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Commerce Bancshares, Inc. Reports First Quarter Growth in Earnings Per Share of 10%

KANSAS CITY, Mo.–(BUSINESS WIRE)– Commerce Bancshares, Inc. (Nasdaq: CBSH) announced earnings of $.68 per common share for the three months ended March 31, 2017 compared to $.62 per share in the same quarter last year and $.68 per share in the fourth quarter of 2016. Net income attributable to Commerce Bancshares, Inc. for the first quarter amounted to $71.5 million, compared to $65.4 million in the first quarter of 2016 and $71.6 million in the prior quarter. For the quarter, the return on average assets was 1.15%, the return on average common equity was 11.7% and the efficiency ratio was 63.1%.

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In making this announcement, David W. Kemper, Chairman and CEO, said, “This quarter we continued to experience solid loan demand as average loans grew 8% annualized, with most of this growth occurring in our commercial lending business. Average deposits also grew $373 million, or 7% annualized, this quarter after strong growth in the previous quarter. Net interest income increased $14.5 million this quarter compared to the same period last year while our net interest margin expanded to 3.14%. Growth in earning assets, coupled with an improving rate environment, had a positive impact to our margins. We continue to see good growth in both trust and deposit fees which grew 9% and 6%, respectively, this quarter over the same period last year, while mortgage banking fees continued to reflect solid growth. Non-interest expense grew by $5.6 million over the previous quarter but included seasonally higher benefits costs of $5.1 million which normally occur in the first quarter of each year.”

Mr. Kemper added, “The overall credit environment continues to be very favorable as both net loan charge-offs and non-performing loans remain at low levels. For the current quarter, net loan charge-offs totaled $9.2 million, compared to $9.0 million in the previous quarter and $8.8 million in the first quarter of 2016. The ratio of annualized net loan charge-offs to average loans was .28% in both the current quarter and the same period last year. This quarter, net recoveries on commercial loans totaled $477 thousand compared to net recoveries in the prior quarter of $517 thousand. Net loan charge-offs of personal banking loans increased slightly to $9.7 million, mostly the result of higher credit card losses. During the current quarter, the provision for loan losses totaled $11.1 million, or $1.9 million higher than net loan charge-offs. The allowance for loan losses amounted to $157.8 million at March 31, 2017, or 1.16% of period end loans.”

Total assets at March 31, 2017 were $25.3 billion, total loans were $13.6 billion, and total deposits were $21.1 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 a 6% cash dividend on its preferred stock.

Commerce Bancshares, Inc. is a registered bank holding company offering a full line of banking services, including investment management and securities brokerage. The Company currently operates in approximately 340 locations in Missouri, Illinois, Kansas, Oklahoma and Colorado.

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

   

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

FINANCIAL HIGHLIGHTS

 
For the Three Months Ended

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

    March 31,
2017 		  December 31,
2016 		  March 31,
2016
FINANCIAL SUMMARY
Net interest income $178,273   $173,202   $163,775
Non-interest income 117,066     119,479     119,024  
Total revenue 295,339 292,681 282,799
Investment securities gains (losses), net (772 ) 3,651 (995 )
Provision for loan losses 11,128 10,400 9,439
Non-interest expense 186,830     181,261     177,473  
Income before taxes 96,609 104,671 94,892
Income taxes 24,907 32,297 29,370
Non-controlling interest expense (income) 198     795     148  
Net income attributable to Commerce Bancshares, Inc. 71,504 71,579 65,374
Preferred stock dividends 2,250     2,250     2,250  
Net income available to common shareholders $69,254     $69,329     $63,124  
Earnings per common share:
Net income — basic $.68 $.68 $.62
Net income — diluted $.68 $.68 $.62
Effective tax rate 25.83 % 31.09 % 31.00 %
Tax equivalent net interest income $187,322 $181,301 $171,425
Average total interest earning assets (1) $ 24,205,227 $ 23,775,165 $ 23,332,333
Diluted wtd. average shares outstanding     100,767,071     100,558,345     100,571,214  
 
RATIOS
Average loans to deposits (2) 64.39 % 64.24 % 62.81 %
Return on total average assets 1.15 1.14 1.07
Return on average common equity (3) 11.74 11.48 11.20
Non-interest income to total revenue 39.64 40.82 42.09
Efficiency ratio (4) 63.14 61.82 62.62
Net yield on interest earning assets     3.14     3.03     2.95  
 
EQUITY SUMMARY
Cash dividends per common share $.225 $.214 $.214
Cash dividends on common stock $22,913 $21,776 $21,760
Cash dividends on preferred stock $2,250 $2,250 $2,250
Book value per common share (5) $23.79 $23.22 $22.71
Market value per common share (5) $56.16 $57.81 $42.81
High market value per common share $60.61 $59.22 $43.77
Low market value per common share $53.15 $45.37 $35.66
Common shares outstanding (5) 101,668,824 101,460,962 101,364,853
Tangible common equity to tangible assets (6) 9.03 % 8.66 % 8.84 %
Tier I leverage ratio     9.56 %   9.55 %   9.11 %
 
OTHER QTD INFORMATION
Number of bank/ATM locations 336 336 346
Full-time equivalent employees     4,807     4,784     4,765  

(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
(Unaudited)

(In thousands, except per share data)

   

March 31,
2017

  December 31,
2016 		  September 30,
2016 		  June 30,
2016 		  March 31,
2016
Interest income $187,997   $181,498   $179,361   $180,065   $172,128
Interest expense 9,724     8,296     8,118     8,236     8,353  
Net interest income 178,273 173,202 171,243 171,829 163,775
Provision for loan losses 11,128     10,400     7,263     9,216     9,439  
Net interest income after provision for loan losses 167,145 162,802 163,980 162,613 154,336
NON-INTEREST INCOME
Bank card transaction fees 43,204 45,338 47,006 45,065 44,470
Trust fees 32,014 31,360 30,951 30,241 29,243
Deposit account charges and other fees 21,942 22,134 22,241 21,328 20,691
Capital market fees 2,342 2,679 2,751 2,500 2,725
Consumer brokerage services 3,649 3,409 3,375 3,491 3,509
Loan fees and sales 3,168 2,583 3,123 3,196 2,510
Other 10,747     11,976     9,872     10,749     15,876  
Total non-interest income 117,066     119,479     119,319     116,570     119,024  
INVESTMENT SECURITIES GAINS (LOSSES), NET (772 ) 3,651 (1,965 ) (744 ) (995 )
NON-INTEREST EXPENSE
Salaries and employee benefits 112,369 108,639 107,004 104,808 106,859
Net occupancy 11,443 11,529 12,366 11,092 11,303
Equipment 4,609 4,884 4,842 4,781 4,634
Supplies and communication 5,709 5,645 5,968 5,693 6,829
Data processing and software 23,097 23,390 23,663 22,770 22,899
Marketing 3,224 3,431 4,399 4,389 3,813
Deposit insurance 3,471 3,443 3,576 3,143 3,165
Other 22,908     20,300     19,424     20,413     17,971  
Total non-interest expense 186,830     181,261     181,242     177,089     177,473  
Income before income taxes 96,609 104,671 100,092 101,350 94,892
Less income taxes 24,907     32,297     30,942     31,542     29,370  
Net income 71,702 72,374 69,150 69,808 65,522
Less non-controlling interest expense (income) 198     795     605     (85 )   148  
Net income attributable to Commerce Bancshares, Inc. 71,504 71,579 68,545 69,893 65,374
Less preferred stock dividends 2,250     2,250     2,250     2,250     2,250  
Net income available to common shareholders $69,254     $69,329     $66,295     $67,643     $63,124  
Net income per common share — basic $.68     $.68     $.65     $.67     $.62  
Net income per common share — diluted     $.68     $.68     $.65     $.66     $.62  
 
OTHER INFORMATION
Return on total average assets 1.15 % 1.14 % 1.12 % 1.15 % 1.07 %
Return on average common equity (1) 11.74 11.48 10.97 11.69 11.20
Efficiency ratio (2) 63.14 61.82 62.25 61.27 62.62
Effective tax rate 25.83 31.09 31.10 31.10 31.00
Net yield on interest earning assets 3.14 3.03 3.08 3.11 2.95
Tax equivalent net interest income     $187,322     $181,301     $179,115     $179,592     $171,425  

(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)

    March 31,
2017 		    December 31,
2016 		    March 31,
2016
ASSETS
Loans
Business $ 4,888,011 $ 4,776,365 $ 4,575,081
Real estate — construction and land 846,904 791,236 745,369
Real estate — business 2,710,595 2,643,374 2,395,933
Real estate — personal 2,013,437 2,010,397 1,903,969
Consumer 1,975,521 1,990,801 1,904,320
Revolving home equity 396,542 413,634 423,005
Consumer credit card 736,766 776,465 744,364
Overdrafts 4,733       10,464       5,829  
Total loans 13,572,509       13,412,736       12,697,870  
Allowance for loan losses (157,832 )     (155,932 )     (152,132 )
Net loans 13,414,677       13,256,804       12,545,738  
Loans held for sale 15,559 14,456 60,078
Investment securities:
Available for sale 9,671,975 9,649,203 9,552,179
Trading 20,200 22,225 23,130
Non-marketable 101,688       99,558       117,259  
Total investment securities 9,793,863       9,770,986       9,692,568  
Federal funds sold and short-term securities purchased under agreements to resell 2,205 15,470 9,075
Long-term securities purchased under agreements to resell 725,000 725,000 825,000
Interest earning deposits with banks 120,234 272,275 171,651
Cash and due from banks 416,161 494,690 375,481
Land, buildings and equipment — net 335,191 337,705 350,423
Goodwill 138,921 138,921 138,921
Other intangible assets — net 6,700 6,709 6,539
Other assets 339,660       608,408       331,478  
Total assets $ 25,308,171       $ 25,641,424       $ 24,506,952  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing $ 7,237,815 $ 7,429,398 $ 7,065,066
Savings, interest checking and money market 11,439,078 11,430,789 11,205,357
Time open and C.D.’s of less than $100,000 696,776 713,075 766,810
Time open and C.D.’s of $100,000 and over 1,718,184       1,527,833       1,649,076  
Total deposits 21,091,853       21,101,095       20,686,309  
Federal funds purchased and securities sold under agreements to repurchase 1,321,149 1,723,905 957,388
Other borrowings 101,975 102,049 103,806
Other liabilities 229,629       213,243       312,167  
Total liabilities 22,744,606       23,140,292       22,059,670  
Stockholders’ equity:
Preferred stock 144,784 144,784 144,784
Common stock 510,015 510,015 489,862
Capital surplus 1,544,034 1,552,454 1,332,429
Retained earnings 337,046 292,849 424,677
Treasury stock (7,588 ) (15,294 ) (52,653 )
Accumulated other comprehensive income 30,412       10,975       102,929  
Total stockholders’ equity 2,558,703 2,495,783 2,442,028
Non-controlling interest 4,862       5,349       5,254  
Total equity 2,563,565       2,501,132       2,447,282  
Total liabilities and equity     $ 25,308,171       $ 25,641,424       $ 24,506,952  
 
   

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS

 
(Unaudited)

(In thousands)

For the Three Months Ended
   

March 31,
2017

   

December 31,
2016

   

September 30,
2016

   

June 30,
2016

   

March 31,
2016

ASSETS:                
Loans:
Business $ 4,906,672 $ 4,731,405 $ 4,694,340 $ 4,691,476 $ 4,491,556
Real estate — construction and land 828,017 821,048 821,422 789,329 682,557
Real estate — business 2,645,531 2,559,028 2,432,325 2,389,170 2,382,094
Real estate — personal 2,012,456 1,985,606 1,943,951 1,905,968 1,909,532
Consumer 1,974,894 1,978,154 1,947,956 1,927,925 1,934,577
Revolving home equity 405,432 415,429 411,832 413,198 429,682
Consumer credit card 747,783 757,618 750,412 738,130 752,098
Overdrafts 4,185       5,501       4,652       3,916       4,772  
Total loans 13,524,970       13,253,789       13,006,890       12,859,112       12,586,868  
Allowance for loan losses (155,328 )     (154,040 )     (153,517 )     (151,622 )     (151,308 )
Net loans 13,369,642       13,099,749       12,853,373       12,707,490       12,435,560  
Loans held for sale 11,972 10,765 26,597 56,272 9,360
Investment securities:
U.S. government and federal agency obligations 913,474 811,524 726,469 698,374 703,212
Government-sponsored enterprise obligations 450,489 445,544 481,573 666,354 776,488
State and municipal obligations 1,783,103 1,784,407 1,747,794 1,763,849 1,718,587
Mortgage-backed securities 3,760,294 3,656,695 3,366,292 3,394,466 3,424,716
Asset-backed securities 2,359,644 2,417,367 2,340,783 2,377,708 2,537,472
Other marketable securities 332,643 333,236 334,747 337,572 342,382
Unrealized gain on investment securities 62,986       155,818       235,169       191,565       149,319  
Total available for sale securities 9,662,633 9,604,591 9,232,827 9,429,888 9,652,176
Trading securities 25,165 21,717 18,433 20,540 18,190
Non-marketable securities 100,740       105,420       113,954       116,103       127,769  
Total investment securities 9,788,538       9,731,728       9,365,214       9,566,531       9,798,135  
Federal funds sold and short-term securities purchased under agreements to resell 9,887 8,336 13,054 11,916 17,378
Long-term securities purchased under agreements to resell 725,001 724,998 766,302 824,999 850,275
Interest earning deposits with banks 207,845 201,367 207,944 125,024 219,636
Other assets 1,139,402       1,153,982       1,151,549       1,113,214       1,172,916  
Total assets $ 25,252,287       $ 24,930,925       $ 24,384,033       $ 24,405,446       $ 24,503,260  
 
LIABILITIES AND EQUITY:
Non-interest bearing deposits $ 7,246,698 $ 7,307,407 $ 7,096,218 $ 6,885,889 $ 6,905,673
Savings 795,695 773,304 778,663 787,478 761,020
Interest checking and money market 10,603,988 10,512,268 10,210,744 10,287,923 10,128,543
Time open & C.D.’s of less than $100,000 705,135 722,775 740,729 758,703 775,221
Time open & C.D.’s of $100,000 and over 1,671,125       1,333,764       1,435,001       1,635,892       1,483,700  
Total deposits 21,022,641       20,649,518       20,261,355       20,355,885       20,054,157  
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase 1,356,316 1,284,916 1,163,728 1,211,892 1,404,754
Other borrowings 102,011       101,412       102,769       104,649       377,711  
Total borrowings 1,458,327 1,386,328 1,266,497 1,316,541 1,782,465
Other liabilities 234,144       346,900       306,306       260,179       254,437  
Total liabilities 22,715,112       22,382,746       21,834,158       21,932,605       22,091,059  
Equity 2,537,175       2,548,179       2,549,875       2,472,841       2,412,201  
Total liabilities and equity     $ 25,252,287       $ 24,930,925       $ 24,384,033       $ 24,405,446       $ 24,503,260  
 
   

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE RATES

 
(Unaudited)

For the Three Months Ended

   

March 31,
2017

   

December 31,
2016

   

September 30,
2016

   

June 30,
2016

   

March 31,
2016

ASSETS:                
Loans:
Business (1) 3.02 % 2.91 % 2.87 % 2.90 % 2.87 %
Real estate — construction and land 3.85 3.64 3.48 3.46 3.51
Real estate — business 3.63 3.61 3.63 3.69 3.70
Real estate — personal 3.74 3.69 3.73 3.76 3.77
Consumer 3.89 3.85 3.91 3.80 3.87
Revolving home equity 3.64 3.50 3.56 3.59 3.52
Consumer credit card 11.66 11.38 11.56 11.54 11.42
Overdrafts —       —       —       —       —  
Total loans 3.92       3.85       3.86       3.86       3.89  
Loans held for sale 6.64 5.77 5.00 4.95 5.80
Investment securities:
U.S. government and federal agency obligations 2.09 2.18 2.43 3.48 .40
Government-sponsored enterprise obligations 1.58 1.54 2.24 3.03 1.93
State and municipal obligations (1) 3.65 3.57 3.60 3.60 3.66
Mortgage-backed securities 2.38 2.40 2.38 2.36 2.45
Asset-backed securities 1.63 1.52 1.48 1.45 1.39
Other marketable securities (1) 2.82       2.95       2.74       2.77       2.79  
Total available for sale securities 2.38 2.36 2.39 2.51 2.20
Trading securities (1) 2.77 2.40 2.42 2.27 2.87
Non-marketable securities (1) 21.08       5.42       10.24       8.03       6.54  
Total investment securities 2.58       2.39       2.49       2.58       2.26  
Federal funds sold and short-term securities purchased under agreements to resell .94 .72 .61 .64 .56
Long-term securities purchased under agreements to resell 2.12 1.86 1.73 1.64 1.64
Interest earning deposits with banks .77       .56       .51       .49       .49  
Total interest earning assets 3.30       3.17       3.22       3.25       3.10  
 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings .13 .12 .12 .11 .12
Interest checking and money market .14 .13 .13 .13 .13
Time open & C.D.’s of less than $100,000 .37 .37 .37 .38 .38
Time open & C.D.’s of $100,000 and over .67       .60       .61       .58       .54  
Total interest bearing deposits .21       .19       .20       .20       .19  
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase .46 .30 .25 .24 .25
Other borrowings 3.53       3.54       3.51       3.49       1.33  
Total borrowings .67       .54       .51       .50       .48  
Total interest bearing liabilities .26 %     .22 %     .22 %     .22 %     .23 %
 
Net yield on interest earning assets     3.14 %     3.03 %     3.08 %     3.11 %     2.95 %

(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

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

   

March 31,
2017

   

December 31,
2016

   

September 30,
2016

   

June 30,
2016

   

March 31,
2016

ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 155,932 $ 154,532 $ 153,832 $ 152,132 $ 151,532
Provision for losses 11,128 10,400 7,263 9,216 9,439
Net charge-offs (recoveries):
Commercial portfolio:
Business 97 268 (50 ) (65 ) 463
Real estate — construction and land (535 ) (882 ) (2,312 ) (507 ) (11 )
Real estate — business (39 )     97       (106 )     (1,030 )     (242 )
(477 )     (517 )     (2,468 )     (1,602 )     210  
Personal banking portfolio:
Consumer credit card 7,148 6,506 6,356 6,650 5,918
Consumer 2,096 2,427 2,240 1,781 2,599
Overdraft 435 379 434 307 219
Real estate — personal 19 (38 ) (78 ) 305 (195 )
Revolving home equity 7       243       79       75       88  
9,705       9,517       9,031       9,118       8,629  
Total net loan charge-offs 9,228       9,000       6,563       7,516       8,839  
Balance at end of period     $ 157,832       $ 155,932       $ 154,532       $ 153,832       $ 152,132  
 
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business .01 % .02 % — % (.01 )% .04 %
Real estate — construction and land (.26 ) (.43 ) (1.12 ) (.26 ) (.01 )
Real estate — business (.01 )     .02       (.02 )     (.17 )     (.04 )
(.02 )     (.03 )     (.12 )     (.08 )     .01  
Personal banking portfolio:
Consumer credit card 3.88 3.42 3.37 3.62 3.16
Consumer .43 .49 .46 .37 .54
Overdraft 42.15 27.41 37.11 31.53 18.46
Real estate — personal — (.01 ) (.02 ) .06 (.04 )
Revolving home equity .01       .23       .08       .07       .08  
.77       .74       .71       .74       .69  
Total     .28 %     .27 %     .20 %     .24 %     .28 %
 
CREDIT QUALITY RATIOS
Non-performing assets to total loans .11 % .11 % .13 % .20 % .25 %
Non-performing assets to total assets .06 .06 .07 .11 .13
Allowance for loan losses to total loans     1.16       1.16       1.17       1.18       1.20  
 
NON-PERFORMING ASSETS
Non-accrual loans:
Business $ 7,935 $ 8,682 $ 8,758 $ 12,716 $ 16,098
Real estate — construction and land 585 564 1,310 2,170 2,710
Real estate — business 1,764 1,634 1,920 5,236 6,234
Real estate — personal 3,368 3,403 3,634 4,293 4,205
Consumer 1,151 — — — —
Revolving home equity —       —       23       109       120  
Total 14,803       14,283       15,645       24,524       29,367  
Foreclosed real estate 387       366       950       1,609       1,997  
Total non-performing assets $ 15,190       $ 14,649       $ 16,595       $ 26,133       $ 31,364  
 
Loans past due 90 days and still accruing interest   $ 14,908       $ 16,396       $ 16,916       $ 15,892       $ 15,360  

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

COMMERCE BANCSHARES, INC.
Management Discussion of First Quarter Results
March 31, 2017

For the quarter ended March 31, 2017, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $71.5 million, compared to $71.6 million in the previous quarter and $65.4 million in the same quarter last year. Quarterly average loans grew by 8.2% (annualized) over the previous quarter, while average deposits increased by 7.2% (annualized). Compared to the previous quarter, net interest income increased by $5.1 million while non-interest income declined $2.4 million. Non-interest expense increased $5.6 million this quarter but included expense of $2.3 million related to the contribution of appreciated securities to a related foundation as explained below. The provision for loan losses totaled $11.1 million, an increase of $728 thousand over the previous quarter, while net securities losses of $772 thousand were recorded this quarter compared to gains of $3.7 million in the prior quarter. The effective income tax rate declined to 25.8% this quarter due mainly to a change in the accounting rules for equity-based compensation that was effective this quarter. For the current quarter, the return on total average assets was 1.15%, the return on average common equity was 11.7%, and the efficiency ratio was 63.1%.

Balance Sheet Review

During the 1st quarter of 2017, average total loans increased $272.4 million, or 8.2% annualized, compared to the previous quarter, and increased $940.7 million, or 7.5%, over the same period last year. Compared to the previous quarter, the increase in average loans resulted mainly from growth in business (up $175.3 million), business real estate (up $86.5 million), and personal real estate (up $26.9 million) loans. Growth in business loans was driven in part by seasonal demand for agribusiness loans along with higher demand for lease, tax-free and other commercial and industrial loans. Demand continued to be solid for business real estate loans. While overall consumer loans declined slightly, demand continued for private banking loans. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $33.0 million, compared to $41.7 million in the prior quarter. Additionally, growth in personal real estate loans was mainly the result of continued demand for 15 year fixed rate loans, which the Company did not sell into the secondary market.

During the 1st quarter of 2017, total average available for sale investment securities increased $58.0 million to $9.7 billion, at fair value. This small growth in investment securities was the result of higher average balances of U.S. government securities (most of which were purchased in the prior quarter) and mortgage-backed securities. Purchases of securities this quarter totaled $480.7 million and were offset by maturities and pay downs of $478.6 million. Current quarter purchases consisted mainly of mortgage-backed and asset-backed securities. At March 31, 2017, the duration of the investment portfolio was 2.9 years, and maturities and pay downs of approximately $2.1 billion are expected to occur during the next 12 months.

Total average deposits increased $373.1 million, or 7.2% (annualized), this quarter compared to the previous quarter. The increase in average deposits resulted mainly from growth in certificates of deposit (increase of $319.7 million), money market (increase of $97.7 million) and government and personal demand deposit (increase of $98.9 million) accounts. Business demand deposits declined on average by $136.1 million. Compared to the previous quarter, total average consumer, commercial and private banking deposits increased $131.6 million, $181.3 million, and $92.5 million, respectively. The average loans to deposits ratio was 64.4% in the current quarter and 64.2% in the prior quarter. Compared to the previous quarter, the Company’s average borrowings increased $72.0 million to $1.5 billion in the current quarter, mostly due to higher balances of customer repurchase agreements.

Net Interest Income

Net interest income (tax equivalent) in the 1st quarter of 2017 amounted to $187.3 million compared with $181.3 million in the previous quarter. Net interest income (tax equivalent) for the current quarter increased $15.9 million compared to the 1st quarter of last year. During the 1st quarter of 2017, the net yield on earning assets (tax equivalent) was 3.14%, compared with 3.03% in the previous quarter and 2.95% in the same period last year. The increase in net interest income (tax equivalent) in the current quarter compared to the prior quarter was due mainly to higher interest income of $6.9 million on loans and investment securities, partly offset by an increase in interest expense of $1.4 million.

Compared to the previous quarter, interest on loans (tax equivalent) increased $2.6 million, mainly as a result of higher average balances of business, business real estate, and personal real estate loans, partly offset by lower yields on business real estate loans. Overall, the average yield on the loan portfolio increased this quarter to 3.92% compared to 3.85% in the previous quarter.

Interest on investment securities (tax equivalent) increased $4.3 million over the previous quarter. The current quarter included one-time interest payments of $2.7 million received on a private equity investment. Also, the current quarter included an adjustment of $413 thousand lowering premium amortization expense due to slowing prepayment speeds on mortgage-backed securities, compared to a similar adjustment lowering amortization by $1.8 million in the previous quarter. Total inflation income on treasury inflation-protected securities (TIPS) totaled $1.9 million for both the current and previous quarters. The yield on total investment securities was 2.58% in the current quarter compared to 2.39% in the prior quarter.

Interest expense on deposits increased $881 thousand this quarter compared with the previous quarter due mainly to higher rates and balances of certificates of deposit, while borrowing costs increased $547 thousand this quarter mostly due to higher rates paid on customer repurchase agreements. Overall rates paid on interest bearing liabilities increased 4 basis points to .26% this quarter.

Non-Interest Income

In the 1st quarter of 2017, total non-interest income amounted to $117.1 million, a decrease of $2.0 million, or 1.6%, compared to the same period last year. Also, current quarter non-interest income declined by $2.4 million when compared to amounts recorded in the previous quarter. The decline in non-interest income from the same period last year was mainly due to lower gains on branch property sales coupled with lower bank card and swap fee income. Trust fees grew by 9.5% this quarter while deposit fees increased by 6.0%.

Total bank card fees in the current quarter declined $1.3 million, or 2.8%, from the same period last year. The decrease was mainly the result of a decline in merchant fees of $1.3 million. Commercial card fees declined by $342 thousand this quarter but were offset by higher debit and credit card interchange fees. The decline in merchant fees resulted from the loss of several large merchant customers affecting this quarter but also lowered operating expenses in this business line. Total bank card fees this quarter were comprised of fees on corporate card ($22.0 million), debit card ($9.6 million), merchant ($5.8 million) and credit card ($5.7 million) transactions.

In the current quarter, trust fees increased $2.8 million, or 9.5%, 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 $1.3 million, or 6.0%, as a result of growth in deposit account service, overdraft and corporate cash management fees.

Compared to the 1st quarter of 2016, loan fees and sales grew 26.2% to $3.2 million, due to higher mortgage banking revenue related to the Company’s fixed rate residential mortgage sale program. Included in other non-interest income are fees from sales of interest rate swaps, which declined by $2.0 million this quarter due to several larger swap transactions occurring in the same period last year. Also in the 1st quarter of 2016, the Company sold a former branch property for a gain of $3.3 million that did not reoccur this quarter. Fees from the sales of tax credits were strong this quarter, totaling $1.2 million, but were lower by $319 thousand when compared to the same period last year. Non-interest income comprised 39.6% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $772 thousand this quarter, compared with net gains of $3.7 million last quarter and net losses of $995 thousand in the same period last year. Net losses in the current quarter resulted mainly from the write-down of $2.9 million in unrealized fair value adjustments on the Company’s private equity investment portfolio, which was offset by a gain of $2.2 million related to the Company’s contribution of appreciated securities mentioned above.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $186.8 million compared to $177.5 million in the same period last year, which was a 5.3% increase. The increase was mainly due to higher costs for salaries and benefits, bank card expense and professional fees, partly offset by lower supplies and communication and marketing costs. Also, non-interest expense this quarter included contribution expense of $2.3 million related to the donation of appreciated securities. Exclusive of this amount, non-interest expense would have grown 4.0% over amounts recorded in the previous year.

Compared to the 1st quarter of last year, salaries and benefits expense increased $5.5 million, or 5.2%. Salaries expense grew by 5.1% mainly due to higher full-time salaries and incentive compensation costs. Benefits expense increased $1.0 million, or 5.4%, mainly due to higher payroll taxes and 401(k) plan expense, which are seasonally higher in the 1st quarter. Growth in total salaries expense compared to the previous year resulted mainly from increased staffing costs in commercial banking, commercial card, residential mortgage, trust, information technology, and other support units. Full-time equivalent employees totaled 4,807 and 4,765 at March 31, 2017 and 2016, respectively.

The decline in supplies and communication costs compared to the 1st quarter of last year was the result of higher chip card reissue costs last year that have now declined. Marketing costs were down this quarter due to lower overall spending but are expected to increase in future quarters this year. The donation of appreciated securities to a related foundation increased non-interest expense, but resulted in a pre-tax loss of $118 thousand (due to a related securities gain) and tax benefits of $856 thousand. It also lowered the annual contribution requirement of approximately $1.5 million. The Company intends to repeat this strategy in subsequent quarters this year at similar amounts.

Income Taxes

The effective tax rate for the Company was 25.8% in the current quarter, 31.1% in the previous quarter, and 31.0% in the 1st quarter of 2016. The lower effective tax rate and related tax expense mainly resulted from a change in the accounting rules for equity-based compensation which was effective January 1, 2017 and lowered tax expense in the current quarter by approximately $4.5 million. These tax benefits are expected to be seasonally higher in the 1st quarter when the majority of the Company’s restricted stock awards vest. Tax benefits related to the donation of appreciated securities also lowered the effective tax rate.

Credit Quality

Net loan charge-offs in the 1st quarter of 2017 amounted to $9.2 million, compared to $9.0 million in the prior quarter and $8.8 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .28% in the current quarter compared to .27% in the previous quarter and .28% in the 1st quarter of last year. During the 1st quarter of 2017, the Company recorded net recoveries on commercial loans of $477 thousand, compared to net recoveries of $517 thousand in the prior quarter. Net loan charge-offs in the personal banking portfolio totaled $9.7 million in the current quarter and $9.5 million in the previous quarter.

In the 1st quarter of 2017, annualized net loan charge-offs on average consumer credit card loans were 3.88%, compared with 3.42% in the previous quarter and 3.16% in the same period last year. Consumer loan net charge-offs were .43% of average consumer loans in the current quarter, .49% in the prior quarter and .54% in the same quarter last year. The provision for loan losses in the current quarter totaled $11.1 million, compared to $10.4 million in the prior quarter and $9.4 million in the 1st quarter of last year. This quarter, the provision for loan losses exceeded net loan charge-offs by $1.9 million. At March 31, 2017, the allowance totaled $157.8 million, which was 1.16% of total loans.

At March 31, 2017, total non-performing assets amounted to $15.2 million, an increase of $541 thousand over the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($14.8 million and $387 thousand, respectively, at March 31, 2017). At March 31, 2017, the balance of non-accrual loans, which represented .11% of loans outstanding, included business loans of $7.9 million, business real estate loans of $1.8 million, personal real estate loans of $3.4 million and consumer loans of $1.2 million. Loans more than 90 days past due and still accruing interest totaled $14.9 million at March 31, 2017.

Other

During the 1st quarter of 2017, the Company paid a cash dividend of $.225 per common share, representing an increase of 5% over the rate paid in 2016. Also, a cash dividend of $2.3 million was paid on its preferred stock. The Company purchased 126,737 shares of treasury stock during the current quarter at an average price of $57.47.

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.

Commerce Bancshares, Inc.

Jeffery Aberdeen, 816-234-2081

Controller

mymoney@commercebank.com

http://www.commercebank.com

Source: Commerce Bancshares, Inc.

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