Commerce Bancshares, Inc. Announces Third Quarter Earnings Per Common Share of $.68

KANSAS CITY, Mo.--()--Commerce Bancshares, Inc. announced earnings of $.68 per common share for the three months ended September 30, 2016, compared to $.70 per share in the prior quarter and $.63 per share in the third quarter of 2015. Net income attributable to Commerce Bancshares, Inc. for the third quarter amounted to $68.5 million, compared to $69.9 million in the prior quarter and $64.6 million in the same quarter last year. For the quarter, the return on average assets was 1.12%, the return on average common equity was 11.0%, and the efficiency ratio was 62.3%.

For the nine months ended September 30, 2016, earnings per common share totaled $2.03, compared to $1.93 in 2015, or an increase of 5.2%. Net income attributable to Commerce Bancshares, Inc. amounted to $203.8 million for the nine months ended September 30, 2016, compared to $200.0 million during the same period last year. For the first nine months of 2016, the return on average assets was 1.11%, and the return on average common equity was 11.3%.

In announcing these results, David W. Kemper, Chairman and CEO, said, “This quarter top line revenue grew 6% compared to the same period last year, with this growth coming from both net interest income and fees. The increase in fees resulted mainly from higher commercial card, deposit, and trust fee income, while loan and sweep fees also showed good growth. The increase in net interest income continues to be driven by overall growth in average loans and higher overall earning assets. Average loans increased $118.1 million this quarter mainly from higher commercial real estate and construction lending and growth in consumer loan balances. Average deposits declined slightly this quarter, and funding costs remained low. Non-interest expense for the quarter totaled $181.2 million, up $4.2 million compared to the previous quarter, mainly reflecting additional investments in staffing, occupancy, and information technology costs.”

Mr. Kemper continued, “The current credit environment remains excellent as net loan charge-offs totaled $6.6 million this quarter, compared to $7.5 million in the previous quarter and $8.4 million in the third quarter of 2015. The decrease in net loan charge-offs compared to the previous quarter was largely due to continued commercial loan recoveries, which totaled $2.5 million compared to $1.6 million in the prior quarter. During the current quarter, the provision for loan losses totaled $7.3 million, or $700 thousand higher than net loan charge-offs, but was $2.0 million less than in the prior quarter. The allowance for loan losses increased to $154.5 million at September 30, 2016, or 1.17% of period end loans. Total non-performing assets decreased $9.5 million from the previous quarter to $16.6 million this quarter.”

Total assets at September 30, 2016 were $24.7 billion, total loans were $13.2 billion, and total deposits were $20.2 billion. During the quarter, the Company paid a common cash dividend of $.225 per share and also paid a 6% cash dividend on its preferred stock.

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 approximately 350 locations in Missouri, Illinois, Kansas, Oklahoma and Colorado. The Company also has operating subsidiaries involved in credit related insurance and private equity activities.

This financial news release, including management's discussion of third 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 Nine Months Ended

(Unaudited)
(Dollars in thousands, except per share data)

    September 30,
2016
    June 30,
2016
    September 30,
2015
    September 30,
2016
    September 30,
2015
FINANCIAL SUMMARY    
Net interest income $171,243     $171,829     $162,038 $506,847 $471,833
Non-interest income 119,319       116,570       111,288       354,913       332,097  
Total revenue 290,562 288,399 273,326 861,760 803,930
Investment securities gains (losses), net (1,965 ) (744 ) (378 ) (3,704 ) 7,800
Provision for loan losses 7,263 9,216 8,364 25,918 19,541
Non-interest expense 181,242       177,089       171,402       535,804       500,710  
Income before taxes 100,092 101,350 93,182 296,334 291,479
Income taxes 30,942 31,542 27,969 91,854 88,929
Non-controlling interest expense (income) 605       (85 )     601       668       2,530  
Net income attributable to Commerce Bancshares, Inc. 68,545 69,893 64,612 203,812 200,020
Preferred stock dividends 2,250       2,250       2,250       6,750       6,750  
Net income available to common shareholders $66,295       $67,643       $62,362       $197,062       $193,270  
Earnings per common share:
Net income — basic $.69 $.70 $.63 $2.04 $1.93
Net income — diluted $.68 $.70 $.63 $2.03 $1.93
Effective tax rate 31.10 % 31.10 % 30.21 % 31.07 % 30.78 %
Tax equivalent net interest income $179,115 $179,592 $169,512 $530,132 $493,897
Average total interest earning assets (1) $ 23,150,832 $ 23,252,289 $ 22,434,664 $ 23,244,807 $ 22,510,617
Diluted wtd. average shares outstanding     95,669,439       95,630,629       96,882,333       95,693,969       98,882,951  
 
RATIOS
Average loans to deposits (2) 64.33 % 63.45 % 62.44 % 63.53 % 60.97 %
Return on total average assets 1.12 1.15 1.09 1.11 1.13
Return on average common equity (3) 10.97 11.69 11.25 11.28 11.62
Non-interest income to total revenue 41.06 40.42 40.72 41.18 41.31
Efficiency ratio (4) 62.25 61.27 62.55 62.04 62.12
Net yield on interest earning assets     3.08       3.11       3.00       3.05       2.93  
 
EQUITY SUMMARY
Cash dividends per common share $.225 $.225 $.214 $.675 $.643
Cash dividends on common stock $21,772 $21,762 $20,936 $65,294 $64,041
Cash dividends on preferred stock $2,250 $2,250 $2,250 $6,750       $6,750  
Book value per common share (5) $25.01 $24.67 $22.83
Market value per common share (5) $49.26 $47.90 $43.39
High market value per common share $51.30 $49.41 $46.38
Low market value per common share $45.74 $42.98 $40.43
Common shares outstanding (5) 96,591,285 96,560,828 97,511,328
Tangible common equity to tangible assets (6) 9.22 % 9.09 % 8.72 %
Tier I leverage ratio     9.58 %     9.36 %     9.31 %
 
OTHER QTD INFORMATION
Number of bank/ATM locations 340 346 347
Full-time equivalent employees     4,778       4,779       4,770  

(1)

 

Excludes allowance for loan losses and unrealized gains/(losses) on available for sale securities.

(2)

Includes loans held for sale.

(3)

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

(4)

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

(5)

As of period end.

(6)

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 Nine Months Ended
(Unaudited)

(In thousands, except per share data)

    September 30,
2016
    June 30,
2016
    March 31,
2016
    December 31,
2015
    September 30,
2015
    September 30,
2016
    September 30,
2015
Interest income $179,361     $180,065     $172,128     $169,742     $169,115 $531,554     $492,674
Interest expense 8,118       8,236       8,353       7,255       7,077       24,707       20,841  
Net interest income 171,243 171,829 163,775 162,487 162,038 506,847 471,833
Provision for loan losses 7,263       9,216       9,439       9,186       8,364       25,918       19,541  
Net interest income after provision for loan losses 163,980       162,613       154,336       153,301       153,674       480,929       452,292  
NON-INTEREST INCOME
Bank card transaction fees 47,006 45,065 44,470 46,320 44,635 136,541 132,606
Trust fees 30,951 30,241 29,243 29,622 29,302 90,435 88,815
Deposit account charges and other fees 22,241 21,328 20,691 21,606 20,674 64,260 58,810
Capital market fees 2,751 2,500 2,725 3,116 2,620 7,976 8,360
Consumer brokerage services 3,375 3,491 3,509 3,254 3,687 10,375 10,530
Loan fees and sales 3,123 3,196 2,510 2,101 1,855 8,829 6,127
Other 9,872       10,749       15,876       10,023       8,515       36,497       26,849  
Total non-interest income 119,319       116,570       119,024       116,042       111,288       354,913       332,097  
INVESTMENT SECURITIES GAINS (LOSSES), NET (1,965 ) (744 ) (995 ) (1,480 ) (378 ) (3,704 ) 7,800
NON-INTEREST EXPENSE
Salaries and employee benefits 107,004 104,808 106,859 102,098 100,874 318,671 298,603
Net occupancy 12,366 11,092 11,303 10,981 11,247 34,761 33,807
Equipment 4,842 4,781 4,634 4,915 4,789 14,257 14,171
Supplies and communication 5,968 5,693 6,829 6,554 5,609 18,490 16,416
Data processing and software 23,663 22,770 22,899 22,274 21,119 69,332 61,670
Marketing 4,399 4,389 3,813 3,539 4,343 12,601 12,568
Deposit insurance 3,576 3,143 3,165 3,145 2,981 9,884 9,001
Other 19,424       20,413       17,971       22,271       20,440       57,808       54,474  
Total non-interest expense 181,242       177,089       177,473       175,777       171,402       535,804       500,710  
Income before income taxes 100,092 101,350 94,892 92,086 93,182 296,334 291,479
Less income taxes 30,942       31,542       29,370       27,661       27,969       91,854       88,929  
Net income 69,150 69,808 65,522 64,425 65,213 204,480 202,550
Less non-controlling interest expense (income) 605       (85 )     148       715       601       668       2,530  
Net income attributable to Commerce Bancshares, Inc. 68,545 69,893 65,374 63,710 64,612 203,812 200,020
Less preferred stock dividends 2,250   2,250   2,250   2,250   2,250   6,750   6,750  
Net income available to common shareholders $66,295       $67,643       $63,124       $61,460       $62,362       $197,062       $193,270  
Net income per common share — basic $.69       $.70       $.65       $.63       $.63       $2.04       $1.93  
Net income per common share — diluted     $.68       $.70       $.65       $.63       $.63       $2.03       $1.93  
 
OTHER INFORMATION
Return on total average assets 1.12 % 1.15 % 1.07 % 1.05 % 1.09 % 1.11 % 1.13 %
Return on average common equity (1) 10.97 11.69 11.20 10.88 11.25 11.28 11.62
Efficiency ratio (2) 62.25 61.27 62.62 62.97 62.55 62.04 62.12
Effective tax rate 31.10 31.10 31.00 30.27 30.21 31.07 30.78
Net yield on interest earning assets 3.08 3.11 2.95 2.94 3.00 3.05 2.93
Tax equivalent net interest income     $179,115       $179,592       $171,425       $170,141       $169,512       $530,132       $493,897  

(1) Annualized net income available to common shareholders divided by average total equity less preferred stock.
(2) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

           
 

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - PERIOD END

 
(Unaudited)

(In thousands)

    September 30,
2016
    June 30,
2016
    September 30,
2015
ASSETS
Loans
Business $ 4,770,883 $ 4,840,248 $ 4,406,854
Real estate — construction and land 800,545 819,896 534,425
Real estate — business 2,520,528 2,399,271 2,286,013
Real estate — personal 1,968,005 1,927,340 1,920,650
Consumer 1,972,969 1,939,486 1,886,806
Revolving home equity 417,591 408,301 428,940
Consumer credit card 760,022 753,166 756,093
Overdrafts 19,698       4,180       4,493  
Total loans 13,230,241       13,091,888       12,224,274  
Allowance for loan losses (154,532 )     (153,832 )     (151,532 )
Net loans 13,075,709       12,938,056       12,072,742  
Loans held for sale 9,511 33,254 4,143
Investment securities:
Available for sale 9,438,871 9,221,346 9,472,959
Trading 28,586 30,512 14,463
Non-marketable 108,224       111,931       116,634  
Total investment securities 9,575,681       9,363,789       9,604,056  
Federal funds sold and short-term securities purchased under agreements to resell 13,415 13,725 32,550
Long-term securities purchased under agreements to resell 725,000 825,000 975,000
Interest earning deposits with banks 56,767 183,223 42,078
Cash and due from banks 396,938 428,300 384,122
Land, buildings and equipment — net 339,196 342,237 351,946
Goodwill 138,921 138,921 138,921
Other intangible assets — net 6,621 6,561 6,826
Other assets 396,709       436,627       355,264  
Total assets $ 24,734,468       $ 24,709,693       $ 23,967,648  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing $ 7,130,415 $ 6,906,265 $ 6,699,873
Savings, interest checking and money market 11,023,526 10,978,734 10,295,260
Time open and C.D.’s of less than $100,000 732,575 749,160 808,210
Time open and C.D.’s of $100,000 and over 1,279,644       1,515,888       1,183,417  
Total deposits 20,166,160       20,150,047       18,986,760  
Federal funds purchased and securities sold under agreements to repurchase 1,489,891 1,632,272 2,193,197
Other borrowings 101,415 103,878 103,831
Other liabilities 416,189       296,675       312,817  
Total liabilities 22,173,655       22,182,872       21,596,605  
Stockholders’ equity:
Preferred stock 144,784 144,784 144,784
Common stock 489,862 489,862 484,155
Capital surplus 1,335,150 1,333,995 1,283,346
Retained earnings 515,081 470,558 555,877
Treasury stock (50,538 ) (51,707 ) (168,493 )
Accumulated other comprehensive income 121,082       134,424       65,636  
Total stockholders’ equity 2,555,421 2,521,916 2,365,305
Non-controlling interest 5,392       4,905       5,738  
Total equity 2,560,813       2,526,821       2,371,043  
Total liabilities and equity     $ 24,734,468       $ 24,709,693       $ 23,967,648  
 
   

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS

 
(Unaudited)

(In thousands)

For the Three Months Ended
   

September 30,
2016

   

June 30,
2016

   

March 31,
2016

   

December 31,
2015

   

September 30,
2015

ASSETS:                
Loans:
Business $ 4,694,340 $ 4,691,476 $ 4,491,556 $ 4,351,756 $ 4,221,478
Real estate — construction and land 821,422 789,329 682,557 584,185 476,331
Real estate — business 2,432,325 2,389,170 2,382,094 2,320,439 2,284,928
Real estate — personal 1,943,951 1,905,968 1,909,532 1,916,219 1,911,469
Consumer 1,947,956 1,927,925 1,934,577 1,908,540 1,861,636
Revolving home equity 411,832 413,198 429,682 429,582 434,355
Consumer credit card 750,412 738,130 752,098 756,743 746,066
Overdrafts 4,652       3,916       4,772       6,303       5,233  
Total loans 13,006,890       12,859,112       12,586,868       12,273,767       11,941,496  
Allowance for loan losses (153,517 )     (151,622 )     (151,308 )     (150,856 )     (150,890 )
Net loans 12,853,373       12,707,490       12,435,560       12,122,911       11,790,606  
Loans held for sale 26,597 56,272 9,360 6,118 4,471
Investment securities:
U.S. government and federal agency obligations 726,469 698,374 703,212 580,816 402,591
Government-sponsored enterprise obligations 481,573 666,354 776,488 824,066 887,631
State and municipal obligations 1,747,794 1,763,849 1,718,587 1,779,704 1,805,931
Mortgage-backed securities 3,366,292 3,394,466 3,424,716 3,335,627 3,217,589
Asset-backed securities 2,340,783 2,377,708 2,537,472 2,574,426 2,546,982
Other marketable securities 334,747 337,572 342,382 337,340 302,323
Unrealized gain on investment securities 235,169       191,565       149,319       130,231       118,404  
Total available for sale securities 9,232,827 9,429,888 9,652,176 9,562,210 9,281,451
Trading securities 18,433 20,540 18,190 23,217 22,283
Non-marketable securities 113,954       116,103       127,769       114,321       114,062  
Total investment securities 9,365,214       9,566,531       9,798,135       9,699,748       9,417,796  
Federal funds sold and short-term securities purchased under agreements to resell 13,054 11,916 17,378 18,694 21,012
Long-term securities purchased under agreements to resell 766,302 824,999 850,275 902,174 1,007,606
Interest earning deposits with banks 207,944 125,024 219,636 178,486 160,687
Other assets 1,151,549       1,113,214       1,172,916       1,119,602       1,106,739  
Total assets $ 24,384,033       $ 24,405,446       $ 24,503,260       $ 24,047,733       $ 23,508,917  
 
LIABILITIES AND EQUITY:
Non-interest bearing deposits $ 7,096,218 $ 6,885,889 $ 6,905,673 $ 6,995,666 $ 6,781,592
Savings 778,663 787,478 761,020 736,824 739,172
Interest checking and money market 10,210,744 10,287,923 10,128,543 9,805,457 9,619,621
Time open & C.D.’s of less than $100,000 740,729 758,703 775,221 796,639 820,792
Time open & C.D.’s of $100,000 and over 1,435,001       1,635,892       1,483,700       1,219,803       1,171,617  
Total deposits 20,261,355       20,355,885       20,054,157       19,554,389       19,132,794  
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase 1,163,728 1,211,892 1,404,754 1,707,430 1,677,322
Other borrowings 102,769       104,649       377,711       103,819       103,875  
Total borrowings 1,266,497 1,316,541 1,782,465 1,811,249 1,781,197
Other liabilities 306,306       260,179       254,437       295,718       250,626  
Total liabilities 21,834,158       21,932,605       22,091,059       21,661,356       21,164,617  
Equity 2,549,875       2,472,841       2,412,201       2,386,377       2,344,300  
Total liabilities and equity     $ 24,384,033       $ 24,405,446       $ 24,503,260       $ 24,047,733       $ 23,508,917  
 
   

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE RATES

 
(Unaudited) For the Three Months Ended
   

September 30,
2016

   

June 30,
2016

   

March 31,
2016

   

December 31,
2015

   

September 30,
2015

ASSETS:                
Loans:
Business (1) 2.87 % 2.90 % 2.87 % 2.78 % 2.73 %
Real estate — construction and land 3.48 3.46 3.51 3.41 3.52
Real estate — business 3.63 3.69 3.70 3.68 3.71
Real estate — personal 3.73 3.76 3.77 3.76 3.73
Consumer 3.91 3.80 3.87 3.91 4.00
Revolving home equity 3.56 3.59 3.52 3.44 3.50
Consumer credit card 11.56 11.54 11.42 11.23 11.59
Overdrafts                          
Total loans 3.86       3.86       3.89       3.85       3.89  
Loans held for sale 5.00 4.95 5.80 5.40 4.26
Investment securities:
U.S. government and federal agency obligations 2.43 3.48 .40 .17 4.39
Government-sponsored enterprise obligations 2.24 3.03 1.93 1.89 1.77
State and municipal obligations (1) 3.60 3.60 3.66 3.64 3.44
Mortgage-backed securities 2.38 2.36 2.45 2.54 2.47
Asset-backed securities 1.48 1.45 1.39 1.25 1.15
Other marketable securities (1) 2.74       2.77       2.79       2.83       2.65  
Total available for sale securities 2.39 2.51 2.20 2.20 2.32
Trading securities (1) 2.42 2.27 2.87 2.65 2.72
Non-marketable securities (1) 10.24       8.03       6.54       8.19       8.28  
Total investment securities 2.49       2.58       2.26       2.27       2.39  
Federal funds sold and short-term securities purchased under agreements to resell .61 .64 .56 .32 .40
Long-term securities purchased under agreements to resell 1.73 1.64 1.64 1.40 1.29
Interest earning deposits with banks .51       .49       .49       .28       .25  
Total interest earning assets 3.22       3.25       3.10       3.07       3.12  
 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings .12 .11 .12 .12 .13
Interest checking and money market .13 .13 .13 .13 .13
Time open & C.D.’s of less than $100,000 .37 .38 .38 .37 .38
Time open & C.D.’s of $100,000 and over .61       .58       .54       .51       .53  
Total interest bearing deposits .20       .20       .19       .18       .18  
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase .25 .24 .25 .14 .11
Other borrowings 3.51       3.49       1.33       3.47       3.43  
Total borrowings .51       .50       .48       .33       .31  
Total interest bearing liabilities .22 %     .22 %     .23 %     .20 %     .20 %
 
Net yield on interest earning assets     3.08 %     3.11 %     2.95 %     2.94 %     3.00 %

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

 
 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CREDIT QUALITY
                         
For the Three Months Ended For the Nine Months Ended
(Unaudited) (In thousands, except per share data)    

September 30,
2016

   

June 30,
2016

   

March 31,
2016

   

December 31,
2015

   

September 30,
2015

   

September 30,
2016

   

September 30,
2015

ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 153,832 $ 152,132 $ 151,532 $ 151,532 $ 151,532 $ 151,532 $ 156,532
Provision for losses 7,263 9,216 9,439 9,186 8,364 25,918 19,541
Net charge-offs (recoveries):
Commercial portfolio:
Business (50 ) (65 ) 463 (133 ) (175 ) 348 (255 )
Real estate — construction and land (2,312 ) (507 ) (11 ) 60 (67 ) (2,830 ) (1,322 )
Real estate — business (106 )     (1,030 )     (242 )     (626 )     (22 )     (1,378 )     493  
(2,468 )     (1,602 )     210       (699 )     (264 )     (3,860 )     (1,084 )
Personal banking portfolio:
Consumer credit card 6,356 6,650 5,918 6,479 5,784 18,924 18,560
Consumer 2,240 1,781 2,599 2,251 2,435 6,620 6,027
Overdraft 434 307 219 487 429 960 863
Real estate — personal (78 ) 305 (195 ) 458 (69 ) 32 (17 )
Revolving home equity 79       75       88       210       49       242       192  
9,031       9,118       8,629       9,885       8,628       26,778       25,625  
Total net loan charge-offs 6,563       7,516       8,839       9,186       8,364       22,918       24,541  
Balance at end of period     $ 154,532       $ 153,832       $ 152,132       $ 151,532       $ 151,532       $ 154,532       $ 151,532  
 
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business % (.01 )% .04 % (.01 )% (.02 )% .01 % (0.01 )%
Real estate — construction and land (1.12 ) (.26 ) (.01 ) .04 (.06 ) (.49 ) (.40 )
Real estate — business (.02 )     (.17 )     (.04 )     (.11 )           (.08 )     .03  
(.12 )     (.08 )     .01       (.04 )     (.01 )     (.07 )     (.02 )
Personal banking portfolio:
Consumer credit card 3.37 3.62 3.16 3.40 3.08 3.38 3.34
Consumer .46 .37 .54 .47 .52 .46 .45
Overdraft 37.11 31.53 18.46 30.65 32.52 28.84 22.55
Real estate — personal (.02 ) .06 (.04 ) .09 (.01 )
Revolving home equity .08       .07       .08       .19       .04       .08       .06  
.71       .74       .69       .78       .69       .71       .70  
Total     .20 %     .24 %     .28 %     .30 %     .28 %     .24 %     .28 %
 
CREDIT QUALITY RATIOS
Non-performing assets to total loans .13 % .20 % .25 % .24 % .24 %
Non-performing assets to total assets .07 .11 .13 .12 .12
Allowance for loan losses to total loans     1.17       1.18       1.20       1.22       1.24  
 
NON-PERFORMING ASSETS
Non-accrual loans:
Business $ 8,758 $ 12,716 $ 16,098 $ 10,874 $ 11,699
Real estate — construction and land 1,310 2,170 2,710 3,090 4,046
Real estate — business 1,920 5,236 6,234 7,863 5,054
Real estate — personal 3,634 4,293 4,205 4,425 4,980
Revolving home equity 23       109       120       323        
Total 15,645       24,524       29,367       26,575       25,779  
Foreclosed real estate 950       1,609       1,997       2,819       3,053  
Total non-performing assets $ 16,595       $ 26,133       $ 31,364       $ 29,394       $ 28,832  
 
Loans past due 90 days and still accruing interest     $ 16,916       $ 15,892       $ 15,360       $ 16,467       $ 14,707  

*as a percentage of average loans (excluding loans held for sale)

COMMERCE BANCSHARES, INC.
Management Discussion of Third Quarter Results
September 30, 2016

For the quarter ended September 30, 2016, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $68.5 million, compared to $69.9 million in the previous quarter and $64.6 million in the same quarter last year. The decrease in net income from the previous quarter resulted mainly from an increase in non-interest expense of $4.2 million, coupled with lower net interest income and higher investment securities losses of $1.2 million. However, non-interest income grew by $2.7 million over the previous quarter, and the provision for loan losses declined by $2.0 million. For the current quarter, the return on total average assets was 1.12%, the return on average common equity was 11.0%, and the efficiency ratio was 62.3%.

Balance Sheet Review

During the 3rd quarter of 2016, average total loans increased $118.1 million, or 3.7% annualized, compared to the previous quarter, and increased $1.1 billion, or 9.1%, compared to the same period last year. Compared to the previous quarter, the increase in average loans resulted mainly from growth in business real estate (up $43.2 million) and construction loans (up $32.1 million). Commercial construction projects continued to drive growth in construction loans, while demand for commercial real estate loans increased this quarter. Business loans declined slightly due partly to seasonal reductions in lines of credit usage; however, leasing and tax-free lending activities continued to show good growth. Average consumer loans, including held for sale auto loans, declined slightly partly due to the sale of certain auto loans in both the 2nd and 3rd quarters of 2016, coupled with continued pay-downs of marine and recreation vehicle loans. In March 2016, automobile loans totaling $50.4 million were reclassified as held for sale, and in the 2nd quarter of 2016, $21.8 million were sold. The remaining held for sale automobile loans were sold in the 3rd quarter of 2016. Average personal real estate loans, including loans held for sale, increased by $36.2 million this quarter, and the Company also sold certain fixed rate loans totaling $43.4 million during the quarter, as part of an origination initiative that began in 2015.

During the 3rd quarter of 2016, total average available for sale investment securities at fair value declined $197.1 million to $9.2 billion. Purchases of new securities totaled $817.4 million in the 3rd quarter of 2016 and were offset by sales, maturities and pay downs of $570.5 million. Government-sponsored agency securities decreased on average by $184.8 million, while average mortgage-backed and asset-backed securities declined $65.1 million. At September 30, 2016, 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 decreased $94.5 million, or .5%, this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from a decline in certificates of deposit of $218.9 million coupled with lower money market (decline of $45.3 million) and interest checking (decline of $31.8 million) balances. Demand deposit balances, however, grew by $210.3 million, mostly related to business and government customer activity. Compared to the previous quarter, total average consumer and private banking deposits decreased $102.2 million and $85.5 million, respectively, while commercial deposits increased $92.2 million. The average loans to deposits ratio was 64.3% in the current quarter and 63.5% in the prior quarter.

Compared to the previous quarter, the Company’s average borrowings declined $50.0 million to $1.3 billion in the current quarter, mostly due to lower federal funds purchased balances.

Net Interest Income

Net interest income (tax equivalent) in the 3rd quarter of 2016 amounted to $179.1 million, compared with $179.6 million in the previous quarter. Net interest income (tax equivalent) for the current quarter increased $9.6 million compared to the 3rd quarter of last year. During the 3rd quarter of 2016, the net yield on earning assets (tax equivalent) was 3.08%, compared with 3.11% in the previous quarter and 3.00% in the same period last year.

The slight decrease in net interest income (tax equivalent) in the current quarter compared to the prior quarter was due mainly to lower interest on investment securities of $3.0 million, which includes a decline in inflation income of $1.5 million on the Company’s treasury inflation-protected securities (TIPS). Also, lower balances of government sponsored securities, mortgage-backed securities and asset-backed securities resulted in a decline in interest income of $1.7 million. However, interest income of $938 thousand was received this quarter on a private equity debt investment which had previously been on non-accrual status. Total inflation income on TIPS for the quarter totaled $2.2 million, compared to $3.7 million in the previous quarter. The yield on investment securities totaled 2.49% in the current quarter, compared to 2.58% in the prior quarter.

As compared to the previous quarter, interest on loans increased by $2.7 million as a result of higher average balances, mostly in consumer loans, coupled with higher rates earned on consumer loans. Overall, the average yield on the loan portfolio increased 6 basis points this quarter to 3.86%.

Excluding the effects of inflation income and the additional interest on a private equity debt investment noted above, the net yield on earning assets would have been 3.02% in the current quarter, 3.01% in the prior quarter, and 2.94% in the same period last year. During the current quarter, adjustments to premium amortization expense on certain mortgage-backed and asset-backed securities, due to slowing prepayment speed assumptions, increased interest income by $746 thousand.

Interest expense on deposits decreased $116 thousand this quarter compared with the previous quarter due mainly to lower certificate of deposit balances. Borrowing costs remained relatively consistent this quarter.

Non-Interest Income

In the 3rd quarter of 2016, total non-interest income amounted to $119.3 million, an increase of $8.0 million, or 7.2%, compared to the same period last year. Also, current quarter non-interest income increased $2.7 million, or 2.4%, when compared to amounts recorded in the previous quarter. The increase in non-interest income over the same period last year was due to growth in bank card, deposit, trust, sweep, tax credit sales, and loan fees and sales income, partly offset by lower swap fees.

Total bank card fees in the current quarter increased $2.4 million, or 5.3%, over the same period last year. The increase was mainly the result of growth in commercial card fees of $2.0 million, or 9.2%, as a result of a higher volume of transactions this quarter. Total bank card fees this quarter were comprised of fees on corporate card ($24.0 million), debit card ($9.9 million), merchant ($6.8 million), and credit card ($6.2 million) transactions.

In the current quarter, trust fees increased $1.6 million, or 5.6%, compared to the same period last year, with growth coming from both private client and institutional customers. Compared to the same period last year, deposit account fees also increased $1.6 million, or 7.6%, as a result of 6.0% growth in corporate cash management fees coupled with higher deposit account service fees, which grew $1.2 million, or 28.6%.

Capital market fees increased 5.0% over the same quarter last year on higher sales volumes, while loan fees and sales grew by $1.3 million due to higher mortgage banking revenue from sales of newly-originated fixed rate residential mortgages. Included in other non-interest income are sweep fees, which increased $1.3 million in the current quarter over the same period last year, and sales of tax credits, which increased by $358 thousand this quarter compared to the same period last year. Fees from sales of interest rate swaps declined by $432 thousand this quarter, offsetting the increases in sweep fees and sales of tax credits. Non-interest income comprised 41.1% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $2.0 million this quarter, compared with net losses of $744 thousand last quarter and net losses of $378 thousand in the same period last year. Net losses in the current quarter mainly resulted from unrealized fair value adjustments to the Company’s private equity investment portfolio, partly offset by realized gains on these investments.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $181.2 million, an increase of $4.2 million over the previous quarter and $9.8 million, or 5.7%, higher than the same period last year. The increase over the same period in the previous year was mainly due to higher costs for salaries and benefits, occupancy, data processing costs, and FDIC insurance expense.

Compared to the 3rd quarter of last year, salaries and benefits expense increased $6.1 million. Growth in salaries expense of $4.4 million, or 5.1%, was mainly due to higher full-time salaries and incentive compensation costs. Benefits expense increased $1.7 million, or 11.6%, mostly due to higher medical costs. Growth in salaries expense compared to the previous year resulted mainly from higher staffing costs in commercial card, residential mortgage, trust, information technology and other support units. Full-time equivalent employees totaled 4,778 and 4,770 at September 30, 2016 and 2015, respectively.

Compared to the 3rd quarter of last year, data processing and software costs and occupancy costs grew $2.5 million and $1.1 million, respectively, while costs for marketing and equipment remained relatively flat. The increase in data processing and software costs resulted from higher bank card processing costs of $1.1 million, coupled with higher software and 3rd party information technology services. Higher occupancy costs were the result of increased rental of disaster recovery facilities and demolition costs of a branch location being replaced. FDIC insurance costs have also increased by $595 thousand compared to the same quarter last year due to higher deposit balances and insurance rates. Costs for supplies and communication increased $359 thousand, or 6.4%, mainly on higher costs related to reissuance of EMV chip cards and increased data network expense. Operating losses totaled $1.9 million this quarter and declined $1.1 million compared to the 3rd quarter of 2015, mainly due to lower bank card related fraud losses.

Income Taxes

The effective tax rate for the Company was 31.1% in both the current quarter and the previous quarter, and was 30.2% in the 3rd quarter of 2015.

Credit Quality

Net loan charge-offs in the 3rd quarter of 2016 amounted to $6.6 million, compared to $7.5 million in the prior quarter and $8.4 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .20% in the current quarter compared to .24% in the previous quarter and .28% in the 3rd quarter of last year. During the 3rd quarter of 2016, the Company recorded net recoveries on commercial loans of $2.5 million, compared to net recoveries of $1.6 million in the prior quarter.

In the 3rd quarter of 2016, annualized net loan charge-offs on average consumer credit card loans were 3.37%, compared with 3.62% in the previous quarter and 3.08% in the same period last year. Consumer loan net charge-offs were .46% of average consumer loans in the current quarter, .37% in the prior quarter and .52% in the same quarter last year. The provision for loan losses in the current quarter totaled $7.3 million, compared to $9.2 million in the prior quarter and $8.4 million in the 3rd quarter of last year. This quarter, the provision for loan losses exceeded net loan charge-offs by $700 thousand. At September 30, 2016, the allowance totaled $154.5 million, which was 1.17% of total loans.

At September 30, 2016, total non-performing assets amounted to $16.6 million, a decrease of $9.5 million from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($15.6 million and $950 thousand, respectively, at September 30, 2016). At September 30, 2016, the balance of non-accrual loans, which represented .12% of loans outstanding, included business loans of $8.8 million, business real estate loans of $1.9 million, personal real estate loans of $3.6 million and construction and land loans of $1.3 million. Loans more than 90 days past due and still accruing interest totaled $16.9 million at September 30, 2016.

Other

During the 3rd quarter of 2016, the Company paid a cash dividend of $.225 per common share, representing an increase of 5% over the rate paid in 2015. Also, a cash dividend of $2.3 million was paid on its preferred stock. Additionally, the Company purchased 20,730 shares of treasury stock this quarter at an average price of $48.90.

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 statements.

Contacts

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

Contacts

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