Commerce Bancshares, Inc. Announces Second Quarter Earnings Per Share of $.70

KANSAS CITY, Mo.--()--Commerce Bancshares, Inc. (NSADAQ: CBSH) announced earnings of $.70 per common share for the three months ended June 30, 2014 compared to $.69 per share in the second quarter of 2013 and $.67 per share in the previous quarter. Net income for the second quarter amounted to $66.5 million, compared to $65.8 million in the same quarter last year and $64.3 million last quarter. For the current quarter, the return on average assets totaled 1.18%, the return on average equity was 11.7%, and the efficiency ratio was 60.3%.

For the six months ended June 30, 2014, earnings per common share totaled $1.37 compared to $1.32 in the first six months of 2013. Net income amounted to $130.8 million for the first six months of 2014 compared to $126.8 million for the same period last year. The return on average assets for the first six months of 2014 was 1.17% and the return on average equity was 11.6%.

In making this announcement, David W. Kemper, Chairman and CEO, said, “This quarter we saw good top line revenue growth when compared to the previous quarter along with solid loan growth. Net loan charge-offs declined and expenses remained well-controlled. Loans outstanding increased $265 million, or 9% annualized, this quarter to $11.5 billion as demand remained solid for commercial and consumer-related loans. Net interest income grew by $7.4 million compared to the previous quarter due to the aforementioned loan growth and higher earnings on the Company’s inflation-protected securities. Our net interest margin grew this quarter to 3.13%. Also, non-interest income grew 6%, or $6.1 million, mainly on growth from bank card, trust and deposit fees. Non-interest expense was mostly unchanged from the previous quarter, and our efficiency ratio declined to 60%.”

Mr. Kemper continued, “Net loan charge-offs for the current quarter totaled $7.6 million, compared to $9.7 million in the previous quarter and $9.4 million in the second quarter of 2013. The decrease in net loan charge-offs compared to the previous quarter is mainly due to an increase in net recoveries on commercial-related loans of $936 thousand coupled with lower consumer net loan charge-offs. During the current quarter, the provision for loan losses totaled $7.6 million and matched net loan charge-offs. The allowance for loan losses amounted to $161.5 million this quarter, or 1.41% of period end loans, and was 3.7 times non-performing loans. Total non-performing assets decreased $2.7 million from the previous quarter to $51.7 million this quarter.”

Total assets at June 30, 2014 were $23.0 billion, total loans were $11.5 billion, and total deposits were $19.0 billion. Through its normal treasury repurchase program, the Company repurchased 1.1 million shares of its common stock at an average price per share of $43.55 during the quarter and paid a cash dividend of $.225 per common share, an increase of 5% over the rate paid in 2013. Also, the Company issued $150 million in 6% non-cumulative perpetual preferred stock and concurrently entered into a $200 million accelerated share repurchase agreement with another financial institution.

Commerce Bancshares, Inc. is a registered bank holding company offering a full line of banking services, including investment management and securities brokerage. The Company currently operates in over 350 locations in Missouri, Illinois, Kansas, Oklahoma and Colorado. The Company also has operating subsidiaries involved in mortgage banking, credit related insurance, and private equity activities.

Summary of Non-Performing Assets and Past Due Loans

(Dollars in thousands)     3/31/2014     6/30/2014     6/30/2013
Non-Accrual Loans     $ 47,573     $ 43,260     $ 39,092
Foreclosed Real Estate     $ 6,871       $ 8,445       $ 13,434  
Total Non-Performing Assets     $ 54,444       $ 51,705       $ 52,526  
Non-Performing Assets to Loans     .49 %     .45 %     .51 %
Non-Performing Assets to Total Assets     .24 %     .22 %     .24 %
Loans 90 Days & Over Past Due — Still Accruing     $ 12,487       $ 11,629       $ 12,509  

This financial news release, including management's discussion of second quarter results, is posted to the Company's web site at www.commercebank.com.

     

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

FINANCIAL HIGHLIGHTS

 
For the Three Months Ended For the Six Months Ended
(Unaudited)     March 31,
2014
  June 30,
2014
  June 30,
2013
  June 30,
2014
  June 30,
2013
FINANCIAL SUMMARY (In thousands, except per share data)  
Net interest income $153,066   $160,493   $159,458 $313,559 $309,801
Taxable equivalent net interest income 159,761 167,889 165,942 327,650 322,650
Non-interest income 102,627 108,763 102,676 211,390 202,553
Investment securities gains (losses), net 10,037 (2,558 ) (1,568 ) 7,479 (3,733 )
Provision for loan losses 9,660 7,555 7,379 17,215 10,664
Non-interest expense 162,340 162,931 156,966 325,271 312,003
Net income attributable to Commerce Bancshares, Inc. 64,313 66,531 65,805 130,844 126,822
Earnings per common share:
Net income — basic $.67 $.70 $.69 $1.37 $1.33
Net income — diluted $.67 $.70 $.69 $1.37 $1.32
Cash dividends $.225 $.225 $.214 $.450 $.429
Cash dividends on common stock 21,590 21,331 20,431 42,921 40,866
Diluted wtd. average shares o/s     95,194     93,913     94,667     94,550     94,816  
RATIOS
Average loans to deposits (1) 59.35 % 59.71 % 56.68 % 59.53 % 55.66 %
Return on total average assets 1.16 % 1.18 % 1.20 % 1.17 % 1.17 %
Return on total average equity 11.56 % 11.69 % 12.07 % 11.62 % 11.73 %
Return on average common equity (2) 11.56 % 11.79 % 12.07 % 11.67 % 11.73 %
Non-interest income to revenue (3) 40.14 % 40.39 % 39.17 % 40.27 % 39.53 %
Efficiency ratio (4)     63.28 %   60.30 %   59.73 %   61.75 %   60.72 %
NET LOAN CHARGE-OFFS (RECOVERIES)
Net total loan charge-offs (recoveries) 9,660 7,555 9,379 17,215 17,164
Business (106 ) 381 (87 ) 275 (137 )
Real estate — construction and land 55 (978 ) (744 ) (923 ) (1,276 )
Real estate — business 426 36 1,253 462 1,149
Consumer credit card 6,447 6,291 6,935 12,738 12,983
Consumer 2,505 1,689 1,452 4,194 3,161
Revolving home equity 113 (351 ) 156 (238 ) 295
Real estate — personal 6 176 172 182 545
Overdraft     214     311     242     525     444  
AT PERIOD END
Book value per share based on total equity $23.75 $24.69 $22.13
Market value per share $46.42 $46.50 $41.48
Allowance for loan losses as a percentage of loans 1.44 % 1.41 % 1.60 %
Tier I leverage ratio 9.41 % 9.12 % 9.08 %
Tangible common equity to assets ratio (5) 9.36 % 8.60 % 9.06 %
Common shares outstanding 95,722,655 91,609,363 95,207,651
Shareholders of record 4,143 4,113 4,107
Number of bank/ATM locations 356 354 356
Full-time equivalent employees     4,745     4,733     4,720  
OTHER QTD INFORMATION
High market value per share $47.31 $47.45 $42.50
Low market value per share     $41.66     $42.09     $36.63  

(1)

 

Includes loans held for sale.

(2)

Annualized net income available to common shareholders divided by average total equity less preferred stock.

(3)

Revenue includes net interest income and non-interest income.

(4)

The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

(5)

The tangible common equity ratio is calculated as stockholders’ equity reduced by preferred stock, goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).

 
       

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 
For the Three Months Ended For the Six Months Ended
(Unaudited)

(In thousands, except per share data)

    March 31,
2014
    June 30,
2014
    June 30,
2013
    June 30,
2014
    June 30,
2013
Interest income $159,998     $167,567     $167,255 $327,565     $326,000
Interest expense 6,932   7,074   7,797   14,006   16,199  
Net interest income 153,066 160,493 159,458 313,559 309,801
Provision for loan losses 9,660   7,555   7,379   17,215   10,664  
Net interest income after provision for loan losses 143,406   152,938   152,079   296,344   299,137  
NON-INTEREST INCOME
Bank card transaction fees 41,717 44,444 40,700 86,161 79,250
Trust fees 26,573 27,765 25,734 54,338 50,903
Deposit account charges and other fees 18,590 19,709 19,602 38,299 38,314
Capital market fees 3,870 3,246 3,305 7,116 7,696
Consumer brokerage services 2,747 2,972 2,853 5,719 5,539
Loan fees and sales 1,209 1,211 1,314 2,420 2,787
Other 7,921   9,416   9,168   17,337   18,064  
Total non-interest income 102,627   108,763   102,676   211,390   202,553  
INVESTMENT SECURITIES GAINS (LOSSES), NET
Change in fair value of other-than-temporarily impaired securities (63 ) (785 ) (293 ) (848 ) 1,096
Portion recognized in other comprehensive income (283 ) 154   (195 ) (129 ) (2,026 )
Net impairment losses recognized in earnings (346 ) (631 ) (488 ) (977 ) (930 )
Realized gains (losses) on sales and fair value adjustments 10,383   (1,927 ) (1,080 ) 8,456   (2,803 )
Investment securities gains (losses), net 10,037   (2,558 ) (1,568 ) 7,479   (3,733 )
NON-INTEREST EXPENSE
Salaries and employee benefits 94,263 94,849 89,569 189,112 180,450
Net occupancy 11,616 11,151 11,234 22,767 22,469
Equipment 4,504 4,525 4,680 9,029 9,363
Supplies and communication 5,699 5,486 5,797 11,185 11,386
Data processing and software 19,087 19,578 19,584 38,665 38,535
Marketing 3,681 3,949 4,048 7,630 7,407
Deposit insurance 2,894 2,892 2,790 5,786 5,557
Other 20,596   20,501   19,264   41,097   36,836  
Total non-interest expense 162,340   162,931   156,966   325,271   312,003  
Income before income taxes 93,730 96,212 96,221 189,942 185,954
Less income taxes 29,609   30,312   30,182   59,921   59,107  
Net income 64,121 65,900 66,039 130,021 126,847
Less non-controlling interest expense (income) (192 ) (631 ) 234   (823 ) 25  
Net income attributable to Commerce Bancshares, Inc. 64,313 66,531 65,805 130,844 126,822
Less preferred stock dividends          
Net income available to common shareholders $64,313   $66,531   $65,805   $130,844   $126,822  
Net income per common share — basic $.67   $.70   $.69   $1.37   $1.33  
Net income per common share — diluted     $.67       $.70       $.69       $1.37       $1.32  
 
           

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
(Unaudited)

(In thousands)

    March 31,
2014
    June 30,
2014
    June 30,
2013
ASSETS
Loans $ 11,222,038 $ 11,486,674 $ 10,370,155
Allowance for loan losses (161,532 ) (161,532 ) (166,032 )
Net loans 11,060,506   11,325,142   10,204,123  
Loans held for sale 8,941
Investment securities:
Available for sale 9,115,116 9,282,640 8,927,815
Trading 15,740 15,684 14,670
Non-marketable 126,119   93,748   113,470  
Total investment securities 9,256,975   9,392,072   9,055,955  
Short-term federal funds sold and securities purchased under agreements to resell 19,525 29,490 22,990
Long-term securities purchased under agreements to resell 950,000 950,000 1,200,000
Interest earning deposits with banks 198,417 18,877 6,816
Cash and due from banks 530,244 516,509 399,687
Land, buildings and equipment — net 344,790 346,363 352,462
Goodwill 138,921 138,921 125,585
Other intangible assets — net 8,811 8,249 4,517
Other assets 328,931   306,191   529,275  
Total assets $ 22,837,120   $ 23,031,814   $ 21,910,351  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing $ 6,552,085 $ 6,439,796 $ 5,811,473
Savings, interest checking and money market 10,328,912 10,085,460 9,573,390
Time open and C.D.’s of less than $100,000 967,272 942,233 1,039,131
Time open and C.D.’s of $100,000 and over 1,389,065   1,498,982   1,472,944  
Total deposits 19,237,334 18,966,471 17,896,938
Federal funds purchased and securities sold under agreements to repurchase 927,152 1,154,323 1,620,694
Other borrowings 105,114 105,096 102,766
Other liabilities 294,009   543,771   183,166  
Total liabilities 20,563,609   20,769,661   19,803,564  
Stockholders’ equity:
Preferred stock 144,816
Common stock 481,224 481,224 458,646
Capital surplus 1,273,290 1,214,836 1,094,922
Retained earnings 492,559 537,759 563,166
Treasury stock (17,193 ) (203,174 ) (35,771 )
Accumulated other comprehensive income 40,499   84,314   21,864  
Total stockholders’ equity 2,270,379 2,259,775 2,102,827
Non-controlling interest 3,132   2,378   3,960  
Total equity 2,273,511   2,262,153   2,106,787  
Total liabilities and equity     $ 22,837,120       $ 23,031,814       $ 21,910,351  
 
   

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

 
(Unaudited)

(Dollars in thousands)

For the Three Months Ended
March 31, 2014     June 30, 2014     June 30, 2013
Average Balance     Avg. Rates Earned/Paid Average Balance     Avg. Rates Earned/Paid Average Balance     Avg. Rates Earned/Paid
ASSETS:            
Loans:
Business (A) $ 3,843,377 2.90 % $ 3,941,572 2.85 % $ 3,253,577 3.07 %
Real estate — construction and land 419,628 3.77 431,819 3.76 373,359 3.94
Real estate — business 2,323,208 3.90 2,292,919 3.86 2,216,876 4.14
Real estate — personal 1,778,573 3.86 1,790,678 3.80 1,664,988 3.97
Consumer 1,533,485 4.41 1,602,136 4.24 1,430,832 4.69
Revolving home equity 423,656 3.82 419,581 3.93 425,762 3.96
Consumer credit card 757,423 11.43 746,485 11.42 741,793 11.20
Overdrafts 5,429       4,669       6,369      
Total loans (B) 11,084,779     4.12   11,229,859     4.05   10,113,556     4.34  
Loans held for sale 9,003 4.05
Investment securities:
U.S. government and federal agency obligations 497,333 1.71 493,880 6.55 400,027 5.15
Government-sponsored enterprise obligations 774,749 1.66 789,575 1.66 439,075 1.74
State and municipal obligations (A) 1,605,752 3.69 1,665,275 3.41 1,634,196 3.61
Mortgage-backed securities 3,019,157 2.80 3,080,464 2.69 3,272,580 2.77
Asset-backed securities 2,854,201 .89 2,860,083 .89 3,199,393 .91
Other marketable securities (A) 153,068     2.50   149,736     2.42   188,267     2.97  
Total available for sale securities (B) 8,904,260 2.18 9,039,013 2.37 9,133,538 2.33
Trading securities (A) 19,183 2.28 18,920 2.14 22,355 2.40
Non-marketable securities (A) 109,932     6.42   110,338     18.12   118,888     16.92  
Total investment securities 9,033,375     2.24   9,168,271     2.56   9,274,781     2.52  
Short-term federal funds sold and securities purchased under agreements to resell 24,464 .43 23,947 .40 23,429 .48
Long-term securities purchased under agreements to resell 1,102,222 1.53 968,680 1.22 1,200,000 1.94
Interest earning deposits with banks 161,117     .25   140,917     .25   116,510     .26  
Total interest earning assets 21,405,957   3.16   21,531,674   3.26   20,737,279   3.36  
Non-interest earning assets (B) 1,039,777   1,064,336   1,184,066  
Total assets $ 22,445,734   $ 22,596,010   $ 21,921,345  
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings $ 649,292 .12 $ 685,134 .12 $ 639,747 .11
Interest checking and money market 9,473,680 .13 9,488,405 .13 8,932,987 .14
Time open & C.D.’s of less than $100,000 975,640 .47 953,789 .45 1,052,574 .63
Time open & C.D.’s of $100,000 and over 1,339,808     .44   1,450,069     .42   1,464,384     .46  
Total interest bearing deposits 12,438,420     .19   12,577,397     .19   12,089,692     .22  
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase 1,209,180 .07 1,169,322 .09 1,544,623 .07
Other borrowings 105,187     3.28   105,101     3.34   103,019     3.23  
Total borrowings 1,314,367     .33   1,274,423     .36   1,647,642     .27  
Total interest bearing liabilities 13,752,787   .20 % 13,851,820   .20 % 13,737,334   .23 %
Non-interest bearing deposits 6,237,479 6,231,003 5,768,455
Other liabilities 198,383 230,497 228,966
Equity 2,257,085   2,282,690   2,186,590  
Total liabilities and equity $ 22,445,734   $ 22,596,010   $ 21,921,345  
Net interest income (T/E) $ 159,761   $ 167,889   $ 165,942  
Net yield on interest earning assets             3.03 %             3.13 %             3.21 %

(A)

 

Stated on a tax equivalent basis using a federal income tax rate of 35%.

(B)

The allowance for loan losses and unrealized gains/(losses) on available for sale securities are included in non-interest earning assets.

 

COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2014

For the quarter ended June 30, 2014, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $66.5 million, an increase of $2.2 million compared to the previous quarter, and an increase of $726 thousand over the same quarter last year. The increase in net income over the previous quarter resulted mainly from growth in net interest income of $7.4 million, a lower provision for loan losses of $2.1 million, and an increase in non-interest income of $6.1 million. Non-interest expense was relatively flat with the previous quarter, however, net securities losses totaled $2.6 million in the current quarter compared to net gains of $10.0 million in the previous quarter. For the current quarter, the return on average assets was 1.18%, the return on average equity was 11.69%, and the efficiency ratio was 60.3%.

Balance Sheet Review

During the 2nd quarter of 2014, outstanding loans increased $264.6 million, or 9.6% annualized, compared to the previous quarter and increased $1.1 billion, or 10.9%, compared to the same period last year. Compared to the previous quarter, the increase in period end loans resulted from growth in business (up $153.9 million), personal real estate (up $36.4 million), construction (up $18.4 million), and consumer loans (up $75.9 million, mainly in automobile and other consumer loans). Business real estate loans declined $37.3 million from the previous quarter. The increase in business loans mainly resulted from growth in commercial and industrial loans and leasing activities. Demand for consumer automobile loans remained strong this quarter, as these loans grew by $59.8 million. However, marine and RV loans, included in the consumer loan portfolio, continued to run off this quarter by $17.0 million.

Total available for sale investment securities, at fair value, averaged $9.2 billion this quarter, an increase of $173.8 million when compared to the previous quarter. Purchases of new securities, totaling $569.4 million in the 2nd quarter of 2014, were offset by sales, maturities and pay downs of $464.1 million. At June 30, 2014, the duration of the investment portfolio was 2.7 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months.

Total average deposits increased $132.5 million during the 2nd quarter of 2014 compared to the previous quarter. The increase in average deposits resulted mainly from growth in interest checking accounts (increase of $46.3 million), jumbo certificates of deposit (increase of $110.3 million), and savings accounts (increase of $35.8 million), but was offset by declines in money market accounts (decrease of $31.6 million) and non-interest bearing business demand deposits (decrease of $38.8 million). Compared to the previous quarter, total average consumer and commercial deposits increased $123.7 million and $48.1 million, respectively, while private banking deposits declined on average by $53.0 million. The average loans to deposits ratio in the current quarter was 59.7%, compared to 59.4% in the previous quarter.

During the current quarter, the Company’s average borrowings decreased $39.9 million compared to the previous quarter, mainly due to a decline in the average balance of repurchase agreements.

Net Interest Income

Net interest income (tax equivalent) in the 2nd quarter of 2014 amounted to $167.9 million compared with $159.8 million in the previous quarter, or an increase of $8.1 million. Net interest income (tax equivalent) for the current quarter increased $1.9 million compared to the 2nd quarter of last year. During the 2nd quarter of 2014, the net yield on earning assets (tax equivalent) was 3.13%, compared with 3.03% in the previous quarter and 3.21% in the same period last year.

The increase in net interest income (tax equivalent) in the 2nd quarter of 2014 compared to the previous quarter was due mainly to an increase in inflation income of $5.7 million on the Company’s inflation-protected securities as a result of a higher Consumer Price Index published this quarter. Additionally, the Company received a special dividend of $1.9 million related to the sale of a private equity investment which settled this quarter. Also this quarter, premium amortization expense was reduced by $218 thousand due to prepayment speed adjustments on various mortgage-backed securities.

Compared to the previous quarter, interest on loans increased $814 thousand (tax-equivalent) as a result of higher volumes on automobile and business loans but offset by lower overall rates earned, especially on consumer loans. The average yield on the loan portfolio declined 7 basis points this quarter. The average rate earned on the investment securities portfolio increased 32 basis points to 2.56% this quarter, largely due to higher rates earned on inflation-protected securities and the special dividend mentioned above.

Interest expense on deposits increased $58 thousand in the 2nd quarter of 2014 compared with the previous quarter, due mainly to growth in jumbo certificate of deposit balances.

Non-Interest Income

In the 2nd quarter of 2014, total non-interest income amounted to $108.8 million, an increase of $6.1 million, or 5.9%, compared to the same period last year. Also, current quarter non-interest income increased $6.1 million when compared to amounts recorded in the previous quarter. The increase in non-interest income over the same period last year was mainly due to growth in bank card and trust fees.

Total bank card fees in the current quarter increased $3.7 million, or 9.2%, over the same period last year. Corporate card fees increased 16.5%, or $3.2 million, while debit and credit card fees grew by 6.5% and 3.7%, respectively. Trust fees for the quarter increased $2.0 million, or 7.9%, compared to the same period last year, resulting mainly from continued growth in both private client and institutional trust fees.

Deposit account fees grew slightly, mostly from account service charges, while fees from corporate cash management and overdraft services were flat. Capital market fees declined slightly, and fees from sales of tax credits declined $976 thousand, mostly due to strong sales in the same period last year.

Investment Securities Gains and Losses

The Company recorded net securities losses of $2.6 million this quarter compared with net losses of $1.6 million in the 2nd quarter of last year. The Company recorded net securities gains of $10.0 million in the previous quarter. Net securities losses this quarter were comprised of adjustments for net losses of $4.7 million on the Company’s private equity portfolio, offset by securities gains of $1.6 million related to the donation of appreciated securities. Additionally, the Company completed its sale of one large private equity investment (large fair value write up noted in the first quarter of 2014) and recorded an additional $1.1 million in realized securities gains. Also during the current quarter, credit-related impairment losses recorded on the Company’s non-agency guaranteed mortgage-backed securities which have been identified as other-than-temporarily impaired totaled $631 thousand. The cumulative credit-related impairment on these bonds totaled $13.8 million at quarter end. At June 30, 2014, the fair value of non-agency guaranteed mortgage-backed securities identified as other-than-temporarily impaired totaled $62.0 million, compared to $66.1 million at March 31, 2014.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $162.9 million, an increase of $6.0 million, or 3.8%, over the same period last year but only a small increase compared to the previous quarter. The increase over the previous year was mainly due to higher salaries expense coupled with an increase in medical costs. Non-interest expense in the current quarter included expenses related to Summit Bancshares totaling $1.3 million which were not present in the same quarter last year.

Compared to the 2nd quarter of last year, salaries expense grew $3.2 million, or 4.2%, mainly due to higher full-time salaries expense coupled with growth in equity compensation costs. Exclusive of salaries costs for Summit Bancshares of $745 thousand (acquired in September 2013), salaries expense grew 3.2%. Benefits expense grew $2.1 million mainly due to higher medical costs which the Company self-insures. Growth in salaries expense resulted partly from staffing additions in commercial banking, wealth, commercial card and IT departments. Full-time equivalent employees totaled 4,733 and 4,720 at June 30, 2014 and 2013, respectively.

Compared to the 2nd quarter of last year, occupancy costs declined slightly while supplies and communication and equipment costs declined by 5.4% and 3.3%, respectively. Data processing costs remained virtually unchanged from previous year’s levels mostly due to lower bank card related processing costs. Compared to the previous year, other expense included an increase in credit card rewards costs of $807 thousand coupled with higher costs for leasing activities, legal, and foreclosed property expense, but offset by operating loss recoveries of $1.0 million realized this quarter. The current quarter also included donation expense of $1.7 million related to the contribution of appreciated securities noted above in the investment securities gains and losses section.

Income Taxes

The effective tax rate for the Company was 31.3% in the current quarter compared to 31.5% in the previous quarter and 31.4% in the 2nd quarter of 2013.

Credit Quality

Net loan charge-offs in the 2nd quarter of 2014 amounted to $7.6 million, compared with $9.7 million in the prior quarter and $9.4 million in the 2nd quarter of last year. The ratio of annualized net loan charge-offs to total average loans was .27% in the current quarter compared to .35% in the previous quarter.

In the 2nd quarter of 2014, annualized net loan charge-offs on average consumer credit card loans amounted to 3.38%, compared with 3.45% in the previous quarter and 3.75% in the same period last year. Consumer loan net charge-offs in the quarter amounted to .42% of average consumer loans, compared to .66% in the previous quarter and .41% in the same quarter last year. The provision for loan losses in the current quarter totaled $7.6 million, a decrease of $2.1 million from the previous quarter and was slightly higher than in the same period last year. The current quarter provision for loan losses matched net loan charge-offs, while in the 2nd quarter of 2013, the provision was $2.0 million less than net loan charge-offs. At June 30, 2014, the allowance was 1.41% of total loans and was 373% of total non-accrual loans.

At June 30, 2014, total non-performing assets amounted to $51.7 million, a decrease of $2.7 million from the previous quarter. Non-performing assets are comprised of non-accrual loans ($43.3 million) and foreclosed real estate ($8.4 million). At June 30, 2014, the balance of non-accrual loans, which represented .38% of loans outstanding, included business real estate loans of $16.5 million, business loans of $11.1 million, and construction and land loans of $8.2 million. Loans more than 90 days past due and still accruing interest totaled $11.6 million at June 30, 2014.

Other

Through its normal treasury repurchase program, the Company purchased 1.1 million shares of treasury stock at an average cost of $43.55, and the Company declared and paid a $.225 per share cash dividend, representing an increase of 5% over the rate paid in 2013.

This quarter the Company also completed the issuance of $150 million in 6% non-cumulative perpetual preferred stock and concurrently entered into a $200 million accelerated share repurchase (ASR) agreement with another financial institution. Under the terms of the ASR agreement, the Company paid $200 million to the financial institution on June 19, 2014 and received 3.1 million shares of its common stock in treasury, representing a substantial majority of shares expected to be delivered from the overall ASR program. The ASR program is expected to be completed within the next twelve months at which time any additional shares would be delivered to the Company. The total number of shares that the Company will receive and the total consideration per share paid ultimately will be determined based on the volume-weighted daily average price of its common stock during the repurchase program. The Company also increased the number of shares under its stock buyback program to 5,000,000 shares to accommodate this program.

Forward Looking Information

This information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include future financial and operating results, expectations, intentions and other statements that are not historical facts. Such statements are based on current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statement.

Contacts

Commerce Bancshares, Inc.
Jeffery Aberdeen, 816-234-2081
Controller
mymoney@commercebank.com
Web Site: http://www.commercebank.com

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Contacts

Commerce Bancshares, Inc.
Jeffery Aberdeen, 816-234-2081
Controller
mymoney@commercebank.com
Web Site: http://www.commercebank.com