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/	cbsh93020178k.htm

Exhibit 99.1



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

FOR IMMEDIATE RELEASE:

Thursday, October 12, 2017

COMMERCE BANCSHARES, INC. REPORTS THIRD

QUARTER GROWTH IN EARNINGS PER SHARE OF 9%

Commerce Bancshares, Inc. announced earnings of $.71 per common share for the three months ended September 30, 2017 compared to $.65 per share in the same quarter last year and $.75 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the third quarter amounted to $74.6 million, compared to $68.5 million in the third quarter of 2016 and $79.0 million in the prior quarter. For the quarter, the return on average assets was 1.19%, the return on average common equity was 11.4%, and the efficiency ratio was 60.4%.

For the nine months ended September 30, 2017, earnings per common share totaled $2.14 compared to $1.93 in 2016, or an increase of 10.9%. Net income attributable to Commerce Bancshares, Inc. for the nine months ended September 30, 2017 increased 10.4% to $225.0 million compared to $203.8 million last year. For the current period year to date, the return on average assets was 1.20%, and the return on average common equity was 11.9%.

In announcing these results, David W. Kemper, Chairman and CEO, said, “Our earnings remained strong this quarter driven by solid expense control and continued low credit losses. Excluding the effects of our inflation bonds, our net interest margin continued to expand this quarter from increased rates on our loan portfolio and stable deposit costs. Our wealth management business continues to post solid results as trust fees grew 11.9% this quarter, compared to the same period last year. Non-interest expense was essentially flat with the prior quarter and was up just 1.8% over the same period last year, driven by lower data processing and other technology costs. Total average loans increased 2.2% annualized this quarter over the prior quarter as growth in average construction and consumer lending was partly offset by a decline in business loans, due to lower line of credit utilization and reduced origination volume.”

Mr. Kemper added, “Capital and liquidity levels continue to be very strong and credit quality remains solid. For the current quarter, net loan charge-offs totaled $10.7 million, down slightly from the prior quarter. This small decline was due to lower credit card net losses and increased recoveries on our commercial loan portfolio, but was offset by increased automobile loan net charge-offs. The ratio of annualized net loan charge-offs to average loans was .31% this quarter compared to .32% last quarter. Non-performing assets increased this quarter to $14.7 million but remain at low levels. During the current quarter, the provision for loan losses matched net loan charge-offs, and the allowance for loan losses amounted to $157.8 million, or 1.15% of period end loans.”

(more)

Total assets at September 30, 2017 were $25.0 billion, total loans were $13.8 billion, and total deposits were $20.4 billion. During the quarter, the Company paid a common cash dividend of $.225 per share, representing a 5% increase over the rate paid in 2016, and also paid an annualized 6% cash dividend on its preferred stock.

Commerce Bancshares, Inc. is a registered bank holding company offering a full line of banking services, including investment management and securities brokerage. The Company currently operates in approximately 330 locations in Missouri, Illinois, Kansas, Oklahoma and Colorado.

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

* * * * * * * * * * * * * * *

For additional information, contact

Jeffery Aberdeen, Controller

at 1000 Walnut Street, Suite 700

Kansas City, MO 64106

or by telephone at (816) 234-2081

Web Site: http://www.commercebank.com

Email: mymoney@commercebank.com

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

FINANCIAL HIGHLIGHTS



	For the Three Months Ended									For the Nine Months Ended
(Unaudited) (Dollars in thousands, except per share data)	September 30, 2017			June 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
FINANCIAL SUMMARY
Net interest income		$182,591			$182,807			$171,243			$543,671			$506,847
Non-interest income	122,242			123,084			119,319			362,392			354,913
Total revenue	304,833			305,891			290,562			906,063			861,760
Investment securities gains (losses), net	(3,037		)	1,651			(1,965		)	(2,158		)	(3,704		)
Provision for loan losses	10,704			10,758			7,263			32,590			25,918
Non-interest expense	184,572			184,594			181,242			555,996			535,804
Income before taxes	106,520			112,190			100,092			315,319			296,334
Income taxes	32,294			33,201			30,942			90,402			91,854
Non-controlling interest expense (income)	(338		)	29			605			(111		)	668
Net income attributable to Commerce Bancshares, Inc.	74,564			78,960			68,545			225,028			203,812
Preferred stock dividends	2,250			2,250			2,250			6,750			6,750
Net income available to common shareholders		$72,314			$76,710			$66,295			$218,278			$197,062
Earnings per common share:
Net income — basic		$.71			$.75			$.65			$2.14			$1.94
Net income — diluted		$.71			$.75			$.65			$2.14			$1.93
Effective tax rate	30.22		%	29.60		%	31.10		%	28.66		%	31.07		%
Tax equivalent net interest income		$190,497			$190,865			$179,115			$568,684			$530,132
Average total interest earning assets ⁽¹⁾	$	23,790,684		$	23,990,273		$	23,150,832		$	23,993,876		$	23,244,807
Diluted wtd. average shares outstanding	100,934,365			100,898,503			100,452,911			100,867,260			100,478,668

RATIOS
Average loans to deposits ⁽²⁾	66.96		%	65.25		%	64.33		%	65.53		%	63.53		%
Return on total average assets	1.19			1.26			1.12			1.20			1.11
Return on average common equity ⁽³⁾	11.35			12.48			10.97			11.85			11.28
Non-interest income to total revenue	40.10			40.24			41.06			40.00			41.18
Efficiency ratio ⁽⁴⁾	60.44			60.24			62.25			61.25			62.04
Net yield on interest earning assets	3.18			3.19			3.08			3.17			3.05

EQUITY SUMMARY
Cash dividends per common share		$.225			$.225			$.214			$.675			$.643
Cash dividends on common stock		$22,906			$22,903			$21,772			$68,722			$65,294
Cash dividends on preferred stock		$2,250			$2,250			$2,250			$6,750			$6,750
Book value per common share ⁽⁵⁾		$25.19			$24.44			$23.82
Market value per common share ⁽⁵⁾		$57.77			$56.83			$46.91
High market value per common share		$59.24			$57.94			$48.86
Low market value per common share		$51.90			$52.02			$43.56
Common shares outstanding ⁽⁵⁾	101,625,459			101,616,435			101,420,849
Tangible common equity to tangible assets ⁽⁶⁾	9.72		%	9.37		%	9.22		%
Tier I leverage ratio	10.16		%	9.87		%	9.58		%

OTHER QTD INFORMATION
Number of bank/ATM locations	334			334			340
Full-time equivalent employees	4,811			4,805			4,778


(1)	Excludes allowance for loan losses and unrealized gains/(losses) on available for sale securities.


(2)	Includes loans held for sale.


(3)	Annualized net income available to common shareholders divided by average total equity less preferred stock.


(4)	The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.


(5)	As of period end.


(6)	The tangible common equity ratio is calculated as stockholders’ equity reduced by preferred stock, goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended															For the Nine Months Ended
(Unaudited) (In thousands, except per share data)	September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			September 30, 2017			September 30, 2016
Interest income		$194,244			$193,594			$187,997			$181,498			$179,361			$575,835			$531,554
Interest expense	11,653			10,787			9,724			8,296			8,118			32,164			24,707
Net interest income	182,591			182,807			178,273			173,202			171,243			543,671			506,847
Provision for loan losses	10,704			10,758			11,128			10,400			7,263			32,590			25,918
Net interest income after provision for loan losses	171,887			172,049			167,145			162,802			163,980			511,081			480,929
NON-INTEREST INCOME
Bank card transaction fees	44,521			44,999			43,204			45,338			47,006			132,724			136,541
Trust fees	34,620			33,120			32,014			31,360			30,951			99,754			90,435
Deposit account charges and other fees	22,659			22,861			21,942			22,134			22,241			67,462			64,260
Capital market fees	1,755			2,156			2,342			2,679			2,751			6,253			7,976
Consumer brokerage services	3,679			3,726			3,649			3,409			3,375			11,054			10,375
Loan fees and sales	3,590			4,091			3,168			2,583			3,123			10,849			8,829
Other	11,418			12,131			10,747			11,976			9,872			34,296			36,497
Total non-interest income	122,242			123,084			117,066			119,479			119,319			362,392			354,913
INVESTMENT SECURITIES GAINS (LOSSES), NET	(3,037		)	1,651			(772		)	3,651			(1,965		)	(2,158		)	(3,704		)
NON-INTEREST EXPENSE
Salaries and employee benefits	111,382			108,829			112,369			108,639			107,004			332,580			318,671
Net occupancy	11,459			11,430			11,443			11,529			12,366			34,332			34,761
Equipment	4,491			4,776			4,609			4,884			4,842			13,876			14,257
Supplies and communication	5,517			5,446			5,709			5,645			5,968			16,672			18,490
Data processing and software	22,700			23,356			23,097			23,390			23,663			69,153			69,332
Marketing	4,676			4,488			3,224			3,431			4,399			12,388			12,601
Deposit insurance	3,479			3,592			3,471			3,443			3,576			10,542			9,884
Other	20,868			22,677			22,908			20,300			19,424			66,453			57,808
Total non-interest expense	184,572			184,594			186,830			181,261			181,242			555,996			535,804
Income before income taxes	106,520			112,190			96,609			104,671			100,092			315,319			296,334
Less income taxes	32,294			33,201			24,907			32,297			30,942			90,402			91,854
Net income	74,226			78,989			71,702			72,374			69,150			224,917			204,480
Less non-controlling interest expense (income)	(338		)	29			198			795			605			(111		)	668
Net income attributable to Commerce Bancshares, Inc.	74,564			78,960			71,504			71,579			68,545			225,028			203,812
Less preferred stock dividends	2,250			2,250			2,250			2,250			2,250			6,750			6,750
Net income available to common shareholders		$72,314			$76,710			$69,254			$69,329			$66,295			$218,278			$197,062
Net income per common share — basic		$.71			$.75			$.68			$.68			$.65			$2.14			$1.94
Net income per common share — diluted		$.71			$.75			$.68			$.68			$.65			$2.14			$1.93

OTHER INFORMATION
Return on total average assets	1.19		%	1.26		%	1.15		%	1.14		%	1.12		%	1.20		%	1.11		%
Return on average common equity ⁽¹⁾	11.35			12.48			11.74			11.48			10.97			11.85			11.28
Efficiency ratio ⁽²⁾	60.44			60.24			63.14			61.82			62.25			61.25			62.04
Effective tax rate	30.22			29.60			25.83			31.09			31.10			28.66			31.07
Net yield on interest earning assets	3.18			3.19			3.14			3.03			3.08			3.17			3.05
Tax equivalent net interest income		$190,497			$190,865			$187,322			$181,301			$179,115			$568,684			$530,132


(1)	Annualized net income available to common shareholders divided by average total equity less preferred stock.


(2)	The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - PERIOD END



(Unaudited) (In thousands)	September 30, 2017			June 30, 2017			September 30, 2016
ASSETS
Loans
Business	$	4,834,037		$	4,852,408		$	4,770,883
Real estate — construction and land	921,609			848,152			800,545
Real estate — business	2,700,174			2,727,349			2,520,528
Real estate — personal	2,029,302			2,009,203			1,968,005
Consumer	2,113,438			2,038,514			1,972,969
Revolving home equity	391,308			403,387			417,591
Consumer credit card	752,379			740,865			760,022
Overdrafts	3,245			6,714			19,698
Total loans	13,745,492			13,626,592			13,230,241
Allowance for loan losses	(157,832		)	(157,832		)	(154,532		)
Net loans	13,587,660			13,468,760			13,075,709
Loans held for sale	17,337			22,002			9,511
Investment securities:
Available for sale	9,109,287			9,439,701			9,438,871
Trading	24,605			22,291			28,586
Non-marketable	99,268			102,388			108,224
Total investment securities	9,233,160			9,564,380			9,575,681
Federal funds sold and short-term securities purchased under agreements to resell	32,630			16,520			13,415
Long-term securities purchased under agreements to resell	700,000			625,000			725,000
Interest earning deposits with banks	105,422			80,860			56,767
Cash and due from banks	461,724			433,747			396,938
Land, buildings and equipment — net	335,348			334,586			339,196
Goodwill	138,921			138,921			138,921
Other intangible assets — net	7,388			7,002			6,621
Other assets	359,551			387,065			396,709
Total assets	$	24,979,141		$	25,078,843		$	24,734,468
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	7,536,127		$	7,314,506		$	7,130,415
Savings, interest checking and money market	11,091,200			11,427,615			11,023,526
Time open and C.D.’s of less than $100,000	657,891			679,668			732,575
Time open and C.D.’s of $100,000 and over	1,158,555			1,403,873			1,279,644
Total deposits	20,443,773			20,825,662			20,166,160
Federal funds purchased and securities sold under agreements to repurchase	1,408,984			1,256,444			1,489,891
Other borrowings	102,553			101,903			101,415
Other liabilities	319,354			266,627			416,189
Total liabilities	22,274,664			22,450,636			22,173,655
Stockholders’ equity:
Preferred stock	144,784			144,784			144,784
Common stock	510,015			510,015			489,862
Capital surplus	1,548,318			1,546,534			1,335,150
Retained earnings	440,261			390,853			515,081
Treasury stock	(9,895		)	(10,373		)	(50,538		)
Accumulated other comprehensive income	67,061			42,070			121,082
Total stockholders’ equity	2,700,544			2,623,883			2,555,421
Non-controlling interest	3,933			4,324			5,392
Total equity	2,704,477			2,628,207			2,560,813
Total liabilities and equity	$	24,979,141		$	25,078,843		$	24,734,468

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS



(Unaudited) (In thousands)	For the Three Months Ended
	September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016
ASSETS:
Loans:
Business	$	4,777,222		$	4,827,439		$	4,906,672		$	4,731,405		$	4,694,340
Real estate — construction and land	887,596			862,479			828,017			821,048			821,422
Real estate — business	2,710,453			2,701,144			2,645,531			2,559,028			2,432,325
Real estate — personal	2,017,264			2,003,997			2,012,456			1,985,606			1,943,951
Consumer	2,070,398			1,997,761			1,974,894			1,978,154			1,947,956
Revolving home equity	395,212			399,730			405,432			415,429			411,832
Consumer credit card	739,692			731,471			747,783			757,618			750,412
Overdrafts	4,373			4,505			4,185			5,501			4,652
Total loans	13,602,210			13,528,526			13,524,970			13,253,789			13,006,890
Allowance for loan losses	(156,909		)	(157,003		)	(155,328		)	(154,040		)	(153,517		)
Net loans	13,445,301			13,371,523			13,369,642			13,099,749			12,853,373
Loans held for sale	21,227			18,341			11,972			10,765			26,597
Investment securities:
U.S. government and federal agency obligations	917,808			910,821			913,474			811,524			726,469
Government-sponsored enterprise obligations	456,668			450,362			450,489			445,544			481,573
State and municipal obligations	1,699,365			1,771,674			1,783,103			1,784,407			1,747,794
Mortgage-backed securities	3,718,697			3,708,124			3,760,294			3,656,695			3,366,292
Asset-backed securities	2,025,415			2,335,344			2,359,644			2,417,367			2,340,783
Other marketable securities	327,634			326,398			332,643			333,236			334,747
Unrealized gain on investment securities	116,873			102,935			62,986			155,818			235,169
Total available for sale securities	9,262,460			9,605,658			9,662,633			9,604,591			9,232,827
Trading securities	21,149			21,062			25,165			21,717			18,433
Non-marketable securities	102,995			101,790			100,740			105,420			113,954
Total investment securities	9,386,604			9,728,510			9,788,538			9,731,728			9,365,214
Federal funds sold and short-term securities purchased under agreements to resell	23,807			13,115			9,887			8,336			13,054
Long-term securities purchased under agreements to resell	662,490			665,655			725,001			724,998			766,302
Interest earning deposits with banks	211,219			139,061			207,845			201,367			207,944
Other assets	1,122,230			1,106,528			1,139,402			1,153,982			1,151,549
Total assets	$	24,872,878		$	25,042,733		$	25,252,287		$	24,930,925		$	24,384,033

LIABILITIES AND EQUITY:
Non-interest bearing deposits	$	7,135,703		$	7,065,849		$	7,246,698		$	7,307,407		$	7,096,218
Savings	829,197			831,038			795,695			773,304			778,663
Interest checking and money market	10,387,212			10,667,042			10,603,988			10,512,268			10,210,744
Time open & C.D.’s of less than $100,000	667,710			688,047			705,135			722,775			740,729
Time open & C.D.’s of $100,000 and over	1,326,290			1,510,001			1,671,125			1,333,764			1,435,001
Total deposits	20,346,112			20,761,977			21,022,641			20,649,518			20,261,355
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	1,500,987			1,363,031			1,356,316			1,284,916			1,163,728
Other borrowings	101,904			105,311			102,011			101,412			102,769
Total borrowings	1,602,891			1,468,342			1,458,327			1,386,328			1,266,497
Other liabilities	251,714			203,139			234,144			346,900			306,306
Total liabilities	22,200,717			22,433,458			22,715,112			22,382,746			21,834,158
Equity	2,672,161			2,609,275			2,537,175			2,548,179			2,549,875
Total liabilities and equity	$	24,872,878		$	25,042,733		$	25,252,287		$	24,930,925		$	24,384,033

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE RATES



(Unaudited)	For the Three Months Ended
(Unaudited)	September 30, 2017		June 30, 2017		March 31, 2017		December 31, 2016		September 30, 2016
ASSETS:
Loans:
Business⁽¹⁾	3.25	%	3.21	%	3.02	%	2.91	%	2.87	%
Real estate — construction and land	4.31		4.30		3.85		3.64		3.48
Real estate — business	3.85		3.74		3.63		3.61		3.63
Real estate — personal	3.72		3.72		3.74		3.69		3.73
Consumer	4.02		3.94		3.89		3.85		3.91
Revolving home equity	4.03		3.84		3.64		3.50		3.56
Consumer credit card	12.03		11.90		11.66		11.38		11.56
Overdrafts	—		—		—		—		—
Total loans	4.13		4.06		3.92		3.85		3.86
Loans held for sale	5.36		5.75		6.64		5.77		5.00
Investment securities:
U.S. government and federal agency obligations	1.40		2.52		2.09		2.18		2.43
Government-sponsored enterprise obligations	1.61		1.59		1.58		1.54		2.24
State and municipal obligations⁽¹⁾	3.57		3.61		3.65		3.57		3.60
Mortgage-backed securities	2.36		2.35		2.38		2.40		2.38
Asset-backed securities	1.82		1.72		1.63		1.52		1.48
Other marketable securities⁽¹⁾	2.73		2.76		2.82		2.95		2.74
Total available for sale securities	2.35		2.42		2.38		2.36		2.39
Trading securities⁽¹⁾	2.51		2.70		2.77		2.40		2.42
Non-marketable securities ⁽¹⁾	6.46		11.49		21.08		5.42		10.24
Total investment securities	2.39		2.52		2.58		2.39		2.49
Federal funds sold and short-term securities purchased under agreements to resell	1.30		1.13		.94		.72		.61
Long-term securities purchased under agreements to resell	2.28		2.22		2.12		1.86		1.73
Interest earning deposits with banks	1.24		1.04		.77		.56		.51
Total interest earning assets	3.37		3.37		3.30		3.17		3.22

LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.12		.12		.13		.12		.12
Interest checking and money market	.16		.15		.14		.13		.13
Time open & C.D.’s of less than $100,000	.40		.39		.37		.37		.37
Time open & C.D.’s of $100,000 and over	.83		.75		.67		.60		.61
Total interest bearing deposits	.24		.23		.21		.19		.20
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	.75		.60		.46		.30		.25
Other borrowings	3.53		3.47		3.53		3.54		3.51
Total borrowings	.93		.81		.67		.54		.51
Total interest bearing liabilities	.31	%	.29	%	.26	%	.22	%	.22	%

Net yield on interest earning assets	3.18	%	3.19	%	3.14	%	3.03	%	3.08	%

(1) Stated on a tax equivalent basis using a federal income tax rate of 35%.



COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CREDIT QUALITY

	For the Three Months Ended															For the Nine Months Ended
(Unaudited) (In thousands, except per share data)	September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			September 30, 2017			September 30, 2016
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period	$	157,832		$	157,832		$	155,932		$	154,532		$	153,832		$	155,932		$	151,532
Provision for losses	10,704			10,758			11,128			10,400			7,263			32,590			25,918
Net charge-offs (recoveries):
Commercial portfolio:
Business	195			318			97			268			(50		)	610			348
Real estate — construction and land	(362		)	(207		)	(535		)	(882		)	(2,312		)	(1,104		)	(2,830		)
Real estate — business	(106		)	(10		)	(39		)	97			(106		)	(155		)	(1,378		)
	(273		)	101			(477		)	(517		)	(2,468		)	(649		)	(3,860		)
Personal banking portfolio:
Consumer credit card	7,631			7,750			7,148			6,506			6,356			22,529			18,924
Consumer	3,057			2,642			2,096			2,427			2,240			7,795			6,620
Overdraft	445			292			435			379			434			1,172			960
Real estate — personal	(137		)	(131		)	19			(38		)	(78		)	(249		)	32
Revolving home equity	(19		)	104			7			243			79			92			242
	10,977			10,657			9,705			9,517			9,031			31,339			26,778
Total net loan charge-offs	10,704			10,758			9,228			9,000			6,563			30,690			22,918
Balance at end of period	$	157,832		$	157,832		$	157,832		$	155,932		$	154,532		$	157,832		$	154,532

NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business	.02		%	.03		%	.01		%	.02		%	—		%	.02		%	.01		%
Real estate — construction and land	(.16		)	(.10		)	(.26		)	(.43		)	(1.12		)	(.17		)	(.49		)
Real estate — business	(.02		)	—			(.01		)	.02			(.02		)	(.01		)	(.08		)
	(.01		)	—			(.02		)	(.03		)	(.12		)	(.01		)	(.07		)
Personal banking portfolio:
Consumer credit card	4.09			4.25			3.88			3.42			3.37			4.07			3.38
Consumer	.59			.53			.43			.49			.46			.52			.46
Overdraft	40.37			26.00			42.15			27.41			37.11			35.98			28.84
Real estate — personal	(.03		)	(.03		)	—			(.01		)	(.02		)	(.02		)	—
Revolving home equity	(.02		)	.10			.01			.23			.08			.03			.08
	.83			.83			.77			.74			.71			.81			.71
Total	.31		%	.32		%	.28		%	.27		%	.20		%	.30		%	.24		%

CREDIT QUALITY RATIOS
Non-performing assets to total loans	.11		%	.10		%	.11		%	.11		%	.13		%
Non-performing assets to total assets	.06			.06			.06			.06			.07
Allowance for loan losses to total loans	1.15			1.16			1.16			1.16			1.17

NON-PERFORMING ASSETS
Non-accrual loans:
Business	$	6,821		$	6,330		$	7,935		$	8,682		$	8,758
Real estate — construction and land	533			544			585			564			1,310
Real estate — business	2,346			1,833			1,764			1,634			1,920
Real estate — personal	2,863			3,504			3,368			3,403			3,634
Consumer	1,077			1,151			1,151			—			—
Revolving home equity	—			—			—			—			23
Total	13,640			13,362			14,803			14,283			15,645
Foreclosed real estate	1,063			515			387			366			950
Total non-performing assets	$	14,703		$	13,877		$	15,190		$	14,649		$	16,595
Loans past due 90 days and still accruing interest	$	16,464		$	14,630		$	14,908		$	16,396		$	16,916

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

COMMERCE BANCSHARES, INC.

Management Discussion of Third Quarter Results

September 30, 2017

For the quarter ended September 30, 2017, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $74.6 million, compared to $79.0 million in the previous quarter and $68.5 million in the same quarter last year. Earnings per share totaled $.71 this quarter, or an increase of 9.2% compared to the same period last year. The current quarter included a loss of $5.4 million, or $.03 per share, related to fair value adjustments on the Company’s private equity investments. Quarterly average loans increased $76.6 million over the previous quarter, while average deposits decreased $415.9 million. Compared to the previous quarter, both net interest income and non-interest income decreased slightly. Non-interest expense was flat with the prior quarter, but included expense of $2.5 million related to the contribution of appreciated securities to a foundation, similar to a contribution made in the prior quarter. The provision for loan losses totaled $10.7 million, which was a slight decline from the previous quarter. For the current quarter, the return on total average assets was 1.19%, the return on average common equity was 11.35%, and the efficiency ratio was 60.44%.

Balance Sheet Review

During the 3^rd quarter of 2017, average loans totaled $13.6 billion, up 2.2% (annualized) over the prior quarter, and grew $590.0 million, or 4.5%, over the same period last year. Compared to the previous quarter, average consumer and construction loans grew $72.6 million and $25.1 million, respectively. Together, business real estate and personal real estate loans increased a combined $22.6 million, while business loans declined $50.2 million. The increase in consumer loans was mainly due to seasonal growth in auto lending coupled with growth in patient health care and private banking lending activities. Construction loans grew 11.6% (annualized) this quarter as advances on existing projects and new lending continued. The decline in business loans continues to result mainly from lower line utilization and lower loan originations than earlier in the year. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $64.1 million, compared to $54.7 million in the prior quarter.

During the 3^rd quarter of 2017, total average available for sale investment securities decreased $343.2 million to $9.3 billion, at fair value. The decline in investment securities was mainly the result of lower average balances of asset-backed and municipal securities, due to sales and maturities of these securities that were not re-invested. Purchases of securities this quarter totaled $476.1 million and were offset by sales, maturities and pay downs of $835.8 million. Current quarter purchases consisted mainly of mortgage-backed securities. At September 30, 2017, the duration of the investment portfolio was 3.0 years, and maturities and pay downs of approximately $1.5 billion are expected to occur during the next 12 months.

Total average deposits decreased $415.9 million, or 7.9% (annualized), this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from a decline in certificates of deposit (decrease of $204.0 million), money market (decrease of $239.4 million), personal demand (decrease of $35.2 million), and interest checking (decrease of $40.4 million) accounts. These declines were offset by growth in business demand deposits of $111.4 million. Compared to the previous quarter, total average consumer, commercial and private banking deposits decreased $111.0 million, $181.0 million and $155.7 million, respectively. The average loans to deposits ratio was

67.0% in the current quarter and 65.2% in the prior quarter. The Company’s average borrowings totaled $1.6 billion, an increase of $134.5 million over the prior quarter’s balance mostly due to higher repurchase agreement balances.

Net Interest Income

Net interest income (tax equivalent) in the 3^rd quarter of 2017 amounted to $190.5 million compared with $190.9 million in the previous quarter. Net interest income (tax equivalent) for the current quarter increased $11.4 million, or 6.4%, compared to the 3^rd quarter of last year. During the current quarter, the net yield on earning assets (tax equivalent) was 3.18%, compared with 3.19% in the previous quarter and 3.08% in the same period last year. The slight decline in net interest income (tax equivalent) in the current quarter compared to the prior quarter was due mainly to lower inflation income of $2.4 million on the Company’s treasury inflation-protected securities (TIPS). Excluding the effects of inflation income on both quarters, the net interest margin would have increased 3 basis points.

Compared to the previous quarter, interest on loans (tax equivalent) increased $4.6 million, as a result of higher loan yields on most loan products coupled with higher balances, primarily on consumer, personal real estate, credit card and construction loans. Overall, the average yield on the loan portfolio increased 7 basis points this quarter to 4.13%, compared to 4.06% in the previous quarter.

Interest on investment securities (tax equivalent) declined $4.6 million from the previous quarter, partly due to lower inflation income mentioned above, but also due to lower average balances of municipal and asset-backed securities. Additionally, interest on private equity investments declined $1.3 million this quarter due to large non-recurring payments received in the prior quarter. The adjustment for premium amortization expense on changing prepayment speeds for mortgage-backed securities increased interest income $635 thousand this quarter, due to higher interest rates. Total inflation income on TIPS totaled $447 thousand in the current quarter and $2.9 million in the previous quarter. The yield on total investment securities was 2.39% in the current quarter compared to 2.52% in the prior quarter.

Interest costs on deposits remained low as the cost of interest bearing deposits totaled 24 basis points compared with 23 basis points in the prior quarter. Interest expense on deposits increased $63 thousand this quarter compared with the previous quarter due mainly to higher rates on certificates of deposit (CD’s) and money market accounts, but offset by lower average balances in the same categories. Borrowing costs increased $803 thousand this quarter mostly due to higher rates paid on customer repurchase agreements. Overall rates paid on interest-bearing liabilities increased 2 basis points to .31% this quarter.

Non-Interest Income

In the 3^rd quarter of 2017, total non-interest income amounted to $122.2 million, an increase of $2.9 million, or 2.4%, compared to the same period last year. Also, current quarter non-interest income decreased slightly compared to the previous quarter. The increase in non-interest income over the same period last year was mainly due to growth in trust, deposit, swap and loan fee income but was offset by lower bank card and capital market fee income.

COMMERCE BANCSHARES, INC.

Management Discussion of Third Quarter Results

September 30, 2017

Total bank card fees in the current quarter declined $2.5 million from the same period last year and decreased $478 thousand compared to the prior quarter. The decrease from the same period last year was mainly the result of a decline in merchant fees of $1.2 million, coupled with a decline in corporate card fees of $1.5 million. The decline in merchant fees from the previous year resulted from the loss of several large customers over the last twelve months, while lower corporate card fees resulted from reduced margins earned on corporate card sales transactions compared to the same period last year. Total bank card fees this quarter were comprised of fees on corporate card ($22.6 million), debit card ($10.0 million), merchant ($5.6 million) and credit card ($6.4 million) transactions.

In the current quarter, trust fees increased $3.7 million, or 11.9%, over the same period last year, resulting mainly from growth in private client customer fee income. Compared to the same period last year, deposit account fees increased $418 thousand, or 1.9%, as a result of growth in deposit and overdraft fees, partially offset by lower corporate cash management fees.

During the 3^rd quarter of 2017, loan fees and sales grew 15.0% over the same quarter in the previous year to $3.6 million, due to higher mortgage banking revenue related to the Company’s fixed rate residential mortgage sale program. Also, fees from consumer brokerage services increased 9.0%, while fees from swaps, letters of credit and foreign exchange (all included in other non-interest income) increased a combined $967 thousand. Capital market fees declined $966 thousand, due to lower trading securities income. Non-interest income comprised 40.1% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $3.0 million this quarter, compared with net gains of $1.7 million last quarter and net losses of $2.0 million in the same period last year. Net losses in the current quarter resulted mainly from unrealized fair value adjustments of $5.2 million to the Company’s private equity investment portfolio, but were offset by a gain of $2.4 million related to the Company’s contribution of appreciated securities mentioned above. This gain was offset by contribution expense of $2.5 million.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $184.6 million compared to $181.2 million in the same period last year, an increase of 1.8%, and was essentially flat with the prior quarter. The increase over the same period last year was mainly due to higher costs for salaries and benefits and the contribution of appreciated securities (expense of $2.5 million this quarter), but was offset by lower operating costs such as occupancy, data processing, and supplies and communication. During the quarter the Company negotiated a new bank card processing agreement, which lowered processing costs in the current quarter by approximately $1.2 million. Excluding the contribution of appreciated securities, non-interest expense grew .5% over amounts recorded in the same period last year.

Compared to the 3^rd quarter of last year, salaries and benefits expense increased $4.4 million, or 4.1%. Salaries expense grew 5.9%, mainly due to higher full-time salaries and incentive compensation costs. Benefits expense totaled $15.6 million, reflecting a decline of 5.8%, mostly on lower medical costs.

Growth in total salaries expense compared to the previous year resulted mainly from increased staffing costs in consumer and commercial banking, wealth, and information technology business units. Full-time equivalent employees totaled 4,811 and 4,778 at September 30, 2017 and 2016, respectively.

The decline in occupancy costs of 7.3% was due to lower rent expense on leased properties during the 3^rd quarter of 2017 and demolition costs for a branch facility during the 3^rd quarter of 2016, which did not recur this quarter. The decline in data processing costs resulted mainly from the new bankcard processing agreement which went into effect this quarter, while supplies and communication costs declined due to lower issuance costs for credit and debit cards. Additionally, equipment and deposit insurance expense declined a combined $448 thousand in the 3^rd quarter of 2017 compared to the same period in 2016. The donation of appreciated securities to a foundation was similar to the donation made in the prior quarter and increased other non-interest expense, but resulted in a pre-tax loss of $110 thousand (due to a related offsetting securities gain) and tax benefits of $963 thousand. The Company will consider this strategy again in the 4^th quarter of this year.

Income Taxes

The effective tax rate for the Company was 30.2% in the current quarter, 29.6% in the previous quarter, and 31.1% in the 3^rd quarter of 2016.

Credit Quality

Net loan charge-offs in the 3^rd quarter of 2017 amounted to $10.7 million, compared to $10.8 million in the prior quarter and $6.6 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .31% in the current quarter compared to .32% in the previous quarter and .20% in the 3^rd quarter of last year. During the 3^rd quarter of 2017, the Company recorded net recoveries on commercial loans of $273 thousand, compared to net loan charge-offs of $101 thousand in the prior quarter. Net loan charge-offs on personal banking loans totaled $11.0 million in the current quarter and $10.7 million in the previous quarter.

In the 3^rd quarter of 2017, annualized net loan charge-offs on average consumer credit card loans were 4.09%, compared to 4.25% in the previous quarter and 3.37% in the same period last year. Consumer loan net charge-offs were .59% of average consumer loans in the current quarter, .53% in the prior quarter and .46% in the same quarter last year. This quarter, the provision for loan losses equaled net loan charge-offs, and at September 30, 2017, the allowance totaled $157.8 million, or 1.15% of total loans.

At September 30, 2017, total non-performing assets amounted to $14.7 million, an increase of $826 thousand over the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($13.6 million and $1.1 million, respectively). At September 30, 2017, the balance of non-accrual loans, which represented .10% of loans outstanding, included business loans of $6.8 million, business real estate loans of $2.3 million, personal real estate loans of $2.9 million and consumer loans of $1.1 million. Loans more than 90 days past due and still accruing interest totaled $16.5 million at September 30, 2017.

COMMERCE BANCSHARES, INC.

Management Discussion of Third Quarter Results

September 30, 2017

Other

During the 3^rd quarter of 2017, the Company paid a cash dividend of $.225 per common share and also paid a cash dividend of $2.3 million on its preferred stock. The Company purchased 11,982 shares of treasury stock during the current quarter at an average price of $57.75.

Forward Looking Information

This information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include future financial and operating results, expectations, intentions and other statements that are not historical

facts. Such statements are based on current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.

COMMERCE BANCSHARES INC /MO/ - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - October 12, 2017

Attached files

COMMERCE BANCSHARES INC /MO/ Reports