Commerce Bancshares, Inc. Reports Second Quarter Growth In Earnings Per Share Of 14%

Commerce Bancshares, Inc. (Nasdaq: CBSH) announced record earnings of $.75 per common share for the three months ended June 30, 2017 compared to $.66 per share in the same quarter last year and $.68 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the second quarter of 2017 amounted to $79.0 million, compared to $69.9 million in the second quarter of 2016 and $71.5 million in the prior quarter. For the quarter, the return on average assets was 1.26%, the return on average common equity was 12.5% and the efficiency ratio was 60.2%.

For the six months ended June 30, 2017, earnings per common share totaled $1.43 compared to $1.28 for the first six months of 2016. Net income attributable to Commerce Bancshares, Inc. amounted to $150.5 million for the six months ended June 30, 2017 compared to $135.3 million last year, or an increase of 11.2%. For the current year to date, the return on average assets was 1.21% and the return on average common equity was 12.1%.

In making this announcement, David W. Kemper, Chairman and CEO, said, "We continued to see strong performance this quarter as top line revenue grew $10.6 million compared to the previous quarter while expenses declined and credit costs remained low. Our net interest margin grew to 3.19% this quarter reflecting increasing interest earned on our loan portfolio coupled with stable funding costs. Fee income also increased $6.0 million this quarter compared to the prior quarter as bank card, trust and deposit fees all showed meaningful increases. While total average loan balances were flat with the prior quarter, we expect to see commercial loan demand and seasonal consumer lending opportunities for the remainder of the year."

Mr. Kemper added, "For the current quarter, net loan charge-offs totaled $10.8 million, compared to $9.2 million in the prior quarter and $7.5 million in the same quarter last year. The growth in net loan charge-offs was mainly the result of higher personal banking loan losses and a reduction in commercial loan recoveries this quarter. The ratio of annualized net loan charge-offs to average loans was .32% this quarter compared to .28% last quarter. Non-performing assets declined this quarter to $13.9 million. Overall, the credit environment remains favorable. 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 1.16% of period end loans."

Total assets at June 30, 2017 were $25.1 billion, total loans were $13.6 billion, and total deposits were $20.8 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 second 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 Six Months Ended

(Unaudited) (Dollars in thousands, except per share data)
  June 30, 2017   March 31,2017   June 30,2016   June 30, 2017   June 30,2016
FINANCIAL SUMMARY
Net interest income $182,807 $178,273 $171,829 $361,080 $335,604
Non-interest income 123,084   117,066   116,570   240,150   235,594  
Total revenue 305,891 295,339 288,399 601,230 571,198
Investment securities gains (losses), net 1,651 (772 ) (744 ) 879 (1,739 )
Provision for loan losses 10,758 11,128 9,216 21,886 18,655
Non-interest expense 184,594   186,830   177,089   371,424   354,562  
Income before taxes 112,190 96,609 101,350 208,799 196,242
Income taxes 33,201 24,907 31,542 58,108 60,912
Non-controlling interest expense (income) 29   198   (85 ) 227   63  
Net income attributable to Commerce Bancshares, Inc. 78,960 71,504 69,893 150,464 135,267
Preferred stock dividends 2,250   2,250   2,250   4,500   4,500  
Net income available to common shareholders $76,710   $69,254   $67,643   $145,964   $130,767  
Earnings per common share:
Net income — basic $.75 $.68 $.67 $1.43 $1.29
Net income — diluted $.75 $.68 $.66 $1.43 $1.28
Effective tax rate 29.60 % 25.83 % 31.10 % 27.86 % 31.05 %
Tax equivalent net interest income $190,865 $187,322 $179,592 $378,187 $351,017
Average total interest earning assets (1) $ 23,990,273 $ 24,205,227 $ 23,252,289 $ 24,097,156 $ 23,292,311
Diluted wtd. average shares outstanding   100,898,503   100,767,071   100,412,160   100,833,150   100,491,688  
RATIOS
Average loans to deposits (2) 65.25 % 64.39 % 63.45 % 64.82 % 63.13 %
Return on total average assets 1.26 1.15 1.15 1.21 1.11
Return on average common equity (3) 12.48 11.74 11.69 12.12 11.44
Non-interest income to total revenue 40.24 39.64 40.42 39.94 41.25
Efficiency ratio (4) 60.24 63.14 61.27 61.67 61.93
Net yield on interest earning assets   3.19   3.14   3.11   3.16   3.03  
EQUITY SUMMARY
Cash dividends per common share $.225 $.225 $.214 $.450 $.429
Cash dividends on common stock $22,903 $22,913 $21,762 $45,816 $43,522
Cash dividends on preferred stock $2,250 $2,250 $2,250 $4,500   $4,500  
Book value per common share (5) $24.44 $23.79 $23.49
Market value per common share (5) $56.83 $56.16 $45.62
High market value per common share $57.94 $60.61 $47.06
Low market value per common share $52.02 $53.15 $40.93
Common shares outstanding (5) 101,616,435 101,668,824 101,388,869
Tangible common equity to tangible assets (6) 9.37 % 9.03 % 9.09 %
Tier I leverage ratio   9.87 % 9.56 % 9.36 %
OTHER QTD INFORMATION
Number of bank/ATM locations 334 336 346
Full-time equivalent employees   4,805   4,807   4,779  

(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 Six Months Ended

(Unaudited) (In thousands, except per share data)
  June 30, 2017   March 31,2017   December 31,2016   September 30,2016   June 30,2016   June 30, 2017   June 30,2016
Interest income $193,594   $187,997   $181,498   $179,361   $180,065 $381,591   $352,193
Interest expense 10,787     9,724     8,296     8,118     8,236     20,511     16,589  
Net interest income 182,807 178,273 173,202 171,243 171,829 361,080 335,604
Provision for loan losses 10,758     11,128     10,400     7,263     9,216     21,886     18,655  

Net interest income after provision for loan  losses
172,049     167,145     162,802     163,980     162,613     339,194     316,949  
NON-INTEREST INCOME
Bank card transaction fees 44,999 43,204 45,338 47,006 45,065 88,203 89,535
Trust fees 33,120 32,014 31,360 30,951 30,241 65,134 59,484
Deposit account charges and other fees 22,861 21,942 22,134 22,241 21,328 44,803 42,019
Capital market fees 2,156 2,342 2,679 2,751 2,500 4,498 5,225
Consumer brokerage services 3,726 3,649 3,409 3,375 3,491 7,375 7,000
Loan fees and sales 4,091 3,168 2,583 3,123 3,196 7,259 5,706
Other 12,131     10,747     11,976     9,872     10,749     22,878     26,625  
Total non-interest income 123,084     117,066     119,479     119,319     116,570     240,150     235,594  

INVESTMENT SECURITIES GAINS   (LOSSES), NET
1,651 (772 ) 3,651 (1,965 ) (744 ) 879 (1,739 )
NON-INTEREST EXPENSE
Salaries and employee benefits 108,829 112,369 108,639 107,004 104,808 221,198 211,667
Net occupancy 11,430 11,443 11,529 12,366 11,092 22,873 22,395
Equipment 4,776 4,609 4,884 4,842 4,781 9,385 9,415
Supplies and communication 5,446 5,709 5,645 5,968 5,693 11,155 12,522
Data processing and software 23,356 23,097 23,390 23,663 22,770 46,453 45,669
Marketing 4,488 3,224 3,431 4,399 4,389 7,712 8,202
Deposit insurance 3,592 3,471 3,443 3,576 3,143 7,063 6,308
Other 22,677     22,908     20,300     19,424     20,413     45,585     38,384  
Total non-interest expense 184,594     186,830     181,261     181,242     177,089     371,424     354,562  
Income before income taxes 112,190 96,609 104,671 100,092 101,350 208,799 196,242
Less income taxes 33,201     24,907     32,297     30,942     31,542     58,108     60,912  
Net income 78,989 71,702 72,374 69,150 69,808 150,691 135,330
Less non-controlling interest expense (income) 29     198     795     605     (85 )   227     63  

Net income attributable to Commerce   Bancshares, Inc.
78,960 71,504 71,579 68,545 69,893 150,464 135,267
Less preferred stock dividends 2,250     2,250     2,250     2,250     2,250     4,500     4,500  

Net income available to common   shareholders
$76,710     $69,254     $69,329     $66,295     $67,643     $145,964     $130,767  
Net income per common share — basic $.75     $.68     $.68     $.65     $.67     $1.43     $1.29  
Net income per common share — diluted  

$.75
    $.68     $.68     $.65     $.66     $1.43     $1.28  
 
OTHER INFORMATION
Return on total average assets 1.26 % 1.15 % 1.14 % 1.12 % 1.15 % 1.21 % 1.11 %
Return on average common equity (1) 12.48 11.74 11.48 10.97 11.69 12.12 11.44
Efficiency ratio (2) 60.24 63.14 61.82 62.25 61.27 61.67 61.93
Effective tax rate 29.60 25.83 31.09 31.10 31.10 27.86 31.05
Net yield on interest earning assets 3.19 3.14 3.03 3.08 3.11 3.16 3.03
Tax equivalent net interest income   $190,865     $187,322     $181,301     $179,115     $179,592     $378,187     $351,017  

(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)
  June 30, 2017   March 31,2017   June 30,2016
ASSETS      
Loans
Business $   4,852,408 $   4,888,011     $   4,840,248
Real estate — construction and land 848,152 846,904 819,896
Real estate — business 2,727,349 2,710,595 2,399,271
Real estate — personal 2,009,203 2,013,437 1,927,340
Consumer 2,038,514 1,975,521 1,939,486
Revolving home equity 403,387 396,542 408,301
Consumer credit card 740,865 736,766 753,166
Overdrafts 6,714     4,733     4,180  
Total loans 13,626,592     13,572,509     13,091,888  
Allowance for loan losses (157,832 )   (157,832 )   (153,832 )
Net loans 13,468,760     13,414,677     12,938,056  
Loans held for sale 22,002 15,559 33,254
Investment securities:
Available for sale 9,439,701 9,671,975 9,221,346
Trading 22,291 20,200 30,512
Non-marketable 102,388     101,688     111,931  

Total investment securities
9,564,380     9,793,863     9,363,789  
Federal funds sold and short-term securities purchased under agreements to resell 16,520 2,205 13,725
Long-term securities purchased under agreements to resell 625,000 725,000 825,000
Interest earning deposits with banks 80,860 120,234 183,223
Cash and due from banks 433,747 416,161 428,300
Land, buildings and equipment — net 334,586 335,191 342,237
Goodwill 138,921 138,921 138,921
Other intangible assets — net 7,002 6,700 6,561
Other assets 387,065     339,660     436,627  
Total assets $   25,078,843     $   25,308,171         $   24,709,693  
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 7,314,506 $ 7,237,815 $ 6,906,265
Savings, interest checking and money market 11,427,615 11,439,078 10,978,734
Time open and C.D.'s of less than $100,000 679,668 696,776 749,160
Time open and C.D.'s of $100,000 and over 1,403,873     1,718,184     1,515,888  
Total deposits 20,825,662     21,091,853     20,150,047  
Federal funds purchased and securities sold under agreements to repurchase 1,256,444 1,321,149 1,632,272
Other borrowings 101,903 101,975 103,878
Other liabilities 266,627     229,629     296,675  
Total liabilities 22,450,636     22,744,606     22,182,872  
Stockholders' equity:
Preferred stock 144,784 144,784 144,784
Common stock 510,015 510,015 489,862
Capital surplus 1,546,534 1,544,034 1,333,995
Retained earnings 390,853 337,046 470,558
Treasury stock (10,373 ) (7,588 ) (51,707 )
Accumulated other comprehensive income 42,070     30,412     134,424  
Total stockholders' equity 2,623,883 2,558,703 2,521,916
Non-controlling interest 4,324     4,862     4,905  
Total equity 2,628,207     2,563,565     2,526,821  
Total liabilities and equity   $   25,078,843     $   25,308,171         $   24,709,693  
 

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE BALANCE SHEETS
     

(Unaudited) (In thousands)
  For the Three Months Ended
 

June 30, 2017
 

March 31,2017
 

December 31,2016
 

September 30,2016
 

June 30,2016
ASSETS:        
Loans:
Business $   4,827,439 $   4,906,672 $   4,731,405 $   4,694,340 $   4,691,476
Real estate — construction and land 862,479 828,017 821,048 821,422 789,329
Real estate — business 2,701,144 2,645,531 2,559,028 2,432,325 2,389,170
Real estate — personal 2,003,997 2,012,456 1,985,606 1,943,951 1,905,968
Consumer 1,997,761 1,974,894 1,978,154 1,947,956 1,927,925
Revolving home equity 399,730 405,432 415,429 411,832 413,198
Consumer credit card 731,471 747,783 757,618 750,412 738,130
Overdrafts 4,505     4,185     5,501     4,652     3,916  
Total loans 13,528,526     13,524,970     13,253,789     13,006,890     12,859,112  
Allowance for loan losses (157,003 )   (155,328 )   (154,040 )   (153,517 )   (151,622 )
Net loans 13,371,523     13,369,642     13,099,749     12,853,373     12,707,490  
Loans held for sale 18,341 11,972 10,765 26,597 56,272
Investment securities:
U.S. government and federal agency obligations 910,821 913,474 811,524 726,469 698,374
Government-sponsored enterprise obligations 450,362 450,489 445,544 481,573 666,354
State and municipal obligations 1,771,674 1,783,103 1,784,407 1,747,794 1,763,849
Mortgage-backed securities 3,708,124 3,760,294 3,656,695 3,366,292 3,394,466
Asset-backed securities 2,335,344 2,359,644 2,417,367 2,340,783 2,377,708
Other marketable securities 326,398 332,643 333,236 334,747 337,572
Unrealized gain on investment securities 102,935     62,986     155,818     235,169     191,565  
Total available for sale securities 9,605,658 9,662,633 9,604,591 9,232,827 9,429,888
Trading securities 21,062 25,165 21,717 18,433 20,540
Non-marketable securities 101,790     100,740     105,420     113,954     116,103  
Total investment securities 9,728,510     9,788,538     9,731,728     9,365,214     9,566,531  
Federal funds sold and short-term securities purchased under agreements to resell 13,115 9,887 8,336 13,054 11,916
Long-term securities purchased under agreements to resell 665,655 725,001 724,998 766,302 824,999
Interest earning deposits with banks 139,061 207,845 201,367 207,944 125,024
Other assets 1,106,528     1,139,402     1,153,982     1,151,549     1,113,214  
Total assets $   25,042,733     $   25,252,287     $   24,930,925     $   24,384,033     $   24,405,446  
 
LIABILITIES AND EQUITY:
Non-interest bearing deposits $ 7,065,849 $ 7,246,698 $ 7,307,407 $ 7,096,218 $ 6,885,889
Savings 831,038 795,695 773,304 778,663 787,478
Interest checking and money market 10,667,042 10,603,988 10,512,268 10,210,744 10,287,923
Time open & C.D.'s of less than $100,000 688,047 705,135 722,775 740,729 758,703
Time open & C.D.'s of $100,000 and over 1,510,001     1,671,125     1,333,764     1,435,001     1,635,892  
Total deposits 20,761,977     21,022,641     20,649,518     20,261,355     20,355,885  
Borrowings:

Federal funds purchased and securities sold under agreements to  repurchase
1,363,031 1,356,316 1,284,916 1,163,728 1,211,892
Other borrowings 105,311     102,011     101,412     102,769     104,649  
Total borrowings 1,468,342 1,458,327 1,386,328 1,266,497 1,316,541
Other liabilities 203,139     234,144     346,900     306,306     260,179  
Total liabilities 22,433,458     22,715,112     22,382,746     21,834,158     21,932,605  
Equity 2,609,275     2,537,175     2,548,179     2,549,875     2,472,841  
Total liabilities and equity   $   25,042,733     $   25,252,287     $   24,930,925     $   24,384,033     $   24,405,446  
 

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE RATES
                     
(Unaudited)   For the Three Months Ended
 

   June 30,    2017
 

   March 31,   2017
 

December 31,2016
 

September 30,2016
 

   June 30,   2016
ASSETS:        
Loans:
Business (1) 3.21 % 3.02 % 2.91 % 2.87 % 2.90 %
Real estate — construction and land 4.30 3.85 3.64 3.48 3.46
Real estate — business 3.74 3.63 3.61 3.63 3.69
Real estate — personal 3.72 3.74 3.69 3.73 3.76
Consumer 3.94 3.89 3.85 3.91 3.80
Revolving home equity 3.84 3.64 3.50 3.56 3.59
Consumer credit card 11.90 11.66 11.38 11.56 11.54
Overdrafts                  
Total loans 4.06     3.92     3.85     3.86     3.86  
Loans held for sale 5.75 6.64 5.77 5.00 4.95
Investment securities:
U.S. government and federal agency obligations 2.52 2.09 2.18 2.43 3.48
Government-sponsored enterprise obligations 1.59 1.58 1.54 2.24 3.03
State and municipal obligations (1) 3.61 3.65 3.57 3.60 3.60
Mortgage-backed securities 2.35 2.38 2.40 2.38 2.36
Asset-backed securities 1.72 1.63 1.52 1.48 1.45
Other marketable securities (1) 2.76     2.82     2.95     2.74     2.77  
Total available for sale securities 2.42 2.38 2.36 2.39 2.51
Trading securities (1) 2.70 2.77 2.40 2.42 2.27
Non-marketable securities (1) 11.49     21.08     5.42     10.24     8.03  
Total investment securities 2.52     2.58     2.39     2.49     2.58  

Federal funds sold and short-term securities purchased under agreements to  resell
1.13 .94 .72 .61 .64
Long-term securities purchased under agreements to resell 2.22 2.12 1.86 1.73 1.64
Interest earning deposits with banks 1.04     .77     .56     .51     .49  
Total interest earning assets 3.37     3.30     3.17     3.22     3.25  
 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings .12 .13 .12 .12 .11
Interest checking and money market .15 .14 .13 .13 .13
Time open & C.D.'s of less than $100,000 .39 .37 .37 .37 .38
Time open & C.D.'s of $100,000 and over .75     .67     .60     .61     .58  
Total interest bearing deposits .23     .21     .19     .20     .20  
Borrowings:

Federal funds purchased and securities sold under agreements to  repurchase
.60 .46 .30 .25 .24
Other borrowings 3.47     3.53     3.54     3.51     3.49  
Total borrowings .81     .67     .54     .51     .50  
Total interest bearing liabilities .29 %   .26 %   .22 %   .22 %   .22 %
 
Net yield on interest earning assets   3.19 %   3.14 %   3.03 %   3.08 %   3.11 %

(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 Six Months Ended

(Unaudited) (In thousands, except per share data)
 

June 30, 2017
 

March 31,2017
 

December 31,2016
 

September 30,2016
 

June 30,2016
 

June 30, 2017
 

June 30,2016
ALLOWANCE FOR LOAN LOSSES          
Balance at beginning of period $ 157,832 $ 155,932 $ 154,532 $ 153,832 $ 152,132 $ 155,932 $ 151,532
Provision for losses 10,758 11,128 10,400 7,263 9,216 21,886 18,655
Net charge-offs (recoveries):
Commercial portfolio:
Business 318 97 268 (50 ) (65 ) 415 398
Real estate — construction and land (207 ) (535 ) (882 ) (2,312 ) (507 ) (742 ) (518 )
Real estate — business (10 )   (39 )   97     (106 )   (1,030 )   (49 )   (1,272 )
101     (477 )   (517 )   (2,468 )   (1,602 )   (376 )   (1,392 )
Personal banking portfolio:
Consumer credit card 7,750 7,148 6,506 6,356 6,650 14,898 12,568
Consumer 2,642 2,096 2,427 2,240 1,781 4,738 4,380
Overdraft 292 435 379 434 307 727 526
Real estate — personal (131 ) 19 (38 ) (78 ) 305 (112 ) 110
Revolving home equity 104     7     243     79     75     111     163  
10,657     9,705     9,517     9,031     9,118     20,362     17,747  
Total net loan charge-offs 10,758     9,228     9,000     6,563     7,516     19,986     16,355  
Balance at end of period   $ 157,832     $ 157,832     $ 155,932     $ 154,532     $ 153,832     $ 157,832     $ 153,832  
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business .03 % .01 % .02 % % (.01

)%
.02 % .02 %
Real estate — construction and land (.10 ) (.26 ) (.43 )

(1.12

)
(.26 ) (.18 ) (.14 )
Real estate — business     (.01 )   .02     (.02 )   (.17 )       (.11 )
    (.02 )   (.03 )   (.12 )   (.08 )   (.01 )   (.04 )
Personal banking portfolio:
Consumer credit card 4.25 3.88 3.42 3.37 3.62 4.06 3.39
Consumer .53 .43 .49 .46 .37 .48 .46
Overdraft 26.00 42.15 27.41 37.11 31.53 33.73 24.35
Real estate — personal (.03 ) (.01 ) (.02 ) .06 (.01 ) .01
Revolving home equity .10     .01     .23     .08     .07     .06     .08  
.83     .77     .74     .71     .74     .80     .71  
Total   .32 %   .28 %   .27 %   .20 %   .24 %   .30 %   .26 %
CREDIT QUALITY RATIOS
Non-performing assets to total loans .10 % .11 % .11 % .13 % .20 %
Non-performing assets to total assets .06 .06 .06 .07 .11
Allowance for loan losses to total loans   1.16     1.16     1.16     1.17     1.18  
NON-PERFORMING ASSETS
Non-accrual loans:
Business $ 6,330 $ 7,935 $ 8,682 $ 8,758 $ 12,716
Real estate — construction and land 544 585 564 1,310 2,170
Real estate — business 1,833 1,764 1,634 1,920 5,236
Real estate — personal 3,504 3,368 3,403 3,634 4,293
Consumer 1,151 1,151
Revolving home equity             23     109  
Total 13,362     14,803     14,283     15,645     24,524  
Foreclosed real estate 515     387     366     950     1,609  
Total non-performing assets $ 13,877     $ 15,190     $ 14,649     $ 16,595     $ 26,133  
Loans past due 90 days and still accruing interest   $ 14,630     $ 14,908     $ 16,396     $ 16,916     $ 15,892  
 

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

COMMERCE BANCSHARES, INC. Management Discussion of Second Quarter Results June 30, 2017

For the quarter ended June 30, 2017, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $79.0 million, compared to $71.5 million in the previous quarter and $69.9 million in the same quarter last year. Earnings per share totaled $.75 this quarter, or an increase of 13.6% compared to the same period last year. Quarterly average loans increased slightly over the previous quarter, while average deposits decreased $260.7 million. Compared to the previous quarter, net interest income increased $4.5 million while non-interest income increased $6.0 million. Non-interest expense decreased $2.2 million this quarter but included expense of $2.3 million related to the contribution of appreciated securities to a related foundation, similar to a contribution made in the prior quarter. The provision for loan losses totaled $10.8 million, a decline of $370 thousand from the previous quarter, while net securities gains of $1.7 million mainly related to fair value adjustments on the securities contributed to the foundation, as noted above. The effective income tax rate totaled 29.6% this quarter compared to 25.8% in the prior quarter. The lower 1 st quarter rate was mainly due to a change in accounting for equity-based compensation. For the current quarter, the return on total average assets was 1.26%, the return on average common equity was 12.5%, and the efficiency ratio was 60.2%.

Balance Sheet Review

During the 2 nd quarter of 2017, average loans totaled $13.5 billion, up slightly over the prior quarter, and grew $631.5 million, or 4.9%, over the same period last year. Compared to the previous quarter, average business real estate and construction loans grew by $55.6 million and $34.5 million, respectively, while business loans declined by $79.2 million. Demand for business real estate loans continued in the 2 nd quarter while additional advances on construction projects grew construction loan balances. The decline in business loans resulted mainly from several large loan pay-offs and a reduction in line of credit usage, especially from the Company's agribusiness customers whose borrowings were down approximately $43 million. Consumer loans grew $22.9 million on growth from private banking, healthcare and automobile lending activities. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $54.7 million, compared to $33.0 million in the prior quarter.

During the 2 nd quarter of 2017, total average available for sale investment securities decreased $57.0 million to $9.6 billion, at fair value. This small decline in investment securities was mainly the result of lower average balances of municipal, mortgage-backed and asset-backed securities. Purchases of securities this quarter totaled $191.7 million and were offset by sales, maturities and pay downs of $433.4 million. Current quarter purchases consisted mainly of mortgage and asset-backed securities. At June 30, 2017, the duration of the investment portfolio was 2.8 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months.

Total average deposits decreased $260.7 million, or 5.0% (annualized), this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from a decline in certificates of deposit (decrease of $178.2 million), business demand (decrease of $201.9 million), and government demand (decrease of $34.2 million) accounts, offset by growth in personal demand deposit, savings and interest checking (combined increase of $116.4 million) and money market (increase of $29.3 million) accounts. Compared to the previous quarter, total average commercial and private banking deposits decreased $218.7 million and $144.0 million, respectively, while consumer deposits grew $115.3 million. The average loans to deposits ratio was 65.3% in the current quarter and 64.4% in the prior quarter. Compared to the previous quarter, the Company's average borrowings totaled $1.5 billion, a slight increase over the prior quarter's balance.

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