Commerce Bancshares, Inc. Reports Third Quarter Growth In Earnings Per Share Of 9%

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 3 rd 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 3 rd 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 3 rd 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 3 rd 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 3 rd 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 3 rd 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 3 rd 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 3 rd quarter of 2017 and demolition costs for a branch facility during the 3 rd 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 3 rd 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 4 th 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 3 rd quarter of 2016.

Credit Quality

Net loan charge-offs in the 3 rd 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 3 rd quarter of last year. During the 3 rd 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 3 rd 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 3 rd 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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