Person is or becomes the
beneficial owner, directly or indirectly, of
securities of the Company (not including in the
securities beneficially owned by such Person any
securities acquired directly from the Company or
its subsidiaries other than in connection with the
acquisition by the Company or its subsidiaries of
a business) representing 20% or more of either the
then outstanding shares of common stock of the
Company or the combined voting power of the
Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company
or there is consummated a sale or disposition by
the Company of all or substantially all of the
Company's assets, other than a sale or disposition
by the Company of all or substantially all of the
Company's assets to an entity, at least 80% of the
combined voting power of the voting securities of
which are owned by Persons in substantially the
same
<PAGE>
proportions as their ownership of the Company
immediately prior to such sale.
For purposes of the above definition of Change in
Control, "Person" shall have the meaning set forth in
Section 3(a)(9) of the Exchange Act, as modified and
used in Sections 13(d) and 14(d) thereof, except that
such term shall not include (i) the Company or any of
its subsidiaries, (ii) a trustee or other fiduciary
holding securities under an employee benefit plan of
the Company or any of its subsidiaries, (iii) an
underwriter temporarily holding securities pursuant to
an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions as
their ownership of stock of the Company.
h. Designation of Beneficiary: Each Participant who shall
be granted a Restricted Stock Award under the Plan may
designate a beneficiary or beneficiaries and may change
such designation from time to time by filing a written
designation of beneficiary with the Secretary of the
Company, provided that no such designation shall be
effective unless received prior to the death of such
Participant. In the absence of such designation or if
the beneficiary or beneficiaries so designated shall
not survive the Participant, the certificate or
certificates evidencing the Award shall be delivered
over to the estate of the Participant.
i. Other Provisions: The agreements authorized under this
Plan may contain such other provisions as the Committee
shall deem advisable.
7. CHANGES IN CAPITAL STRUCTURE.
The aggregate number of shares of Common Stock on which
Awards may be granted to persons participating under the Plan and
the number of shares thereof covered by each outstanding Award
shall be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a
subdivision or consolidation of shares or other capital
adjustment or the payment of a stock dividend or other increase
or decrease in such shares effected without receipt of
consideration by the Company; provided, however, that any
fractional shares resulting from such adjustment shall be
eliminated and any additional certificates evidencing shares of
Common Stock to be issued pursuant to a stock dividend or other
increase in such shares shall be delivered to and held by the
Secretary of the Company subject to the terms of the agreement
entered into by the Participant and the Company.
8. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT.
Neither the establishment of the Plan nor the granting of
any Award hereunder shall confer upon the recipient thereof any
right to be continued in the employ of the Company or a
Subsidiary, and the Company and its Subsidiaries expressly
reserve the right to discharge any Participant whenever the
interest of the Company or its Subsidiaries may so require
without liability to the Company or its Subsidiaries, the Board
of Directors of the Company or its Subsidiaries, or the
Committee.
<PAGE>
9. TAXES.
a. The person entitled to receive shares of Common Stock
pursuant to the Award will be given notice as far in advance as
practicable to permit cash payment for applicable withholding
taxes to be made to the Company. The Company may defer making
delivery of the certificate representing the shares until
indemnified to its satisfaction with respect to any such
withholding tax.
b. Notwithstanding the foregoing, when an Award shall have
vested and a Participant is required to pay to the Company an
amount required to be withheld under applicable federal, state,
local and payroll taxes, the Participant may satisfy this obliga
tion in whole or in part by electing (the "Election") to have the
Company withhold shares of Common Stock having a value equal to
the amount required to be withheld. The value of the shares to
be withheld shall be based on the last sale price of the Common
Stock as reported by the Automated Quotation System of the
National Association of Securities Dealers on the date that the
amount of tax to be withheld shall be determined ("Tax Date").
Each Election must be made on or prior to the Tax Date. The
Committee may disapprove any Election or may suspend or terminate
the right to make Elections. An Election is irrevocable.
10. AMENDMENT OF THE PLAN.
The Board of Directors of the Company may, by resolution,
amend or revise the Plan except that, without shareholder
approval, no such amendment shall increase the maximum aggregate
number of shares which may be granted under the Plan except as
provided in Section 7 or changes the class of eligible employees,
and no such amendment may without the Participant's consent
amend, suspend or terminate rights or obligations pursuant to
outstanding Restricted Stock Awards.
11. EFFECTIVE DATE.
The Plan shall be effective as of October 4, 1991.
<PAGE>
EXHIBIT 10(J)
TRUST AGREEMENT
FOR THE
COMMERCE BANCSHARES, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1 ESTABLISHMENT OF TRUST 1
SECTION 2 PAYMENTS TO PLAN PARTICIPANTS AND THEIR
BENEFICIARIES 2
SECTION 3 TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO
TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT 2
SECTION 4 PAYMENTS TO COMPANY 3
SECTION 5 INVESTMENT AUTHORITY 3
SECTION 6 DISPOSITION OF INCOME 4
SECTION 7 ACCOUNTING BY TRUSTEE 4
SECTION 9 COMPENSATION AND EXPENSES OF TRUSTEE 5
SECTION 10 RESIGNATION AND REMOVAL OF TRUSTEE 5
SECTION 11 APPOINTMENT OF SUCCESSOR 6
SECTION 12 AMENDMENT OR TERMINATION 6
SECTION 13 MISCELLANEOUS 6
SECTION 14 EFFECTIVE DATE 6
<PAGE>
TRUST AGREEMENT
FOR THE COMMERCE BANCSHARES, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
THIS AGREEMENT made this 31st day of December 1999, by and
between Commerce Bancshares, Inc.(the "Company") and Commerce
Bank, N.A. (the "Trustee").
WHEREAS, Company has amended the Commerce Bancshares, Inc.
Executive Incentive Compensation Plan ("Plan") to allow a rabbi
trust; and
WHEREAS, Company has incurred or expects to incur liability
under the terms of such Plan with respect to the individuals
participating in such Plan; and
WHEREAS, Company wishes to establish a trust (hereinafter
called "Trust") and to contribute to the Trust assets that shall
be held therein, subject to the claims of Company's creditors in
the event of Company's Insolvency, as herein defined, until paid
to Plan participants and their beneficiaries in such manner and
at such times as specified in the Plan; and
WHEREAS, it is the intention of the parties that this Trust
shall constitute an unfunded arrangement and shall not affect the
status of the Plan as an unfunded plan maintained for the purpose
of providing deferred compensation for a select group of
management or highly compensated employees for purposes of Title
I of the Employee Retirement Income Security Act of 1974; and
WHEREAS, it is the intention of Company to make
contributions to the Trust to provide itself with a source of
funds to assist it in the meeting of its liabilities under the
Plan;
NOW, THEREFORE, the parties do hereby establish the Trust
and agree that the Trust shall be comprised, held and disposed of
as follows:
Section 1. ESTABLISHMENT OF TRUST
(a) Company hereby deposits with Trustee in trust $1.00,
which shall become the principal of the Trust to be held,
administered and disposed of by Trustee as provided in this Trust
Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which
Company is the grantor, within the meaning of subpart E, part I,
subchapter J, chapter 1, subtitle A of the Internal Revenue Code
of 1986, as amended, and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon
shall be held separate and apart from other funds of Company and
shall be used exclusively for the uses and purposes of Plan
participants and general creditors as herein set forth. Plan
participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets
<PAGE>
of the Trust. Any rights created under the Plan and this Trust
Agreement shall be mere unsecured contractual rights of Plan
participants and their beneficiaries against Company. Any assets
held by the Trust will be subject to the claims of Company's
general creditors under federal and state law in the event of
Insolvency, as defined in Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or
from time to time, make additional deposits of cash or other
property in Trust with Trustee to augment the principal to be
held, administered and disposed of by Trustee as provided in this
trust agreement. Neither Trustee nor any plan participant or
beneficiary shall have any right to compel such additional
deposits.
Section 2. PAYMENTS TO PLAN PARTICIPANTS
AND THEIR BENEFICIARIES
(a) Company shall deliver to Trustee a schedule (the
"Payment Schedule") that indicates the amounts payable in respect
of each Plan participant (and his or her beneficiaries), that
provides a formula or other instructions acceptable to Trustee
for determining the amounts so payable, the form in which such
amount is to be paid (as provided for or available under the
Plan), and the time of commencement for payment of such amounts.
Except as otherwise provided herein, Trustee shall make payments
to the Plan participants and their beneficiaries in accordance
with such Payment Schedule. The Trustee shall make provision for
the reporting and withholding of any federal, state or local
taxes that may be required to be withheld with respect to the
payment of benefits pursuant to the terms of the Plan and shall
pay amounts withheld to the appropriate taxing authorities or
determine that such amounts have been reported, withheld and paid
by Company.
(b) The entitlement of a Plan participant or his or her
beneficiaries to benefits under the Plan shall be determined by
Company or such party as it shall designate under the Plan, and
any claim for such benefits shall be considered and reviewed
under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the
terms of the Plan. Company shall notify Trustee of its decision
to make payment of benefits directly prior to the time amounts
are payable to participants or their beneficiaries. In addition,
if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the
terms of the Plan, Company shall make the balance of each such
payment as it falls due. Trustee shall notify Company where
principal and earnings are not sufficient.
Section 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST
BENEFICIARY WHEN COMPANY IS INSOLVENT
(a) Trustee shall cease payment of benefits to Plan
participants and their beneficiaries if the Company is Insolvent.
Company shall be considered "Insolvent" for purposes of this
Trust Agreement if (i) Company is unable to pay its debts as they
become due, or (ii) Company is subject to a pending proceeding as
a debtor under the United States Bankruptcy Code.
2
<PAGE>
(b) At all times during the continuance of this Trust, as
provided in Section 1(d) hereof, the principal and income of the
Trust shall be subject to claims of general creditors of Company
under federal and state law as set forth below.
(1) The Board of Directors and the Chief Executive Officer
of Company shall have the duty to inform Trustee in
writing of Company's Insolvency. If a person claiming
to be a creditor of Company alleges in writing to
Trustee that Company has become Insolvent, Trustee
shall determine whether Company is Insolvent and,
pending such determination, Trustee shall discontinue
payment of benefits to Plan participants or their
beneficiaries.
(2) Unless Trustee has actual knowledge of Company's
Insolvency, or has received notice from Company or a
person claiming to be a creditor alleging that Company
is Insolvent, Trustee shall have no duty to inquire
whether Company is Insolvent. Trustee may in all events
rely on such evidence concerning Company's solvency as
may be furnished to Trustee and that provides Trustee
with a reasonable basis for making a determination
concerning Company's solvency.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Plan
participants or their beneficiaries and shall hold the
assets of the Trust for the benefit of Company's
general creditors. Nothing in this Trust Agreement
shall in any way diminish any rights of Plan
participants or their beneficiaries to pursue their
rights as general creditors of Company with respect to
benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with
Section 2 of this Trust Agreement only after Trustee
has determined that Company is not Insolvent (or is no
longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to
Section 3(b) hereof and subsequently resumes such payments, the
first payment following such discontinuance shall include the
aggregate amount of all payments due to Plan participants or
their beneficiaries under the terms of the Plan for the period of
such discontinuance, less the aggregate amount of any payments
made to Plan participants or their beneficiaries by Company in
lieu of the payments provided for hereunder during any such
period of discontinuance.
Section 4. PAYMENTS TO COMPANY
Except as provided in Section 3 hereof, after the Trust has
become irrevocable, Company shall have no right or power to
direct Trustee to return to Company or to divert to others any of
the Trust assets before all payment of benefits have been made to
Plan participants and their beneficiaries pursuant to the terms
of the Plan.
Section 5. INVESTMENT AUTHORITY
(a) Subject to any Company direction as set forth below,
Trustee may invest in securities (including stock or rights to
acquire stock) or obligations issued by Company;
3
<PAGE>
regulated, mutual or collective investment funds created, maintained,
or advised by Company; or any bank accounts of Company. All rights
associated with assets of the Trust shall be exercised by Trustee
or the person designated by Trustee, and shall in no event be
exercisable by or rest with Plan Participants.
(b) Company shall have the right at anytime, and from time
to time in its sole discretion, to direct the Trustee with
respect to the investment of Trust assets, and may substitute
assets of equal fair market value for any asset held by the
Trust. The right of substitution is exercisable by Company in a
non-fiduciary capacity without the approval or consent of any
person in a fiduciary capacity.
Section 6. DISPOSITION OF INCOME
During the term of this trust, all income received by the Trust,
net of expenses and taxes, shall be accumulated and reinvested.
Section 7. ACCOUNTING BY TRUSTEE
Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions
required to be made, including such specific records as shall be
agreed upon in writing between Company and Trustee. Within 90
days following the close of each calendar year and within 90 days
after the removal or resignation of Trustee, Trustee shall
deliver to Company a written account of its administration of the
Trust during such year or during the period from the close of the
last preceding year to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all
securities and investments purchased and sold with the cost or
net proceeds of such purchases or sales (accrued interest paid or
receivable being shown separately), and showing all cash,
securities and other property held in the Trust at the end of
such year or as of the date of such removal or resignation, as
the case may be.
Section 8. RESPONSIBILITY OF TRUSTEE
(a) Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent
person acting in like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and
with like aims, provided, however, that Trustee shall incur no
liability to any person for any action taken pursuant to a
direction, request or approval given by Company which is
contemplated by, and in conformity with, the terms of the Plan or
this Trust and is given in writing by Company. In the event of a
dispute between Company and a party, Trustee may apply to a court
of competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising
in connection with this Trust, Company agrees to indemnify
Trustee against Trustee's costs, expenses and liabilities
(including, without limitation, attorneys' fees and expenses)
relating thereto and to be primarily liable for such payments.
If Company does not pay such costs, expenses and liabilities in a
reasonably timely manner, Trustee may obtain payment from the
Trust.
4
<PAGE>
(c) Trustee may consult with legal counsel (who may also be
counsel for Company generally) with respect to any of its duties
or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries,
investment advisors, financial consultants or other professionals
to assist it in performing any of its duties or obligations
hereunder.
(e) Trustee shall have, without exclusion, all powers
conferred on Trustees by applicable law, unless expressly
provided otherwise herein, provided, however, that if an
insurance policy is held as an asset of the Trust, Trustee shall
have no power to name a beneficiary of the policy other than the
Trust, to assign the policy (as distinct from conversion of the
policy to a different form) other than to a successor Trustee, or
to loan to any person the proceeds of any borrowing against such
policy.
(f) However, notwithstanding the provisions of section 8(e)
above, Trustee may loan to Company the proceeds of any borrowing
against an insurance policy held as an asset of the Trust.
(g) Notwithstanding any powers granted to Trustee pursuant
to this Trust Agreement or to applicable law, Trustee shall not
have any power that could give this Trust the objective of
carrying on a business and dividing the gains therefrom, within
the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal
Revenue Code.
Section 9. COMPENSATION AND EXPENSES OF TRUSTEE
Company shall pay all administrative and Trustee's fees and
expenses. If not so paid, the fees and expenses shall be paid
from the Trust.
Section 10. RESIGNATION AND REMOVAL OF TRUSTEE
(a) Trustee may resign at any time by written notice to
Company, which shall be effective 90 days after receipt of such
notice unless Company and Trustee agree otherwise.
(b) Trustee may be removed by Company on 30 days notice or
upon shorter notice accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment
of a successor Trustee, all assets shall subsequently be
transferred to the successor Trustee. The transfer shall be
completed within 90 days after receipt of notice of resignation,
removal or transfer, unless Company extends the time limit.
(d) If Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective
date of resignation or removal under paragraph(s) (a) or (b) of
this section. If no such appointment has been made, Trustee may
apply to a court of competent jurisdiction for appointment of a
successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative
expenses of the Trust.
5
<PAGE>
Section 11. APPOINTMENT OF SUCCESSOR
(a) If Trustee resigns or is removed in accordance with
section 10(a) or (b) hereof, Company may appoint any third party,
such as a bank Trust department or other party that may be
granted corporate Trustee powers under state law, as a successor
to replace Trustee upon resignation or removal. The appointment
shall be effective when accepted in writing by the new Trustee,
who shall have all of the rights and powers of the former
Trustee, including ownership rights in the Trust assets. The
former Trustee shall execute any instrument necessary or
reasonably requested by Company or the successor Trustee to
evidence the transfer.
(b) The successor trustee need not examine the records and
acts of any prior trustee and may retain or dispose of existing
Trust assets, subject to Sections 7 and 8 hereof. The successor
trustee shall not be responsible for and Company shall indemnify
and defend the successor trustee from any claim or liability
resulting from any action or inaction of any prior trustee or
from any other past event, or any condition existing at the time
it becomes successor trustee.
Section 12. AMENDMENT OR TERMINATION
(a) This Trust Agreement may be amended by a written
instrument executed by Trustee and Company. Notwithstanding the
foregoing, no such amendment shall conflict with the terms of the
Plan or shall make the Trust revocable after it has become
irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which
Plan participants and their beneficiaries are no longer entitled
to benefits pursuant to the terms of the Plan. Upon termination
of the Trust any assets remaining in the Trust shall be returned
to Company.
Section 13. MISCELLANEOUS
(a) Any provision of this Trust Agreement prohibited by law
shall be ineffective to the extent of any such prohibition,
without invalidating the remaining provisions hereof.
(b) Benefits payable to Plan participants and their
beneficiaries under this Trust Agreement may not be anticipated,
assigned (either at law or in equity), alienated, pledged,
encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed
in accordance with the laws of the State of Missouri.
Section 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be December
31, 1999.
COMMERCE BANCSHARES, INC.
By: /s/ Robert C. Matthews, Jr.
-------------------------------
COMMERCE BANK, N.A.
By: /s/ Michael Marlow
-------------------------------
6
<PAGE>
Exhibit 13
WORKING TOGETHER By any measurement, Commerce Bancshares continues to grow
stronger and better able to serve the needs of our diverse customers. This
success comes from our ability to transform financial transactions into
customer relationships. To accomplish this value-added transformation,
we have trained and empowered our people to manage these relationships for
the long run, using the effective tools and support we provide to make it
easier for customers to get information and do business with us. We prove to
our customers every day that we understand their needs, and respond with the
financial products and services designed to meet their personal, family and
business objectives and challenges. In addition, our employees continue to
increase their involvement and profile in community events and programs.
Throughout our entire organization, and in all of our communities, we are
committed to maintaining and extending our mission which defines how we work:
Be accessible. Offer solutions. Build relationships.
CONTENTS ANNUAL MEETING
Chairman's Letter Page 2 The annual meeting of Shareholders will
be held Wednesday, April 19, 2000 at
9:30 a.m. in The Plaza, Ritz-Carlton,
100 Carondelet Plaza, Clayton, Missouri
63105.
Management's Discussion TRANSFER AGENT, REGISTRAR
and Analysis of Consolidated AND DIVIDEND DISBURSING AGENT
Financial Condition and First Chicago Trust Company of New York,
Results of Operations Page 21 a division of EquiServe, P.O. Box 2500,
Jersey City, New Jersey 07303-2500,
Financial Statements of 800-317-4445.
Commerce Bancshares, Inc.
and Subsidiaries Page 40 NOTICE
Shareholders, analysts or potential
Notes to Financial investors desiring additional
Statements Page 44 information may make their requests in
writing to Mr. Jeffery D. Aberdeen,
Independent Auditors' Controller, at the address of the
Report Page 58 Company.
Directors and Officers Page 61
DIVIDEND REINVESTMENT PROGRAM
Commerce Brokerage Services, Inc.* offers Equity Dividend Reinvestment for
securities held within a Commerce brokerage account. Our brokerage customers
may elect this option for more than 6,200 individual securities, including the
common stock of Commerce Bancshares, Inc. For information, please contact any
of our Regional Investment Specialists or one of our main brokerage offices:
St. Louis 314-746-8777 Kansas City 816-234-2416
800-356-1606 800-772-SAVE
*An affiliate of Commerce Bancshares, Inc. and a registered broker-dealer.
<PAGE>
FINANCIAL HIGHLIGHTS 1
(This page not included in the EDGARized exhibit.)
<PAGE>
CHAIRMAN'S LETTER 2 -18
(This section not included in the EDGARized exhibit.)
<PAGE>
COMMERCE BANCSHARES, INC. 1999 FINANCIAL REVIEW
Common Stock Data
20
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
21
Consolidated Financial Statements:
Balance Sheets
40
Statements of Income
41
Statements of Cash Flows
42
Statements of Stockholders' Equity
43
Notes to Financial Statements
44
Independent Auditors' Report
58
Statement of Management's Responsibility
59
Summary of Quarterly Statements of Income
60
19
<PAGE>
Common Stock Data
Commerce Bancshares, Inc. (Parent)
The following table sets forth the high and low prices of actual transactions
for the Company's common stock (CBSH) and cash dividends paid for the periods
indicated (restated for the 5% stock dividend distributed in 1999).
<TABLE>
<CAPTION>
Cash
1999 High Low Dividends
- -------------------------------------------
<S> <C> <C> <C>
First Quarter $41.55 $35.71 $.143
Second Quarter 40.83 34.64 .143
Third Quarter 39.40 32.20 .143
Fourth Quarter 39.58 32.38 .143
1998
- -------------------------------------------
First Quarter $44.60 $37.49 $.132
Second Quarter 45.92 40.82 .132
Third Quarter 46.83 34.92 .132
Fourth Quarter 44.33 30.84 .132
1997
- -------------------------------------------
First Quarter $29.08 $25.56 $.118
Second Quarter 27.79 24.19 .118
Third Quarter 34.48 25.92 .118
Fourth Quarter 42.48 32.47 .118
</TABLE>
Commerce Bancshares, Inc. common shares are publicly traded on The Nasdaq Stock
Market (NASDAQ). NASDAQ is a highly-regulated electronic securities market
comprised of competing Market Makers whose trading is supported by a
communications network linking them to quotation dissemination, trade reporting,
and order execution systems. The Company had 5,730 shareholders of record as of
December 31, 1999.
20
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations
Commerce Bancshares, Inc. and Subsidiaries
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes. The historical trends
reflected in the financial information presented below are not necessarily
reflective of anticipated future results.
<TABLE>
<CAPTION>
KEY RATIOS
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Based on average balance sheets):
Return on total assets 1.50% 1.43% 1.37% 1.28% 1.21%
Return on stockholders' equity 15.40 14.58 14.08 13.40 12.72
Efficiency ratio 58.53 58.30 58.24 58.76 60.33
Loans to deposits 77.94 75.24 70.93 67.07 68.28
Net yield on interest earning assets (tax equivalent basis) 4.61 4.56 4.61 4.40 4.50
Non-interest bearing deposits to total deposits 14.82 18.50 21.35 19.65 19.81
Equity to total assets 9.72 9.83 9.74 9.53 9.48
Cash dividend payout ratio 22.05 22.81 23.24 23.28 24.07
================================================================================================================================
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 466,001 $ 427,745 $ 397,774 $ 365,743 $ 355,745
Provision for loan losses 35,335 36,874 31,354 24,522 14,629
Non-interest income 236,209 214,037 180,092 159,162 133,150
Non-interest expense 419,015 379,344 344,450 317,954 305,484
Net income 166,213 150,091 132,702 119,512 107,640
Net income per share - basic* 2.62 2.34 2.06 1.81 1.57
Net income per share - diluted* 2.59 2.30 2.03 1.80 1.56
Total assets 11,400,936 11,402,023 10,306,941 9,698,186 9,573,951
Loans 7,576,892 7,046,852 6,224,381 5,472,342 5,317,813
Investment securities 2,508,415 3,031,716 2,664,931 2,721,515 2,594,753
Deposits 9,164,123 9,530,197 8,700,578 8,166,429 8,193,092
Long-term debt 25,735 27,130 7,102 14,120 14,562
Stockholders' equity 1,079,832 1,080,785 980,784 924,271 883,783
Cash dividends per common share* .571 .526 .472 .417 .376
================================================================================================================================
</TABLE>
*Restated for the 5% stock dividend distributed in 1999.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------------
$ Change % Change
(Dollars in thousands) '99-'98 '98-'97 '99-'98 '98-'97
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $38,256 $29,971 8.9% 7.5%
Provision for loan losses (1,539) 5,520 (4.2) 17.6
Non-interest income (excluding securities gains) 28,174 30,304 13.6 17.1
Net gains on securities transactions (6,002) 3,641 (87.1) 111.9
Non-interest expense 39,671 34,894 10.5 10.1
Income taxes 6,174 6,113 8.2 8.8
- --------------------------------------------------------------------------------------------------------------------------------
Net income $16,122 $17,389 10.7% 13.1%
================================================================================================================================
</TABLE>
Consolidated 1999 net income was $166.2 million, which was a $16.1 million, or
10.7%, increase over the previous year. Diluted earnings per share increased
12.6% to $2.59 compared to $2.30 in 1998. The return on average assets was 1.50%
compared to 1.43% in 1998, and the return on equity increased to 15.40% from
14.58% in 1998. Net interest income increased $38.3 million, or 8.9%, due in
part to average loan growth of 9.4% and lower deposit costs. Loan growth was
funded partly by average deposit growth of 5.6%. The provision for loan losses
decreased $1.5 million from 1998, but exceeded current year net charge-offs by
20%. Non-interest income grew $22.2 million, mainly from growth in trust,
deposit account and credit card fees. Non-interest expense increased $39.7
million largely because of higher salaries and data processing costs. Non-
performing assets decreased to their lowest year end level since 1995, at .31%
of total assets.
Net income for 1998 was $150.1 million, a 13.1% increase over 1997 income.
Diluted earnings per share increased 13.3% to $2.30 in 1998 compared to $2.03 in
1997. The increase in net income of $17.4 million was mainly due to growth in
net interest income of $30.0 million coupled with strong growth in non-interest
income of $33.9 million, but
21
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations (cont.)
offset by higher non-interest expense which was up 10.1% over the previous year.
Also, the provision for loan losses increased over the previous year by $5.5
million. The growth in the net interest margin mainly resulted from loan growth.
Non-interest income grew mainly in the areas of trust, deposit account and
credit card fees, while non-interest expense increased mainly in the areas of
salaries and benefits and data processing costs.
During 1998, the Company acquired four banks located in Kansas, with combined
assets of approximately $430 million and 15 new locations. Stock valued at $84.0
million was issued and these acquisitions were recorded under the pooling of
interests method of accounting. Prior year financial results were not restated
for these poolings because those restated amounts did not differ materially from
the Company's historical operating results.
In 1997, two Kansas banks, with assets of $295 million, were acquired at a cost
of $53.2 million in treasury stock and $4.3 million in cash. The effects of
these acquisitions were not material to the financial statements of the Company.
The Company distributed a 5% stock dividend for the sixth consecutive year on
December 17, 1999. All per share and average share data in this report has been
restated to reflect the stock dividend.
Net Interest Income. Net interest income is the difference between total
interest income and total interest expense, resulting from the Company's
lending, investing, borrowing, and deposit gathering activities. The following
table summarizes the changes in net interest income on a fully tax equivalent
basis, by major category of interest earning assets and interest bearing
liabilities, identifying changes related to volumes and rates. Changes not
solely due to volume or rate changes are allocated to rate. Management believes
this allocation method, applied on a consistent basis, provides meaningful
comparisons between the respective periods.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Change due to Change due to
Average Average Average Average
(In thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income, fully taxable equivalent basis.
Loans $49,349 $(28,790) $ 20,559 $ 63,290 $(14,607) $ 48,683
Investment securities:
U.S. government & federal agency securities (9,542) (1,942) (11,484) (11,309) (1,237) (12,546)
State & municipal securities (584) (52) (636) (52) 186 134)
CMO's and asset-backed securities 17,766 (1,516) 16,250 5,806 (281) 5,525
Other securities (1,309) 159 (1,150) 1,492 265 1,757
Federal funds sold and securities purchased
under agreements to resell (299) (1,185) (1,484) 2,558 (424) 2,134
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 55,381 (33,326) 22,055 61,785 (16,098) 45,687
- ------------------------------------------------------------------------------------------------------------------------
Interest expense.
Interest bearing deposits:
Savings 441 (2,027) (1,586) 409 (350) 59
Interest bearing demand 13,132 (21,891) (8,759) 18,434 (10,380) 8,054
Time open & C.D.'s of less than $100,000 (1,428) (7,296) (8,724) 2,129 (346) 1,783
Time open & C.D.'s of $100,000 and over 2,134 (1,275) 859 2,385 48 2,433
Federal funds purchased and securities
sold under agreements to repurchase 4,350 (2,350) 2,000 4,032 (407) 3,625
Long-term debt and other borrowings 522 (132) 390 102 (459) (357)
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 19,151 (34,971) (15,820) 27,491 (11,894) 15,597
- ------------------------------------------------------------------------------------------------------------------------
Net interest income, fully taxable equivalent basis $36,230 $ 1,645 $ 37,875 $ 34,294 $ (4,204) $ 30,090
========================================================================================================================
</TABLE>
Net interest income was $466.0 million in 1999, $427.7 million in 1998 and
$397.8 million in 1997. Compared to the prior year, net interest income
increased $38.3 million, or 8.9%, in 1999 and increased $30.0 million, or 7.5%,
in 1998. The increase in 1999 resulted from strong loan growth, which improved
the mix of higher earning assets, coupled with a decline in rates paid on
interest bearing liabilities of 57 basis points. These increases to net interest
income were partially offset by an increase in average interest bearing
liabilities and a decline in loan yields. The net interest income increase in
1998 resulted largely from similar trends. The net yield on earning assets was
4.61% in 1999, 4.56% in
22
<PAGE>
1998 and 4.61% in 1997. Average interest earning assets increased 7.5% in 1999
over 1998, compared to 8.7% in 1998 over 1997. Average interest bearing
liabilities increased 11.0% in 1999 compared to 11.3% in 1998.
Tax equivalent interest income was $754.7 million in 1999, $732.7 million in
1998 and $687.0 million in 1997; and represents an increase of $22.1 million, or
3.0%, in 1999 and an increase of $45.7 million, or 6.7%, in 1998. Contributing
to the 1999 increase was growth of $620.0 million, or 9.4%, in average loan
balances. In addition, average investments in CMO's and asset-backed securities
increased $281.6 million, reflecting a shift from lower-yielding U.S. government
securities. Counteracting these effects was a decline of 44 basis points in
average rates earned on loans, which occurred mainly in the business and
personal banking categories. The increase in interest income in 1998 over 1997
was due to average loan growth of $781.6 million, partially offset by a decline
in investment security balances and lower average rates earned on loans. Loans
represented 71% of average interest earning assets in 1999, investment
securities represented 26%, and short-term federal funds sold and securities
purchased under agreements to resell represented 3%.
Total interest expense was $284.6 million in 1999, $300.7 million in 1998 and
$285.1 million in 1997. Interest expense decreased $16.1 million, or 5.4%, in
1999 compared to 1998. Interest expense on deposits decreased $18.2 million from
1998, mainly because of declines in rates paid on interest bearing demand
deposits (60 basis points) and C.D.'s under $100,000 (37 basis points). These
effects were partly offset by a $275.7 million increase in the Company's Premium
Money Market deposit accounts. In 1998 compared to 1997, interest on deposits
increased $12.3 million due to growth of $601.7 million in average interest
bearing demand deposits (mainly Premium Money Market accounts), which was
partially offset by a decrease in rates paid on these deposits of 28 basis
points. Premium and other money market deposits represented 60% of total average
interest bearing deposits in 1999.
Provision and Allowance for Loan Losses. Management 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 charged
against current income are based on such factors as past loan loss experience,
current loan portfolio mix, evaluation of actual and potential losses in the
loan portfolio, prevailing regional and national economic conditions that might
have an impact on the portfolio, regular reviews and examinations of the loan
portfolio conducted by internal loan reviewers supervised by Commerce
Bancshares, Inc. (the Parent), 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 may be taken to reflect
management's desire to maintain a satisfactory allowance to protect the Company
from those losses which occur in the normal course of business.
As with any financial institution, weak economic conditions, higher inflation,
interest rates, or unemployment may lead to increased losses in the loan
portfolio. Conversely, improvements in economic conditions tend to reduce loan
losses. Management has 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 and market, 3) documented policies concerning loan administration
(loan file documentation, disclosures, approvals, etc.) and 4) a loan review
staff employed by the Parent which travels to subsidiary bank markets 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 maintain the allowance at a
satisfactory level on an individual bank basis.
The allowance for loan losses at December 31, 1999, was 1.62% of loans
outstanding compared to 1.66% at year end 1998. The allowance for loan losses at
year end covered non-performing assets (defined as non-accrual loans, loans 90
days delinquent and still accruing interest, and foreclosed real estate) by
345%. Net charge-offs totaled $29.4 million in 1999 compared to $31.5 million in
1998. The ratio of net charge-offs to average loans outstanding in 1999 was .41%
compared to .48% in 1998 and 1997. The provision for loan losses was $35.3
million, exceeding 1999 net charge-offs by $6.0 million, compared to a provision
of $36.9 million in 1998 and $31.4 million in 1997.
A subsidiary bank is an issuer of Visa and MasterCard credit cards. Credit card
loans outstanding at year end 1999 amounted
23
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations (cont.)
to $521.8 million, or 6.9% of total loans. The percentage of consumer loans
outstanding which are generated through revolving credit balances and cash
advances is significantly higher for Commerce than it is for a banking group
that does not issue credit cards. Because credit card loans traditionally have a
higher ratio of net charge-offs to loans outstanding when compared with other
portfolio segments, management evaluates the credit card allowance as a separate
component to ensure its adequacy. Net charge-offs decreased to 3.28% of average
credit card loans in 1999 compared to 3.87% in 1998. This decline in net
charge-offs was consistent with industry trends when compared with 1998.
Declining trends for credit card delinquency for the Company and the industry
were also observed during 1999. The Company's net charge-off experience has been
significantly better than industry averages.
Management is not aware of any other significant risks in the current loan
portfolio mix that would result from concentrations of loans within any
particular market, industry, or portfolio segment. 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. The allowance at year end 1999 represented a 4.19 times multiple of net
loan losses for the year just ended.
Based on current economic conditions, management considers the December 31, 1999
allowance adequate to cover the possible risk of loss in the loan portfolio at
the present time. 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.
The schedule which follows summarizes the relationship between loan balances and
activity in the allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loans outstanding at end of period (A) $7,576,892 $7,046,852 $6,224,381 $5,472,342 $5,317,813
==================================================================================================================================
Average loans outstanding (A) $7,216,867 $6,596,831 $5,815,192 $5,321,584 $5,161,552
==================================================================================================================================
Allowance for loan losses:
Balance at beginning of period $ 117,092 $ 105,918 $ 98,223 $ 98,537 $ 87,179
- -----------------------------------------------------------------------------------------------------------------------------------
Additions to allowance through
charges to expense 35,335 36,874 31,354 24,522 14,629
- -----------------------------------------------------------------------------------------------------------------------------------
Allowances of acquired banks -- 5,808 4,275 -- 12,932
- -----------------------------------------------------------------------------------------------------------------------------------
Loans charged off:
Business 7,444 7,827 5,734 4,912 3,422
Construction 544 211 300 -- --
Business real estate 624 212 113 205 391
Personal real estate 933 279 401 341 208
Personal banking 10,544 10,372 8,472 9,327 7,413
Credit card 20,449 23,465 23,163 17,129 11,838
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans charged off 40,538 42,366 38,183 31,914 23,272
- -----------------------------------------------------------------------------------------------------------------------------------
Recovery of loans previously charged off:
Business 2,540 2,578 2,992 1,739 1,632
Construction 110 402 340 -- --
Business real estate 337 651 500 416 542
Personal real estate 251 83 70 123 99
Personal banking 3,898 3,533 3,420 2,628 2,633
Credit card 4,017 3,611 2,927 2,172 2,163
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 11,153 10,858 10,249 7,078 7,069
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 29,385 31,508 27,934 24,836 16,203
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 123,042 $ 117,092 $ 105,918 $ 98,223 $ 98,537
===================================================================================================================================
Ratio of net charge-offs to average
loans outstanding .41% .48% .48% .47% .31%
Ratio of allowance to loans at end of period 1.62% 1.66% 1.70% 1.79% 1.85%
Ratio of provision to average loans outstanding .49% .56% .54% .46% .28%
===================================================================================================================================
</TABLE>
(A) Net of unearned income; before deducting allowance for loan losses
24
<PAGE>
Non-Interest Income.
<TABLE>
<CAPTION>
% Change
(Dollars in thousands) 1999 1998 1997 '99-'98 '98-'97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $ 55,773 $ 50,460 $ 41,224 10.5% 22.4%
Deposit account charges and other fees 68,538 63,145 57,223 8.5 10.3
Credit card transaction fees 44,466 36,786 30,703 20.9 19.8
Trading account profits and commissions 10,310 8,733 7,420 18.1 17.7
Brokerage, mutual funds and annuities fees 8,992 7,239 6,278 24.2 15.3
Net gains on securities transactions 892 6,894 3,253 (87.1) 111.9
Other 47,238 40,780 33,991 15.8 20.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income $236,209 $214,037 $180,092 10.4% 18.8%
===================================================================================================================================
Total non-interest income excluding net
gains on securities transactions $235,317 $207,143 $176,839 13.6% 17.1%
===================================================================================================================================
Non-interest income as a % of operating income
(net interest income plus non-interest income) 33.6% 33.4% 31.2%
Operating income per full-time equivalent employee $ 133.0 $ 123.3 $ 115.9
===================================================================================================================================
</TABLE>
Non-interest income grew to $236.2 million in 1999, an increase of 10.4% over
1998. Credit card fee income increased $7.7 million, or 20.9%, over the previous
year because of growth in transaction volumes in both merchant and cardholder
businesses, transaction pricing changes, and strong increases in fees charged on
debit card transactions. Trust fees grew $5.3 million, or 10.5%, because of
account growth and increases in the value of assets managed, especially in the
personal trust area. Deposit account fees increased $5.4 million over last year
mainly due to growth in overdraft fee income. Fees collected from the sales of
mutual funds and annuities increased $1.5 million, or 28.4%, over 1998. Other
non-interest income increased mainly due to gains on investment sales realized
by a venture capital partnership in which the Company participates. This
category also increased due to gains on sales of two banking branches and growth
in cash management fee income. A loss on the sale of a housing development
partnership partially reduced these increases. Compared to 1998, lower gains
were recorded on sales of mortgage loans, which were partly offset by higher
gains on student loan sales. Net gains on securities transactions were $6.0
million lower in 1999 than in 1998.
Venture capital activity produced investment gains of $3.9 million in 1999
compared to $4.6 million in 1998 and $1.8 million in 1997. Sales of other equity
securites by the Parent resulted in a net loss of $53 thousand in 1999 compared
to net gains of $860 thousand in 1998 and $1.8 million in 1997. Banking
subsidiaries contributed net gains of $945 thousand and $1.6 million in 1999 and
1998, respectively, and net losses of $222 thousand in 1997, on sales of
portfolio investment securities.
Non-interest income totaled $214.0 million in 1998, and represented an increase
of $33.9 million, or 18.8%, over the previous year. The increase in non-interest
income was the result of strong growth in trust, deposit account and credit card
fees, all of which achieved double digit growth. The growth in trust fees was
the result of increases in fees from both the personal trust and employee
benefit areas. Deposit account fees increased mainly as a result of new account
growth coupled with improved procedures over fee collection. The growth in
credit card fees was a result of increased transaction volumes in both the
cardholder and merchant areas, in addition to growth in the Company's debit card
product. Other non-interest income included increases in fees for non-customer
ATM usage, official check float income and customer check income, which
increased over $4 million in 1998 compared to 1997. Also included were gains on
sales of student loans, which amounted to $4.6 million in 1998 compared to $3.0
million in 1997.
25
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations (cont.)
<TABLE>
<CAPTION>
Non-Interest Expense.
% Change
(Dollars in thousands) 1999 1998 1997 '99-'98 '98-'97
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries $185,866 $172,835 $156,497 7.5% 10.4%
Employee benefits 29,351 25,255 22,598 16.2 11.8
Net occupancy 27,950 23,805 21,570 17.4 10.4
Equipment 20,612 18,148 16,492 13.6 10.0
Supplies and communication 33,800 29,867 25,838 13.2 15.6
Data processing 35,515 30,654 24,628 15.9 24.5
Marketing 12,915 12,206 12,757 5.8 (4.3)
Goodwill and core deposit premium 8,528 9,193 9,778 (7.2) (6.0)
Other 64,478 57,381 54,292 12.4 5.7
- ----------------------------------------------------------------------------------------------------------------
Total non-interest expense $419,015 $379,344 $344,450 10.5% 10.1%
================================================================================================================
Efficiency ratio (non-interest expense as a % of operating
income, excluding net gains on securities transactions
and goodwill/core deposit premium amortization) 58.5% 58.3% 58.2%
Salaries and benefits as a % of total non-interest expense 51.4% 52.2% 52.0%
Number of full-time equivalent employees 5,278 5,206 4,985
================================================================================================================
</TABLE>
Non-interest expense amounted to $419.0 million in 1999, which was a $39.7
million, or 10.5%, increase over 1998. Non-interest expense increased in 1999
mainly in the areas of salaries and employee benefits, data processing,
occupancy, supplies, and several other expense areas. Additional employees,
merit increases, and contract programming contributed to a salary increase of
7.5% over the prior year. Increased costs for medical insurance, employment
taxes, pension and 401K expense contributed to higher employee benefits.
Occupancy expense increased $4.1 million compared to 1998 because of additional
office space rented, lower outside tenant rent income, and higher building
repairs and maintenance costs. Supplies and communication expense grew $3.9
million over 1998, and included increases in telephone costs and general office
supplies related to a new data processing contract. Data processing costs
increased 15.9% over the previous year, mainly due to higher charges by
information service providers, partly based on growth in the Company's
customers, products and services. The increase in other expense occurred partly
because of higher fees paid for professional and consulting services incurred
during the year, some of which were Year 2000 related.
Non-interest expense of $379.3 million in 1998 increased $34.9 million, or
10.1%, over the previous year. The increase was mainly the result of higher
salaries and benefits coupled with higher costs for data processing, office
supplies and occupancy. Salaries expense increased $16.3 million, or 10.4%,
mainly due to additional staffing and incentive pay for new product sales.
Increased health care and employment taxes contributed to the $2.7 million
increase in benefits costs. Data processing costs increased $6.0 million due to
higher charges by information service providers. Occupancy costs grew partly due
to the outsourcing of certain property management functions which were
previously salaried, while supplies and communication costs increased mainly in
the areas of telephone and general office supplies. Other expense included
higher losses in the check collection and clearing areas.
Income Taxes. Income tax expense was $81.6 million, $75.5 million and $69.4
million in 1999, 1998 and 1997, respectively. The effective tax rate on income
from operations was 32.9%, 33.5% and 34.3% in 1999, 1998 and 1997, respectively.
The effective tax rates were lower than the federal statutory rate of 35% mainly
due to various tax initiatives undertaken by the Company and tax exempt interest
on state and municipal obligations. These factors were partly offset by state
and local income taxes and non-deductible goodwill amortization.
26
<PAGE>
FINANCIAL CONDITION
Loan Portfolio Analysis. A breakdown of average balances invested in each
category of loans appears on page 36. 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) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Business $2,564,476 $2,464,168 $2,056,862 $1,700,678 $1,716,080
Real estate - construction 354,351 325,360 233,209 182,474 168,031
Real estate - business 1,247,956 1,000,380 926,107 758,650 695,558
Real estate - personal 1,377,903 1,315,041 1,148,236 1,010,572 983,249
Personal banking 1,510,380 1,409,022 1,311,081 1,256,684 1,258,809
Credit card 521,826 532,881 548,886 563,284 496,086
- -------------------------------------------------------------------------------------------------
Total loans, net of unearned income $7,576,892 $7,046,852 $6,224,381 $5,472,342 $5,317,813
=================================================================================================
</TABLE>
The contractual maturities of loan categories at December 31, 1999, and a
breakdown of those loans between predetermined rate and floating rate loans is
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 $1,604,433 $ 758,216 $ 201,827 $2,564,476
Real estate - construction 173,343 163,808 17,200 354,351
Real estate - business 374,941 738,604 134,411 1,247,956
Real estate - personal 103,537 264,644 1,009,722 1,377,903
- -------------------------------------------------------------------------------------------------
Total $2,256,254 $1,925,272 $1,363,160 5,544,686
=================================================================================================
Personal banking (1) 1,510,380
Credit card (2) 521,826
- -------------------------------------------------------------------------------------------------
Total loans, net of unearned income $7,576,892
=================================================================================================
Loans with predetermined rate $1,020,218 $1,197,733 $ 411,715 $2,629,666
Loans with floating rate 1,236,036 727,539 951,445 2,915,020
- -------------------------------------------------------------------------------------------------
Total $2,256,254 $1,925,272 $1,363,160 $5,544,686
=================================================================================================
(1) Personal banking loans with floating rate totaled $568,675,000.
(2) Credit card loans with floating rate totaled $460,163,000.
</TABLE>
Total loans grew $530.0 million, or 7.5%, during 1999 compared to growth of
$822.5 million, or 13.2%, during 1998. The growth in 1999 came principally from
business real estate, personal banking, and business loans, which grew 24.7%,
7.2% and 4.1%, respectively. This growth in 1999 included the effects of a
strong economy throughout many of the markets the Company serves. The 1998
growth included loans of approximately $238 million which were acquired in 1998
bank acquisitions. Additionally, other banking consolidations in a number of the
markets continue to provide the Company an opportunity to establish new customer
relationships.
The Company currently generates approximately 29% of its loan portfolio in the
St. Louis regional market and 29% in the Kansas City regional market. The
portfolio is diversified from a business and retail standpoint, with 55% in
loans to business and 45% in loans to individual consumers. 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
sustain lower levels of problem loans and loan losses.
Loans by type as a percentage of total loans follows:
<TABLE>
<CAPTION>
- ----------------------------------------------
December 31
1999 1998
- ----------------------------------------------
<S> <C> <C>
Business 33.8% 35.0%
Real estate - construction 4.7 4.6
Real estate - business 16.5 14.2
Real estate - personal 18.2 18.6
Personal banking 19.9 20.0
Credit card 6.9 7.6
- ----------------------------------------------
Total loans 100.0% 100.0%
==============================================
</TABLE>
Business Loans. Total business loans amounted to $2.56 billion at December 31,
1999, compared to $2.46 billion at December 31, 1998, an increase of $100.3
million, or 4.1%. The growth came predominately from growth in the Kansas City
and St. Louis markets. This group of loans is comprised primarily of loans to
customers in the regional trade area of
27
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations (cont.)
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 of $4.9 million in 1999 compared to $5.2 million in 1998.
Non-accrual business loans decreased to $6.4 million (.2% of business loans) at
December 31, 1999, compared to $6.6 million (.3% of business loans) at December
31, 1998. 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 2000 is dependent upon 1) the strength of the economy, 2) the actions of the
Federal Reserve with regard to targets for economic growth, interest rates, and
inflationary tendencies, and 3) the competitive environment as previously
described.
Real Estate-Construction. The portfolio of loans in this category amounted to
$354.4 million at December 31, 1999, compared to $325.4 million at year end
1998, reflecting growth of $29.0 million, or 8.9%. Non-accrual loans in this
category decreased to $2.5 million at year end 1999 compared to $7.2 million at
year end 1998. The 1998 non-accrual balance included one $4.5 million loan. 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 remains low. Residential construction and
land development loans are primarily located in the Kansas City and St. Louis
metropolitan areas. The Company experienced $434 thousand net charge-offs in
1999 and $191 thousand net recoveries in 1998. Management is not aware of any
significant adverse exposure in this category.
Real Estate-Business. Total business real estate loans were $1.25 billion at
December 31, 1999, reflecting growth of $247.6 million, or 24.7%. Again, the
growth came from the Company's major markets in Missouri, Kansas and Illinois.
At December 31, 1999, non-accrual balances amounted to $3.6 million, or .3% of
the loans in this category, compared to $2.8 million at year end 1998. The
Company experienced net charge-offs of $287 thousand in 1999 and net recoveries
of $439 thousand in 1998. 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. 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 2000,
provided that the economy performs at or near the Federal Reserve's target level
for growth.
Real Estate-Personal. The mortgage loans in this category are extended,
predominantly, for owner-occupied residential properties. At December 31, 1999,
there were $1.38 billion in loans outstanding compared to $1.32 billion at
December 31, 1998, reflecting growth of $62.9 million, or 4.8%. The Company
typically does not experience significant problem credits in this category.
There were net charge-offs of $682 thousand in 1999 compared to $196 thousand in
1998. The increase was attributable to charge-offs recorded on one pool of
participated home improvement loans. The non-accrual balances of loans in this
category decreased to $373 thousand at December 31, 1999, compared to $947
thousand at year end 1998. 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 strong.
Personal Banking. Total personal banking loans were $1.51 billion at December
31, 1999, and reflected growth of $101.4 million, or 7.2% over the previous
year. Net charge-offs were $6.6 million in 1999 compared to $6.8 million in
1998. The majority of personal banking loan losses were related to indirect
paper purchases generally secured by automobiles. The personal banking 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 $201.9 million of home equity loan balances at December 31, 1999, with
an additional $332.5 million in unused lines of credit that can be drawn at the
discretion of the borrower. These home equity lines are
28
<PAGE>
secured by first or second mortgages on residential property of the borrower.
The underwriting terms for the home equity line product permit borrowing
availability, in the aggregate, generally 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 38% of the loans in the personal banking category are
extended on a floating interest rate basis.
Credit Card. Total credit card loans amounted to $521.8 million at December 31,
1999, compared to $532.9 million at December 31, 1998, which was a decrease of
2.1%. The credit card portfolio is concentrated within regional markets served
by the Company. Approximately 57% of the households in Missouri that own a
Commerce credit card product also maintain a deposit relationship with a
subsidiary bank. The Company has a variety of credit card products which offer
ATM access to either advances against the credit card account or transactions
against related deposit accounts. Approximately 88% of the outstanding credit
card loans have a floating interest rate. Net charge-offs amounted to $16.4
million in 1999, which was a $3.4 million decrease from 1998. The decline in
losses was consistent with lower delinquency and bankruptcy levels, following
industry trends. The net charge-off ratios of 3.3% in 1999 and 3.9% in 1998
remain well below national averages. The Company refrains 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 are not
currently 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) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual:
Business $ 6,362 $ 6,590 $15,125 $ 6,978 $ 9,936
Real estate - construction 2,541 7,168 1,944 552 304
Real estate - business 3,644 2,787 4,314 4,373 3,364
Real estate - personal 373 947 1,888 1,911 2,444
Personal banking 59 339 111 131 186
- --------------------------------------------------------------------------------------------------------------------------------
Total non-accrual 12,979 17,831 23,382 13,945 16,234
- --------------------------------------------------------------------------------------------------------------------------------
Past due 90 days and still accruing interest:
Business 4,428 7,721 6,419 5,647 3,802
Real estate - construction 1 500 580 2,138 363
Real estate - business 1,202 1,797 2,857 1,021 1,025
Real estate - personal 3,771 3,426 3,637 3,923 2,597
Personal banking 5,603 4,327 3,116 5,414 3,855
Credit card 6,312 6,758 7,774 6,663 4,048
- --------------------------------------------------------------------------------------------------------------------------------
Total past due 90 days and still accruing interest 21,317 24,529 24,383 24,806 15,690
- --------------------------------------------------------------------------------------------------------------------------------
Total impaired loans 34,296 42,360 47,765 38,751 31,924
- --------------------------------------------------------------------------------------------------------------------------------
Real estate acquired in foreclosure 1,347 2,521 994 1,136 1,955
- --------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $35,643 $44,881 $48,759 $39,887 $33,879
================================================================================================================================
Non-performing assets as a percentage of total loans .47% .64% .78% .73% .64%
================================================================================================================================
Non-performing assets as a percentage of total assets .31% .39% .47% .41% .35%
================================================================================================================================
</TABLE>
29
<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 1999 is presented below:
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------
<S> <C>
Gross amount of interest that would have been recorded
at original rate $2,012
Interest that was reflected in income 362
- ---------------------------------------------------------------------------
Interest income not recognized $1,650
===========================================================================
</TABLE>
Total non-accrual loans at year end 1999 decreased $4.9 million from 1998
levels, mainly due to a decrease of $4.6 million in non-accrual construction
loans. Loans past due 90 days and still accruing interest decreased $3.2 million
at year end 1999 compared to 1998 mainly due to decreases in business loans,
partially offset by higher personal loan delinquencies. Real estate which was
acquired in foreclosure decreased $1.2 million from year end 1998.
At December 31, 1999, the Company's mortgage banking subsidiary held residential
real estate loans of approximately $7.8 million at lower of cost or market,
which are to be resold to secondary markets within approximately three months.
The Company engages in various venture capital activities through direct venture
investments and a venture capital subsidiary. At December 31, 1999, these debt
and equity investments had a carrying value of $9.6 million and funded 9
companies or partnerships. Many of these investments are not readily marketable.
In addition, the Company's venture capital subsidiary is qualified as a Missouri
Certified Capital Company. This certification expands its investment
opportunities to Missouri businesses with less than $4 million in revenues.
Investments held under this certification were $1.6 million at year end 1999.
The Company organized a $30 million limited partnership venture fund in 1993
with 49% outside participation, which is managed by a subsidiary. At December
31, 1999, the Company's investment in this partnership was $8.5 million.
Management believes the potential for long-term gains in these types of
investment activity outweighs the potential risk of losses.
There were no loan concentrations of multiple borrowers in similar activities at
December 31, 1999 which exceeded 5% of total loans. The Company's aggregate
legal lending limit to any single or related borrowing entities is in excess of
$100 million. The largest exposures generally do not exceed $50 million.
Investment Securities Analysis. During 1999, total investment securities
decreased $435.7 million to $2.51 billion (excluding unrealized gains/losses)
compared to $2.95 billion at the previous year end. The decrease was used to
fund an increase in loans. The average tax equivalent yield on total investment
securities was 6.14% in 1999 and 6.25% in 1998.
At December 31, 1999, available for sale securities totaled $2.45 billion, which
included a net unrealized loss in fair value of $1.8 million. The amount of the
related after tax unrealized loss reported in stockholders' equity was $1.2
million. Most of the unrealized loss in fair value occurred in CMO's and asset-
backed securities, as a result of higher interest rates. This loss was largely
offset by unrealized gains on marketable equity securities held by the Parent.
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.
Investment securities at year end for the past two years are shown as follows:
<TABLE>
<CAPTION>
December 31
- -----------------------------------------------------------------------------
(In thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Amortized Cost
U.S. government and
federal agency obligations $1,144,694 $1,408,279
State and municipal obligations 79,362 98,426
CMO's and asset-backed securities 1,129,341 962,267
Other debt securities 82,634 419,259
Equity securities 50,560 43,499
Trading securities 23,639 14,210
- -----------------------------------------------------------------------------
Total $2,510,230 $2,945,940
=============================================================================
Fair Value
U.S. government and
federal agency obligations $1,136,332 $1,448,547
State and municipal obligations 80,263 101,785
CMO's and asset-backed securities 1,106,975 974,377
Other debt securities 82,262 419,413
Equity securities 78,944 73,384
Trading securities 23,639 14,210
- -----------------------------------------------------------------------------
Total $2,508,415 $3,031,716
=============================================================================
</TABLE>
A summary of maturities by category of investment securities and the weighted
average yield for each range of maturities as of December 31, 1999, is presented
in the Investment Securities note to the financial statements. U.S. government
and federal agency securities comprise 45% of the investment portfolio at
December 31, 1999, with a weighted average yield of 6.08% and an estimated
average maturity of 1.6 years; CMO's and asset-backed securities comprise 44%
with a weighted average yield of 6.24% and an estimated average maturity of 4.1
years.
Other debt and equity securities above include Federal Reserve Bank stock and
other bonds, notes, corporate stock
30
<PAGE>
(held primarily by non-banking entities) and debentures. The tax equivalent
yield on these securities in 1999 computed on average balances invested was
5.82%.
Deposits and Borrowings. Deposits are the primary funding source for the
Company's banks, and are acquired from a broad base of local markets, including
both individual and corporate customers. Total deposits were $9.16 billion a
year end 1999 compared to $9.53 billion at year end 1998, reflecting a decline
of $366.1 million, or 3.8%. Deposits by type as a percentage of total deposits
follows:
<TABLE>
<CAPTION>
December 31
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing demand 17.3% 17.4%
Savings and interest bearing demand 56.2 55.6
Time open and C.D.'s of less than $100,000 23.1 23.8
Time open and C.D.'s of $100,000 and over 3.4 3.2
- ---------------------------------------------------------------------------
Total deposits 100.0% 100.0%
===========================================================================
</TABLE>
Core deposits (defined as all non-interest and interest bearing deposits,
excluding short-term C.D.'s of $100,000 and over) supported 90% of average
earning assets in 1999 and 92% in 1998. Average balances by major deposit
category for the last six years appear on pages 36 and 37. The maturity schedule
of time deposits of $100,000 and over outstanding at December 31, 1999 appears
in the financial statements note on Fair Value of Financial Instruments.
Short-term borrowings consist mainly of federal funds purchased and securities
sold under agreements to repurchase. Balances outstanding at year end 1999 were
$1.04 billion, a $424.6 million increase over $617.8 million outstanding at year
end 1998. The Company's long-term debt amounted to $25.7 million at year end
1999, of which $10.5 million was borrowed from the Federal Home Loan Bank and
$12.2 million was borrowed from insurance companies to fund a venture capital
initiative.
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 $88.2 million at cost and $113.3
million at fair value at December 31, 1999 compared to $92.4 million at cost and
$119.0 million at fair value at December 31, 1998. Total liabilities of the
Parent at December 31, 1999 were unchanged from $14.2 million at December 31,
1998. These liabilities consisted mainly of accrued income taxes, salaries, and
employee benefits. The Parent had no third-party short-term borrowings or long-
term debt during 1999. Primary sources of funds for the Parent are dividends and
management fees from its subsidiary banks, which were $103.9 million and $22.7
million, respectively, in 1999. The subsidiary banks may distribute dividends
without prior regulatory approval that do not exceed the sum of net income for
the current year and retained net income for the preceding two years, 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. No commercial paper was outstanding
during the past three years. 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 an affiliate bank, 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 include available for sale
securities, which consist mainly of investments in U.S. government, federal
agency, and mortgage-backed securities. The available for sale bank portfolio
totaled $2.32 billion at December 31, 1999, including an unrealized net loss of
$29.7 million. Investment securities maturing in 2000 and 2001 total
approximately $478 million and $418 million, respectively.
The Company continues to maintain a sound equity to assets ratio of 9.72%, based
on 1999 average balances. At December 31, 1999, the Company and each of its
banking subsidiaries exceeded the minimum risk based capital requirements.
Consolidated Tier 1 and Total capital ratios were 11.68% and 12.99%,
respectively, and the leverage ratio was 9.17%. The minimum ratios for well-
capitalized banks are 6.00% for Tier 1 capital, 10.00% for Total capital and
5.00% for the leverage ratio.
The cash flows from the operating, investing and financing activities of the
Company resulted in a net decrease in cash and due from banks of $53.5 million
in 1999. The net cash required by investing activities was $153.8 million, which
resulted from a $552.3 million net increase in loans, largely funded by a $438.7
million net decrease in investment securities. The liquidity needs arising from
investing activities and the decrease in the deposit base were partly satisfied
by a $424.6 million increase in short-term borrowings of federal funds purchased
and securities sold under agreements to repurchase. In addition, the cash
generated by
31
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations (cont.)
operating activities provides a high degree of liquidity. 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 utilize partial funding through one or
more of these options.
Cash and stock requirements for acquisitions, funding of various employee
benefit programs and dividends were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(In millions) 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Use of cash
Cash used in acquisitions $ - $ .9 $ 4.3
Purchases of treasury stock 81.6 85.1 94.1
Exercise of stock options, sales to
affiliate non-employee directors
and restricted stock awards, net (3.5) (3.7) (2.6)
Cash dividends 36.1 33.7 30.4
Use of stock
Acquisition-related issuance of
treasury stock - 66.9 53.2
Acquisition-related issuance of new stock - 17.1 -
===========================================================================
</TABLE>
In February 1999, the Board of Directors authorized the Company to purchase
additional shares of common stock, bringing the total purchase authorization to
3,000,000 shares. The Company has routinely used these reacquired shares to fund
stock dividends and employee benefit programs. At December 31, 1999, the Company
had acquired approximately 1,854,000 shares under the 1999 authorization.
Various commitments and contingent liabilities arise in the normal course of
business which are not required to be recorded on the balance sheet. The most
significant of these are loan commitments totaling $3.04 billion (excluding
approximately $2.44 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 $246.5 million at December 31, 1999. 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 interest rate swap agreements. 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.
INTEREST RATE SENSITIVITY
The Asset/Liability Management Committee measures and manages the Company's
interest rate risk sensitivity on a monthly basis to maintain stability in
earnings throughout various rate environments. The Committee evaluates the
Company's risk position to determine whether the level of exposure is
significant enough to hedge a potential decline in earnings or whether the
Company can safely increase risk to enhance returns. Three main analytical tools
provide management insight into the Company's exposure to changing rates;
repricing or GAP reports, twelve month net interest income simulations, and
market value analyses. These measurement tools indicate that the Company is
currently well within acceptable risk guidelines as set by management and that
interest rate risk is low.
The repricing schedule which follows illustrates the repricing mismatch within
the Company's interest sensitive assets and liabilities. This schedule provides
management with a snapshot of the maturity or repricing timing of asset and
liability principal cash flows. The interest sensitivity gap portrays the timing
of net repricing risk within the Company's balance sheet. A negative sensitivity
gap would indicate that more liabilities will be repricing within that
particular time frame such that, if rates rise, liabilities will be repricing up
faster than assets. A positive gap would indicate the opposite. GAP reports can
be somewhat misleading in that they typically capture only the repricing timing
within the balance sheet, while they are less accurate in capturing other
significant risks such as basis risk and embedded options risk. Basis risk
involves the potential for the spread relationship between rates to change under
different rate environments, while embedded options risk addresses the potential
for the alteration of the level and/or timing of cash flows given changes in
rates. Quantifying these additional risks within a repricing context makes the
gap position in the first year more positive as interest bearing demand deposits
are spread out further to reflect lagged and partial repricing.
The Company's main interest rate measurement tool is income simulation, which
forecasts net interest income over the next twelve months under different rate
scenarios in order to quantify potential changes in short term accounting
income. Management has set policy limits specifying acceptable levels of risk
given certain rate movements. These rate movements, against which compliance is
measured, include a "most likely" rate forecast provided by an outside vendor,
as well as six "shock" scenarios, which are intended to capture interest rate
risk under extremely adverse conditions by immediately shifting rates up and
down. Simulation results indicate that the Company is well within these limits.
Income simulations are more informative than GAP reports because
32
<PAGE>
they are able to capture more of the dynamics within the balance sheet, such as
basis risk and embedded options risk. One such scenario uses rates and volumes
at December 31, 1999 for the twelve month projection. When this position is
subjected to a graduated shift in interest rates of 100 basis points rising and
100 basis points falling, the annual impact to the Company's net interest income
is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Increase % of Net
(Dollars in millions) (Decrease) Interest Income
- ------------------------------------------------------------------
<S> <C> <C>
100 basis points rising $ 1.8 .4%
100 basis points falling (2.8) (.6)
==================================================================
</TABLE>
Simulation results also illustrate that the Company's net interest income over
the next twelve months is susceptible to large increases in rates. When rates
rise, the Company's income suffers to the extent that borrowers refinance less,
leaving the Company with lower yielding loans. Large increases in rates also
accelerate the upward repricing of administered rate non-maturity deposit
accounts. Generally, the repricing of these accounts lags and does not reprice
in full with market rates; the Company recognizes that there is a limit to the
extent that these prices can be held down.
While net interest income simulations capture rate-related risks to short term
earnings, they do not capture risks within the current balance sheet beyond
twelve months. The Company uses market value analyses to help identify longer
term risks which may reside on the current balance sheet. This is considered a
secondary risk measurement tool by management. The market value of equity is
indicative of the present value of all future income streams generated by the
current balance sheet. The Company measures the market value of equity as the
net present value of all asset and liability cash flows discounted at forward
rates suggested by the current Treasury curve plus appropriate credit and rate
risk spreads. It is the change in the market value of equity under different
rate environments which gives insight into the magnitude of risk to future
earnings due to rate changes. Management has set policy limits concerning
potential declines in the market value of equity within which it feels
comfortable that risk is relatively low. Current results show that the Company
is well within these limits. Market value analyses are also particularly
important in that they help management understand the price sensitivity
characteristics of non-marketable bank products under different rate
environments.
Overall, although the Company does have some exposure to changing rates, the
interest rate risk management reports have identified the main sources of
exposure and indicate that overall interest rate risk is low. The Company's
balance sheet is well-diversified, exposure to volatile purchased funding is
low, credit quality is excellent, the use of off-balance-sheet derivative
products is insignificant, embedded options risk is low, and the Company's
strong deposit base acts as a natural hedge in periods of significant rate
volatility. Management believes that the Company is appropriately positioned to
protect and enhance earnings throughout various rate environments.
33
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations (cont.)
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, 1999
1-3 4-6 7-12 1-5 Over 5
(In thousands) Months Months Months Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net of unearned income $3,077,574 $ 273,942 $1,066,494 $2,736,556 $ 422,326 $ 7,576,892
Investment securities 254,162 157,524 257,764 1,411,703 427,262 2,508,415
Federal funds sold and securities
purchased under agreements to resell 238,602 - - - - 238,602
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 3,570,338 431,466 1,324,258 4,148,259 849,588 10,323,909
- ----------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Time open & C.D.'s of less than $100,000 508,741 509,177 586,310 500,425 9,790 2,114,443
Time open & C.D.'s of $100,000 & over 72,529 70,495 120,518 46,586 713 310,841
Savings and interest bearing demand (A) 2,063,123 1,078,605 247,081 1,352,250 413,447 5,154,506
Federal funds purchased and securities
sold under agreements to repurchase 1,042,429 - - - - 1,042,429
Long-term debt and other borrowings 296 205 376 3,434 21,424 25,735
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 3,687,118 1,658,482 954,285 1,902,695 445,374 8,647,954
- ----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (116,780) $(1,227,016) $ 369,973 $2,245,564 $ 404,214 $ 1,675,955
============================================================================================================================
Cumulative interest sensitivity gap $ (116,780) $(1,343,796) $ (973,823) $1,271,741 $1,675,955
============================================================================================================================
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities .97 .75 .85 1.16 1.19
============================================================================================================================
</TABLE>
(A) The Company recognizes the fact that, although savings and other interest
bearing demand deposits can potentially reprice or be withdrawn at any time,
slotting the entirety of these balances in the 1 to 3 month time frame
dramatically overstates their sensitivity. Historical trends and analyses have
shown that the majority of these deposits neither reprice fully with market
rates nor will customers significantly alter balances based on changes in market
rates. These balances have been spread over longer time frames to reflect these
findings.
OPERATING SEGMENTS
The Company segregates financial information for use in assessing its
performance and allocating resources among three operating segments. The results
are determined based on the Company's management accounting process, which
assigns balance sheet and income statement items to each responsible segment.
These segments are defined by customer base and product type. The management
process measures the performance of the operating segments based on the
management structure of the Company and is not necessarily comparable with
similar information for any other financial institution. Each segment is managed
by executives who, in conjunction with the Chief Executive Officer, make
strategic business decisions regarding that segment. The three reportable
operating segments are Consumer, Commercial and Money Management.
Consumer. The Consumer segment includes the retail branch network, consumer
finance, bankcard, student loans and discount brokerage services. Pre-tax income
for 1999 was $102.1 million, an increase of $697 thousand over 1998. Direct net
interest income increased $26.7 million, which was partially offset by a
decrease of $16.1 million in funding credits allocated to the segment. Increases
in data processing expense and assigned management costs were partly offset by
increases in bankcard fee income and deposit fee income. Average loans directly
related to the segment increased 8.5% over 1998, mainly in personal real estate
and personal banking loans, which increased $77.8 million and $100.5 million,
respectively. Average deposits increased 6.3% over 1998 balances. The
acquisition of three banks in 1998 contributed to the above increases.
Commercial. The Commercial segment provides corporate lending, leasing,
international services, and corporate cash management services. Pre-tax income
increased $4.2 million, or 4.3%, over 1998. Direct net interest income increased
$12.2 million, or 5.0%, over 1998. This increase was partly offset by increases
in salaries and employee benefits and data processing expense. Compared to 1998,
total average loans increased 10.4%, mainly due to a $152.1 million increase in
business loans. Average deposits increased 5.1% over 1998 balances.
Money Management. The Money Management segment consists of the Investment
Management Group (IMG) and the Capital Markets Group (CMG). IMG provides trust
and estate planning services, and advisory and discretionary investment
management services. CMG sells fixed-income securities for personal and
commercial customers. Pre-tax income was $25.9 million in 1999
34
<PAGE>
compared to $24.8 million in 1998, an increase of $1.1 million. Non-interest
income increased due to growth in trust and bond fee income. These increases
were partly offset by increases in salaries and employee benefits and data
processing expense. Average deposits increased $3.3 million, or 13.1%, over
1998, mainly in non-interest bearing demand deposits.
YEAR 2000 READINESS DISCLOSURE
Over the past several years, the Company expended substantial time and effort to
ensure that the computer date transition into year 2000 would be successful. To
date, the Company has not experienced any significant Year 2000 problems, nor
does it expect to encounter significant future problems related to Year 2000
issues. The Company continues to monitor its position and is prepared to
implement contingency plans to address Year 2000 problems should they occur. The
total cost of the Company's Year 2000 project, including internal staffing
costs, amounted to $7.1 million from its inception through December 31, 1999.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", will be adopted by the Company
on January 1, 2001. SFAS No. 137, an amendment of SFAS No. 133, deferred its
effective date for one year. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. All derivatives
must be recognized on the balance sheet at fair value, with special accounting
requirements for designated hedging activities. Certain changes in fair value
must be adjusted through income. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
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. Virtually all assets and liabilities of financial institutions
are monetary in nature and represent obligations to pay or receive fixed and
determinable amounts not affected by future changes in prices. Changes in
interest rates have a significant effect on the earnings of financial
institutions. 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 in
recent years.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected.
35
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations [cont.]
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS - AVERAGE RATES AND YIELDS
Years Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
(Dollars in thousands) Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets.
Loans: (A)
Business (B) $ 2,424,416 $177,298 7.31% $ 2,211,936 $171,290 7.74% $1,835,546 $146,304 7.97%
Construction and
development 352,767 27,612 7.83 257,920 21,123 8.19 247,530 21,458 8.67
Real estate - business 1,075,335 85,661 7.97 955,057 79,850 8.36 824,356 70,539 8.56
Real estate - personal 1,337,578 97,051 7.26 1,256,118 94,399 7.52 1,068,668 84,255 7.88
Personal banking 1,525,662 123,076 8.07 1,402,676 119,894 8.55 1,308,293 112,572 8.60
Credit card 501,109 65,193 13.01 513,124 68,776 13.40 530,799 71,521 13.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 7,216,867 575,891 7.98 6,596,831 555,332 8.42 5,815,192 506,649 8.71
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal
agency 1,263,601 75,865 6.00 1,418,501 87,349 6.16 1,599,452 99,895 6.25
State & municipal
obligations (B) 91,390 7,273 7.96 98,664 7,909 8.02 99,328 7,775 7.83
CMO's and asset-backed
securities 1,162,167 71,805 6.18 880,617 55,555 6.31 789,039 50,030 6.34
Trading account securities 13,163 845 6.42 11,302 554 4.90 8,358 444 5.32
Other marketable
securities (B) 116,431 6,993 6.01 142,125 8,325 5.86 111,140 6,624 5.96
Other non-marketable
securities 33,616 1,736 5.16 31,795 1,845 5.80 43,529 1,899 4.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,680,368 164,517 6.14 2,583,004 161,537 6.25 2,650,846 166,667 6.29
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased
under agreements to resell 287,305 14,297 4.98 292,863 15,781 5.39 246,361 13,647 5.54
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning
assets 10,184,540 754,705 7.41 9,472,698 732,650 7.73 8,712,399 686,963 7.88
- ------------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan
losses (119,567) (110,904) (102,145)
Unrealized gain (loss)
on investment securities 41,438 65,420 25,903
Cash and due from banks 590,367 608,981 635,444
Land, buildings and
equipment-net 228,236 218,201 213,087
Other assets 179,450 215,227 187,513
- ---------------------------------------- ------------ -----------
Total assets $11,104,464 $10,469,623 $9,672,201
======================================== ============ ===========
Liabilities and Equity.
Interest bearing deposits:
Savings $ 336,845 5,783 1.72 $ 317,833 7,369 2.32 $ 301,010 7,310 2.43
Interest bearing demand 5,073,867 126,014 2.48 4,377,794 134,773 3.08 3,776,101 126,719 3.36
Time open & C.D.'s of
less than $100,000 2,182,804 109,857 5.03 2,197,549 118,581 5.40 2,160,892 116,798 5.41
Time open & C.D.'s of
$100,000 and over 293,926 14,572 4.96 252,628 13,713 5.43 210,283 11,280 5.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 7,887,442 256,226 3.25 7,145,804 274,436 3.84 6,448,286 262,107 4.06
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased
and securities sold under
agreements to repurchase 621,160 27,827 4.48 533,862 25,827 4.84 450,439 22,202 4.93
Long-term debt and other
borrowings (C) 26,627 884 3.32 12,953 494 3.82 11,565 851 7.37
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowings 647,787 28,711 4.43 546,815 26,321 4.81 462,004 23,053 4.99
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 8,535,229 284,937 3.34% 7,692,619 300,757 3.91% 6,910,290 285,160 4.13%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits 1,372,100 1,622,429 1,750,171
Other liabilities 117,933 125,362 69,539
Stockholders' equity 1,079,202 1,029,213 942,201
- ---------------------------------------- ----------- ----------
Total liabilities and
equity $11,104,464 $10,469,623 $9,672,201
====================================================================================================================================
Net interest margin (T/E) $469,768 $431,893 $401,803
====================================================================================================================================
Net yield on interest
earning assets 4.61% 4.56% 4.61%
====================================================================================================================================
Percentage increase in net
interest margin (T/E) over
the prior year 8.77% 7.49% 8.45%
====================================================================================================================================
</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.
(B) Interest income and yields are presented on a fully-taxable equivalent basis
using the Federal statutory income tax rate. Business loan interest income
includes tax free loan income of $3,579,000 in 1999, $3,499,000 in 1998,
$3,144,000 in 1997, $3,934,000 in 1996 and $4,259,000 in 1995, including tax
equivalent adjustments of $1,153,000 in 1999, $1,122,000 in 1998, $1,045,000 in
1997, $1,323,000 in 1996 and $1,438,000 in 1995. State and municipal interest
income includes tax equivalent adjustments of $2,375,000 in 1999, $2,641,000 in
1998, $2,583,000 in 1997, $2,956,000 in 1996 and $3,075,000 in 1995. Interest
income of other marketable securities includes tax equivalent adjustments of
$551,000 in 1999, $416,000 in 1998, $459,000 in 1997, $585,000 in 1996 and
$513,000 in 1995.
36
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Average
Average Average Average Balance
Interest Rates Interest Rates Interest Rates Five Year
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Compound
Balance Expense Paid Balance Expense Paid Balance Expense Paid Growth
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets.
Loans: (A)
Business (B) $1,670,328 $131,652 7.88% $1,703,933 $141,872 8.33% $1,392,650 $ 99,111 7.12% 11. 73%
Construction and
development 168,220 14,670 8.72 130,346 12,227 9.38 115,628 9,372 8.11 24.99
Real estate - business 719,377 61,845 8.60 693,539 61,958 8.93 538,793 43,256 8.03 14.82
Real estate - personal 990,069 77,568 7.83 954,956 74,571 7.81 759,338 53,473 7.04 11.99
Personal banking 1,262,166 109,065 8.64 1,258,729 110,202 8.76 1,013,462 80,513 7.94 8.53
Credit card 511,424 67,493 13.20 420,049 58,368 13.90 360,194 47,082 13.07 6.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 5,321,584 462,293 8.69 5,161,552 459,198 8.90 4,180,065 332,807 7.96 11.54
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government & federal
agency 1,763,146 108,451 6.15 1,705,562 105,216 6.17 2,076,150 121,339 5.84 (9.45)
State & municipal
obligations (B) 115,021 9,060 7.88 123,152 9,577 7.78 46,602 3,549 7.62 14.42
CMO's and asset-backed
securities 653,301 40,913 6.26 719,747 44,928 6.24 586,935 35,132 5.99 14.64
Trading account securities 6,500 345 5.30 3,975 240 6.03 4,168 159 3.82 25.86
Other marketable
securities (B) 51,320 3,529 6.88 66,368 4,110 6.19 69,870 4,191 6.00 10.75
Other non-marketable
securities 36,820 2,542 6.90 26,407 685 2.59 20,424 631 3.09 10.48
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,626,108 164,840 6.28 2,645,211 164,756 6.23 2,804,149 165,001 5.88 (.90)
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased
under agreements to resell 467,103 25,334 5.42 205,547 12,075 5.87 132,672 5,457 4.11 16.71
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning
assets 8,414,795 652,467 7.75 8,012,310 636,029 7.94 7,116,886 503,265 7.07 7.43
- ------------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan
losses (98,312) (95,884) (86,664) 6.65
Unrealized gain (loss)
on investment securities 21,675 (13,983) (15,424) NA
Cash and due from banks 623,523 607,656 555,171 1.24
Land, buildings and
equipment-net 208,967 205,702 194,159 3.29
Other assets 194,278 209,168 149,568 3.71
- --------------------------- ---------- ---------- ---------- -------
Total assets $9,364,926 $8,924,969 $7,913,696 7.01%
=========================== ========== ========== ========== =======
Liabilities and Equity.
Interest bearing deposits:
Savings $ 299,018 7,165 2.40 $ 312,049 7,954 2.55 $ 273,032 6,618 2.42 4.29%
Interest bearing demand 3,656,476 121,367 3.32 3,329,272 112,729 3.39 3,247,965 84,037 2.59 9.33
Time open & C.D.'s of
less than $100,000 2,195,628 119,366 5.44 2,206,655 118,267 5.36 1,826,661 77,884 4.26 3.63
Time open & C.D.'s of
$100,000 and over 223,723 11,606 5.19 213,950 11,430 5.34 155,813 6,213 3.99 13.53
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 6,374,845 259,504 4.07 6,061,926 250,380 4.13 5,503,471 174,752 3.18 7.46
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased
and securities sold under
agreements to repurchase 449,831 21,427 4.76 442,413 23,792 5.38 287,642 10,384 3.61 16.65
Long-term debt and other
borrowings (C) 14,690 1,054 7.17 16,195 1,146 7.08 7,129 542 7.60 30.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowings 464,521 22,481 4.84 458,608 24,938 5.44 294,771 10,926 3.71 17.05
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 6,839,366 281,985 4.12% 6,520,534 275,318 4.22% 5,798,242 185,678 3.20% 8.04
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits 1,559,157 1,497,474 1,341,721 .45
Other liabilities 74,374 60,527 37,515 25.74
Stockholders' equity 892,029 846,434 736,218 7.95
- --------------------------- ---------- ---------- ---------- -------
Total liabilities and
equity $9,364,926 $8,924,969 $7,913,696 7.01%
====================================================================================================================================
Net interest margin (T/E) $370,482 $360,711 $317,587
====================================================================================================================================
Net yield on interest
earning assets 4.40% 4.50% 4.46%
====================================================================================================================================
Percentage increase in net
interest margin (T/E) over
the prior year 2.71% 13.58% 10.52%
====================================================================================================================================
</TABLE>
(C) Interest expense of $312,000, $31,000, $58,000,$125,000 and $60,000 which
was capitalized on construction projects in 1999, 1998, 1997, 1996 and 1995,
respectively, is not deducted from the interest expense shown above.
37
<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, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
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:
Business (A) $ 2,523 7.44% $ 2,456 7.39% $ 2,352 7.24% $ 2,366 7.17%
Construction and
development 355 8.02 352 7.87 354 7.67 350 7.75
Real estate - business 1,165 7.95 1,087 7.94 1,047 8.02 1,000 7.96
Real estate - personal 1,357 7.20 1,334 7.13 1,329 7.31 1,330 7.39
Personal banking 1,589 8.10 1,598 7.91 1,470 8.06 1,444 8.22
Credit card 502 13.00 500 13.20 493 12.78 509 13.05
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 7,491 8.01 7,327 7.96 7,045 7.95 6,999 8.00
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government &
federal agency 1,164 6.05 1,232 5.92 1,290 5.98 1,371 6.07
State & municipal
obligations (A) 86 8.00 92 7.82 93 7.91 94 8.11
CMO's and asset-backed
securities 1,159 6.15 1,224 6.16 1,251 6.15 1,012 6.27
Trading account
securities 12 9.16 11 6.09 12 4.54 18 6.00
Other marketable
securities (A) 91 7.05 90 5.96 88 5.81 198 5.63
Other non-marketable
securities 35 5.27 34 5.01 33 5.07 33 5.31
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,547 6.20 2,683 6.08 2,767 6.10 2,726 6.17
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under
agreements to resell 188 5.26 170 5.32 286 4.88 510 4.81
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning
assets 10,226 7.51 10,180 7.42 10,098 7.36 10,235 7.35
- -----------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan
losses (122) (120) (119) (117)
Unrealized gain on
investment securities 13 26 53 74
Cash and due from banks 599 573 610 579
Land, buildings and
equipment - net 234 231 226 222
Other assets 188 172 168 190
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $11,138 $11,062 $11,036 $11,183
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity.
Interest bearing deposits:
Savings $ 326 1.63 $ 340 1.57 $ 347 1.69 $ 335 1.99
Interest bearing
demand 5,057 2.55 5,096 2.46 5,092 2.41 5,051 2.52
Time open & C.D.'s
under $100,000 2,128 4.96 2,144 4.93 2,207 5.03 2,253 5.21
Time open & C.D.'s
$100,000 & over 296 4.89 285 4.82 293 5.02 301 5.09
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 7,807 3.25 7,865 3.18 7,939 3.20 7,940 3.36
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased
and securities sold
under agreements to
repurchase 723 4.83 627 4.55 526 4.21 607 4.22
Long-term debt and
other borrowings 27 3.35 27 3.25 27 3.25 27 3.42
- -----------------------------------------------------------------------------------------------------------------------------------
Total borrowings 750 4.78 654 4.50 553 4.16 634 4.18
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 8,557 3.39% 8,519 3.28% 8,492 3.26% 8,574 3.42%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits 1,397 1,356 1,348 1,387
Other liabilities 102 111 117 142
Stockholders' equity 1,082 1,076 1,079 1,080
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
equity $11,138 $11,062 $11,036 $11,183
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin
(T/E) $ 121 $ 120 $ 116 $ 113
- -----------------------------------------------------------------------------------------------------------------------------------
Net yield on interest
earning assets 4.68% 4.67% 4.61% 4.49%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Includes tax equivalent calculations.
38
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
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:
Business (A) $ 2,301 7.46% $ 2,223 7.79% $ 2,233 7.85% $ 2,088 7.89%
Construction and development 307 7.82 249 8.24 242 8.32 234 8.49
Real estate - business 980 8.26 955 8.30 949 8.40 936 8.49
Real estate - personal 1,309 7.32 1,279 7.37 1,250 7.57 1,184 7.84
Personal banking 1,492 8.36 1,431 8.65 1,345 8.61 1,341 8.58
Credit card 514 12.88 508 13.21 505 13.47 525 14.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 6,903 8.16 6,645 8.40 6,524 8.48 6,308 8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government &
federal agency 1,412 6.02 1,388 6.11 1,440 6.19 1,435 6.31
State & municipal
obligations (A) 100 8.12 102 7.92 100 7.87 92 8.16
CMO's and asset-backed
securities 944 6.26 856 6.25 868 6.33 853 6.39
Trading account securities 13 4.63 13 6.00 11 6.00 9 6.00
Other marketable securities (A) 213 5.65 118 5.90 124 6.44 114 5.59
Other non-marketable
securities 32 5.41 32 5.90 31 4.35 31 7.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,714 6.14 2,509 6.21 2,574 6.28 2,534 6.39
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell 345 4.99 326 5.53 207 5.55 294 5.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning
assets 9,962 7.50 9,480 7.72 9,305 7.81 9,136 7.93
- ------------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan
losses (116) (112) (110) (106)
Unrealized gain on
investment securities 86 59 60 57
Cash and due from banks 614 561 624 637
Land, buildings and
equipment - net 222 218 217 215
Other assets 216 221 215 209
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $10,984 $10,427 $10,311 $10,148
====================================================================================================================================
Liabilities and Equity.
Interest bearing deposits:
Savings $ 325 2.07 $ 317 2.39 $ 322 2.40 $ 307 2.43
Interest bearing
demand 4,868 2.69 4,660 2.98 4,015 3.37 3,956 3.38
Time open & C.D.'s
under $100,000 2,249 5.35 2,191 5.39 2,188 5.41 2,161 5.44
Time open & C.D.'s
$100,000 & over 286 5.28 249 5.48 245 5.48 229 5.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 7,728 3.53 7,417 3.75 6,770 4.06 6,653 4.08
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 587 4.37 531 4.93 503 5.03 515 5.10
Long-term debt and
other borrowings 24 2.76 14 7.53 6 7.53 7 7.53
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowings 611 4.31 545 4.85 509 5.06 522 5.13
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 8,339 3.59% 7,962 3.83% 7,279 4.13% 7,175 4.15%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits 1,427 1,317 1,894 1,860
Other liabilities 151 125 110 115
Stockholders' equity 1,067 1,023 1,028 998
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
equity $10,984 $10,427 $10,311 $10,148
====================================================================================================================================
Net interest margin (T/E) $ 113 $ 108 $ 106 $ 105
====================================================================================================================================
Net yield on interest
earning assets 4.50% 4.51% 4.58% 4.66%
====================================================================================================================================
</TABLE>
(A) Includes tax equivalent calculations.
39
<PAGE>
Consolidated Balance Sheets
Commerce Bancshares, Inc. and Subsidiaries
December 31
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
(In thousands)
Assets.
Loans, net of unearned income $ 7,576,892 $ 7,046,852
Allowance for loan losses (123,042) (117,092)
- --------------------------------------------------------------------------------
Net loans 7,453,850 6,929,760
- --------------------------------------------------------------------------------
Investment securities:
Available for sale 2,451,785 2,988,230
Trading account 23,639 14,210
Other non-marketable 32,991 29,276
- --------------------------------------------------------------------------------
Total investment securities 2,508,415 3,031,716
- --------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 238,602 261,535
Cash and due from banks 685,157 738,672
Land, buildings and
equipment - net 235,163 222,129
Goodwill and core deposit premium - net 68,209 77,009
Other assets 211,540 141,202
- --------------------------------------------------------------------------------
Total assets $11,400,936 $11,402,023
================================================================================
Liabilities and Stockholders' Equity.
Deposits:
Non-interest bearing demand $ 1,584,333 $1,657,037
Savings and interest
bearing demand 5,154,506 5,295,897
Time open and C.D.'s
of less than $100,000 2,114,443 2,269,835
Time open and C.D.'s
of $100,000 and over 310,841 307,428
- --------------------------------------------------------------------------------
Total deposits 9,164,123 9,530,197
- --------------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 1,042,429 617,830
Long-term debt and other borrowings 25,735 27,130
Other liabilities 88,817 146,081
- --------------------------------------------------------------------------------
Total liabilities 10,321,104 10,321,238
- --------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized and unissued 2,000,000
shares - -
Common stock, $5 par value
Authorized 100,000,000 shares;
issued 62,428,078 shares in
1999 and 61,352,684 shares in 1998 312,140 306,763
Capital surplus 129,173 106,159
Retained earnings 642,746 624,256
Treasury stock of
53,829 shares in 1999
and 193,208 shares in 1998, at cost (2,089) (8,561)
Unearned employee benefits (916) (904)
Accumulated other
comprehensive income (1,222) 53,072
- --------------------------------------------------------------------------------
Total stockholders' equity 1,079,832 1,080,785
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $11,400,936 $11,402,023
================================================================================
See accompanying notes to financial statements.
40
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Commerce Bancshares, Inc. and Subsidiaries
For the Years Ended December 31
- --------------------------------------------------------------------------------
(In thousands, except share data) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest Income.
Interest and fees on loans $574,738 $554,210 $505,604
Interest on investment securities 161,591 158,480 163,625
Interest on federal funds sold and securities
purchased under agreements to resell 14,297 15,781 13,647
- --------------------------------------------------------------------------------
Total interest income 750,626 728,471 682,876
- --------------------------------------------------------------------------------
Interest Expense.
Interest on deposits:
Savings and interest bearing demand 131,797 142,142 134,029
Time open and C.D.'s of less than
$100,000 109,857 118,581 116,798
Time open and C.D.'s
of $100,000 and over 14,572 13,713 11,280
Interest on federal funds purchased and
securities sold under agreements to
repurchase 27,827 25,827 22,202
Interest on long-term debt
and other borrowings 572 463 793
- --------------------------------------------------------------------------------
Total interest expense 284,625 300,726 285,102
- --------------------------------------------------------------------------------
Net interest income 466,001 427,745 397,774
Provision for loan losses 35,335 36,874 31,354
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 430,666 390,871 366,420
- --------------------------------------------------------------------------------
Non-Interest Income.
Trust fees 55,773 50,460 41,224
Deposit account charges and other fees 68,538 63,145 57,223
Credit card transaction fees 44,466 36,786 30,703
Trading account profits and commissions 10,310 8,733 7,420
Net gains on securities transactions 892 6,894 3,253
Other 56,230 48,019 40,269
- --------------------------------------------------------------------------------
Total non-interest income 236,209 214,037 180,092
- --------------------------------------------------------------------------------
Non-Interest Expense.
Salaries and employee benefits 215,217 198,090 179,095
Net occupancy 27,950 23,805 21,570
Equipment 20,612 18,148 16,492
Supplies and communication 33,800 29,867 25,838
Data processing 35,515 30,654 24,628
Marketing 12,915 12,206 12,757
Goodwill and core deposit 8,528 9,193 9,778
Other 64,478 57,381 54,292
- --------------------------------------------------------------------------------
Total non-interest expense 419,015 379,344 344,450
- --------------------------------------------------------------------------------
Income before income taxes 247,860 225,564 202,062
Less income taxes 81,647 75,473 69,360
- --------------------------------------------------------------------------------
Net income $166,213 $150,091 $132,702
================================================================================
Net income per share - basic $ 2.62 $ 2.34 $ 2.06
Net income per share - diluted $ 2.59 $ 2.30 $ 2.03
================================================================================
Cash dividends per common share $ .571 $ .526 $ .472
================================================================================
See accompanying notes to financial statements.
41
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Commerce Bancshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Years Ended December 31
- ---------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities.
Net income $ 166,213 $ 150,091 $ 132,702
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 35,335 36,874 31,354
Provision for depreciation and amortization 35,412 32,188 30,433
Accretion of investment security discounts (3,064) (3,978) (5,681)
Amortization of investment security premiums 10,878 7,833 9,140
Provision (benefit) for deferred income taxes (7,983) 10,266 16,731
Net gains on securities transactions (892) (6,894) (3,253)
Net (increase) decrease in trading account securities (10,057) (6,345) 1,412
Decrease in interest receivable 3,978 2,091 6,750
Increase (decrease) in interest payable (5,124) 1,917 1,622
Other changes, net (12,970) (7,111) (4,771)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 211,726 216,932 216,439
- ---------------------------------------------------------------------------------------------------
Investing Activities.
Net cash received in acquisitions - 15,113 6,200
Cash paid in sales of branches (25,179) - -
Proceeds from sales of available for sale securities 117,268 360,446 534,452
Proceeds from maturities of available for sale securities 1,528,288 1,120,599 904,695
Purchases of available for sale securities (1,206,850) (1,680,147) (1,258,881)
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell 22,933 (108,420) 244,235
Net increase in loans (552,313) (607,290) (621,438)
Purchases of premises and equipment (43,923) (30,258) (27,621)
Sales of premises and equipment 6,014 8,543 8,085
- ---------------------------------------------------------------------------------------------------
Net cash used by investing activities (153,762) (921,414) (210,273)
- ---------------------------------------------------------------------------------------------------
Financing Activities.
Net increase (decrease) in non-interest bearing demand,
savings and interest bearing demand deposits (277,804) 440,001 350,260
Net increase (decrease) in time open and C.D.s (142,883) 25,642 (68,346)
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 424,599 102,766 (14,249)
Repayment of long-term debt (1,175) (3,602) (6,952)
Additional borrowings - 15,245 -
Purchases of treasury stock (81,648) (85,132) (94,067)
Issuance under stock purchase, option and benefit plans 3,486 3,737 2,599
Cash dividends paid on common stock (36,054) (33,742) (30,432)
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (111,479) 464,915 138,813
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (53,515) (239,567) 144,979
Cash and cash equivalents at beginning of year 738,672 978,239 833,260
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 685,157 $ 738,672 $ 978,239
===================================================================================================
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
Statements of Stockholders' Equity
Commerce Bancshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Common Capital Retained Treasury Employee Comprehensive
(In thousands, except per share data) Stock Surplus Earnings Stock Benefits Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $281,740 $ 10,379 $ 621,689 $ (7,422) $(340) $18,225 $ 924,271
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 132,702 132,702
Change in unrealized gain (loss) on
available for sale securities 10,892 10,892
-----------
Total comprehensive income 143,594
-----------
Purchase of treasury stock (96,296) (96,296)
Cash dividends paid ($.472 per share) (30,432) (30,432)
Issuance under stock purchase, option
and award plans, net (2,953) 9,458 (261) 6,244
Purchase acquisition 1,383 9,256 10,639
Pooling acquisition (37,200) 17,612 42,352 22,764
5% stock dividend, net 9,689 77,095 (115,184) 28,400 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 291,429 48,704 626,387 (14,252) (601) 29,117 980,784
====================================================================================================================================
Net income 150,091 150,091
Change in unrealized gain (loss) on
available for sale securities 23,352 23,352
-----------
Total comprehensive income 173,443
-----------
Purchase of treasury stock (86,408) (86,408)
Cash dividends paid ($.526 per share) (33,742) (33,742)
Issuance under stock purchase,
option and award plans, net (5,464) 12,477 (303) 6,710
Pooling acquisitions 1,800 (43,316) 11,170 69,898 603 40,155
5% stock dividend, net 13,534 106,235 (129,650) 9,724 (157)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 306,763 106,159 624,256 (8,561) (904) 53,072 1,080,785
====================================================================================================================================
Net income 166,213 166,213
Change in unrealized gain
(loss) on available for sale
securities (54,294) (54,294)
-----------
Total comprehensive income 111,919
-----------
Purchase of treasury stock (83,172) (83,172)
Cash dividends paid ($.571 per share) (36,054) (36,054)
Issuance under stock purchase,
option and award plans, net (5,944) 12,407 (12) 6,451
5% stock dividend, net 5,377 28,958 (111,669) 77,237 (97)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $312,140 $129,173 $ 642,746 $ (2,089) $(916) $(1,222) $1,079,832
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
Notes to Financial Statements
Commerce Bancshares, Inc. and Subsidiaries
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The Company follows generally accepted accounting
principles (GAAP) and reporting practices applicable to the banking industry.
The preparation of financial statements under GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and notes. While the financial statements reflect management's best
estimates and judgment, actual results could differ from those estimates. The
consolidated financial statements include the accounts of the Company and its
substantially wholly-owned subsidiaries (after elimination of all material
intercompany balances and transactions). Certain amounts for prior years have
been reclassified to conform to the current year presentation.
Acquisitions/Intangible Assets. 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.
Results of operations of companies acquired in purchase business combinations
are included from the date of acquisition.
Loans. Interest on loans is accrued based upon the principal amount
outstanding. The accrual of interest on loans is discontinued when, in
management's judgment, the collectibility of interest or principal in the normal
course of business is doubtful. Loan and commitment fees are deferred and
recognized as income over the life of the loan or commitment as an adjustment of
yield.
Allowance/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 losses, reflective of the risks in the loan portfolio. This
estimate is based upon reviews of the portfolio, past loan loss experience,
current economic conditions and such other factors, which in management's
judgment, deserve current recognition. Impaired loans include all non-accrual
loans and loans 90 days delinquent and still accruing interest.
Investments in Debt and Equity Securities. Securities classified as available
for sale are carried at fair value. Their related unrealized gains and losses,
net of tax, are reported in accumulated other comprehensive income, a component
of stockholders' equity. Premiums and discounts are amortized to interest income
over the estimated lives of the securities. Gains and losses are calculated
using the specific identification method. Trading account securities are carried
at fair value with unrealized gains and losses recorded as 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.
Property and Equipment. Land is stated at cost, and buildings and equipment are
stated at cost less accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods. Maintenance and repairs are charged to
expense as incurred.
Income Taxes. The Company and its eligible subsidiaries file consolidated
income tax returns. Deferred income taxes are provided on temporary differences
between the financial reporting bases and income tax bases of the Company's
assets and liabilities.
Derivatives. The Company is exposed to market risk, including changes in
interest rates and currency exchange rates. To manage the volatility relating to
these exposures, the Company's risk management policies permit its use of
derivative products. The Company manages potential credit exposure through
established credit approvals, risk control limits and other monitoring
procedures. The Company uses derivatives on a limited basis mainly to stabilize
interest rate margins and hedge against interest rate movements, or to
facilitate customers' foreign exchange requirements. The Company more often
manages normal asset and liability positions by altering the products it offers
and by selling portions of specific loan or investment portfolios as necessary.
The Company does not trade in derivative financial instruments for purely
speculative purposes. Management believes the Company has and will be able to
continue to position itself to manage these risks satisfactorily, without
significant use of derivatives.
Treasury Stock. Purchases of the Company's common stock are recorded at cost.
Upon reissuance, treasury stock is reduced based upon the average cost basis of
shares held.
Income per Share. Basic income per share is computed using the weighted average
number of common shares outstanding during each year. Diluted income per share
includes the effect
44
<PAGE>
of all dilutive potential common shares (primarily stock options) outstanding
during each year. All per share data has been restated to reflect the 5% stock
dividend distributed in 1999.
Acquisitions
In 1998, the Company acquired four Kansas banks. City National Bank of
Pittsburg, Kansas, with assets of $120 million, was acquired in March for stock
valued at $34.3 million. In November, the Company acquired Columbus State Bank,
Columbus, Kansas, Fidelity State Bank in Garden City, and Heritage Bank of
Olathe. These banks had combined assets of $310 million. Stock valued at $49.7
million was exchanged. The 1998 acquisitions were accounted for as poolings of
interests.
In May 1997, the Company acquired Shawnee State Bank, located in the Kansas City
metropolitan area, with assets of $202 million. The acquisition was recorded as
pooling of interests. The Citizens National Bank in Independence, Kansas, was
acquired in September 1997 in a purchase transaction. The Citizens National Bank
had assets of $93 million at acquisition date. Total consideration paid in these
two transactions was cash of $4.3 million and treasury stock valued at $53.2
million. Goodwill of $7.2 million was recorded by the Company in the Citizens
purchase transaction.
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
1998 and 1997 acquisitions had been consummated on January 1, 1997.
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
Net interest income plus non-interest income $655,024 $603,513
Net income 153,403 138,974
Net income per share - diluted 2.31 2.04
======================================================================================================
</TABLE>
Loans and Allowance for Losses
Major classifications of loans at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
Business $2,564,476 $2,464,168
Real estate - construction 354,351 325,360
Real estate - business 1,247,956 1,000,380
Real estate - personal 1,377,903 1,315,041
Personal banking 1,510,380 1,409,022
Credit card 521,826 532,881
- ------------------------------------------------------------------------------------------------------
Total loans $7,576,892 $7,046,852
======================================================================================================
</TABLE>
Loans to directors and executive officers of the Parent and its significant
subsidiaries and to their associates are summarized as follows:
(In thousands)
- -------------------------------------------------
Balance at January 1, 1999 $31,645
Additions 50,333
Amounts collected (51,414)
Amounts written off -
- -------------------------------------------------
Balance at December 31, 1999 $30,564
=================================================
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, 1999, 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 limited
industry concentrations of credit risk. Loans and loan commitments are extended
under the Company's normal credit standards, controls, and monitoring features.
Most loan commitments are short term in nature, and loan maturities generally do
not exceed 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, 1999, unfunded loan commitments totaled $3,044,918,000 (excluding
$2,437,851,000 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. At December 31, 1999, loans of $952,137,000 were pledged
at the Federal Reserve as collateral for discount window borrowings. There were
no discount window borrowings at December 31, 1999.
A summary of the allowance for loan losses is as follows:
Years Ended December 31
- -----------------------------------------------------------------
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------
Balance, January 1 $117,092 $105,918 $ 98,223
- -----------------------------------------------------------------
Additions:
Provision for loan losses 35,335 36,874 31,354
Allowances of acquired banks - 5,808 4,275
- -----------------------------------------------------------------
Total additions 35,335 42,682 35,629
- -----------------------------------------------------------------
Deductions:
Loan losses 40,538 42,366 38,183
Less recoveries 11,153 10,858 10,249
- -----------------------------------------------------------------
Net loan losses 29,385 31,508 27,934
- -----------------------------------------------------------------
Balance, December 31 $123,042 $117,092 $105,918
=================================================================
45
<PAGE>
Notes to Financial Statements (cont.)
Commerce Bancshares, Inc. and Subsidiaries
Impaired loans include all non-accrual loans and loans 90 days delinquent and
still accruing interest. The net amount of interest income recorded on such
loans during their impairment period was not significant. The Company had ceased
recognition of interest income on loans with a book value of $12,979,000 and
$17,831,000 at December 31, 1999 and 1998, respectively. The interest income not
recognized on non-accrual loans was $1,650,000, $1,936,000 and $1,802,000 during
1999, 1998 and 1997, respectively. Loans 90 days delinquent and still accruing
interest amounted to $21,317,000 and $24,529,000 at December 31, 1999 and 1998,
respectively. Real estate and other assets acquired in foreclosure amounted to
$2,806,000 and $4,781,000 at December 31, 1999 and 1998, respectively.
INVESTMENT SECURITIES
A summary of the available for sale investment securities by maturity groupings
as of December 31, 1999 follows below. 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, 1999. Yields on
tax exempt securities have not been adjusted for tax exempt status.
<TABLE>
<CAPTION>
Weighted
Amortized Fair Average
(Dollars in thousands) Cost Value Yield
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. government and federal agency obligations:
Within 1 year $ 416,088 $ 413,699 5.95%
After 1 but within 5 years 720,186 714,761 6.15
After 5 but within 10 years 4,392 4,225 5.92
After 10 years 4,028 3,647 5.83
- ---------------------------------------------------------------------------------------------------------------------
Total U.S. government and federal agency obligations 1,144,694 1,136,332 6.08
=====================================================================================================================
State and municipal obligations:
Within 1 year 18,697 18,784 5.24
After 1 but within 5 years 41,523 42,180 5.21
After 5 but within 10 years 10,164 10,290 5.29
After 10 years 8,978 9,009 6.19
- ---------------------------------------------------------------------------------------------------------------------
Total state and municipal obligations 79,362 80,263 5.34
=====================================================================================================================
CMO's and asset-backed securities 1,129,341 1,106,975 6.24
=====================================================================================================================
Other debt securities:
Within 1 year 70,918 70,915
After 1 but within 5 years 11,616 11,247
After 5 but within 10 years 100 100
- ---------------------------------------------------------------------------------------------------------------------
Total other debt securities 82,634 82,262
=====================================================================================================================
Equity securities 17,569 45,953
=====================================================================================================================
Total available for sale investment securities $2,453,600 $2,451,785
=====================================================================================================================
</TABLE>
The unrealized gains and losses by type are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999
U.S. government and federal agency obligations $1,144,694 $ 1,308 $ 9,670 $1,136,332
State and municipal obligations 79,362 1,025 124 80,263
CMO's and asset-backed securities 1,129,341 756 23,122 1,106,975
Other debt securities 82,634 - 372 82,262
Equity securities 17,569 30,247 1,863 45,953
- ---------------------------------------------------------------------------------------------------------------------
Total $2,453,600 $33,336 $35,151 $2,451,785
=====================================================================================================================
December 31, 1998
U.S. government and federal agency obligations $1,408,279 $40,342 $ 74 $1,448,547
State and municipal obligations 98,426 3,369 10 101,785
CMO's and asset-backed securities 962,267 12,686 576 974,377
Other debt securities 419,259 161 7 419,413
Equity securities 14,223 30,037 152 44,108
- ---------------------------------------------------------------------------------------------------------------------
Total $2,902,454 $86,595 $ 819 $2,988,230
=====================================================================================================================
</TABLE>
46
<PAGE>
The following table presents proceeds from sales of securities and the
components of net securities gains.
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------
Proceeds from sales $117,268 $360,446 $534,452
=================================================================
Realized gains $ 2,113 $ 7,588 $ 4,564
Realized losses 1,221 694 1,311
- -----------------------------------------------------------------
Net realized gains $ 892 $ 6,894 $ 3,253
=================================================================
Investment securities with a par value of $652,291,000 and $838,676,000 were
pledged at December 31, 1999 and 1998, respectively, to secure public deposits
and for other purposes as required by law. Additional investment securities with
a par value of $512,142,000 were pledged at the Federal Reserve as collateral
for discount window borrowings. 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, 1999 and
1998:
(In thousands) 1999 1998
- -------------------------------------------------------
Land $ 56,457 $ 54,364
Buildings and improvements 283,644 269,320
Equipment 161,650 161,379
- -------------------------------------------------------
Total 501,751 485,063
- -------------------------------------------------------
Less accumulated depreciation
and amortization 266,588 262,934
- -------------------------------------------------------
Net land, buildings and equipment $235,163 $222,129
=======================================================
Depreciation expense of $23,847,000, $21,018,000 and $19,678,000 for 1999, 1998
and 1997, respectively, was included in net occupancy expense, equipment expense
and other expense in the Consolidated Statements of Income. Repairs and
maintenance expense of $15,150,000, $14,841,000 and $14,016,000 for 1999, 1998
and 1997, respectively, was included in net occupancy expense, equipment expense
and other expense.
BORROWINGS
Short-term borrowings of the Company consisted primarily of federal funds
purchased and securities sold under agreements to repurchase by subsidiary
banks. The following table presents balance and interest rate information on
these borrowings.
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------
Balance:
Average $ 621,160 $533,862 $450,439
Year end 1,042,429 617,830 512,558
Maximum month-end during year 1,042,429 617,830 549,907
- -----------------------------------------------------------------
Interest rate:
Average 4.5% 4.8% 4.9%
Year end 4.1% 4.2% 5.2%
- -----------------------------------------------------------------
Long-term debt of the Company was $25,735,000 at December 31, 1999. This amount
included $10,522,000 in borrowings from the Federal Home Loan Bank (FHLB), which
carry an average rate of 5.5% and have maturity dates ranging from 2008 to 2013.
These borrowings are secured by certain pledged bank assets. Also included in
long-term debt was $12,203,000 borrowed from third-party insurance companies by
a venture capital subsidiary, a Missouri Certified Capital Company, to support
its investment activities. Because the insurance companies receive tax credits,
the borrowings do not bear interest. This debt is secured by assets of the
subsidiary and letters of credit from an affiliate bank. Discounted principal of
$3,259,000 is due in 2007 and $7,515,000 in 2012.
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, 1999 totaled $109,957,000.
Cash payments for interest on deposits and borrowings during 1999, 1998 and 1997
on a consolidated basis amounted to $289,589,000, $298,643,000 and $283,281,000,
respectively.
INCOME TAXES
Total income taxes for 1999, 1998 and 1997 were allocated as shown in the
following tables.
Income tax expense from operations for the years ended December 31, 1999, 1998
and 1997 consists of:
(In thousands) Current Deferred Total
- -----------------------------------------------------------------
Year ended December 31, 1999:
U.S. federal $85,825 $(7,946) $77,879
State and local 3,805 (37) 3,768
- -----------------------------------------------------------------
$89,630 $(7,983) $81,647
=================================================================
Year ended December 31, 1998:
U.S. federal $61,550 $10,697 $72,247
State and local 3,657 (431) 3,226
- -----------------------------------------------------------------
$65,207 $10,266 $75,473
=================================================================
Year ended December 31, 1997:
U.S. federal $50,573 $15,917 $66,490
State and local 2,056 814 2,870
- -----------------------------------------------------------------
$52,629 $16,731 $69,360
=================================================================
47
<PAGE>
Notes to Financial Statements (cont.)
Commerce Bancshares, Inc. and Subsidiaries
Income tax expense (benefits) allocated directly to stockholders' equity for the
years ended December 31, 1999, 1998 and 1997 consists of:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gain (loss) on
securities available for sale $(33,278) $14,766 $ 6,546
Compensation expense for tax
purposes in excess of
amounts recognized for
financial reporting purposes (1,119) (1,475) (1,470)
- -------------------------------------------------------------------
Income tax expense
(benefits) allocated to
stockholders' equity $(34,397) $13,291 $ 5,076
===================================================================
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented below.
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to
allowance for loan losses $ 53,017 $ 50,735
Unrealized loss on
securities available for sale 690 -
Unearned fee income, due to earlier
recognition for tax purposes 610 832
Deferred compensation,
principally due to accrual for
financial reporting purposes 1,637 1,864
Accrued expenses, principally due to
accrual for financial reporting purposes 2,168 1,584
Net operating loss carryforwards
of acquired companies 123 157
Other - 258
- -------------------------------------------------------------------
Total gross deferred tax assets 58,245 55,430
- -------------------------------------------------------------------
Deferred tax liabilities:
Investment securities,
principally due to discount accretion 2,269 2,168
Capitalized interest 839 896
Unrealized gain on
securities available for sale - 32,588
Land, buildings and equipment,
principally due to write-up in
value in purchase accounting
entries for finanical reporting 33,125 29,230
Core deposit intangible, principally
due to purchase accounting entries
for financial reporting 3,595 4,467
Pension benefit obligation, due to
recognition of the excess pension
asset for financial reporting purposes 1,281 1,773
Realignment of corporate entities 33,850 37,850
Other 2,474 2,526
- -------------------------------------------------------------------
Total gross deferred tax liabilities 77,433 111,498
- -------------------------------------------------------------------
Net deferred tax liability $(19,188) $(56,068)
===================================================================
</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) 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $86,751 $78,947 $70,722
Increase (reduction) in
income taxes resulting from:
Amortization of goodwill 1,829 1,716 1,628
Tax exempt income (2,164) (2,334) (2,240)
Tax deductible dividends on
allocated shares held by
the Company's ESOP (777) (734) (720)
State and local income
taxes, net of federal
income tax benefit 2,449 2,097 1,866
Other, net (6,441) (4,219) (1,896)
- ---------------------------------------------------------------------
Total income tax expense $81,647 $75,473 $69,360
=====================================================================
</TABLE>
Cash payments of income taxes, net of refunds and interest received, amounted to
$104,261,000, $56,220,000 and $36,335,000 on a consolidated basis during 1999,
1998 and 1997, respectively. The Parent had net receipts of $2,415,000,
$3,341,000 and $846,000 during 1999, 1998 and 1997, respectively, from tax
benefits.
EMPLOYEE BENEFIT PLANS
Employee benefits charged to operating expenses aggregated $29,351,000,
$25,255,000 and $22,598,000 for 1999, 1998 and 1997, respectively. 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 make contributions 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits
earned during the year $ 3,678 $ 3,329 $ 2,731
Interest cost on projected
benefit obligation 3,940 4,006 3,767
Actual plan assets value
(increase) decrease (5,397) (5,512) (11,816)
Net amortization and deferral (696) (795) 6,323
- -------------------------------------------------------------------
Net periodic pension cost $ 1,525 $ 1,028 $ 1,005
===================================================================
</TABLE>
48
<PAGE>
The following table sets forth the pension plan's funded status, using valuation
dates of September 30, 1999 and 1998.
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Change in projected benefit obligation
- ------------------------------------------------------------------------
Projected benefit obligation
at beginning of year $60,308 $57,561
Service cost 3,678 3,329
Interest cost 3,940 4,006
Amendments - 259
Benefits paid (4,429) (4,314)
Actuarial (gain) loss (6,185) (533)
- ------------------------------------------------------------------------
Projected benefit obligation at end of year 57,312 60,308
- ------------------------------------------------------------------------
Change in plan assets
- ------------------------------------------------------------------------
Fair value of plan assets at beginning of year 61,828 62,774
Actual return on plan assets 9,031 3,368
Benefits paid (4,429) (4,314)
- ------------------------------------------------------------------------
Fair value of plan assets at end of year 66,430 61,828
- ------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 9,118 1,520
Unrecognized net (gain) loss from past
experience different from that assumed
and effects of change in assumptions (2,836) 7,067
Prior service benefit not yet recognized
in net pension cost (1,076) (1,218)
Unrecognized net transition asset
being recognized over 15 years (1,915) (2,553)
- ------------------------------------------------------------------------
Prepaid pension cost included in
other assets $ 3,291 $ 4,816
========================================================================
</TABLE>
Assumptions used in computing the plan's funded status were:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.75% 6.75% 7.25%
Rate of increase in future
compensation levels 5.70% 5.70% 5.00%
Long-term rate of return on assets 9.00% 9.00% 9.00%
======================================================================
</TABLE>
At December 31, 1999, approximately 77% of plan assets were invested in U.S.
government bonds, corporate bonds and equities.
In addition to the pension plan, substantially all of the Company's employees
are covered by a contributory defined contribution plan (401K), the
Participating Investment Plan. Under the plan, the Company makes matching
contributions, which aggregated $3,108,000 in 1999, $2,692,000 in 1998 and
$2,466,000 in 1997.
Stock Option Plans, Restricted Stock Awards and Directors Stock Purchase Plan*
The Company has reserved 9,715,689 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 10
years.
At December 31, 1999, 3,721,356 shares remain available for option grants under
these programs. The following tables summarize option activity over the last
three years and current options outstanding.
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Option Price Shares Option Price Shares Option Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,516,963 $22.60 2,324,707 $18.21 2,101,233 $15.76
- -----------------------------------------------------------------------------------------------------------------------------------
Granted 480,967 36.40 467,433 40.81 495,079 27.04
Cancelled (32,293) 36.62 (15,429) 32.79 (11,280) 22.60
Exercised (290,188) 15.88 (259,748) 15.53 (260,325) 15.01
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,675,449 $25.64 2,516,963 $22.60 2,324,707 $18.21
===================================================================================================================================
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of Exercise Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$11.61 - $16.00 916,441 3.9 years $14.85 916,441 $14.85
$16.06 - $19.54 402,394 6.1 years 19.46 402,394 19.46
$25.05 - $26.98 441,823 7.1 years 26.97 330,573 26.97
$32.75 - $45.01 914,791 8.6 years 38.52 343,838 39.24
- -----------------------------------------------------------------------------------------------------------------------------------
$11.61 - $45.01 2,675,449 6.4 years $25.64 1,993,246 $22.00
===================================================================================================================================
</TABLE>
The Company has a restricted stock award plan under which 301,519 shares of
common stock were reserved, and 161,601 shares remain available for grant at
December 31, 1999. 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
12,141 shares
49
<PAGE>
Notes to Financial Statements (cont.)
Commerce Bancshares, Inc. and Subsidiaries
in 1999, 16,574 shares in 1998 and 16,498 shares in 1997, resulting in deferred
compensation amounts of $439,000, $687,000 and $461,000, respectively.
Approximately $322,000, $276,000 and $165,000 was amortized to salaries expense
in 1999, 1998 and 1997, respectively. Unamortized deferred compensation of
$916,000, $904,000 and $601,000 has been recorded as a reduction of
stockholders' equity at December 31, 1999, 1998 and 1997, respectively.
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 181,349 at December 31, 1999. In 1999, 18,056 shares were purchased
at an average price of $37.38 and in 1998, 23,257 shares were purchased at an
average price of $41.53.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock and performance-based
awards. Had compensation cost for the Company's other stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the
Company's net income and income per share would have been reduced to the pro
forma amounts shown below.
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $166,213 $150,091 $132,702
Pro forma 162,926 147,144 130,529
- ------------------------------------------------------------------------
Basic income per share
As reported $ 2.62 $ 2.34 $ 2.06
Pro forma 2.57 2.29 2.02
- ------------------------------------------------------------------------
Diluted income per share
As reported $ 2.59 $ 2.30 $ 2.03
Pro forma 2.54 2.26 2.00
========================================================================
</TABLE>
Following is a summary of the fair values of options granted using the Black-
Scholes option-pricing model.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted per share average
fair value at grant date $11.30 $12.39 $8.65
Assumptions:
Dividend yield 2.0% 2.0% 2.0%
Volatility 24.2% 24.2% 21.0%
Risk-free interest rate 6.8% 5.0% 5.8%
Expected life 5.5 years 6.5 years 7.8 years
========================================================================
</TABLE>
*All share and per share amounts in this note have been restated for the 5%
stock dividend distributed in 1999.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 requires the reporting of
comprehensive income and its components. Comprehensive income is defined as the
change in equity from transactions and other events and circumstances from non-
owner sources, and excludes investments by and distributions to owners.
Comprehensive income includes net income and other items of comprehensive income
meeting the above criteria. The Company's only component of other comprehensive
income is the unrealized holding gains and losses on available for sale
securities as shown below.
<TABLE>
<CAPTION>
For the Years Ended December 31
- -----------------------------------------------------------------------
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) $(86,680) $44,033 $19,044
Less: reclassification adjustment for
gains included in net income 892 5,915 1,606
- -----------------------------------------------------------------------
Net unrealized gains
(losses) on securities (87,572) 38,118 17,438
Income tax expense (benefit) (33,278) 14,766 6,546
- -----------------------------------------------------------------------
Other comprehensive income $(54,294) $23,352 $10,892
=======================================================================
</TABLE>
SEGMENTS
Management has established three operating segments within the Company. The
Consumer segment includes the retail branch network, consumer finance, bankcard,
student loans and discount brokerage services. The Commercial segment provides
corporate lending, leasing, and international services, as well as business,
government deposit and cash management services. The Money Management segment
provides traditional trust and estate tax planning services, and advisory and
discretionary investment management services.
The Company's business line reporting system derives segment information by
specifically attributing most assets and income statement items to a segment.
The Company's internal funds transfer pricing methodology allocates a standard
cost for funds used or credit for funds provided to all segment assets and
liabilities using funding pools. Income and expense that directly relate to
segment operations are recorded in the segment when incurred. Expenses that
indirectly support the segments are allocated based on the most appropriate
method available.
The Company's reportable segments are strategic lines of business that offer
different products and services. They are managed separately because each line
services a specific customer need, requiring different performance measurement
analyses and marketing strategies.
50
<PAGE>
The following tables present selected financial information by segment and
reconciliations of combined segment totals to consolidated totals. There were no
material intersegment revenues between the three segments. Financial data for
recent bank acquisitions which have not yet been assimilated into the business
segment and cost allocation systems are included in the Consumer segment and are
not considered material.
<TABLE>
<CAPTION>
SEGMENT INCOME STATEMENT DATA
Money Segment Other/ Consolidated
(In thousands) Consumer Commercial Management Totals Elimination Totals
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Net interest income after loan loss expense $ 35,025 $ 256,489 $(17,705) $273,809 $ 156,857 $430,666
Cost of funds allocation 198,781 (101,544) 23,828 121,065 (121,065) -
Non-interest income 131,604 27,043 71,318 229,965 6,244 236,209
- -------------------------------------------------------------------------------------------------------------------------------
Total net revenue 365,410 181,988 77,441 624,839 42,036 666,875
Non-interest expense 263,284 79,489 51,531 394,304 24,711 419,015
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $102,126 $ 102,499 $ 25,910 $230,535 $ 17,325 $247,860
===============================================================================================================================
Year ended December 31, 1998:
Net interest income after loan loss expense $ 5,104 $ 244,795 $(18,830) $231,069 $ 159,802 $390,871
Cost of funds allocation 214,894 (98,183) 23,995 140,706 (140,706) -
Non-interest income 114,116 25,840 65,300 205,256 8,781 214,037
- -------------------------------------------------------------------------------------------------------------------------------
Total net revenue 334,114 172,452 70,465 577,031 27,877 604,908
Non-interest expense 232,685 74,167 45,616 352,468 26,876 379,344
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $101,429 $ 98,285 $ 24,849 $224,563 $ 1,001 $225,564
===============================================================================================================================
Year ended December 31, 1997:
Net interest income after loan loss expense $ 2,324 $ 213,382 $(14,391) $201,315 $ 165,105 $366,420
Cost of funds allocation 220,687 (80,803) 18,409 158,293 (158,293) -
Non-interest income 93,084 26,321 53,048 172,453 7,639 180,092
- -------------------------------------------------------------------------------------------------------------------------------
Total net revenue 316,095 158,900 57,066 532,061 14,451 546,512
Non-interest expense 207,187 72,242 40,702 320,131 24,319 344,450
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $108,908 $ 86,658 $ 16,364 $211,930 $ (9,868) $202,062
===============================================================================================================================
</TABLE>
The segment activity, as shown above, includes both direct and allocated items.
Amounts in the "Other/Elimination" column include activity not related to the
segments, such as that relating to administrative functions, and the effect of
certain expense allocations to the segments.
<TABLE>
<CAPTION>
SEGMENT BALANCE SHEET DATA
Money Segment Other/ Consolidated
(In thousands) Consumer Commercial Management Totals Elimination Totals
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average balances for 1999:
Assets $3,677,667 $3,741,466 $88,945 $7,508,078 $3,596,386 $11,104,464
Loans 3,510,062 3,711,447 2,659 7,224,168 (7,301) 7,216,867
Deposits 7,408,465 1,854,732 28,240 9,291,437 (31,895) 9,259,542
===============================================================================================================================
Average balances for 1998:
Assets $3,384,943 $3,392,879 $75,160 $6,852,982 $3,616,641 $10,469,623
Loans 3,235,438 3,363,228 1,112 6,599,778 (2,947) 6,596,831
Deposits 6,970,588 1,764,350 24,975 8,759,913 8,320 8,768,233
===============================================================================================================================
</TABLE>
The above segment balances include only those items directly associated with the
segment. The "Other/Elimination" column includes unallocated bank balances not
associated with a segment (such as investment securities, federal funds sold,
goodwill and core deposit premium), balances relating to certain other
administrative and corporate functions, and eliminations between segment and
non-segment balances. This column also includes the resulting effect of
allocating such items as float, deposit reserve and capital for the purpose of
computing the cost or credit for funds used/provided.
51
<PAGE>
Notes to Financial Statements (cont.)
Commerce Bancshares, Inc. and Subsidiaries
COMMON STOCK
On December 17, 1999, the Company distributed a 5% stock dividend on its $5 par
common stock for the sixth consecutive year. 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 1999.
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------
Purchases of common stock 2,047,726
Issuance of stock:
Sales under employee and director plans 295,673
5% stock dividend 2,966,826
=================================================================
</TABLE>
Basic income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the year. Diluted income per share gives effect to all dilutive potential common
shares that were outstanding during the year. The shares used in the calculation
of basic and diluted income per share, which have been restated for all stock
dividends, are shown below.
<TABLE>
<CAPTION>
For the Years Ended December 31
- -----------------------------------------------------------------
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Weighted average common
shares outstanding 63,381 64,121 64,486
Stock options 833 1,088 876
- -----------------------------------------------------------------
64,214 65,209 65,362
=================================================================
</TABLE>
Under a Rights Agreement dated August 23, 1988, as amended in the amended and
restated rights agreement with Commerce Bank, N.A. as rights agent, dated as of
July 19, 1996, 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 February 1999, the Board of Directors approved additional purchases of the
Company's common stock, bringing the total purchase authorization to 3,000,000
shares. The Company has routinely used these reacquired shares to fund employee
benefit programs and annual stock dividends. Approximately 1,854,000 shares have
been acquired under the 1999 approval through December 31, 1999.
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 1 capital to
total average assets (leverage ratio), and minimum ratios of Tier 1 and Total
capital to risk-weighted assets (as defined). The minimum required ratios for
well-capitalized banks are 6.00% for Tier 1 capital, 10.00% for Total capital
and 5.00% for the leverage ratio.
The Company's actual capital amounts and ratios at the last two year ends are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Risk-Weighted Assets $8,678,987 $8,426,289
Tier 1 Capital $1,014,071 $ 952,488
Total Capital $1,127,005 $1,060,692
Tier 1 Capital Ratio 11.68% 11.30%
Total Capital Ratio 12.99% 12.59%
Leverage Ratio 9.17% 8.80%
=================================================================
</TABLE>
Management believes that, at December 31, 1999, the Company meets all capital
requirements to which it is subject.
52
<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.
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 is calculated by
discounting all simulated cash flows. Cash flows include all principal and
interest to be received, taking embedded optionality such as the customer's
right to prepay into account. Discount rates are computed for each loan category
using implied forward market rates adjusted to recognize each loan's approximate
credit risk. 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.
The "Carrying Amount" of loans in the schedule below excludes deferred or
unamortized fees and costs related to the loan transaction.
Investment Securities. The fair values of the debt and equity instruments in
the 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.
A breakdown of investment securities by category and maturity is provided in the
financial statements note on Investment Securities. 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.
Federal Funds Sold and Securities Purchased under Agreements to Resell and Cash
and Due From Banks. The carrying amounts of federal funds sold and securities
purchased under agreements to resell and cash and due from banks approximate
fair value. Federal funds sold and securities purchased under agreements to
resell generally mature in 90 days or less and present little or no risk.
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. These fair value
estimates do not recognize any benefit the Company receives as a result of being
able to administer, or control, the pricing of these accounts. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. Discount rates are based on the Company's approximate cost of obtaining
similar maturity funding in the market.
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.
53
<PAGE>
Notes to Financial Statements (cont.)
Commerce Bancshares, Inc. and Subsidiaries
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets.
Loans $7,566,363 $7,489,108 $7,010,142 $7,067,656
Available for sale investment securities 2,451,785 2,451,785 2,988,230 2,988,230
Trading account securities 23,639 23,639 14,210 14,210
Other non-marketable securities 32,991 32,991 29,276 29,276
Federal funds sold and securities purchased under
agreements to resell 238,602 238,602 261,535 261,535
Cash and due from banks 685,157 685,157 738,672 738,672
===================================================================================================
Financial Liabilities.
Non-interest bearing demand deposits $1,584,333 $1,584,333 $1,657,037 $1,657,037
Savings and interest bearing demand deposits 5,154,506 5,154,506 5,295,897 5,295,897
Time open and C.D.'s:
Maturing in year 1 1,829,817 1,811,889 1,811,778 1,812,142
Maturing in year 2 364,858 359,744 476,520 477,148
Maturing in year 3 110,624 109,073 171,192 171,419
Maturing in year 4 61,218 60,354 51,399 51,489
Maturing in year 5 48,265 47,543 49,969 50,047
Maturing in over 5 years 10,502 10,335 16,405 16,469
Federal funds purchased and securities
sold under agreements to repurchase 1,042,429 1,042,429 617,830 617,830
Long-term debt and other borrowings 25,735 19,097 27,130 26,837
===================================================================================================
</TABLE>
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.
The Company enters into foreign exchange contracts both to facilitate customer
business and to manage the resultant risk. The Company maintains a generally
matched position to minimize currency fluctuation exposure. Interest rate swap
contracts are entered into by the Company to limit its interest rate risk. 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
swaps are not material.
These instruments are also referenced in the financial statements notes on
Financial Instruments with Off-Balance-Sheet Risk or Loans 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.
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. The contractual or
notional amounts of financial instruments with off-balance-sheet risk at
December 31 were:
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Commitments to extend credit:
Credit card $2,437,851 $2,161,405
Other 3,044,918 2,882,581
Commitments to purchase/sell
when-issued securities 8,083 2,831
Standby letters of credit, net of participations 246,501 238,745
Commercial letters of credit 31,590 22,353
Foreign exchange contracts:
Forward contracts 96,878 304,268
Options written/purchased 1,128 1,264
Spot 4,906 522
Interest rate swaps 23,065 10,439
==========================================================================
54
<PAGE>
Commitments to extend credit are legally binding agreements to lend to a
borrower providing there are no violations of any conditions established in the
contract. As many of the commitments are expected to expire without being drawn
upon, the total commitment does not necessarily represent future cash
requirements. Refer to the financial statements note on Loans and Allowance for
Losses for further discussion.
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. 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.
Transactions involving securities described as "when-issued" are treated as
conditional transactions in a security authorized for issuance but not yet
actually issued. Purchases and sales of when-issued securities for which
settlement date has not occurred are not to be reflected in the financial
statements until settlement date.
Foreign exchange contracts are commitments to purchase or deliver foreign
currency at a specified exchange rate. The Company engages in foreign exchange
trading activities to enable customers involved in international business to
hedge their exposure to foreign currency fluctuations and to minimize the
Company's related exposure arising in connection with these customer
transactions. The Company maintains a generally matched position; therefore,
exchange rate and market risks are minimal. Risk arises primarily from non-
performance by the counterparty, in which case the currency must be bought or
sold at the prevailing market rate. The Company also enters into interest rate
swaps to limit its interest rate risk. Interest rate swaps are contractual
agreements between counterparties to exchange fixed and floating rate payment
obligations over a set period of time. The current credit exposure (or
replacement cost) across all off-balance-sheet derivative contracts covered by
the risk-based capital standards was $890,000 at December 31, 1999.
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
$3,432,000, $3,054,000 and $2,401,000 in 1999, 1998 and 1997, respectively. A
summary of minimum lease commitments follows:
<TABLE>
<CAPTION>
(In thousands) Type of Property
- ----------------------------------------------------------------------
Real Total
Years Ended December 31 Property Equipment Commitments
- ----------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 2,987 $635 $ 3,622
2001 2,770 498 3,268
2002 2,185 345 2,530
2003 1,854 342 2,196
2004 1,452 252 1,704
After 15,381 - 15,381
- ----------------------------------------------------------------------
Total minimum
lease payments $28,701
======================================================================
</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 1999.
The Company incurred expense of $17,537,000 in 1999, $15,248,000 in 1998 and
$11,989,000 in 1997 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 $2,273,000 in 1998 and
$3,030,000 in 1997. The Company's remaining commitment at December 31, 1999 was
$2,273,000.
In the normal course of business, the Company had certain lawsuits pending at
December 31, 1999. 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.
55
<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>
Condensed Balance Sheets
December 31
- --------------------------------------------------------------------------------------------------
(In thousands) 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets.
Investment in consolidated subsidiaries:
Banks $ 923,213 $ 913,447
Non-banks 31,114 31,497
Receivables from subsidiaries, net of borrowings 6,807 7,059
Cash 195 492
Securities purchased under agreements to resell 5,918 7,002
Investment securities:
Available for sale 103,344 109,773
Other non-marketable 4,009 2,265
Other assets 19,410 23,416
- --------------------------------------------------------------------------------------------------
Total assets $1,094,010 $1,094,951
==================================================================================================
Liabilities and Stockholders' Equity.
Accounts payable, accrued taxes and other liabilities $ 14,178 $ 14,166
- --------------------------------------------------------------------------------------------------
Total liabilities 14,178 14,166
- --------------------------------------------------------------------------------------------------
Stockholders' equity 1,079,832 1,080,785
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,094,010 $1,094,951
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income
For the Years Ended December 31
- --------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income.
Dividends received:
Bank subsidiaries $ 103,910 $ 142,316 $ 103,626
Non-bank subsidiaries 169 379 200
Earnings of consolidated subsidiaries, net of dividends 62,590 8,317 28,628
Interest on investment securities 3,927 4,198 3,451
Interest on securities purchased under agreements to resell 321 316 233
Management fees charged subsidiaries 22,743 20,719 16,842
Data processing fees charged subsidiaries - - 27,638
Net gains (losses) on securities transactions (53) 1,101 1,967
Other 5,092 1,588 1,577
- --------------------------------------------------------------------------------------------------
Total income 198,699 178,934 184,162
==================================================================================================
Expense.
Salaries and employee benefits 21,249 19,854 28,525
Marketing 491 519 351
External data processing 3 3 11,552
Other 12,953 10,664 13,928
- --------------------------------------------------------------------------------------------------
Total expense 34,696 31,040 54,356
- --------------------------------------------------------------------------------------------------
Income tax expense (benefit) (2,210) (2,197) (2,896)
- --------------------------------------------------------------------------------------------------
Net income $ 166,213 $ 150,091 $ 132,702
==================================================================================================
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
For the Years Ended December 31
- ---------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities.
Net income $ 166,213 $ 150,091 $ 132,702
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings of consolidated subsidiaries, net of dividends (62,590) (8,317) (28,628)
Other adjustments, net 7,648 2,168 (5,329)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 111,271 143,942 98,745
- ---------------------------------------------------------------------------------------------------------------
Investing Activities.
(Increase) decrease in investment in subsidiaries, net (103) (3) 457
(Increase) decrease in receivables from subsidiaries, net of borrowings 252 3,524 (2,541)
Proceeds from sales of investment securities 3,374 6,994 2,538
Proceeds from maturities of investment securities 451,473 432,963 473,204
Purchases of investment securities (452,352) (471,530) (450,361)
Net decrease in securities purchased under agreements to resell 1,084 98 238
Net purchases of equipment (1,080) (526) (334)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 2,648 (28,480) 23,201
- ---------------------------------------------------------------------------------------------------------------
Financing Activities.
Purchases of treasury stock (81,648) (85,132) (94,067)
Issuance under stock purchase, option and benefit plans 3,486 3,737 2,599
Cash dividends paid on common stock (36,054) (33,742) (30,432)
- ---------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (114,216) (115,137) (121,900)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (297) 325 46
Cash at beginning of year 492 167 121
- ---------------------------------------------------------------------------------------------------------------
Cash at end of year $ 195 $ 492 $ 167
===============================================================================================================
</TABLE>
Dividends paid by the Parent were substantially provided from subsidiary bank
dividends. The subsidiary banks may distribute dividends without prior
regulatory approval that do not exceed the sum of net income for the current
year and retained net income for the preceding two years, 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. In 1997, the Parent charged data processing
fees, which were allocated to the subsidiaries based on transaction volume. In
1998, the data servicing department was transferred from the Parent to a
subsidiary bank, with a resulting decline in related fee income, provider
expense, salary and depreciation expense on the Parent. The Parent makes
advances to non-banking subsidiaries and subsidiary bank holding companies.
Advances are made to the Parent by subsidiary bank holding companies for
investment in temporary liquid securities. Interest on such advances is based on
market rates.
At December 31, 1999, the Parent had a $20,000,000 line of credit for general
corporate purposes with a subsidiary bank. During 1999, the Parent had no
borrowings from the subsidiary bank.
Investment securities held by the Parent, which consist primarily of common
stock and commercial paper, included an unrealized gain in fair value of
$25,056,000 at December 31, 1999. The corresponding net of tax unrealized gain
included in stockholders' equity was $15,535,000. Also included in stockholders'
equity was the unrealized net of tax loss in fair value of investment securities
held by subsidiaries, which amounted to $16,757,000 at December 31, 1999.
57
<PAGE>
INDEPENDENT AUDITORS' REPORT
Commerce Bancshares, Inc. and Subsidiaries
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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
January 31, 2000
Kansas City, Missouri
58
<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, 1999. 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. (Missouri), Commerce Bank, N.A. (Illinois) and Commerce Bank, N.A.
(Kansas) maintained effective internal control structures over financial
reporting as of December 31, 1999.
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. (Missouri), Commerce Bank, N.A. (Illinois) and Commerce
Bank, N.A. (Kansas), 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, 1999.
59
<PAGE>
Summary of Quarterly Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
For the Quarter Ended
- -------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/99 9/30/99 6/30/99 3/31/99
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $192,561 $189,412 $184,155 $184,498
Interest expense (72,788) (70,420) (69,085) (72,332)
- -------------------------------------------------------------------------------------------------------
Net interest income 119,773 118,992 115,070 112,166
Non-interest income 60,584 56,733 61,436 57,456
Salaries and employee benefits (54,640) (53,183) (53,369) (54,025)
Other expense (52,401) (51,483) (51,238) (48,676)
Provision for loan losses (9,751) (8,293) (8,741) (8,550)
- -------------------------------------------------------------------------------------------------------
Income before income taxes 63,565 62,766 63,158 58,371
Income taxes (19,212) (21,362) (21,387) (19,686)
- -------------------------------------------------------------------------------------------------------
Net income $ 44,353 $ 41,404 $ 41,771 $ 38,685
=======================================================================================================
Net income per share - basic* $ .70 $ .66 $ .66 $ .60
Net income per share - diluted* $ .70 $ .65 $ .65 $ .59
=======================================================================================================
Weighted average shares - basic* 62,686 63,111 63,649 64,098
Weighted average shares - diluted* 63,447 63,906 64,513 65,013
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended
- -------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/98 9/30/98 6/30/98 3/31/98
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $187,299 $183,468 $180,151 $177,553
Interest expense (75,429) (76,863) (74,955) (73,479)
- -------------------------------------------------------------------------------------------------------
Net interest income 111,870 106,605 105,196 104,074
Non-interest income 57,667 50,670 55,741 49,959
Salaries and employee benefits (51,061) (48,644) (49,879) (48,506)
Other expense (52,583) (43,301) (43,455) (41,915)
Provision for loan losses (6,971) (7,777) (11,410) (10,716)
- -------------------------------------------------------------------------------------------------------
Income before income taxes 58,922 57,553 56,193 52,896
Income taxes (18,522) (19,839) (18,699) (18,413)
=======================================================================================================
Net income $ 40,400 $ 37,714 $ 37,494 $ 34,483
=======================================================================================================
Net income per share - basic* $.63 $.59 $.58 $.54
Net income per share - diluted* $.62 $.58 $.57 $.53
=======================================================================================================
Weighted average shares - basic* 64,162 63,796 64,440 64,088
Weighted average shares - diluted* 65,188 64,807 65,609 65,238
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended
- -------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 12/31/97 9/30/97 6/30/97 3/31/97
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $178,039 $173,686 $168,339 $162,812
Interest expense (73,054) (72,628) (70,395) (69,025)
- -------------------------------------------------------------------------------------------------------
Net interest income 104,985 101,058 97,944 93,787
Non-interest income 49,457 46,687 42,385 41,563
Salaries and employee benefits (46,571) (45,818) (43,708) (42,998)
Other expense (44,228) (41,826) (40,185) (39,116)
Provision for loan losses (8,716) (7,807) (7,293) (7,538)
- -------------------------------------------------------------------------------------------------------
Income before income taxes 54,927 52,294 49,143 45,698
Income taxes (18,179) (18,072) (16,810) (16,299)
- -------------------------------------------------------------------------------------------------------
Net income $ 36,748 $ 34,222 $ 32,333 $ 29,399
=======================================================================================================
Net income per share - basic* $.57 $.53 $.50 $.46
Net income per share - diluted* $.56 $.52 $.50 $.45
=======================================================================================================
Weighted average shares - basic* 64,390 64,370 64,638 64,549
Weighted average shares - diluted* 65,535 65,259 65,340 65,312
=======================================================================================================
</TABLE>
* Restated for the 5% stock dividend distributed in 1999.
60
<PAGE>
COMMUNITY BANK DIRECTORS
(This list not included in EDGARized exhibit.)
61 through 66
<PAGE>
OFFICER AND DIRECTORS
(This list not included in EDGARized exhibit.)
Inside Back Cover
<PAGE>
Exhibit 21
The consolidated subsidiaries of the Registrant at March 1, 2000, were
as follows:
State or Other
Jurisdiction of
Name Location Incorporation
CBI-Kansas, Inc. Kansas City, MO Kansas
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
County Realty Corp. Clayton, MO Missouri
Commerce Brokerage
Services, Inc. Clayton, MO Missouri
Commerce Financial Corp. Clayton, MO Missouri
Clayton Financial Corp. Clayton, MO Missouri
Clayton Realty Corp. Clayton, MO Missouri
Commerce Insurance
Services, Inc. Fenton, MO Missouri
Shawnee State, Inc. Shawnee, KS Kansas
Commerce Bank, National Association Wichita, KS United States
Union Center, Inc. Wichita, KS Kansas
21st Street Redevelopment
Company, L.C. Wichita, KS Kansas
CBI-Illinois, Inc. Kansas City, MO Delaware
Commerce Bank, National Association Peoria, IL United States
Illinois Financial, LLC Peoria, IL Delaware
Illinois Realty, LLC Peoria, IL Delaware
Commerce Bank of Omaha,
National Association Omaha, NE United States
CBI Insurance Company Kansas City, MO Arizona
CFB Partners, Inc. Kansas City, MO Missouri
CFB Venture Fund I, Inc. Clayton, MO Missouri
Capital For Business, Inc. Kansas City, MO Missouri
Commerce Mortgage Corp. Kansas City, MO Missouri
Commerce Property and Casualty
Agency, Inc. Kansas City, MO Missouri
Mid-America Financial Corp. Kansas City, MO Missouri
Delaware Redevelopment
Corporation Kansas City, MO Missouri
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, No. 33-61501
and No. 333-14651, each on Form S-8 of Commerce Bancshares, Inc. of our
report dated January 31, 2000, relating to the consolidated balance sheets of
Commerce Bancshares, Inc. and Subsidiaries as of December 31, 1999 and 1998
and the related statements of income, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999, which
report appears in the December 31, 1999 annual report on Form 10-K of Commerce
Bancshares, Inc.
KPMG LLP
Kansas City, Missouri
March 10, 2000
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do 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, 1999, 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 have executed these presents this 4th
day of February, 2000.
s/ Giorgio Balzer
s/ Fred L. Brown
s/ James B. Hebenstreit
s/ David W. Kemper
s/ Jonathan M. Kemper
s/ Mary Ann Krey
s/ Terry O. Meek
s/ Benjamin F. Rassieur III
s/ John H. Robinson, Jr.
s/ L. W. Stolzer
s/ William A. Sullins, Jr.
s/ Robert H. West
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Commerce Bancshares, Inc. 12/31/99 Form 10-K and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 685,157
<INT-BEARING-DEPOSITS> 0<F1>
<FED-FUNDS-SOLD> 238,602
<TRADING-ASSETS> 23,639
<INVESTMENTS-HELD-FOR-SALE> 2,451,785<F2>
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 7,576,892<F3>
<ALLOWANCE> 123,042
<TOTAL-ASSETS> 11,400,936
<DEPOSITS> 9,164,123
<SHORT-TERM> 1,042,429
<LIABILITIES-OTHER> 88,817
<LONG-TERM> 25,735
0
0
<COMMON> 312,140
<OTHER-SE> 767,692
<TOTAL-LIABILITIES-AND-EQUITY> 11,400,936
<INTEREST-LOAN> 574,738
<INTEREST-INVEST> 160,746<F4>
<INTEREST-OTHER> 14,297
<INTEREST-TOTAL> 750,626
<INTEREST-DEPOSIT> 256,226
<INTEREST-EXPENSE> 284,625
<INTEREST-INCOME-NET> 466,001
<LOAN-LOSSES> 35,335
<SECURITIES-GAINS> 892
<EXPENSE-OTHER> 419,015
<INCOME-PRETAX> 247,860
<INCOME-PRE-EXTRAORDINARY> 166,213
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,213
<EPS-BASIC> 2.62<F6>
<EPS-DILUTED> 2.59<F6>
<YIELD-ACTUAL> 4.61<F5>
<LOANS-NON> 12,979
<LOANS-PAST> 21,317
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 117,092
<CHARGE-OFFS> 40,538
<RECOVERIES> 11,153
<ALLOWANCE-CLOSE> 123,042
<ALLOWANCE-DOMESTIC> 123,042
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Certificates of deposit of $200,000 are included in Investments-
Held-For-Sale.
<F2>Excludes non-marketable securities of $32,991,000.
<F3>Gross of allowance for loan losses.
<F4>Excludes interest of $845,000 on trading account securities.
<F5>Yield is computed on a tax equivalent basis.
<F6>A 5% stock dividend was distributed on December 17, 1999.
Prior financial data schedules have not been restated.
</FN>
</TABLE>
