COMMERCE BANCSHARES INC /MO/ - FORM 8-K - EX-99.1 - EXHIBIT 99.1

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8-K - 8-K - COMMERCE BANCSHARES INC /MO/	cbsh93020168k.htm

Exhibit 99.1



	CBSH
1000 Walnut Street / Suite 700 / Kansas City, Missouri 64106 / 816.234.2000

FOR IMMEDIATE RELEASE:

Friday, October 14, 2016

COMMERCE BANCSHARES, INC. ANNOUNCES THIRD

QUARTER EARNINGS PER COMMON SHARE OF $.68

Commerce Bancshares, Inc. announced earnings of $.68 per common share for the three months ended September 30, 2016, compared to $.70 per share in the prior quarter and $.63 per share in the third quarter of 2015. Net income attributable to Commerce Bancshares, Inc. for the third quarter amounted to $68.5 million, compared to $69.9 million in the prior quarter and $64.6 million in the same quarter last year. For the quarter, the return on average assets was 1.12%, the return on average common equity was 11.0%, and the efficiency ratio was 62.3%.

For the nine months ended September 30, 2016, earnings per common share totaled $2.03, compared to $1.93 in 2015, or an increase of 5.2%. Net income attributable to Commerce Bancshares, Inc. amounted to $203.8 million for the nine months ended September 30, 2016, compared to $200.0 million during the same period last year. For the first nine months of 2016, the return on average assets was 1.11%, and the return on average common equity was 11.3%.

In announcing these results, David W. Kemper, Chairman and CEO, said, “This quarter top line revenue grew 6% compared to the same period last year, with this growth coming from both net interest income and fees. The increase in fees resulted mainly from higher commercial card, deposit, and trust fee income, while loan and sweep fees also showed good growth. The increase in net interest income continues to be driven by overall growth in average loans and higher overall earning assets. Average loans increased $118.1 million this quarter mainly from higher commercial real estate and construction lending and growth in consumer loan balances. Average deposits declined slightly this quarter, and funding costs remained low. Non-interest expense for the quarter totaled $181.2 million, up $4.2 million compared to the previous quarter, mainly reflecting additional investments in staffing, occupancy, and information technology costs.”

Mr. Kemper continued, “The current credit environment remains excellent as net loan charge-offs totaled $6.6 million this quarter, compared to $7.5 million in the previous quarter and $8.4 million in the third quarter of 2015. The decrease in net loan charge-offs compared to the previous quarter was largely due to continued commercial loan recoveries, which totaled $2.5 million compared to $1.6 million in the prior quarter. During the current quarter, the provision for loan losses totaled $7.3 million, or $700 thousand higher than net loan charge-offs, but was $2.0 million less than in the prior quarter. The allowance for loan losses increased to $154.5 million at September 30, 2016, or 1.17% of period end loans. Total non-performing assets decreased $9.5 million from the previous quarter to $16.6 million this quarter.”

(more)

Total assets at September 30, 2016 were $24.7 billion, total loans were $13.2 billion, and total deposits were $20.2 billion. During the quarter, the Company paid a common cash dividend of $.225 per share 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 350 locations in Missouri, Illinois, Kansas, Oklahoma and Colorado. The Company also has operating subsidiaries involved in credit related insurance and private equity activities.

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, 2016			June 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
FINANCIAL SUMMARY
Net interest income		$171,243			$171,829			$162,038			$506,847			$471,833
Non-interest income	119,319			116,570			111,288			354,913			332,097
Total revenue	290,562			288,399			273,326			861,760			803,930
Investment securities gains (losses), net	(1,965		)	(744		)	(378		)	(3,704		)	7,800
Provision for loan losses	7,263			9,216			8,364			25,918			19,541
Non-interest expense	181,242			177,089			171,402			535,804			500,710
Income before taxes	100,092			101,350			93,182			296,334			291,479
Income taxes	30,942			31,542			27,969			91,854			88,929
Non-controlling interest expense (income)	605			(85		)	601			668			2,530
Net income attributable to Commerce Bancshares, Inc.	68,545			69,893			64,612			203,812			200,020
Preferred stock dividends	2,250			2,250			2,250			6,750			6,750
Net income available to common shareholders		$66,295			$67,643			$62,362			$197,062			$193,270
Earnings per common share:
Net income — basic		$.69			$.70			$.63			$2.04			$1.93
Net income — diluted		$.68			$.70			$.63			$2.03			$1.93
Effective tax rate	31.10		%	31.10		%	30.21		%	31.07		%	30.78		%
Tax equivalent net interest income		$179,115			$179,592			$169,512			$530,132			$493,897
Average total interest earning assets ⁽¹⁾	$	23,150,832		$	23,252,289		$	22,434,664		$	23,244,807		$	22,510,617
Diluted wtd. average shares outstanding	95,669,439			95,630,629			96,882,333			95,693,969			98,882,951

RATIOS
Average loans to deposits ⁽²⁾	64.33		%	63.45		%	62.44		%	63.53		%	60.97		%
Return on total average assets	1.12			1.15			1.09			1.11			1.13
Return on average common equity ⁽³⁾	10.97			11.69			11.25			11.28			11.62
Non-interest income to total revenue	41.06			40.42			40.72			41.18			41.31
Efficiency ratio ⁽⁴⁾	62.25			61.27			62.55			62.04			62.12
Net yield on interest earning assets	3.08			3.11			3.00			3.05			2.93

EQUITY SUMMARY
Cash dividends per common share		$.225			$.225			$.214			$.675			$.643
Cash dividends on common stock		$21,772			$21,762			$20,936			$65,294			$64,041
Cash dividends on preferred stock		$2,250			$2,250			$2,250			$6,750			$6,750
Book value per common share ⁽⁵⁾		$25.01			$24.67			$22.83
Market value per common share ⁽⁵⁾		$49.26			$47.90			$43.39
High market value per common share		$51.30			$49.41			$46.38
Low market value per common share		$45.74			$42.98			$40.43
Common shares outstanding ⁽⁵⁾	96,591,285			96,560,828			97,511,328
Tangible common equity to tangible assets ⁽⁶⁾	9.22		%	9.09		%	8.72		%
Tier I leverage ratio	9.58		%	9.36		%	9.31		%

OTHER QTD INFORMATION
Number of bank/ATM locations	340			346			347
Full-time equivalent employees	4,778			4,779			4,770


(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, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			September 30, 2016			September 30, 2015
Interest income		$179,361			$180,065			$172,128			$169,742			$169,115			$531,554			$492,674
Interest expense	8,118			8,236			8,353			7,255			7,077			24,707			20,841
Net interest income	171,243			171,829			163,775			162,487			162,038			506,847			471,833
Provision for loan losses	7,263			9,216			9,439			9,186			8,364			25,918			19,541
Net interest income after provision for loan losses	163,980			162,613			154,336			153,301			153,674			480,929			452,292
NON-INTEREST INCOME
Bank card transaction fees	47,006			45,065			44,470			46,320			44,635			136,541			132,606
Trust fees	30,951			30,241			29,243			29,622			29,302			90,435			88,815
Deposit account charges and other fees	22,241			21,328			20,691			21,606			20,674			64,260			58,810
Capital market fees	2,751			2,500			2,725			3,116			2,620			7,976			8,360
Consumer brokerage services	3,375			3,491			3,509			3,254			3,687			10,375			10,530
Loan fees and sales	3,123			3,196			2,510			2,101			1,855			8,829			6,127
Other	9,872			10,749			15,876			10,023			8,515			36,497			26,849
Total non-interest income	119,319			116,570			119,024			116,042			111,288			354,913			332,097
INVESTMENT SECURITIES GAINS (LOSSES), NET	(1,965		)	(744		)	(995		)	(1,480		)	(378		)	(3,704		)	7,800
NON-INTEREST EXPENSE
Salaries and employee benefits	107,004			104,808			106,859			102,098			100,874			318,671			298,603
Net occupancy	12,366			11,092			11,303			10,981			11,247			34,761			33,807
Equipment	4,842			4,781			4,634			4,915			4,789			14,257			14,171
Supplies and communication	5,968			5,693			6,829			6,554			5,609			18,490			16,416
Data processing and software	23,663			22,770			22,899			22,274			21,119			69,332			61,670
Marketing	4,399			4,389			3,813			3,539			4,343			12,601			12,568
Deposit insurance	3,576			3,143			3,165			3,145			2,981			9,884			9,001
Other	19,424			20,413			17,971			22,271			20,440			57,808			54,474
Total non-interest expense	181,242			177,089			177,473			175,777			171,402			535,804			500,710
Income before income taxes	100,092			101,350			94,892			92,086			93,182			296,334			291,479
Less income taxes	30,942			31,542			29,370			27,661			27,969			91,854			88,929
Net income	69,150			69,808			65,522			64,425			65,213			204,480			202,550
Less non-controlling interest expense (income)	605			(85		)	148			715			601			668			2,530
Net income attributable to Commerce Bancshares, Inc.	68,545			69,893			65,374			63,710			64,612			203,812			200,020
Less preferred stock dividends	2,250			2,250			2,250			2,250			2,250			6,750			6,750
Net income available to common shareholders		$66,295			$67,643			$63,124			$61,460			$62,362			$197,062			$193,270
Net income per common share — basic		$.69			$.70			$.65			$.63			$.63			$2.04			$1.93
Net income per common share — diluted		$.68			$.70			$.65			$.63			$.63			$2.03			$1.93

OTHER INFORMATION
Return on total average assets	1.12		%	1.15		%	1.07		%	1.05		%	1.09		%	1.11		%	1.13		%
Return on average common equity ⁽¹⁾	10.97			11.69			11.20			10.88			11.25			11.28			11.62
Efficiency ratio ⁽²⁾	62.25			61.27			62.62			62.97			62.55			62.04			62.12
Effective tax rate	31.10			31.10			31.00			30.27			30.21			31.07			30.78
Net yield on interest earning assets	3.08			3.11			2.95			2.94			3.00			3.05			2.93
Tax equivalent net interest income		$179,115			$179,592			$171,425			$170,141			$169,512			$530,132			$493,897


(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, 2016			June 30, 2016			September 30, 2015
ASSETS
Loans
Business	$	4,770,883		$	4,840,248		$	4,406,854
Real estate — construction and land	800,545			819,896			534,425
Real estate — business	2,520,528			2,399,271			2,286,013
Real estate — personal	1,968,005			1,927,340			1,920,650
Consumer	1,972,969			1,939,486			1,886,806
Revolving home equity	417,591			408,301			428,940
Consumer credit card	760,022			753,166			756,093
Overdrafts	19,698			4,180			4,493
Total loans	13,230,241			13,091,888			12,224,274
Allowance for loan losses	(154,532		)	(153,832		)	(151,532		)
Net loans	13,075,709			12,938,056			12,072,742
Loans held for sale	9,511			33,254			4,143
Investment securities:
Available for sale	9,438,871			9,221,346			9,472,959
Trading	28,586			30,512			14,463
Non-marketable	108,224			111,931			116,634
Total investment securities	9,575,681			9,363,789			9,604,056
Federal funds sold and short-term securities purchased under agreements to resell	13,415			13,725			32,550
Long-term securities purchased under agreements to resell	725,000			825,000			975,000
Interest earning deposits with banks	56,767			183,223			42,078
Cash and due from banks	396,938			428,300			384,122
Land, buildings and equipment — net	339,196			342,237			351,946
Goodwill	138,921			138,921			138,921
Other intangible assets — net	6,621			6,561			6,826
Other assets	396,709			436,627			355,264
Total assets	$	24,734,468		$	24,709,693		$	23,967,648
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	7,130,415		$	6,906,265		$	6,699,873
Savings, interest checking and money market	11,023,526			10,978,734			10,295,260
Time open and C.D.’s of less than $100,000	732,575			749,160			808,210
Time open and C.D.’s of $100,000 and over	1,279,644			1,515,888			1,183,417
Total deposits	20,166,160			20,150,047			18,986,760
Federal funds purchased and securities sold under agreements to repurchase	1,489,891			1,632,272			2,193,197
Other borrowings	101,415			103,878			103,831
Other liabilities	416,189			296,675			312,817
Total liabilities	22,173,655			22,182,872			21,596,605
Stockholders’ equity:
Preferred stock	144,784			144,784			144,784
Common stock	489,862			489,862			484,155
Capital surplus	1,335,150			1,333,995			1,283,346
Retained earnings	515,081			470,558			555,877
Treasury stock	(50,538		)	(51,707		)	(168,493		)
Accumulated other comprehensive income	121,082			134,424			65,636
Total stockholders’ equity	2,555,421			2,521,916			2,365,305
Non-controlling interest	5,392			4,905			5,738
Total equity	2,560,813			2,526,821			2,371,043
Total liabilities and equity	$	24,734,468		$	24,709,693		$	23,967,648

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS



(Unaudited) (In thousands)	For the Three Months Ended
	September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015
ASSETS:
Loans:
Business	$	4,694,340		$	4,691,476		$	4,491,556		$	4,351,756		$	4,221,478
Real estate — construction and land	821,422			789,329			682,557			584,185			476,331
Real estate — business	2,432,325			2,389,170			2,382,094			2,320,439			2,284,928
Real estate — personal	1,943,951			1,905,968			1,909,532			1,916,219			1,911,469
Consumer	1,947,956			1,927,925			1,934,577			1,908,540			1,861,636
Revolving home equity	411,832			413,198			429,682			429,582			434,355
Consumer credit card	750,412			738,130			752,098			756,743			746,066
Overdrafts	4,652			3,916			4,772			6,303			5,233
Total loans	13,006,890			12,859,112			12,586,868			12,273,767			11,941,496
Allowance for loan losses	(153,517		)	(151,622		)	(151,308		)	(150,856		)	(150,890		)
Net loans	12,853,373			12,707,490			12,435,560			12,122,911			11,790,606
Loans held for sale	26,597			56,272			9,360			6,118			4,471
Investment securities:
U.S. government and federal agency obligations	726,469			698,374			703,212			580,816			402,591
Government-sponsored enterprise obligations	481,573			666,354			776,488			824,066			887,631
State and municipal obligations	1,747,794			1,763,849			1,718,587			1,779,704			1,805,931
Mortgage-backed securities	3,366,292			3,394,466			3,424,716			3,335,627			3,217,589
Asset-backed securities	2,340,783			2,377,708			2,537,472			2,574,426			2,546,982
Other marketable securities	334,747			337,572			342,382			337,340			302,323
Unrealized gain on investment securities	235,169			191,565			149,319			130,231			118,404
Total available for sale securities	9,232,827			9,429,888			9,652,176			9,562,210			9,281,451
Trading securities	18,433			20,540			18,190			23,217			22,283
Non-marketable securities	113,954			116,103			127,769			114,321			114,062
Total investment securities	9,365,214			9,566,531			9,798,135			9,699,748			9,417,796
Federal funds sold and short-term securities purchased under agreements to resell	13,054			11,916			17,378			18,694			21,012
Long-term securities purchased under agreements to resell	766,302			824,999			850,275			902,174			1,007,606
Interest earning deposits with banks	207,944			125,024			219,636			178,486			160,687
Other assets	1,151,549			1,113,214			1,172,916			1,119,602			1,106,739
Total assets	$	24,384,033		$	24,405,446		$	24,503,260		$	24,047,733		$	23,508,917

LIABILITIES AND EQUITY:
Non-interest bearing deposits	$	7,096,218		$	6,885,889		$	6,905,673		$	6,995,666		$	6,781,592
Savings	778,663			787,478			761,020			736,824			739,172
Interest checking and money market	10,210,744			10,287,923			10,128,543			9,805,457			9,619,621
Time open & C.D.’s of less than $100,000	740,729			758,703			775,221			796,639			820,792
Time open & C.D.’s of $100,000 and over	1,435,001			1,635,892			1,483,700			1,219,803			1,171,617
Total deposits	20,261,355			20,355,885			20,054,157			19,554,389			19,132,794
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	1,163,728			1,211,892			1,404,754			1,707,430			1,677,322
Other borrowings	102,769			104,649			377,711			103,819			103,875
Total borrowings	1,266,497			1,316,541			1,782,465			1,811,249			1,781,197
Other liabilities	306,306			260,179			254,437			295,718			250,626
Total liabilities	21,834,158			21,932,605			22,091,059			21,661,356			21,164,617
Equity	2,549,875			2,472,841			2,412,201			2,386,377			2,344,300
Total liabilities and equity	$	24,384,033		$	24,405,446		$	24,503,260		$	24,047,733		$	23,508,917

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE RATES



(Unaudited)	For the Three Months Ended
(Unaudited)	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
ASSETS:
Loans:
Business⁽¹⁾	2.87	%	2.90	%	2.87	%	2.78	%	2.73	%
Real estate — construction and land	3.48		3.46		3.51		3.41		3.52
Real estate — business	3.63		3.69		3.70		3.68		3.71
Real estate — personal	3.73		3.76		3.77		3.76		3.73
Consumer	3.91		3.80		3.87		3.91		4.00
Revolving home equity	3.56		3.59		3.52		3.44		3.50
Consumer credit card	11.56		11.54		11.42		11.23		11.59
Overdrafts	—		—		—		—		—
Total loans	3.86		3.86		3.89		3.85		3.89
Loans held for sale	5.00		4.95		5.80		5.40		4.26
Investment securities:
U.S. government and federal agency obligations	2.43		3.48		.40		.17		4.39
Government-sponsored enterprise obligations	2.24		3.03		1.93		1.89		1.77
State and municipal obligations⁽¹⁾	3.60		3.60		3.66		3.64		3.44
Mortgage-backed securities	2.38		2.36		2.45		2.54		2.47
Asset-backed securities	1.48		1.45		1.39		1.25		1.15
Other marketable securities⁽¹⁾	2.74		2.77		2.79		2.83		2.65
Total available for sale securities	2.39		2.51		2.20		2.20		2.32
Trading securities⁽¹⁾	2.42		2.27		2.87		2.65		2.72
Non-marketable securities ⁽¹⁾	10.24		8.03		6.54		8.19		8.28
Total investment securities	2.49		2.58		2.26		2.27		2.39
Federal funds sold and short-term securities purchased under agreements to resell	.61		.64		.56		.32		.40
Long-term securities purchased under agreements to resell	1.73		1.64		1.64		1.40		1.29
Interest earning deposits with banks	.51		.49		.49		.28		.25
Total interest earning assets	3.22		3.25		3.10		3.07		3.12

LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.12		.11		.12		.12		.13
Interest checking and money market	.13		.13		.13		.13		.13
Time open & C.D.’s of less than $100,000	.37		.38		.38		.37		.38
Time open & C.D.’s of $100,000 and over	.61		.58		.54		.51		.53
Total interest bearing deposits	.20		.20		.19		.18		.18
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	.25		.24		.25		.14		.11
Other borrowings	3.51		3.49		1.33		3.47		3.43
Total borrowings	.51		.50		.48		.33		.31
Total interest bearing liabilities	.22	%	.22	%	.23	%	.20	%	.20	%

Net yield on interest earning assets	3.08	%	3.11	%	2.95	%	2.94	%	3.00	%

(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, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			September 30, 2016			September 30, 2015
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period	$	153,832		$	152,132		$	151,532		$	151,532		$	151,532		$	151,532		$	156,532
Provision for losses	7,263			9,216			9,439			9,186			8,364			25,918			19,541
Net charge-offs (recoveries):
Commercial portfolio:
Business	(50		)	(65		)	463			(133		)	(175		)	348			(255		)
Real estate — construction and land	(2,312		)	(507		)	(11		)	60			(67		)	(2,830		)	(1,322		)
Real estate — business	(106		)	(1,030		)	(242		)	(626		)	(22		)	(1,378		)	493
	(2,468		)	(1,602		)	210			(699		)	(264		)	(3,860		)	(1,084		)
Personal banking portfolio:
Consumer credit card	6,356			6,650			5,918			6,479			5,784			18,924			18,560
Consumer	2,240			1,781			2,599			2,251			2,435			6,620			6,027
Overdraft	434			307			219			487			429			960			863
Real estate — personal	(78		)	305			(195		)	458			(69		)	32			(17		)
Revolving home equity	79			75			88			210			49			242			192
	9,031			9,118			8,629			9,885			8,628			26,778			25,625
Total net loan charge-offs	6,563			7,516			8,839			9,186			8,364			22,918			24,541
Balance at end of period	$	154,532		$	153,832		$	152,132		$	151,532		$	151,532		$	154,532		$	151,532

NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business	—		%	(.01		)%	.04		%	(.01		)%	(.02		)%	.01		%	(0.01		)%
Real estate — construction and land	(1.12		)	(.26		)	(.01		)	.04			(.06		)	(.49		)	(.40		)
Real estate — business	(.02		)	(.17		)	(.04		)	(.11		)	—			(.08		)	.03
	(.12		)	(.08		)	.01			(.04		)	(.01		)	(.07		)	(.02		)
Personal banking portfolio:
Consumer credit card	3.37			3.62			3.16			3.40			3.08			3.38			3.34
Consumer	.46			.37			.54			.47			.52			.46			.45
Overdraft	37.11			31.53			18.46			30.65			32.52			28.84			22.55
Real estate — personal	(.02		)	.06			(.04		)	.09			(.01		)	—			—
Revolving home equity	.08			.07			.08			.19			.04			.08			.06
	.71			.74			.69			.78			.69			.71			.70
Total	.20		%	.24		%	.28		%	.30		%	.28		%	.24		%	.28		%

CREDIT QUALITY RATIOS
Non-performing assets to total loans	.13		%	.20		%	.25		%	.24		%	.24		%
Non-performing assets to total assets	.07			.11			.13			.12			.12
Allowance for loan losses to total loans	1.17			1.18			1.20			1.22			1.24

NON-PERFORMING ASSETS
Non-accrual loans:
Business	$	8,758		$	12,716		$	16,098		$	10,874		$	11,699
Real estate — construction and land	1,310			2,170			2,710			3,090			4,046
Real estate — business	1,920			5,236			6,234			7,863			5,054
Real estate — personal	3,634			4,293			4,205			4,425			4,980
Revolving home equity	23			109			120			323			—
Total	15,645			24,524			29,367			26,575			25,779
Foreclosed real estate	950			1,609			1,997			2,819			3,053
Total non-performing assets	$	16,595		$	26,133		$	31,364		$	29,394		$	28,832

Loans past due 90 days and still accruing interest	$	16,916		$	15,892		$	15,360		$	16,467		$	14,707

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

COMMERCE BANCSHARES, INC.

Management Discussion of Third Quarter Results

September 30, 2016

For the quarter ended September 30, 2016, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $68.5 million, compared to $69.9 million in the previous quarter and $64.6 million in the same quarter last year. The decrease in net income from the previous quarter resulted mainly from an increase in non-interest expense of $4.2 million, coupled with lower net interest income and higher investment securities losses of $1.2 million. However, non-interest income grew by $2.7 million over the previous quarter, and the provision for loan losses declined by $2.0 million. For the current quarter, the return on total average assets was 1.12%, the return on average common equity was 11.0%, and the efficiency ratio was 62.3%.

Balance Sheet Review

During the 3^rd quarter of 2016, average total loans increased $118.1 million, or 3.7% annualized, compared to the previous quarter, and increased $1.1 billion, or 9.1%, compared to the same period last year. Compared to the previous quarter, the increase in average loans resulted mainly from growth in business real estate (up $43.2 million) and construction loans (up $32.1 million). Commercial construction projects continued to drive growth in construction loans, while demand for commercial real estate loans increased this quarter. Business loans declined slightly due partly to seasonal reductions in lines of credit usage; however, leasing and tax-free lending activities continued to show good growth. Average consumer loans, including held for sale auto loans, declined slightly partly due to the sale of certain auto loans in both the 2^nd and 3^rd quarters of 2016, coupled with continued pay-downs of marine and recreation vehicle loans. In March 2016, automobile loans totaling $50.4 million were reclassified as held for sale, and in the 2^nd quarter of 2016, $21.8 million were sold. The remaining held for sale automobile loans were sold in the 3^rd quarter of 2016. Average personal real estate loans, including loans held for sale, increased by $36.2 million this quarter, and the Company also sold certain fixed rate loans totaling $43.4 million during the quarter, as part of an origination initiative that began in 2015.

During the 3^rd quarter of 2016, total average available for sale investment securities at fair value declined $197.1 million to $9.2 billion. Purchases of new securities totaled $817.4 million in the 3^rd quarter of 2016 and were offset by sales, maturities and pay downs of $570.5 million. Government-sponsored agency securities decreased on average by $184.8 million, while average mortgage-backed and asset-backed securities declined $65.1 million. At September 30, 2016, the duration of the investment portfolio was 2.7 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months.

Total average deposits decreased $94.5 million, or .5%, this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from a decline in certificates of deposit of $218.9 million coupled with lower money market (decline of $45.3 million) and interest checking (decline of $31.8 million) balances. Demand deposit balances, however, grew by $210.3 million, mostly related to business and government customer activity. Compared to the previous quarter, total average consumer and private banking deposits decreased $102.2 million and $85.5 million, respectively, while commercial deposits increased $92.2 million. The average loans to deposits ratio was 64.3% in the current quarter and 63.5% in the prior quarter.

Compared to the previous quarter, the Company’s average borrowings declined $50.0 million to $1.3 billion in the current quarter, mostly due to lower federal funds purchased balances.

Net Interest Income

Net interest income (tax equivalent) in the 3^rd quarter of 2016 amounted to $179.1 million, compared with $179.6 million in the previous quarter. Net interest income (tax equivalent) for the current quarter increased $9.6 million compared to the 3^rd quarter of last year. During the 3^rd quarter of 2016, the net yield on earning assets (tax equivalent) was 3.08%, compared with 3.11% in the previous quarter and 3.00% in the same period last year.

The slight decrease in net interest income (tax equivalent) in the current quarter compared to the prior quarter was due mainly to lower interest on investment securities of $3.0 million, which includes a decline in inflation income of $1.5 million on the Company’s treasury inflation-protected securities (TIPS). Also, lower balances of government sponsored securities, mortgage-backed securities and asset-backed securities resulted in a decline in interest income of $1.7 million. However, interest income of $938 thousand was received this quarter on a private equity debt investment which had previously been on non-accrual status. Total inflation income on TIPS for the quarter totaled $2.2 million, compared to $3.7 million in the previous quarter. The yield on investment securities totaled 2.49% in the current quarter, compared to 2.58% in the prior quarter.

As compared to the previous quarter, interest on loans increased by $2.7 million as a result of higher average balances, mostly in consumer loans, coupled with higher rates earned on consumer loans. Overall, the average yield on the loan portfolio increased 6 basis points this quarter to 3.86%.

Excluding the effects of inflation income and the additional interest on a private equity debt investment noted above, the net yield on earning assets would have been 3.02% in the current quarter, 3.01% in the prior quarter, and 2.94% in the same period last year. During the current quarter, adjustments to premium amortization expense on certain mortgage-backed and asset-backed securities, due to slowing prepayment speed assumptions, increased interest income by $746 thousand.

Interest expense on deposits decreased $116 thousand this quarter compared with the previous quarter due mainly to lower certificate of deposit balances. Borrowing costs remained relatively consistent this quarter.

Non-Interest Income

In the 3^rd quarter of 2016, total non-interest income amounted to $119.3 million, an increase of $8.0 million, or 7.2%, compared to the same period last year. Also, current quarter non-interest income increased $2.7 million, or 2.4%, when compared to amounts recorded in the previous quarter. The increase in non-interest income over the same period last year was due to growth in bank card, deposit, trust, sweep, tax credit sales, and loan fees and sales income, partly offset by lower swap fees.

Total bank card fees in the current quarter increased $2.4 million, or 5.3%, over the same period last year. The increase was mainly the result of growth in commercial card fees of $2.0 million, or 9.2%, as a result of a higher volume of transactions this quarter. Total bank card fees this quarter were comprised of fees on

COMMERCE BANCSHARES, INC.

Management Discussion of Third Quarter Results

September 30, 2016

corporate card ($24.0 million), debit card ($9.9 million), merchant ($6.8 million), and credit card ($6.2 million) transactions.

In the current quarter, trust fees increased $1.6 million, or 5.6%, compared to the same period last year, with growth coming from both private client and institutional customers. Compared to the same period last year, deposit account fees also increased $1.6 million, or 7.6%, as a result of 6.0% growth in corporate cash management fees coupled with higher deposit account service fees, which grew $1.2 million, or 28.6%.

Capital market fees increased 5.0% over the same quarter last year on higher sales volumes, while loan fees and sales grew by $1.3 million due to higher mortgage banking revenue from sales of newly-originated fixed rate residential mortgages. Included in other non-interest income are sweep fees, which increased $1.3 million in the current quarter over the same period last year, and sales of tax credits, which increased by $358 thousand this quarter compared to the same period last year. Fees from sales of interest rate swaps declined by $432 thousand this quarter, offsetting the increases in sweep fees and sales of tax credits. Non-interest income comprised 41.1% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $2.0 million this quarter, compared with net losses of $744 thousand last quarter and net losses of $378 thousand in the same period last year. Net losses in the current quarter mainly resulted from unrealized fair value adjustments to the Company’s private equity investment portfolio, partly offset by realized gains on these investments.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $181.2 million, an increase of $4.2 million over the previous quarter and $9.8 million, or 5.7%, higher than the same period last year. The increase over the same period in the previous year was mainly due to higher costs for salaries and benefits, occupancy, data processing costs, and FDIC insurance expense.

Compared to the 3^rd quarter of last year, salaries and benefits expense increased $6.1 million. Growth in salaries expense of $4.4 million, or 5.1%, was mainly due to higher full-time salaries and incentive compensation costs. Benefits expense increased $1.7 million, or 11.6%, mostly due to higher medical costs. Growth in salaries expense compared to the previous year resulted mainly from higher staffing costs in commercial card, residential mortgage, trust, information technology and other support units. Full-time equivalent employees totaled 4,778 and 4,770 at September 30, 2016 and 2015, respectively.

Compared to the 3^rd quarter of last year, data processing and software costs and occupancy costs grew $2.5 million and $1.1 million, respectively, while costs for marketing and equipment remained relatively flat. The increase in data processing and software costs resulted from higher bank card processing costs of $1.1 million, coupled with higher software and 3^rd party information technology services. Higher occupancy costs were the result of increased rental of disaster recovery facilities and demolition costs of a branch location being replaced. FDIC insurance costs have also increased by $595 thousand compared to the same quarter last year due to higher deposit balances and insurance rates. Costs for supplies and communication increased

$359 thousand, or 6.4%, mainly on higher costs related to reissuance of EMV chip cards and increased data network expense. Operating losses totaled $1.9 million this quarter and declined $1.1 million compared to the 3^rd quarter of 2015, mainly due to lower bank card related fraud losses.

Income Taxes

The effective tax rate for the Company was 31.1% in both the current quarter and the previous quarter, and was 30.2% in the 3^rd quarter of 2015.

Credit Quality

Net loan charge-offs in the 3^rd quarter of 2016 amounted to $6.6 million, compared to $7.5 million in the prior quarter and $8.4 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .20% in the current quarter compared to .24% in the previous quarter and .28% in the 3^rd quarter of last year. During the 3^rd quarter of 2016, the Company recorded net recoveries on commercial loans of $2.5 million, compared to net recoveries of $1.6 million in the prior quarter.

In the 3^rd quarter of 2016, annualized net loan charge-offs on average consumer credit card loans were 3.37%, compared with 3.62% in the previous quarter and 3.08% in the same period last year. Consumer loan net charge-offs were .46% of average consumer loans in the current quarter, .37% in the prior quarter and .52% in the same quarter last year. The provision for loan losses in the current quarter totaled $7.3 million, compared to $9.2 million in the prior quarter and $8.4 million in the 3^rd quarter of last year. This quarter, the provision for loan losses exceeded net loan charge-offs by $700 thousand. At September 30, 2016, the allowance totaled $154.5 million, which was 1.17% of total loans.

At September 30, 2016, total non-performing assets amounted to $16.6 million, a decrease of $9.5 million from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($15.6 million and $950 thousand, respectively, at September 30, 2016). At September 30, 2016, the balance of non-accrual loans, which represented .12% of loans outstanding, included business loans of $8.8 million, business real estate loans of $1.9 million, personal real estate loans of $3.6 million and construction and land loans of $1.3 million. Loans more than 90 days past due and still accruing interest totaled $16.9 million at September 30, 2016.

Other

During the 3^rd quarter of 2016, the Company paid a cash dividend of $.225 per common share, representing an increase of 5% over the rate paid in 2015. Also, a cash dividend of $2.3 million was paid on its preferred stock. Additionally, the Company purchased 20,730 shares of treasury stock this quarter at an average price of $48.90.

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 /MO/ - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - October 14, 2016

Attached files

COMMERCE BANCSHARES INC /MO/ Reports