Market Overview

Commerce Bancshares, Inc. Reports Third Quarter Growth in Earnings Per Share of 9%

Share:

Commerce Bancshares, Inc. (NASDAQ:CBSH) announced earnings of $.71
per common share for the three months ended September 30, 2017 compared
to $.65 per share in the same quarter last year and $.75 per share in
the prior quarter.
Net income attributable to Commerce
Bancshares, Inc. for the third quarter amounted to $74.6 million,
compared to $68.5 million in the third quarter of 2016 and $79.0 million
in the prior quarter.
For the quarter, the return on average
assets was 1.19%, the return on average common equity was 11.4%, and the
efficiency ratio was 60.4%.

For the nine months ended September 30, 2017, earnings per common
share totaled $2.14 compared to $1.93 in 2016, or an increase of 10.9%.

Net income attributable to Commerce Bancshares, Inc. for the nine
months ended September 30, 2017 increased 10.4% to $225.0 million
compared to $203.8 million last year.
For the current period year
to date, the return on average assets was 1.20%, and the return on
average common equity was 11.9%.

In announcing these results, David W. Kemper, Chairman and CEO, said,
"Our earnings remained strong this quarter driven by solid expense
control and continued low credit losses.
Excluding the effects of
our inflation bonds, our net interest margin continued to expand this
quarter from increased rates on our loan portfolio and stable deposit
costs.
Our wealth management business continues to post solid
results as trust fees grew 11.9% this quarter, compared to the same
period last year.
Non-interest expense was essentially flat with
the prior quarter and was up just 1.8% over the same period last year,
driven by lower data processing and other technology costs.
Total
average loans increased 2.2% annualized this quarter over the prior
quarter as growth in average construction and consumer lending was
partly offset by a decline in business loans, due to lower line of
credit utilization and reduced origination volume."

Mr. Kemper added, "Capital and liquidity levels continue to be very
strong and credit quality remains solid.
For the current quarter,
net loan charge-offs totaled $10.7 million, down slightly from the prior
quarter.
This small decline was due to lower credit card net
losses and increased recoveries on our commercial loan portfolio, but
was offset by increased automobile loan net charge-offs.
The
ratio of annualized net loan charge-offs to average loans was .31% this
quarter compared to .32% last quarter.
Non-performing assets
increased this quarter to $14.7 million but remain at low levels.
During
the current quarter, the provision for loan losses matched net loan
charge-offs, and the allowance for loan losses amounted to $157.8
million, or 1.15% of period end loans."

Total assets at September 30, 2017 were $25.0 billion, total loans
were $13.8 billion, and total deposits were $20.4 billion.
During
the quarter, the Company paid a common cash dividend of $.225 per share,
representing a 5% increase over the rate paid in 2016, and also paid an
annualized 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 330 locations in Missouri, Illinois, Kansas,
Oklahoma and Colorado.

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

For additional information, contact
Jeffery Aberdeen,
Controller

at 1000 Walnut Street, Suite 700
Kansas
City, MO 64106

or by telephone at (816) 234-2081
Web
Site:
http://www.commercebank.com
Email:
mymoney@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,
2017
  June 30,
2017
  September 30,
2016
  September 30,
2017
  September 30,
2016
FINANCIAL SUMMARY
Net interest income $182,591 $182,807 $171,243 $543,671 $506,847
Non-interest income 122,242     123,084     119,319     362,392     354,913  
Total revenue 304,833 305,891 290,562 906,063 861,760
Investment securities gains (losses), net (3,037 ) 1,651 (1,965 ) (2,158 ) (3,704 )
Provision for loan losses 10,704 10,758 7,263 32,590 25,918
Non-interest expense 184,572     184,594     181,242     555,996     535,804  
Income before taxes 106,520 112,190 100,092 315,319 296,334
Income taxes 32,294 33,201 30,942 90,402 91,854
Non-controlling interest expense (income) (338 )   29     605     (111 )   668  
Net income attributable to Commerce Bancshares, Inc. 74,564 78,960 68,545 225,028 203,812
Preferred stock dividends 2,250     2,250     2,250     6,750     6,750  
Net income available to common shareholders $72,314     $76,710     $66,295     $218,278     $197,062  
Earnings per common share:
Net income — basic $.71 $.75 $.65 $2.14 $1.94
Net income — diluted $.71 $.75 $.65 $2.14 $1.93
Effective tax rate 30.22 % 29.60 % 31.10 % 28.66 % 31.07 %
Tax equivalent net interest income $190,497 $190,865 $179,115 $568,684 $530,132
Average total interest earning assets (1) $ 23,790,684 $ 23,990,273 $ 23,150,832 $ 23,993,876 $ 23,244,807
Diluted wtd. average shares outstanding   100,934,365     100,898,503     100,452,911     100,867,260     100,478,668  
RATIOS
Average loans to deposits (2) 66.96 % 65.25 % 64.33 % 65.53 % 63.53 %
Return on total average assets 1.19 1.26 1.12 1.20 1.11
Return on average common equity (3) 11.35 12.48 10.97 11.85 11.28
Non-interest income to total revenue 40.10 40.24 41.06 40.00 41.18
Efficiency ratio (4) 60.44 60.24 62.25 61.25 62.04
Net yield on interest earning assets   3.18     3.19     3.08     3.17     3.05  
EQUITY SUMMARY
Cash dividends per common share $.225 $.225 $.214 $.675 $.643
Cash dividends on common stock $22,906 $22,903 $21,772 $68,722 $65,294
Cash dividends on preferred stock $2,250 $2,250 $2,250 $6,750     $6,750  
Book value per common share (5) $25.19 $24.44 $23.82
Market value per common share (5) $57.77 $56.83 $46.91
High market value per common share $59.24 $57.94 $48.86
Low market value per common share $51.90 $52.02 $43.56
Common shares outstanding (5) 101,625,459 101,616,435 101,420,849
Tangible common equity to tangible assets (6) 9.72 % 9.37 % 9.22 %
Tier I leverage ratio   10.16 %   9.87 %   9.58 %
OTHER QTD INFORMATION
Number of bank/ATM locations 334 334 340
Full-time equivalent employees   4,811     4,805     4,778  

(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,
2017
  June 30,
2017
  March 31,
2017
  December 31,
2016
  September 30,
2016
  September 30,
2017
  September 30,
2016
Interest income $194,244   $193,594   $187,997   $181,498   $179,361 $575,835   $531,554
Interest expense 11,653     10,787     9,724     8,296     8,118     32,164     24,707  
Net interest income 182,591 182,807 178,273 173,202 171,243 543,671 506,847

Provision for loan losses

10,704     10,758     11,128     10,400     7,263     32,590     25,918  

Net interest income after provision for
 loan losses

171,887     172,049     167,145     162,802     163,980     511,081     480,929  
NON-INTEREST INCOME
Bank card transaction fees 44,521 44,999 43,204 45,338 47,006 132,724 136,541
Trust fees 34,620 33,120 32,014 31,360 30,951 99,754 90,435
Deposit account charges and other fees 22,659 22,861 21,942 22,134 22,241 67,462 64,260
Capital market fees 1,755 2,156 2,342 2,679 2,751 6,253 7,976
Consumer brokerage services 3,679 3,726 3,649 3,409 3,375 11,054 10,375
Loan fees and sales 3,590 4,091 3,168 2,583 3,123 10,849 8,829
Other 11,418     12,131     10,747     11,976     9,872     34,296     36,497  
Total non-interest income 122,242     123,084     117,066     119,479     119,319     362,392     354,913  
INVESTMENT SECURITIES GAINS (LOSSES), NET (3,037 ) 1,651 (772 ) 3,651 (1,965 ) (2,158 ) (3,704 )
NON-INTEREST EXPENSE
Salaries and employee benefits 111,382 108,829 112,369 108,639 107,004 332,580 318,671
Net occupancy 11,459 11,430 11,443 11,529 12,366 34,332 34,761
Equipment 4,491 4,776 4,609 4,884 4,842 13,876 14,257
Supplies and communication 5,517 5,446 5,709 5,645 5,968 16,672 18,490
Data processing and software 22,700 23,356 23,097 23,390 23,663 69,153 69,332
Marketing 4,676 4,488 3,224 3,431 4,399 12,388 12,601
Deposit insurance 3,479 3,592 3,471 3,443 3,576 10,542 9,884
Other 20,868     22,677     22,908     20,300     19,424     66,453     57,808  
Total non-interest expense 184,572     184,594     186,830     181,261     181,242     555,996     535,804  
Income before income taxes 106,520 112,190 96,609 104,671 100,092 315,319 296,334
Less income taxes 32,294     33,201     24,907     32,297     30,942     90,402     91,854  
Net income 74,226 78,989 71,702 72,374 69,150 224,917 204,480
Less non-controlling interest expense (income) (338 )   29     198     795     605     (111 )   668  

Net income attributable to Commerce
 Bancshares,
Inc.

74,564 78,960 71,504 71,579 68,545 225,028 203,812
Less preferred stock dividends 2,250     2,250     2,250     2,250     2,250     6,750     6,750  
Net income available to common shareholders $72,314     $76,710     $69,254     $69,329     $66,295     $218,278     $197,062  
Net income per common share — basic $.71     $.75     $.68     $.68     $.65     $2.14     $1.94  
Net income per common share — diluted   $.71     $.75     $.68     $.68     $.65     $2.14     $1.93  
OTHER INFORMATION
Return on total average assets 1.19 % 1.26 % 1.15 % 1.14 % 1.12 % 1.20 % 1.11 %
Return on average common equity (1) 11.35 12.48 11.74 11.48 10.97 11.85 11.28
Efficiency ratio (2) 60.44 60.24 63.14 61.82 62.25 61.25 62.04
Effective tax rate 30.22 29.60 25.83 31.09 31.10 28.66 31.07
Net yield on interest earning assets 3.18 3.19 3.14 3.03 3.08 3.17 3.05
Tax equivalent net interest income   $190,497     $190,865     $187,322     $181,301     $179,115     $568,684     $530,132  

(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,
2017

  June 30,
2017
  September 30,
2016
ASSETS      
Loans
Business $ 4,834,037 $ 4,852,408 $ 4,770,883
Real estate — construction and land 921,609 848,152 800,545
Real estate — business 2,700,174 2,727,349 2,520,528
Real estate — personal 2,029,302 2,009,203 1,968,005
Consumer 2,113,438 2,038,514 1,972,969
Revolving home equity 391,308 403,387 417,591
Consumer credit card 752,379 740,865 760,022
Overdrafts 3,245     6,714     19,698  
Total loans 13,745,492     13,626,592     13,230,241  
Allowance for loan losses (157,832 )   (157,832 )   (154,532 )
Net loans 13,587,660     13,468,760     13,075,709  
Loans held for sale 17,337 22,002 9,511
Investment securities:
Available for sale 9,109,287 9,439,701 9,438,871
Trading 24,605 22,291 28,586
Non-marketable 99,268     102,388     108,224  
Total investment securities 9,233,160     9,564,380     9,575,681  
Federal funds sold and short-term securities purchased under
agreements to resell
32,630 16,520 13,415
Long-term securities purchased under agreements to resell 700,000 625,000 725,000
Interest earning deposits with banks 105,422 80,860 56,767
Cash and due from banks 461,724 433,747 396,938
Land, buildings and equipment — net 335,348 334,586 339,196
Goodwill 138,921 138,921 138,921
Other intangible assets — net 7,388 7,002 6,621
Other assets 359,551     387,065     396,709  
Total assets $ 24,979,141     $ 25,078,843     $ 24,734,468  
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 7,536,127 $ 7,314,506 $ 7,130,415
Savings, interest checking and money market 11,091,200 11,427,615 11,023,526
Time open and C.D.'s of less than $100,000 657,891 679,668 732,575
Time open and C.D.'s of $100,000 and over 1,158,555     1,403,873     1,279,644  
Total deposits 20,443,773     20,825,662     20,166,160  
Federal funds purchased and securities sold under agreements to
repurchase
1,408,984 1,256,444 1,489,891
Other borrowings 102,553 101,903 101,415
Other liabilities 319,354     266,627     416,189  
Total liabilities 22,274,664     22,450,636     22,173,655  
Stockholders' equity:
Preferred stock 144,784 144,784 144,784
Common stock 510,015 510,015 489,862
Capital surplus 1,548,318 1,546,534 1,335,150
Retained earnings 440,261 390,853 515,081
Treasury stock (9,895 ) (10,373 ) (50,538 )
Accumulated other comprehensive income 67,061     42,070     121,082  
Total stockholders' equity 2,700,544 2,623,883 2,555,421
Non-controlling interest 3,933     4,324     5,392  
Total equity 2,704,477     2,628,207     2,560,813  
Total liabilities and equity   $ 24,979,141     $ 25,078,843     $ 24,734,468  
 

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE
BALANCE SHEETS

     

(Unaudited)
(In thousands)

 

For the Three Months Ended

 

September 30,
2017

 

June 30,
2017

 

March 31,
2017

 

December 31,
2016

 

September 30,
2016

ASSETS:        
Loans:
Business $ 4,777,222 $ 4,827,439 $ 4,906,672 $ 4,731,405 $ 4,694,340
Real estate — construction and land 887,596 862,479 828,017 821,048 821,422
Real estate — business 2,710,453 2,701,144 2,645,531 2,559,028 2,432,325
Real estate — personal 2,017,264 2,003,997 2,012,456 1,985,606 1,943,951
Consumer 2,070,398 1,997,761 1,974,894 1,978,154 1,947,956
Revolving home equity 395,212 399,730 405,432 415,429 411,832
Consumer credit card 739,692 731,471 747,783 757,618 750,412
Overdrafts 4,373     4,505     4,185     5,501     4,652  
Total loans 13,602,210     13,528,526     13,524,970     13,253,789     13,006,890  
Allowance for loan losses (156,909 )   (157,003 )   (155,328 )   (154,040 )   (153,517 )
Net loans 13,445,301     13,371,523     13,369,642     13,099,749     12,853,373  
Loans held for sale 21,227 18,341 11,972 10,765 26,597
Investment securities:
U.S. government and federal agency obligations 917,808 910,821 913,474 811,524 726,469
Government-sponsored enterprise obligations 456,668 450,362 450,489 445,544 481,573
State and municipal obligations 1,699,365 1,771,674 1,783,103 1,784,407 1,747,794
Mortgage-backed securities 3,718,697 3,708,124 3,760,294 3,656,695 3,366,292
Asset-backed securities 2,025,415 2,335,344 2,359,644 2,417,367 2,340,783
Other marketable securities 327,634 326,398 332,643 333,236 334,747
Unrealized gain on investment securities 116,873     102,935     62,986     155,818     235,169  
Total available for sale securities 9,262,460 9,605,658 9,662,633 9,604,591 9,232,827
Trading securities 21,149 21,062 25,165 21,717 18,433
Non-marketable securities 102,995     101,790     100,740     105,420     113,954  
Total investment securities 9,386,604     9,728,510     9,788,538     9,731,728     9,365,214  

Federal funds sold and short-term securities purchased under
agreements
 to resell

23,807 13,115 9,887 8,336 13,054
Long-term securities purchased under agreements to resell 662,490 665,655 725,001 724,998 766,302
Interest earning deposits with banks 211,219 139,061 207,845 201,367 207,944
Other assets 1,122,230     1,106,528     1,139,402     1,153,982     1,151,549  
Total assets $ 24,872,878     $ 25,042,733     $ 25,252,287     $ 24,930,925     $ 24,384,033  
 
LIABILITIES AND EQUITY:
Non-interest bearing deposits $ 7,135,703 $ 7,065,849 $ 7,246,698 $ 7,307,407 $ 7,096,218
Savings 829,197 831,038 795,695 773,304 778,663
Interest checking and money market 10,387,212 10,667,042 10,603,988 10,512,268 10,210,744
Time open & C.D.'s of less than $100,000 667,710 688,047 705,135 722,775 740,729
Time open & C.D.'s of $100,000 and over 1,326,290     1,510,001     1,671,125     1,333,764     1,435,001  
Total deposits 20,346,112     20,761,977     21,022,641     20,649,518     20,261,355  
Borrowings:

Federal funds purchased and securities sold under agreements to
 repurchase

1,500,987 1,363,031 1,356,316 1,284,916 1,163,728
Other borrowings 101,904     105,311     102,011     101,412     102,769  
Total borrowings 1,602,891 1,468,342 1,458,327 1,386,328 1,266,497
Other liabilities 251,714     203,139     234,144     346,900     306,306  
Total liabilities 22,200,717     22,433,458     22,715,112     22,382,746     21,834,158  
Equity 2,672,161     2,609,275     2,537,175     2,548,179     2,549,875  
Total liabilities and equity   $ 24,872,878     $ 25,042,733     $ 25,252,287     $ 24,930,925     $ 24,384,033  
 

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE
RATES

     
(Unaudited)   For the Three Months Ended
 

September 30,
2017

 

June 30,
2017

 

March 31,
2017

 

December 31,
2016

 

September 30,
2016

ASSETS:        
Loans:
Business (1) 3.25 % 3.21 % 3.02 % 2.91 % 2.87 %
Real estate — construction and land 4.31 4.30 3.85 3.64 3.48
Real estate — business 3.85 3.74 3.63 3.61 3.63
Real estate — personal 3.72 3.72 3.74 3.69 3.73
Consumer 4.02 3.94 3.89 3.85 3.91
Revolving home equity 4.03 3.84 3.64 3.50 3.56
Consumer credit card 12.03 11.90 11.66 11.38 11.56
Overdrafts                  
Total loans 4.13     4.06     3.92     3.85     3.86  
Loans held for sale 5.36 5.75 6.64 5.77 5.00
Investment securities:
U.S. government and federal agency obligations 1.40 2.52 2.09 2.18 2.43
Government-sponsored enterprise obligations 1.61 1.59 1.58 1.54 2.24
State and municipal obligations (1) 3.57 3.61 3.65 3.57 3.60
Mortgage-backed securities 2.36 2.35 2.38 2.40 2.38
Asset-backed securities 1.82 1.72 1.63 1.52 1.48
Other marketable securities (1) 2.73     2.76     2.82     2.95     2.74  
Total available for sale securities 2.35 2.42 2.38 2.36 2.39
Trading securities (1) 2.51 2.70 2.77 2.40 2.42
Non-marketable securities (1) 6.46     11.49     21.08     5.42     10.24  
Total investment securities 2.39     2.52     2.58     2.39     2.49  

Federal funds sold and short-term securities purchased under
agreements to
 resell

1.30 1.13 .94 .72 .61
Long-term securities purchased under agreements to resell 2.28 2.22 2.12 1.86 1.73
Interest earning deposits with banks 1.24     1.04     .77     .56     .51  
Total interest earning assets 3.37     3.37     3.30     3.17     3.22  
 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings .12 .12 .13 .12 .12
Interest checking and money market .16 .15 .14 .13 .13
Time open & C.D.'s of less than $100,000 .40 .39 .37 .37 .37
Time open & C.D.'s of $100,000 and over .83     .75     .67     .60     .61  
Total interest bearing deposits .24     .23     .21     .19     .20  
Borrowings:

Federal funds purchased and securities sold under agreements to
 repurchase

.75 .60 .46 .30 .25
Other borrowings 3.53     3.47     3.53     3.54     3.51  
Total borrowings .93     .81     .67     .54     .51  
Total interest bearing liabilities .31 %   .29 %   .26 %   .22 %   .22 %
 
Net yield on interest earning assets   3.18 %   3.19 %   3.14 %   3.03 %   3.08 %

(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,
2017

 

June 30,
2017

 

March 31,
2017

 

December 31,
2016

 

September 30,
2016

 

September 30,
2017

 

September 30,
2016

ALLOWANCE FOR LOAN LOSSES          
Balance at beginning of period $ 157,832 $ 157,832 $ 155,932 $ 154,532 $ 153,832 $ 155,932 $ 151,532
Provision for losses 10,704 10,758 11,128 10,400 7,263 32,590 25,918
Net charge-offs (recoveries):
Commercial portfolio:
Business 195 318 97 268 (50 ) 610 348
Real estate — construction and land (362 ) (207 ) (535 ) (882 ) (2,312 ) (1,104 ) (2,830 )
Real estate — business (106 )   (10 )   (39 )   97     (106 )   (155 )   (1,378 )
(273 )   101     (477 )   (517 )   (2,468 )   (649 )   (3,860 )
Personal banking portfolio:
Consumer credit card 7,631 7,750 7,148 6,506 6,356 22,529 18,924
Consumer 3,057 2,642 2,096 2,427 2,240 7,795 6,620
Overdraft 445 292 435 379 434 1,172 960
Real estate — personal (137 ) (131 ) 19 (38 ) (78 ) (249 ) 32
Revolving home equity (19 )   104     7     243     79     92     242  
10,977     10,657     9,705     9,517     9,031     31,339     26,778  
Total net loan charge-offs 10,704     10,758     9,228     9,000     6,563     30,690     22,918  
Balance at end of period   $ 157,832     $ 157,832     $ 157,832     $ 155,932     $ 154,532     $ 157,832     $ 154,532  
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business .02 % .03 % .01 % .02 % % .02 % .01 %
Real estate — construction and land (.16 ) (.10 ) (.26 ) (.43 ) (1.12 ) (.17 ) (.49 )
Real estate — business (.02 )       (.01 )   .02     (.02 )   (.01 )   (.08 )
(.01 )       (.02 )   (.03 )   (.12 )   (.01 )   (.07 )
Personal banking portfolio:
Consumer credit card 4.09 4.25 3.88 3.42 3.37 4.07 3.38
Consumer .59 .53 .43 .49 .46 .52 .46
Overdraft 40.37 26.00 42.15 27.41 37.11 35.98 28.84
Real estate — personal (.03 ) (.03 ) (.01 ) (.02 ) (.02 )
Revolving home equity (.02 )   .10     .01     .23     .08     .03     .08  
.83     .83     .77     .74     .71     .81     .71  
Total   .31 %   .32 %   .28 %   .27 %   .20 %   .30 %   .24 %
CREDIT QUALITY RATIOS
Non-performing assets to total loans .11 % .10 % .11 % .11 % .13 %
Non-performing assets to total assets .06 .06 .06 .06 .07
Allowance for loan losses to total loans   1.15     1.16     1.16     1.16     1.17  
NON-PERFORMING ASSETS
Non-accrual loans:
Business $ 6,821 $ 6,330 $ 7,935 $ 8,682 $ 8,758
Real estate — construction and land 533 544 585 564 1,310
Real estate — business 2,346 1,833 1,764 1,634 1,920
Real estate — personal 2,863 3,504 3,368 3,403 3,634
Consumer 1,077 1,151 1,151
Revolving home equity                 23  
Total 13,640     13,362     14,803     14,283     15,645  
Foreclosed real estate 1,063     515     387     366     950  
Total non-performing assets $ 14,703     $ 13,877     $ 15,190     $ 14,649     $ 16,595  
 
Loans past due 90 days and still accruing interest   $ 16,464     $ 14,630     $ 14,908     $ 16,396     $ 16,916  

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

 

COMMERCE BANCSHARES, INC.
Management Discussion of Third
Quarter Results

September 30, 2017

For the quarter ended September 30, 2017, net income attributable to
Commerce Bancshares, Inc. (net income) amounted to $74.6 million,
compared to $79.0 million in the previous quarter and $68.5 million in
the same quarter last year. Earnings per share totaled $.71 this
quarter, or an increase of 9.2% compared to the same period last year.
The current quarter included a loss of $5.4 million, or $.03 per share,
related to fair value adjustments on the Company's private equity
investments. Quarterly average loans increased $76.6 million over the
previous quarter, while average deposits decreased $415.9 million.
Compared to the previous quarter, both net interest income and
non-interest income decreased slightly. Non-interest expense was flat
with the prior quarter, but included expense of $2.5 million related to
the contribution of appreciated securities to a foundation, similar to a
contribution made in the prior quarter. The provision for loan losses
totaled $10.7 million, which was a slight decline from the previous
quarter. For the current quarter, the return on total average assets was
1.19%, the return on average common equity was 11.35%, and the
efficiency ratio was 60.44%.

Balance Sheet Review

During the 3rd quarter of 2017, average loans totaled $13.6
billion, up 2.2% (annualized) over the prior quarter, and grew $590.0
million, or 4.5%, over the same period last year. Compared to the
previous quarter, average consumer and construction loans grew $72.6
million and $25.1 million, respectively. Together, business real estate
and personal real estate loans increased a combined $22.6 million, while
business loans declined $50.2 million. The increase in consumer loans
was mainly due to seasonal growth in auto lending coupled with growth in
patient health care and private banking lending activities. Construction
loans grew 11.6% (annualized) this quarter as advances on existing
projects and new lending continued. The decline in business loans
continues to result mainly from lower line utilization and lower loan
originations than earlier in the year. During the current quarter, the
Company sold certain fixed rate personal real estate loans totaling
$64.1 million, compared to $54.7 million in the prior quarter.

During the 3rd quarter of 2017, total average available for
sale investment securities decreased $343.2 million to $9.3 billion, at
fair value. The decline in investment securities was mainly the result
of lower average balances of asset-backed and municipal securities, due
to sales and maturities of these securities that were not re-invested.
Purchases of securities this quarter totaled $476.1 million and were
offset by sales, maturities and pay downs of $835.8 million. Current
quarter purchases consisted mainly of mortgage-backed securities. At
September 30, 2017, the duration of the investment portfolio was 3.0
years, and maturities and pay downs of approximately $1.5 billion are
expected to occur during the next 12 months.

Total average deposits decreased $415.9 million, or 7.9% (annualized),
this quarter compared to the previous quarter. The decrease in average
deposits resulted mainly from a decline in certificates of deposit
(decrease of $204.0 million), money market (decrease of $239.4 million),
personal demand (decrease of $35.2 million), and interest checking
(decrease of $40.4 million) accounts. These declines were offset by
growth in business demand deposits of $111.4 million. Compared to the
previous quarter, total average consumer, commercial and private banking
deposits decreased $111.0 million, $181.0 million and $155.7 million,
respectively. The average loans to deposits ratio was 67.0% in the
current quarter and 65.2% in the prior quarter. The Company's average
borrowings totaled $1.6 billion, an increase of $134.5 million over the
prior quarter's balance mostly due to higher repurchase agreement
balances.

Net Interest Income

Net interest income (tax equivalent) in the 3rd quarter of
2017 amounted to $190.5 million compared with $190.9 million in the
previous quarter. Net interest income (tax equivalent) for the current
quarter increased $11.4 million, or 6.4%, compared to the 3rd
quarter of last year. During the current quarter, the net yield on
earning assets (tax equivalent) was 3.18%, compared with 3.19% in the
previous quarter and 3.08% in the same period last year. The slight
decline in net interest income (tax equivalent) in the current quarter
compared to the prior quarter was due mainly to lower inflation income
of $2.4 million on the Company's treasury inflation-protected securities
(TIPS). Excluding the effects of inflation income on both quarters, the
net interest margin would have increased 3 basis points.

Compared to the previous quarter, interest on loans (tax equivalent)
increased $4.6 million, as a result of higher loan yields on most loan
products coupled with higher balances, primarily on consumer, personal
real estate, credit card and construction loans. Overall, the average
yield on the loan portfolio increased 7 basis points this quarter to
4.13%, compared to 4.06% in the previous quarter.

Interest on investment securities (tax equivalent) declined $4.6 million
from the previous quarter, partly due to lower inflation income
mentioned above, but also due to lower average balances of municipal and
asset-backed securities. Additionally, interest on private equity
investments declined $1.3 million this quarter due to large
non-recurring payments received in the prior quarter. The adjustment for
premium amortization expense on changing prepayment speeds for
mortgage-backed securities increased interest income $635 thousand this
quarter, due to higher interest rates. Total inflation income on TIPS
totaled $447 thousand in the current quarter and $2.9 million in the
previous quarter. The yield on total investment securities was 2.39% in
the current quarter compared to 2.52% in the prior quarter.

Interest costs on deposits remained low as the cost of interest bearing
deposits totaled 24 basis points compared with 23 basis points in the
prior quarter. Interest expense on deposits increased $63 thousand this
quarter compared with the previous quarter due mainly to higher rates on
certificates of deposit (CD's) and money market accounts, but offset by
lower average balances in the same categories. Borrowing costs increased
$803 thousand this quarter mostly due to higher rates paid on customer
repurchase agreements. Overall rates paid on interest-bearing
liabilities increased 2 basis points to .31% this quarter.

Non-Interest Income

In the 3rd quarter of 2017, total non-interest income
amounted to $122.2 million, an increase of $2.9 million, or 2.4%,
compared to the same period last year. Also, current quarter
non-interest income decreased slightly compared to the previous quarter.
The increase in non-interest income over the same period last year was
mainly due to growth in trust, deposit, swap and loan fee income but was
offset by lower bank card and capital market fee income.

Total bank card fees in the current quarter declined $2.5 million from
the same period last year and decreased $478 thousand compared to the
prior quarter. The decrease from the same period last year was mainly
the result of a decline in merchant fees of $1.2 million, coupled with a
decline in corporate card fees of $1.5 million. The decline in merchant
fees from the previous year resulted from the loss of several large
customers over the last twelve months, while lower corporate card fees
resulted from reduced margins earned on corporate card sales
transactions compared to the same period last year. Total bank card fees
this quarter were comprised of fees on corporate card ($22.6 million),
debit card ($10.0 million), merchant ($5.6 million) and credit card
($6.4 million) transactions.

In the current quarter, trust fees increased $3.7 million, or 11.9%,
over the same period last year, resulting mainly from growth in private
client customer fee income. Compared to the same period last year,
deposit account fees increased $418 thousand, or 1.9%, as a result of
growth in deposit and overdraft fees, partially offset by lower
corporate cash management fees.

During the 3rd quarter of 2017, loan fees and sales grew
15.0% over the same quarter in the previous year to $3.6 million, due to
higher mortgage banking revenue related to the Company's fixed rate
residential mortgage sale program. Also, fees from consumer brokerage
services increased 9.0%, while fees from swaps, letters of credit and
foreign exchange (all included in other non-interest income) increased a
combined $967 thousand. Capital market fees declined $966 thousand, due
to lower trading securities income. Non-interest income comprised 40.1%
of the Company's total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $3.0 million this quarter,
compared with net gains of $1.7 million last quarter and net losses of
$2.0 million in the same period last year. Net losses in the current
quarter resulted mainly from unrealized fair value adjustments of $5.2
million to the Company's private equity investment portfolio, but were
offset by a gain of $2.4 million related to the Company's contribution
of appreciated securities mentioned above. This gain was offset by
contribution expense of $2.5 million.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $184.6 million
compared to $181.2 million in the same period last year, an increase of
1.8%, and was essentially flat with the prior quarter. The increase over
the same period last year was mainly due to higher costs for salaries
and benefits and the contribution of appreciated securities (expense of
$2.5 million this quarter), but was offset by lower operating costs such
as occupancy, data processing, and supplies and communication. During
the quarter the Company negotiated a new bank card processing agreement,
which lowered processing costs in the current quarter by approximately
$1.2 million. Excluding the contribution of appreciated securities,
non-interest expense grew .5% over amounts recorded in the same period
last year.

Compared to the 3rd quarter of last year, salaries and
benefits expense increased $4.4 million, or 4.1%. Salaries expense grew
5.9%, mainly due to higher full-time salaries and incentive compensation
costs. Benefits expense totaled $15.6 million, reflecting a decline of
5.8%, mostly on lower medical costs. Growth in total salaries expense
compared to the previous year resulted mainly from increased staffing
costs in consumer and commercial banking, wealth, and information
technology business units. Full-time equivalent employees totaled 4,811
and 4,778 at September 30, 2017 and 2016, respectively.

The decline in occupancy costs of 7.3% was due to lower rent expense on
leased properties during the 3rd quarter of 2017 and
demolition costs for a branch facility during the 3rd quarter
of 2016, which did not recur this quarter. The decline in data
processing costs resulted mainly from the new bankcard processing
agreement which went into effect this quarter, while supplies and
communication costs declined due to lower issuance costs for credit and
debit cards. Additionally, equipment and deposit insurance expense
declined a combined $448 thousand in the 3rd quarter of 2017
compared to the same period in 2016. The donation of appreciated
securities to a foundation was similar to the donation made in the prior
quarter and increased other non-interest expense, but resulted in a
pre-tax loss of $110 thousand (due to a related offsetting securities
gain) and tax benefits of $963 thousand. The Company will consider this
strategy again in the 4th quarter of this year.

Income Taxes

The effective tax rate for the Company was 30.2% in the current quarter,
29.6% in the previous quarter, and 31.1% in the 3rd quarter
of 2016.

Credit Quality

Net loan charge-offs in the 3rd quarter of 2017 amounted to
$10.7 million, compared to $10.8 million in the prior quarter and $6.6
million in the same period last year. The ratio of annualized net loan
charge-offs to total average loans was .31% in the current quarter
compared to .32% in the previous quarter and .20% in the 3rd
quarter of last year. During the 3rd quarter of 2017, the
Company recorded net recoveries on commercial loans of $273 thousand,
compared to net loan charge-offs of $101 thousand in the prior quarter.
Net loan charge-offs on personal banking loans totaled $11.0 million in
the current quarter and $10.7 million in the previous quarter.

In the 3rd quarter of 2017, annualized net loan charge-offs
on average consumer credit card loans were 4.09%, compared to 4.25% in
the previous quarter and 3.37% in the same period last year. Consumer
loan net charge-offs were .59% of average consumer loans in the current
quarter, .53% in the prior quarter and .46% in the same quarter last
year. This quarter, the provision for loan losses equaled net loan
charge-offs, and at September 30, 2017, the allowance totaled $157.8
million, or 1.15% of total loans.

At September 30, 2017, total non-performing assets amounted to $14.7
million, an increase of $826 thousand over the previous quarter.
Non-performing assets are comprised of non-accrual loans and foreclosed
real estate ($13.6 million and $1.1 million, respectively). At September
30, 2017, the balance of non-accrual loans, which represented .10% of
loans outstanding, included business loans of $6.8 million, business
real estate loans of $2.3 million, personal real estate loans of $2.9
million and consumer loans of $1.1 million. Loans more than 90 days past
due and still accruing interest totaled $16.5 million at September 30,
2017.

Other

During the 3rd quarter of 2017, the Company paid a cash
dividend of $.225 per common share and also paid a cash dividend of $2.3
million on its preferred stock. The Company purchased 11,982 shares of
treasury stock during the current quarter at an average price of $57.75.

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.

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