Commerce Bancshares, Inc. Reports Second Quarter Earnings Per Share Of $.96

Jul 16, 2019 06:00 am

KANSAS CITY, Mo. --

Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $.96 per common share for the three months ended June 30, 2019, compared to $.96 per share in the same quarter last year and $.85 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the second quarter of 2019 amounted to $108.0 million, compared to $110.3 million in the second quarter of 2018 and $97.1 million in the prior quarter. For the quarter, the return on average assets was 1.73%, the return on average common equity was 14.5% and the efficiency ratio was 55.9%.

For the six months ended June 30, 2019, earnings per common share totaled $1.81 compared to $1.84 for the first six months of 2018. Net income attributable to Commerce Bancshares, Inc. amounted to $205.1 million for the six months ended June 30, 2019 compared to $211.3 million in the comparable period last year. Year to date, the return on average assets was 1.66% and the return on average common equity was 14.1%.

In announcing these results, John Kemper, Chief Executive Officer, said, “We are pleased to report strong earnings this quarter, driven by the performance of our diversified, fee-based businesses, focus on credit quality, and prudent expense management. Fee income totaled $127.3 million this quarter and represented 38% of our total revenue. The growth in our fee-based businesses reflects our commitment to delivering innovative solutions and building well rounded banking relationships. Average loan growth was modest this quarter due to softening demand for consumer card and auto loans, offset by higher loan demand from commercial customers. We saw a surge in demand for residential mortgage loans this quarter, but we sell most of our production, which generates fee income instead of increasing our loan balances. Compared to the prior quarter, net interest income grew but included inflation income from our inflation-protected securities. Adjusted for this income, our net yield on earning assets decreased slightly, resulting mainly from a decline in commercial loan yields and slight growth in deposit costs, partly offset by increasing consumer loan yields. After significant margin growth beginning in 2017, the recent drop in forward rate expectations is putting downward pressure on net interest income and creating a significant headwind for banks like Commerce.”

Mr. Kemper continued, “This quarter net loan charge-offs totaled $11.3 million, compared to $11.7 million in the prior quarter and $10.0 million in the second quarter of 2018, as the overall credit environment remained favorable. In the current quarter, the ratio of annualized net loan charge-offs to average loans was .32%, compared to .34% in the previous quarter, and .29% in the second quarter of last year. Net loan charge-offs on commercial loans totaled $169 thousand this quarter and remained exceptionally low, while net loan charge-offs on personal banking loans decreased $182 thousand to $11.1 million. During the current quarter, the provision for loan losses exceeded net loan charge-offs by $500 thousand and totaled $11.8 million. The allowance for loan losses amounted to $161.2 million at June 30, 2019, or 1.13% of period end loans. Non-performing assets totaled $12.0 million this quarter and remained at very low levels.”

Total assets at June 30, 2019 were $25.8 billion, total loans were $14.3 billion, and total deposits were $19.8 billion. During the quarter, the Company paid a common cash dividend of $.26 per share, representing a 16.1% increase over the rate paid in 2018, and paid a 6% cash dividend on its preferred stock. The Company purchased 779,726 of its common shares this quarter.

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 banking facilities in nine key markets including St. Louis, Kansas City, Springfield, Central Missouri, Central Illinois, Wichita, Tulsa, Oklahoma City and Denver. The Company also maintains commercial offices in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids.

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
Matthew Burkemper, Investor Relations
at 8000 Forsyth, Mailstop: CBIR-1
Clayton, MO 63105
or by telephone at (314) 746-7485
Web Site: http://www.commercebank.com
Email: [email protected]

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, 2019			March 31, 2019			June 30, 2018			June 30, 2019			June 30, 2018
FINANCIAL SUMMARY
Net interest income	$	211,634		$	203,488		$	210,959		$	415,122		$	403,851
Non-interest income		127,259			121,240			124,850			248,499			244,540
Total revenue		338,893			324,728			335,809			663,621			648,391
Investment securities gains (losses), net		(110	)		(925	)		(3,075	)		(1,035	)		2,335
Provision for loan losses		11,806			12,463			10,043			24,269			20,439
Non-interest expense		189,779			191,425			181,860			381,204			364,137
Income before taxes		137,198			119,915			140,831			257,113			266,150
Income taxes		28,899			22,860			29,507			51,759			52,765
Non-controlling interest expense (income)		328			(83	)		994			245			2,071
Net income attributable to Commerce Bancshares, Inc.		107,971			97,138			110,330			205,109			211,314
Preferred stock dividends		2,250			2,250			2,250			4,500			4,500
Net income available to common shareholders	$	105,721		$	94,888		$	108,080		$	200,609		$	206,814
Earnings per common share:
Net income — basic	$	.96		$	.85		$	.96		$	1.81		$	1.84
Net income — diluted	$	.96		$	.85		$	.96		$	1.81		$	1.84
Effective tax rate		21.11	%		19.05	%		21.10	%		20.15	%		19.98	%
Tax equivalent net interest income	$	215,203		$	207,104		$	215,775		$	422,307		$	412,413
Average total interest earning assets ⁽¹⁾	$	23,939,495		$	23,874,861		$	23,683,587		$	23,907,357		$	23,688,441
Diluted wtd. average shares outstanding		109,752,238			110,300,988			111,330,889			110,025,097			111,297,697

RATIOS
Average loans to deposits ⁽²⁾		70.97	%		70.96	%		68.85	%		70.96	%		68.97	%
Return on total average assets		1.73			1.58			1.80			1.66			1.73
Return on average common equity ⁽³⁾		14.46			13.64			16.78			14.06			16.19
Non-interest income to total revenue		37.55			37.34			37.18			37.45			37.71
Efficiency ratio ⁽⁴⁾		55.88			58.76			54.06			57.29			56.06
Net yield on interest earning assets		3.61			3.52			3.65			3.56			3.51

EQUITY SUMMARY
Cash dividends per common share	$	.260		$	.260		$	.224		$	.520		$	.448
Cash dividends on common stock	$	28,682		$	28,858		$	25,096		$	57,540		$	50,202
Cash dividends on preferred stock	$	2,250		$	2,250		$	2,250		$	4,500		$	4,500
Book value per common share ⁽⁵⁾	$	27.53		$	26.18		$	23.47
Market value per common share ⁽⁵⁾	$	59.66		$	58.06		$	61.63
High market value per common share	$	61.96		$	64.02		$	64.21
Low market value per common share	$	56.63		$	55.62		$	55.11
Common shares outstanding ⁽⁵⁾		109,927,645			110,696,250			111,944,745
Tangible common equity to tangible assets ⁽⁶⁾		11.25	%		11.06	%		10.18	%
Tier I leverage ratio		11.75	%		11.67	%		11.18	%

OTHER QTD INFORMATION
Number of bank/ATM locations		319			319			322
Full-time equivalent employees		4,857			4,841			4,797

(1)	Excludes allowance for loan losses and unrealized gains/(losses) on available for sale debt 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).
All share and per share amounts have been restated to reflect the 5% stock dividend distributed in December 2018.

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, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			June 30, 2019			June 30, 2018
Interest income	$	238,412		$	227,865		$	232,832		$	224,751		$	225,623		$	466,277		$	431,618
Interest expense		26,778			24,377			20,612			16,997			14,664			51,155			27,767
Net interest income		211,634			203,488			212,220			207,754			210,959			415,122			403,851
Provision for loan losses		11,806			12,463			12,256			9,999			10,043			24,269			20,439
Net interest income after provision for loan losses		199,828			191,025			199,964			197,755			200,916			390,853			383,412
NON-INTEREST INCOME
Bank card transaction fees		42,646			39,644			44,481			42,427			43,215			82,290			84,668
Trust fees		38,375			37,256			37,466			37,400			37,036			75,631			73,098
Deposit account charges and other fees		23,959			23,018			23,887			23,755			23,893			46,977			46,875
Capital market fees		1,944			1,879			1,843			1,595			1,992			3,823			4,283
Consumer brokerage services		3,888			3,747			4,184			3,884			3,971			7,635			7,739
Loan fees and sales		4,238			3,309			3,053			3,579			3,229			7,547			6,091
Other		12,209			12,387			18,173			11,074			11,514			24,596			21,786
Total non-interest income		127,259			121,240			133,087			123,714			124,850			248,499			244,540
INVESTMENT SECURITIES GAINS (LOSSES), NET		(110	)		(925	)		(7,129	)		4,306			(3,075	)		(1,035	)		2,335
NON-INTEREST EXPENSE
Salaries and employee benefits		120,062			122,128			120,517			116,194			115,589			242,190			231,483
Net occupancy		11,145			11,501			11,711			11,631			11,118			22,646			22,702
Equipment		4,790			4,471			4,508			4,592			4,594			9,261			9,025
Supplies and communication		5,275			5,162			5,095			5,103			5,126			10,437			10,439
Data processing and software		23,248			22,260			22,216			22,056			21,016			45,508			41,706
Marketing		6,015			5,900			5,602			4,999			5,142			11,915			9,947
Deposit insurance		1,693			1,710			1,796			3,167			3,126			3,403			6,583
Community service		641			803			480			580			656			1,444			1,385
Other		16,910			17,490			16,700			16,737			15,493			34,400			30,867
Total non-interest expense		189,779			191,425			188,625			185,059			181,860			381,204			364,137
Income before income taxes		137,198			119,915			137,297			140,716			140,831			257,113			266,150
Less income taxes		28,899			22,860			26,537			26,647			29,507			51,759			52,765
Net income		108,299			97,055			110,760			114,069			111,324			205,354			213,385
Less non-controlling interest expense (income)		328			(83	)		1,108			1,493			994			245			2,071
Net income attributable to Commerce Bancshares, Inc.		107,971			97,138			109,652			112,576			110,330			205,109			211,314
Less preferred stock dividends		2,250			2,250			2,250			2,250			2,250			4,500			4,500
Net income available to common shareholders	$	105,721		$	94,888		$	107,402		$	110,326		$	108,080		$	200,609		$	206,814
Net income per common share — basic	$	.96		$	.85		$	.96		$	.99		$	.96		$	1.81		$	1.84
Net income per common share — diluted	$	.96		$	.85		$	.96		$	.98		$	.96		$	1.81		$	1.84

OTHER INFORMATION
Return on total average assets		1.73	%		1.58	%		1.75	%		1.81	%		1.80	%		1.66	%		1.73	%
Return on average common equity ⁽¹⁾		14.46			13.64			15.85			16.43			16.78			14.06			16.19
Efficiency ratio ⁽²⁾		55.88			58.76			54.53			55.73			54.06			57.29			56.06
Effective tax rate		21.11			19.05			19.49			19.14			21.10			20.15			19.98
Net yield on interest earning assets		3.61			3.52			3.58			3.52			3.65			3.56			3.51
Tax equivalent net interest income	$	215,203		$	207,104		$	216,281		$	211,368		$	215,775		$	422,307		$	412,413

(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, 2019			March 31, 2019			June 30, 2018
ASSETS
Loans
Business	$	5,257,682		$	5,175,541		$	4,990,298
Real estate — construction and land		909,784			925,269			967,151
Real estate — business		2,867,831			2,859,614			2,727,580
Real estate — personal		2,160,515			2,125,087			2,102,586
Consumer		1,927,623			1,893,212			2,012,644
Revolving home equity		357,406			364,010			374,557
Consumer credit card		776,333			772,396			775,214
Overdrafts		3,074			5,593			4,081
Total loans		14,260,248			14,120,722			13,954,111
Allowance for loan losses		(161,182	)		(160,682	)		(159,532	)
Net loans		14,099,066			13,960,040			13,794,579
Loans held for sale		20,067			20,085			20,352
Investment securities:
Available for sale debt securities		8,682,303			8,627,890			8,412,376
Trading debt securities		36,508			30,427			31,156
Equity securities		4,744			4,694			4,444
Other securities		130,038			129,504			112,309
Total investment securities		8,853,593			8,792,515			8,560,285
Federal funds sold and short-term securities purchased under agreements to resell	—				250			31,500
Long-term securities purchased under agreements to resell		700,000			700,000			700,000
Interest earning deposits with banks		492,318			166,077			114,947
Cash and due from banks		456,192			428,018			386,339
Premises and equipment — net		363,554			362,679			331,782
Goodwill		138,921			138,921			138,921
Other intangible assets — net		8,763			8,511			8,083
Other assets		639,700			456,375			437,954
Total assets	$	25,772,174		$	25,033,471		$	24,524,742
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	6,274,838		$	6,298,724		$	6,876,756
Savings, interest checking and money market		11,452,849			11,799,346			11,761,832
Certificates of deposit of less than $100,000		613,505			599,289			603,629
Certificates of deposit of $100,000 and over		1,488,416			1,276,994			1,079,340
Total deposits		19,829,608			19,974,353			20,321,557
Federal funds purchased and securities sold under agreements to repurchase		2,394,294			1,722,751			1,166,759
Other borrowings		4,510			2,022			9,291
Other liabilities		372,399			291,132			255,752
Total liabilities		22,600,811			21,990,258			21,753,359
Stockholders’ equity:
Preferred stock		144,784			144,784			144,784
Common stock		559,432			559,432			535,407
Capital surplus		2,077,491			2,074,912			1,804,057
Retained earnings		384,232			307,193			408,374
Treasury stock		(106,106	)		(60,547	)		(15,854	)
Accumulated other comprehensive income (loss)		108,898			11,981			(108,781	)
Total stockholders’ equity		3,168,731			3,037,755			2,767,987
Non-controlling interest		2,632			5,458			3,396
Total equity		3,171,363			3,043,213			2,771,383
Total liabilities and equity	$	25,772,174		$	25,033,471		$	24,524,742

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS
(Unaudited) (In thousands)	For the Three Months Ended
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
ASSETS:
Loans:
Business	$	5,142,794		$	5,084,920		$	5,028,635		$	4,926,063		$	4,962,171
Real estate — construction and land		908,777			907,062			953,166			992,045			971,854
Real estate — business		2,868,503			2,864,177			2,757,595			2,732,968			2,726,697
Real estate — personal		2,135,048			2,119,365			2,122,357			2,110,945			2,078,972
Consumer		1,907,979			1,929,202			1,962,401			1,984,643			2,025,585
Revolving home equity		361,673			370,962			374,216			373,819			378,366
Consumer credit card		766,080			781,167			788,353			774,512			754,199
Overdrafts		4,889			4,205			5,277			4,704			4,497
Total loans		14,095,743			14,061,060			13,992,000			13,899,699			13,902,341
Allowance for loan losses		(161,403	)		(159,275	)		(158,880	)		(158,840	)		(158,664	)
Net loans		13,934,340			13,901,785			13,833,120			13,740,859			13,743,677
Loans held for sale		20,731			18,350			18,475			18,201			22,202
Investment securities:
U.S. government and federal agency obligations		843,974			909,466			923,545			923,557			923,183
Government-sponsored enterprise obligations		199,506			199,480			214,913			261,938			354,156
State and municipal obligations		1,222,008			1,283,349			1,361,079			1,375,768			1,394,766
Mortgage-backed securities		4,614,703			4,360,428			4,379,805			4,434,119			4,067,152
Asset-backed securities		1,412,452			1,525,623			1,518,706			1,427,041			1,407,300
Other debt securities		331,459			335,612			339,841			339,952			340,246
Unrealized gain (loss) on debt securities		42,009			(48,925	)		(166,181	)		(119,319	)		(122,114	)
Total available for sale debt securities		8,666,111			8,565,033			8,571,708			8,643,056			8,364,689
Trading debt securities		30,169			25,411			26,322			24,490			26,101
Equity securities		4,717			4,568			4,432			4,466			47,179
Other securities		130,433			130,057			127,634			120,206			108,563
Total investment securities		8,831,430			8,725,069			8,730,096			8,792,218			8,546,532
Federal funds sold and short-term securities purchased under agreements to resell		1,601			4,797			14,415			13,042			36,791
Long-term securities purchased under agreements to resell		700,000			700,000			699,999			685,869			700,000
Interest earning deposits with banks		331,999			316,660			352,942			298,632			353,607
Other assets		1,251,555			1,197,261			1,158,816			1,147,250			1,119,454
Total assets	$	25,071,656		$	24,863,922		$	24,807,863		$	24,696,071		$	24,522,263

LIABILITIES AND EQUITY:
Non-interest bearing deposits	$	6,335,620		$	6,324,738		$	6,666,715		$	6,677,665		$	6,749,104
Savings		929,974			896,378			870,844			877,347			881,045
Interest checking and money market		10,642,648			10,762,550			10,840,048			10,839,310			10,850,123
Certificates of deposit of less than $100,000		605,440			590,200			584,828			593,936			609,011
Certificates of deposit of $100,000 and over		1,378,402			1,267,517			1,090,546			1,100,299			1,134,900
Total deposits		19,892,084			19,841,383			20,052,981			20,088,557			20,224,183
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase		1,793,526			1,771,534			1,655,997			1,499,837			1,339,278
Other borrowings		1,318			1,248			1,335			1,833			1,913
Total borrowings		1,794,844			1,772,782			1,657,332			1,501,670			1,341,191
Other liabilities		307,433			284,018			264,449			296,884			229,080
Total liabilities		21,994,361			21,898,183			21,974,762			21,887,111			21,794,454
Equity		3,077,295			2,965,739			2,833,101			2,808,960			2,727,809
Total liabilities and equity	$	25,071,656		$	24,863,922		$	24,807,863		$	24,696,071		$	24,522,263

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE RATES
(Unaudited)	For the Three Months Ended
(Unaudited)	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018
ASSETS:
Loans:
Business⁽¹⁾	4.02	%	4.07	%	3.93	%	3.80	%	3.69	%
Real estate — construction and land	5.63		5.73		5.47		5.21		5.06
Real estate — business	4.60		4.61		4.53		4.35		4.22
Real estate — personal	3.97		4.00		3.87		3.83		3.84
Consumer	4.77		4.73		4.62		4.46		4.39
Revolving home equity	5.20		5.17		4.98		4.72		4.51
Consumer credit card	12.33		12.18		11.91		11.99		12.05
Overdrafts	—		—		—		—		—
Total loans	4.82		4.85		4.72		4.59		4.49
Loans held for sale	6.98		7.38		6.59		6.87		6.72
Investment securities:
U.S. government and federal agency obligations	4.66		.78		1.90		2.23		3.18
Government-sponsored enterprise obligations	2.32		2.35		2.24		2.10		1.88
State and municipal obligations⁽¹⁾	3.18		3.19		3.06		2.98		3.06
Mortgage-backed securities	2.70		2.76		2.75		2.65		2.60
Asset-backed securities	2.79		2.70		2.55		2.42		2.32
Other debt securities	2.68		2.69		2.60		2.59		2.63
Total available for sale debt securities	2.97		2.59		2.65		2.60		2.66
Trading debt securities⁽¹⁾	3.14		3.24		3.21		3.13		3.15
Equity securities ⁽¹⁾	35.97		37.55		39.92		32.69		89.68
Other securities ⁽¹⁾	6.69		5.73		15.51		13.00		6.68
Total investment securities	3.04		2.66		2.86		2.76		3.19
Federal funds sold and short-term securities purchased under agreements to resell	2.76		2.79		2.56		2.10		1.93
Long-term securities purchased under agreements to resell	2.11		2.18		2.31		2.26		2.17
Interest earning deposits with banks	2.40		2.42		2.28		1.96		1.80
Total interest earning assets	4.05		3.93		3.92		3.80		3.90

LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.11		.11		.11		.11		.11
Interest checking and money market	.38		.35		.30		.26		.23
Certificates of deposit of less than $100,000	1.01		.87		.70		.56		.46
Certificates of deposit of $100,000 and over	2.02		1.92		1.61		1.41		1.23
Total interest bearing deposits	.55		.51		.41		.35		.32
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	1.80		1.72		1.60		1.33		1.18
Other borrowings	1.52		1.62		2.67		2.60		2.52
Total borrowings	1.80		1.72		1.60		1.33		1.19
Total interest bearing liabilities	.70	%	.65	%	.54	%	.45	%	.40	%

Net yield on interest earning assets	3.61	%	3.52	%	3.58	%	3.52	%	3.65	%

(1)

Stated on a tax equivalent basis using a federal income tax rate of 21%.

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, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			June 30, 2019			June 30, 2018
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period	$	160,682		$	159,932		$	159,732		$	159,532		$	159,532		$	159,932		$	159,532
Provision for losses		11,806			12,463			12,256			9,999			10,043			24,269			20,439
Net charge-offs (recoveries):
Commercial portfolio:
Business		284			447			1,748			332			36			731			22
Real estate — construction and land		(101	)		(16	)		(183	)		(119	)		(297	)		(117	)		(333	)
Real estate — business		(14	)		(37	)		(91	)		(42	)		(40	)		(51	)		(245	)
		169			394			1,474			171			(301	)		563			(556	)
Personal banking portfolio:
Consumer credit card		9,066			8,958			7,421			7,340			8,251			18,024			15,817
Consumer		1,723			1,924			2,805			2,091			1,862			3,647			4,390
Overdraft		253			317			500			351			326			570			770
Real estate — personal		(21	)		101			(144	)		(153	)		(95	)		80			(38	)
Revolving home equity		116			19		—				(1	)	—				135			56
		11,137			11,319			10,582			9,628			10,344			22,456			20,995
Total net loan charge-offs		11,306			11,713			12,056			9,799			10,043			23,019			20,439
Balance at end of period	$	161,182		$	160,682		$	159,932		$	159,732		$	159,532		$	161,182		$	159,532

NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business		.02	%		.04	%		.14	%		.03	%	—		%		.03	%	—		%
Real estate — construction and land		(.04	)		(.01	)		(.08	)		(.05	)		(.12	)		(.03	)		(.07	)
Real estate — business	—				(.01	)		(.01	)		(.01	)		(.01	)	—				(.02	)
		.01			.02			.07			.01			(.01	)		.01			(.01	)
Personal banking portfolio:
Consumer credit card		4.75			4.65			3.73			3.76			4.39			4.70			4.22
Consumer		.36			.40			.57			.42			.37			.38			.43
Overdraft		20.76			30.57			37.59			29.60			29.08			25.27			34.04
Real estate — personal	—				.02			(.03	)		(.03	)		(.02	)		.01		—
Revolving home equity		.13			.02		—			—			—				.07			.03
		.86			.88			.80			.73			.79			.87			.80
Total		.32	%		.34	%		.34	%		.28	%		.29	%		.33	%		.30	%

CREDIT QUALITY RATIOS
Non-performing assets to total loans		.08	%		.09	%		.10	%		.07	%		.08	%
Non-performing assets to total assets		.05			.05			.05			.04			.04
Allowance for loan losses to total loans		1.13			1.14			1.13			1.14			1.14

NON-PERFORMING ASSETS
Non-accrual loans:
Business	$	8,428		$	8,569		$	8,985		$	5,131		$	5,114
Real estate — construction and land		3			4			4			4			5
Real estate — business		950			1,746			1,715			1,467			2,465
Real estate — personal		1,752			1,848			1,832			1,767			1,888
Total		11,133			12,167			12,536			8,369			9,472
Foreclosed real estate		897			737			1,413			1,181			1,039
Total non-performing assets	$	12,030		$	12,904		$	13,949		$	9,550		$	10,511
Loans past due 90 days and still accruing interest	$	16,532		$	16,655		$	16,658		$	13,991		$	13,453
*as a percentage of average loans (excluding loans held for sale)

COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2019

For the quarter ended June 30, 2019, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $108.0 million, compared to $97.1 million in the previous quarter and $110.3 million in the same quarter last year. The increase in net income over the previous quarter was primarily the result of higher net interest income and non-interest income coupled with lower non-interest expense. Excluding inflation income on the Company’s inflation protected securities (TIPs), the net interest margin declined five basis points to 3.50%, mainly due to a modest increase in deposit costs, while interest earning asset balances and rates were mostly flat. Non-interest income increased $6.0 million over the previous quarter. Average loans increased $37.1 million over the previous quarter, while average deposits increased $50.7 million. For the quarter, the return on average assets was 1.73%, the return on average common equity was 14.5%, and the efficiency ratio was 55.9%.

Balance Sheet Review

During the 2^nd quarter of 2019, average loans totaled $14.1 billion, or an increase of $37.1 million over the prior quarter, and grew $191.9 million, or 1.4%, over the same quarter last year. Period-end loans grew $139.5 million over the prior quarter. Compared to the previous quarter, average business loans grew $57.9 million, and average personal real estate loans grew $15.7 million. This growth was partly offset by declines in average consumer (decline of $21.2 million) and consumer credit card (decline of $15.1 million) lending activities. Growth in business loans was the result of increased commercial and industrial, commercial credit card, and tax-free lending activities. Personal real estate loans grew on higher loan originations during the 2^nd quarter of 2019 compared to the previous quarter. The decline in consumer loans resulted from lower auto, marine/RV, and fixed home equity lending. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $60.4 million, compared to $45.6 million in the prior quarter.

Total average available for sale debt securities increased $101.1 million over the previous quarter to $8.7 billion, at fair value. The increase in investment securities was mainly the result of growth in average mortgage-backed securities, partially offset by declines in average asset-backed, U.S. government and federal agency obligations, and state and municipal securities. Purchases of securities during the quarter totaled $511.8 million, and sales, maturities and pay downs were $556.8 million. At June 30, 2019, the duration of the investment portfolio was 2.8 years, and maturities and pay downs of approximately $1.2 billion are expected to occur during the next 12 months.

Total average deposits increased $50.7 million this quarter compared to the previous quarter. The increase in average deposits resulted from growth in certificates of deposit ($126.1 million), trust demand deposits ($97.2 million) and savings deposits ($33.6 million). These increases were mostly offset by declines of $119.9 million and $115.1 million in interest checking and money market and business demand average deposits, respectively. Compared to the previous quarter, total average consumer and wealth deposits (including private banking) increased $122.4 million and $77.9 million, respectively, while average commercial deposits declined $154.0 million this quarter. The average loans to deposits ratio was 71.0% in both the current and prior quarters. The Company’s average borrowings, which includes customer repurchase agreements, were $1.8 billion in the 2^nd quarter of 2019, unchanged from the prior quarter’s balance.

Net Interest Income

Net interest income in the 2^nd quarter of 2019 amounted to $211.6 million compared to $203.5 million in the previous quarter, an increase of $8.1 million. On a tax equivalent basis, net interest income for the current quarter increased $8.1 million over the previous quarter to $215.2 million. The growth in net interest income was mostly due to an $8.5 million increase this quarter in inflation income on the Company’s TIPs but was partially offset by a $1.1 million premium amortization expense adjustment on accelerating prepayment speeds for mortgage-backed and asset-backed securities. Excluding these items, net interest income increased $819 thousand, while the adjusted net yield on earning assets (tax equivalent) decreased to 3.52%, compared to 3.55% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) increased $1.3 million mostly as a result of higher loan yields on personal banking loans, combined with higher balances of business loans. The average tax-equivalent yield on the loan portfolio declined three basis points this quarter to 4.82%, compared to 4.85% in the previous quarter, as yields on commercial loans contracted slightly, offsetting yield growth on personal banking loans.

Interest income on investment securities (tax equivalent) increased $9.2 million over the previous quarter, mainly due to the higher inflation income on TIPs, as noted above. An increase in the Consumer Price Index this quarter resulted in inflation income of $6.5 million. The yield on total investment securities was 3.04% in the current quarter, up from 2.66% in the previous quarter.

Interest costs on deposits totaled 55 basis points in the 2^nd quarter of 2019, compared to 51 basis points in the prior quarter. Interest expense on deposits increased $1.9 million this quarter compared to the previous quarter mainly due to higher rates on money market accounts and certificates of deposit (CD), coupled with growth in jumbo CD balances. Borrowing costs increased $548 thousand this quarter mainly due to higher balances of federal funds purchased. In the current quarter, the overall rate paid on interest bearing liabilities was .70%, compared to .65% in the prior quarter.

Non-Interest Income

In the 2^nd quarter of 2019, total non-interest income amounted to $127.3 million, an increase of $2.4 million, or 1.9%, compared to the same period last year and increased $6.0 million, or 5.0%, compared to the prior quarter. The increase in non-interest income over the same period last year was mainly due to growth in trust, cash sweep, and loan fee income, coupled with gains on sales of assets. These increases to income were partly offset by lower swap, international, and net bank card fees.

Total net bank card fees in the current quarter decreased $569 thousand, or 1.3%, from the same period last year, but increased $3.0 million, or 7.6%, compared to the prior quarter. Net corporate card fees declined $1.1 million, or 4.4%, from the same quarter last year mainly due to higher rewards and network expense. Net debit card fees declined $223 thousand, or 2.2%, due to higher network expense, partly offset by higher interchange income. Overall net merchant income increased $355 thousand, or 7.3%, due to higher interchange fees, partly offset by higher network expense, while net credit card fees increased $372 thousand, or 10.6% on higher interchange revenue. Total net bank card fees this quarter were comprised of fees on corporate card ($23.5 million), debit card ($10.0 million), merchant ($5.2 million) and credit card ($3.9 million) transactions.

In the current quarter, trust fees increased $1.3 million, or 3.6%, over the same period last year, resulting from growth in private client fee income. Compared to the same period last year, deposit account fees increased slightly due to growth in corporate cash management fees, offset by lower overdraft and deposit account fees.

During the 2^nd quarter of 2019, loan fees and sales increased $1.0 million, or 31.2%, over amounts recorded in the same quarter last year, mainly due to higher mortgage banking revenue. Cash sweep fees grew $556 thousand, or 24.4%, over the same period last year, while international fees declined $548 thousand. Swap fees declined $906 thousand compared to the same quarter last year as customer demand for this product has shifted due to expectations on future interest rates. Other non-interest income this quarter also included gains of $576 thousand on sales of leased assets to customers upon lease termination and sales of branch properties, compared to losses of $548 thousand on sales of branch properties and write downs on software costs in the 2^nd quarter of 2018. Non-interest income comprised 37.6% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $110 thousand in the current quarter, compared to losses of $925 thousand in the prior quarter and losses of $3.1 million in the 2^nd quarter of 2018. Net securities losses in the current quarter resulted mainly from fair value net losses on the Company’s private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $189.8 million, compared to $181.9 million in the same period last year and $191.4 million in the prior quarter. The increase in non-interest expense compared to the same period last year was mainly due to higher salaries and benefits and data processing costs, partly offset by lower deposit insurance expense.

Compared to the 2^nd quarter of last year, salaries and benefits expense increased $4.5 million, or 3.9%, driven by growth in full-time salary costs. Full-time equivalent employees totaled 4,857 and 4,797 at June 30, 2019 and 2018, respectively.

Marketing costs increased $873 thousand mainly due to increased marketing efforts for consumer deposit customers and healthcare banking initiatives. Data processing costs increased $2.2 million due to higher costs for service providers and software expense as the Company continues its efforts to implement a new core deposit system and various other technology-based initiatives. However, deposit insurance expense declined $1.4 million due to reduced FDIC insurance rates. Other non-interest expense increased over the prior quarter mainly due to higher professional fees, travel and entertainment and foreclosed property expense.

Income Taxes

The effective tax rate for the Company was 21.1% in the current quarter, 19.1% in the previous quarter, and 21.1% in the 2^nd quarter of 2018.

Credit Quality

Net loan charge-offs in the 2^nd quarter of 2019 amounted to $11.3 million, compared to $11.7 million in the prior quarter and $10.0 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .32% in the current quarter, compared to .34% in the previous quarter and .29% in the 2^nd quarter of last year. Compared to the prior quarter, net loan charge-offs on commercial loans declined $225 thousand to $169 thousand for the 2^nd quarter of 2019, while net loan charge-offs on personal banking loans decreased $182 thousand to $11.1 million.

In the 2^nd quarter of 2019, annualized net loan charge-offs on average consumer credit card loans were 4.75%, compared to 4.65% in the previous quarter, and 4.39% in the same quarter last year. Consumer loan net charge-offs were .36% of average consumer loans in the current quarter, .40% in the prior quarter and .37% in the same quarter last year. This quarter, the provision for loan losses totaled $11.8 million and exceeded net loan charge-offs by $500 thousand. At June 30, 2019, the allowance totaled $161.2 million, or 1.13% of total loans.

At June 30, 2019, total non-performing assets amounted to $12.0 million, a decrease of $874 thousand from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($11.1 million and $897 thousand, respectively). At June 30, 2019, the balance of non-accrual loans, which represented .08% of loans outstanding, included business loans of $8.4 million, business real estate loans of $950 thousand, and personal real estate loans of $1.8 million. Loans more than 90 days past due and still accruing interest totaled $16.5 million at June 30, 2019.

Other

During the 2^nd quarter of 2019, the Company paid a cash dividend of $.26 per common share, representing a 16.1% increase over the same period last year. The Company also paid an annualized 6% cash dividend on its preferred stock. The Company purchased 779,726 shares of treasury stock during the current quarter at an average price of $59.48.

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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20190716005180/en/

Matthew Burkemper, Investor Relations
(314) 746-7485
Web Site: http://www.commercebank.com
Email: [email protected]

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Commerce Bancshares, Inc. Reports Second Quarter Earnings Per Share Of $.96