Commerce Bancshares, Inc. Announces First Quarter Earnings Per Common Share of $.65

Commerce Bancshares, Inc. (NASDAQ:CBSH) announced earnings of $.65 per common share for the three months ended March 31, 2016 compared to $.63 per share in the prior quarter and $.58 per share in the first quarter of 2015. Net income attributable to Commerce Bancshares, Inc. for the first quarter amounted to $65.4 million, compared to $63.7 million in the prior quarter and $61.1 million in the same quarter last year. For the quarter, the return on average assets was 1.07%, the return on average common equity was 11.2% and the efficiency ratio was 62.62%.

In announcing these results, David W. Kemper, Chairman and CEO, said, “This quarter we are pleased to report solid top line revenue growth of 6% annualized along with continued strong average loan growth. Average total loans increased by $313.1 million, or 10% annualized, this quarter compared to the previous quarter, with most of this growth occurring in business, construction and business real estate lending. Average deposits also grew by $499.8 million, an annualized increase of 10%. This quarter our net interest income grew by $1.3 million over the prior quarter and increased $17.6 million, or 12%, over the same period last year. Non-interest income grew $3.0 million over the prior quarter and increased $12.5 million, or 12%, over the first quarter last year. Growth in fee income over the prior year was spread throughout a number of business lines but mainly resulted from higher deposit, bank card, trust, swap, tax credit and mortgage banking fees.Non-interest expense grew by $1.7 million over the previous quarter.”

Mr. Kemper continued, “Net loan charge-offs for the current quarter totaled $8.8 million, compared to $9.2 million in the previous quarter and $7.4 million in the first quarter of 2015. The decrease in net loan charge-offs compared to the previous quarter was mainly due to lower personal real estate and consumer credit card net loan losses but offset by slightly higher commercial loan charge-offs. During the current quarter, the provision for loan losses totaled $9.4 million, or $600 thousand higher than net loan charge-offs. The allowance for loan losses amounted to $152.1 million at March 31, 2016, or 1.20% of period end loans, and was 5.2 times non-performing loans. Total non-performing assets increased $2.0 million over the previous quarter to $31.4 million this quarter.”

Total assets at March 31, 2016 were $24.5 billion, total loans were $12.7 billion, and total deposits were $20.7 billion. During the quarter, the Company paid a common cash dividend of $.225 per share, representing a 5% increase over the rate paid in 2015 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 mortgage banking, credit related insurance, and private equity activities.

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
FINANCIAL HIGHLIGHTS

For the Three Months Ended

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

March 31,
2016
December 31,
2015
March 31,
2015
FINANCIAL SUMMARY
Net interest income $163,775 $162,487 $146,138
Non-interest income 119,024 116,042 106,574
Total revenue 282,799 278,529 252,712
Investment securities gains (losses), net (995) (1,480 ) 6,035
Provision for loan losses 9,439 9,186 4,420
Non-interest expense 177,473 175,777 163,845
Income before taxes 94,892 92,086 90,482
Income taxes 29,370 27,661 28,468
Non-controlling interest expense 148 715 959
Net income attributable to Commerce Bancshares, Inc. 65,374 63,710 61,055
Preferred stock dividends 2,250 2,250 2,250
Net income available to common shareholders$63,124 $61,460 $58,805
Earnings per common share:
Net income — basic $.65 $.63 $.58
Net income — diluted $.65 $.63 $.58
Effective tax rate 31.00% 30.27 % 31.80 %
Taxable equivalent net interest income $171,425 $170,141 $153,348
Diluted wtd. average shares outstanding 95,782,109 96,486,100 100,367,348
RATIOS
Average loans to deposits (1)62.81% 62.80 % 59.71 %
Return on total average assets 1.07 1.05 1.05
Return on average common equity (2)11.20 10.88 10.69
Non-interest income to total revenue 42.09 41.66 42.17
Efficiency ratio (3)62.62 62.97 64.65
Net yield on interest earning assets 2.95 2.94 2.76
EQUITY SUMMARY
Cash dividends per share $.225 $.214 $.214
Cash dividends on common stock $21,760 $20,920 $21,752
Cash dividends on preferred stock $2,250 $2,250 $2,250
Book value per common share (4)$23.85 $22.86 $22.30
Market value per common share (4)$44.95 $42.54 $40.30
High market value per common share $45.96 $47.10 $41.86
Low market value per common share $37.44 $41.40 $37.65
Common shares outstanding (4)96,537,955 97,226,000 101,368,889
Tangible common equity to tangible assets (5)8.84% 8.48 % 8.83 %
Tier I leverage ratio 9.11% 9.23 % 9.31 %
OTHER QTD INFORMATION
Number of bank/ATM locations 346 346 353
Full-time equivalent employees 4,765 4,770 4,769

(1)

Includes loans held for sale.

(2)

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

(3)

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

(4)

As of period end.

(5)

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended
(Unaudited)

(In thousands, except per share data)

March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Interest income $172,128 $169,742 $169,115 $170,577 $152,982
Interest expense 8,353 7,255 7,077 6,920 6,844
Net interest income 163,775 162,487 162,038 163,657 146,138
Provision for loan losses 9,439 9,186 8,364 6,757 4,420
Net interest income after provision for loan losses 154,336 153,301 153,674 156,900 141,718
NON-INTEREST INCOME
Bank card transaction fees 44,470 46,320 44,635 45,672 42,299
Trust fees 30,370 30,054 29,630 30,531 29,586
Deposit account charges and other fees 20,691 21,606 20,674 19,637 18,499
Capital market fees 2,725 3,116 2,620 2,738 3,002
Consumer brokerage services 3,509 3,254 3,687 3,507 3,336
Loan fees and sales 2,510 2,101 1,855 2,183 2,089
Other 14,749 9,591 8,187 9,967 7,763
Total non-interest income 119,024 116,042 111,288 114,235 106,574
INVESTMENT SECURITIES GAINS (LOSSES), NET(995) (1,480 ) (378 ) 2,143 6,035
NON-INTEREST EXPENSE
Salaries and employee benefits 106,859 102,098 100,874 99,655 98,074
Net occupancy 11,303 10,981 11,247 10,999 11,561
Equipment 4,634 4,915 4,789 4,679 4,703
Supplies and communication 6,829 6,554 5,609 5,226 5,581
Data processing and software 22,899 22,274 21,119 21,045 19,506
Marketing 3,813 3,539 4,343 4,307 3,918
Deposit insurance 3,165 3,145 2,981 3,019 3,001
Other 17,971 22,271 20,440 16,533 17,501
Total non-interest expense 177,473 175,777 171,402 165,463 163,845
Income before income taxes 94,892 92,086 93,182 107,815 90,482
Less income taxes 29,370 27,661 27,969 32,492 28,468
Net income 65,522 64,425 65,213 75,323 62,014
Less non-controlling interest expense 148 715 601 970 959
Net income attributable to Commerce Bancshares, Inc.65,374 63,710 64,612 74,353 61,055
Less preferred stock dividends 2,250 2,250 2,250 2,250 2,250
Net income available to common shareholders$63,124 $61,460 $62,362 $72,103 $58,805
Net income per common share — basic $.65 $.63 $.63 $.72 $.58
Net income per common share — diluted $.65 $.63 $.63 $.72 $.58
OTHER INFORMATION
Return on total average assets 1.07% 1.05 % 1.09 % 1.26 % 1.05 %
Return on average common equity (1)11.20 10.88 11.25 12.91 10.69
Efficiency ratio (2)62.62 62.97 62.55 59.39 64.65
Effective tax rate 31.00 30.27 30.21 30.41 31.80
Net yield on interest earning assets 2.95 2.94 3.00 3.04 2.76
Net interest income (T/E) $171,425 $170,141 $169,512 $171,037 $153,348

(1)

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

(2)

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - PERIOD END

(Unaudited)
(In thousands)

March 31,
2016
December 31,
2015
March 31,
2015
ASSETS
Loans
Business $4,575,081 $ 4,397,893 $ 4,183,977
Real estate — construction and land 745,369 624,070 423,928
Real estate — business 2,395,933 2,355,544 2,282,988
Real estate — personal 1,903,969 1,915,953 1,887,557
Consumer 1,904,320 1,924,365 1,766,888
Revolving home equity 423,005 432,981 426,964
Consumer credit card 744,364 779,744 739,543
Overdrafts 5,829 6,142 10,115
Total loans 12,697,870 12,436,692 11,721,960
Allowance for loan losses (152,132) (151,532 ) (153,532 )
Net loans12,545,738 12,285,160 11,568,428
Loans held for sale 60,078 7,607 2,770
Investment securities:
Available for sale 9,552,179 9,777,004 9,917,242
Trading 23,130 11,890 15,501
Non-marketable 117,259 112,786 110,560
Total investment securities9,692,568 9,901,680 10,043,303

Federal funds sold and short-term securities purchased
 under agreements to resell

9,075 14,505 12,450
Long-term securities purchased under agreements to resell 825,000 875,000 1,050,000
Interest earning deposits with banks 171,651 23,803 123,712
Cash and due from banks 375,481 464,411 416,109
Land, buildings and equipment — net 350,423 352,581 356,309
Goodwill 138,921 138,921 138,921
Other intangible assets — net 6,539 6,669 7,143
Other assets 331,478 534,625 330,338
Total assets$24,506,952 $ 24,604,962 $ 24,049,483
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing $7,065,066 $ 7,146,398 $ 6,785,221
Savings, interest checking and money market 11,205,357 10,834,746 10,656,139
Time open and C.D.’s of less than $100,000 766,810 785,191 853,842
Time open and C.D.’s of $100,000 and over 1,649,076 1,212,518 1,281,297
Total deposits20,686,309 19,978,853 19,576,499

Federal funds purchased and securities sold under
 agreements to repurchase

957,388 1,963,552 1,610,463
Other borrowings 103,806 103,818 103,854
Other liabilities 312,167 191,321 353,260
Total liabilities22,059,670 22,237,544 21,644,076
Total stockholders’ equity2,442,028 2,361,990 2,400,614
Non-controlling interest 5,254 5,428 4,793
Total equity2,447,282 2,367,418 2,405,407
Total liabilities and equity$24,506,952 $ 24,604,962 $ 24,049,483

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS

(Unaudited)
(Dollars in thousands)

For the Three Months Ended

March 31,
2016

December 31,
2015

September 30,
2015

June 30,
2015

March 31,
2015

ASSETS:
Loans:
Business $4,491,556 $ 4,351,756 $ 4,221,478 $ 4,135,362 $ 4,031,904
Real estate — construction and land 682,557 584,185 476,331 432,008 414,908
Real estate — business 2,382,094 2,320,439 2,284,928 2,287,885 2,281,777
Real estate — personal 1,909,532 1,916,219 1,911,469 1,891,109 1,877,580
Consumer 1,934,577 1,908,540 1,861,636 1,815,699 1,731,146
Revolving home equity 429,682 429,582 434,355 429,644 430,525
Consumer credit card 752,098 756,743 746,066 734,289 748,831
Overdrafts 4,772 6,303 5,233 4,510 5,612
Total loans12,586,868 12,273,767 11,941,496 11,730,506 11,522,283
Allowance for loan losses (151,308) (150,856 ) (150,890 ) (152,994 ) (156,097 )
Net loans12,435,560 12,122,911 11,790,606 11,577,512 11,366,186
Loans held for sale 9,360 6,118 4,471 3,969 1,851
Investment securities:
U.S. government and federal agency obligations 703,212 580,816 402,591 424,823 455,633
Government-sponsored enterprise obligations 776,488 824,066 887,631 988,120 1,057,666
State and municipal obligations 1,718,587 1,779,704 1,805,931 1,799,355 1,759,511
Mortgage-backed securities 3,424,716 3,335,627 3,217,589 3,161,050 2,938,575
Asset-backed securities 2,537,472 2,574,426 2,546,982 2,839,483 3,140,086
Other marketable securities 342,382 337,340 302,323 249,075 160,634
Unrealized gain on investment securities 149,319 130,231 118,404 170,039 169,486
Total available for sale securities9,652,176 9,562,210 9,281,451 9,631,945 9,681,591
Trading securities 18,190 23,217 22,283 19,758 16,719
Non-marketable securities 127,769 114,321 114,062 109,522 107,511
Total investment securities9,798,135 9,699,748 9,417,796 9,761,225 9,805,821
Federal funds sold and short-term securities purchased under agreements to resell 17,378 18,694 21,012 12,812 12,092

Long-term securities purchased under agreements to
 resell

850,275 902,174 1,007,606 1,049,999 1,049,998
Interest earning deposits with banks 219,636 178,486 160,687 198,407 288,589
Other assets 1,172,916 1,119,602 1,106,739 1,135,601 1,127,864
Total assets$24,503,260 $ 24,047,733 $ 23,508,917 $ 23,739,525 $ 23,652,401
LIABILITIES AND EQUITY:
Non-interest bearing deposits $6,905,673 $ 6,995,666 $ 6,781,592 $ 6,744,536 $ 6,621,110
Savings 761,020 736,824 739,172 738,769 701,987
Interest checking and money market 10,128,543 9,805,457 9,619,621 9,759,608 9,828,203
Time open & C.D.’s of less than $100,000 775,221 796,639 820,792 844,675 868,179
Time open & C.D.’s of $100,000 and over 1,483,700 1,219,803 1,171,617 1,227,322 1,280,110
Total deposits20,054,157 19,554,389 19,132,794 19,314,910 19,299,589
Borrowings:

Federal funds purchased and securities sold under agreements to
 repurchase

1,404,754 1,707,430 1,677,322 1,674,682 1,558,118
Other borrowings 377,711 103,819 103,875 103,846 103,999
Total borrowings1,782,465 1,811,249 1,781,197 1,778,528 1,662,117
Other liabilities 254,437 295,718 250,626 260,945 314,163
Total liabilities22,091,059 21,661,356 21,164,617 21,354,383 21,275,869
Equity2,412,201 2,386,377 2,344,300 2,385,142 2,376,532
Total liabilities and equity$24,503,260 $ 24,047,733 $ 23,508,917 $ 23,739,525 $ 23,652,401

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE RATES

(Unaudited)

(Dollars in thousands)

For the Three Months Ended

March 31,

2016

December 31,
2015

September 30,
2015

June 30,

2015

March 31,

2015

ASSETS:
Loans:
Business (1)2.87% 2.78 % 2.73 % 2.79 % 2.82 %
Real estate — construction and land 3.51 3.41 3.52 3.65 3.81
Real estate — business 3.70 3.68 3.71 3.83 3.73
Real estate — personal 3.77 3.76 3.73 3.77 3.83
Consumer 3.87 3.91 4.00 3.92 4.05
Revolving home equity 3.52 3.44 3.50 3.60 3.63
Consumer credit card 11.42 11.23 11.59 11.74 11.62
Overdrafts
Total loans3.89 3.85 3.89 3.95 3.99
Loans held for sale 5.80 5.40 4.26 3.94 4.65
Investment securities:
U.S. government and federal agency obligations .40 .17 4.39 6.09 (5.32 )

(2)

Government-sponsored enterprise obligations 1.93 1.89 1.77 1.82 1.90
State and municipal obligations (1)3.66 3.64 3.44 3.49 3.55
Mortgage-backed securities 2.45 2.54 2.47 2.61 2.62
Asset-backed securities 1.39 1.25 1.15 1.03 .88
Other marketable securities (1)2.79 2.83 2.65 2.61 2.50

Total available for sale securities

2.20 2.20 2.32 2.38 1.76
Trading securities (1)2.87 2.65 2.72 2.86 2.74
Non-marketable securities (1)6.54 8.19 8.28 8.90 8.94
Total investment securities2.26 2.27 2.39 2.45 1.84
Federal funds sold and short-term securities purchased under agreements to resell .56 .32 .40 .47 .30
Long-term securities purchased under agreements to resell 1.64 1.40 1.29 1.40 1.18
Interest earning deposits with banks .49 .28 .25 .25 .25
Total interest earning assets3.10 3.07 3.12 3.16 2.89
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings .12 .12 .13 .11 .12
Interest checking and money market .13 .13 .13 .13 .13
Time open & C.D.’s of less than $100,000 .38 .37 .38 .39 .41
Time open & C.D.’s of $100,000 and over .54 .51 .53 .49 .45
Total interest bearing deposits.19 .18 .18 .18 .18
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase .25 .14 .11 .10 .10
Other borrowings 1.33 3.47 3.43 3.44 3.43
Total borrowings.48 .33 .31 .30 .30
Total interest bearing liabilities.23% .20 % .20 % .19 % .19 %
Net yield on interest earning assets2.95% 2.94 % 3.00 % 3.04 % 2.76 %

(1)

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

(2)

Includes losses of $7.0 million in inflation interest on U.S. Treasury inflation-protected securities in the first quarter of 2015.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CREDIT QUALITY

For the Three Months Ended

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

March 31,

2016

December 31,
2015

September 30,
2015

June 30,
2015

March 31,

2015

ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $151,532 $ 151,532 $ 151,532 $ 153,532 $ 156,532
Provision for losses 9,439 9,186 8,364 6,757 4,420
Net charge-offs (recoveries):
Commercial portfolio:
Business 463 (133 ) (175 ) (239 ) 159
Real estate — construction and land (11) 60 (67 ) (309 ) (946 )
Real estate — business (242) (626 ) (22 ) 764 (249 )
210 (699 ) (264 ) 216 (1,036 )
Personal banking portfolio:
Consumer credit card 5,918 6,479 5,784 6,424 6,352
Consumer 2,599 2,251 2,435 1,849 1,743
Overdraft 219 487 429 212 222
Real estate — personal (195) 458 (69 ) (47 ) 99
Revolving home equity 88 210 49 103 40
8,629 9,885 8,628 8,541 8,456
Total net loan charge-offs 8,839 9,186 8,364 8,757 7,420
Balance at end of period $152,132 $ 151,532 $ 151,532 $ 151,532 $ 153,532
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business .04% (.01 )% (.02 )% (.02 )% .02 %
Real estate — construction and land (.01) .04 (.06 ) (.29 ) (.92 )
Real estate — business (.04) (.11 ) .13 (.04 )
.01 (.04 ) (.01 ) .01 .06
Personal banking portfolio:
Consumer credit card 3.16 3.40 3.08 3.51 3.44
Consumer .54 .47 .52 .41 .41
Overdraft 18.46 30.65 32.52 18.85 16.04
Real estate — personal (.04) .09 (.01 ) (.01 ) .02
Revolving home equity .08 .19 .04 .10 .04
.69 .78 .69 .70 .72
Total .28% .30 % .28 % .30 % .26 %
CREDIT QUALITY RATIOS
Non-performing assets to total loans .25% .24 % .24 % .26 % .35 %
Non-performing assets to total assets .13 .12 .12 .13 .17
Allowance for loan losses to total loans 1.20 1.22 1.24 1.27 1.31
NON-PERFORMING ASSETS
Non-accrual loans:
Business $16,098 $ 10,874 $ 11,699 $ 11,856 $ 9,961
Real estate — construction and land 2,710 3,090 4,046 3,600 4,488
Real estate — business 6,234 7,863 5,054 5,643 15,028
Real estate — personal 4,205 4,425 4,980 5,446 6,341
Consumer 100
Revolving home equity 120 323
Total 29,367 26,575 25,779 26,645 35,818
Foreclosed real estate 1,997 2,819 3,053 4,185 4,967
Total non-performing assets$31,364 $ 29,394 $ 28,832 $ 30,830 $ 40,785
Loans past due 90 days and still accruing interest$15,360 $ 16,467 $ 14,707 $ 14,218 $ 12,181

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

COMMERCE BANCSHARES, INC.
Management Discussion of First Quarter Results
March 31, 2016

For the quarter ended March 31, 2016, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $65.4 million, compared to $63.7 million in the previous quarter and $61.1 million in the same quarter last year. The increase in net income over the previous quarter resulted mainly from an increase in net interest income of $1.3 million coupled with higher non-interest income $3.0 million. The provision for loan losses increased by $253 thousand, while non-interest expense grew this quarter by $1.7 million compared to the previous quarter. For the current quarter, the return on total average assets was 1.07%, the return on average common equity was 11.2%, and the efficiency ratio was 62.6%.

Balance Sheet Review

During the 1st quarter of 2016, average total loans increased $313.1 million, or 10% annualized, compared to the previous quarter and increased $1.1 billion, or 9.2%, compared to the same period last year. Compared to the previous quarter, the increase in average loans resulted mainly from growth in business (up $139.8 million), construction (up $98.4 million), business real estate (up $61.7 million) and consumer loans (growth of $26.0 million). The increase in business loans came from continued growth in commercial and industrial, leasing and tax-free lending activities, while commercial construction projects continued to drive growth in construction loans. Average consumer loan growth was largely the result of continued demand for automobile and other consumer type loans, which grew $36.4 million, partly offset by a decline of $9.6 million in marine and RV loans. Average personal real estate loans declined $6.7 million this quarter; however, the Company also sold certain fixed rate loans totaling $22.0 million during the quarter, as part of an origination initiative that began in 2015. In March 2016, the Company identified certain automobile loans totaling $50.4 million which it intends to sell, and reclassified these loans as held for sale.

During the 1st quarter of 2016, total average available for sale investment securities increased $90.0 million to $9.7 billion. Purchases of new securities totaled $215.1 million in the 1st quarter of 2016 and were offset by sales, maturities and pay downs of $541.9 million. U.S. government and federal agency securities increased on average by $122.4 million, while mortgage-backed securities increased $89.1 million. At March 31, 2016, the duration of the investment portfolio was 2.8 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months.

Total average deposits increased $499.8 million, or 2.6%, this quarter compared to the previous quarter. The increase in average deposits resulted mainly from increases in money market (increase of $324.6 million), savings (increase of $24.2 million), and short-term jumbo certificate of deposit (increase of $264.7 million) accounts. Business demand deposits declined $159.6 million this quarter. Compared to the previous quarter, total average commercial, consumer and private banking deposits increased $250.7 million, $172.4 million, and $80.7 million, respectively. The average loans to deposits ratio was 62.8% in both the current quarter and in the prior quarter.

The Company’s average borrowings declined $28.8 million to $1.8 billion as a result of a decline of $302.7 million in federal funds purchased and repurchase agreements, partly offset by an increase in FHLB debt of $272.5 million.

Net Interest Income

Net interest income (tax equivalent) in the 1st quarter of 2016 amounted to $171.4 million compared with $170.1 million in the previous quarter, an increase of $1.3 million. Net interest income (tax equivalent) for the current quarter increased $18.1 million compared to the 1st quarter of last year. During the 1st quarter of 2016, the net yield on earning assets (tax equivalent) was 2.95%, compared with 2.94% in the previous quarter and 2.76% in the same period last year.

The increase in net interest income (tax equivalent) in the current quarter compared to the prior period was due mainly to an increase in interest on loans of $2.5 million and higher earnings on U.S. Treasury and asset-backed securities of $1.2 million. Inflation income on inflation-protected securities amounted to negative $1.5 million, compared to negative $1.4 million in the prior quarter as a result of a slight decline in the Consumer Price Index published this quarter. Inflation income in the same period last year totaled negative $7.0 million. Excluding the effects of inflation income, the net yield on earning assets would have been 2.98% in the current quarter, 2.97% in the prior quarter, and 2.89% 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 increasing prepayment speed assumptions, decreased interest income by $147 thousand compared with an increase of $966 thousand in the prior quarter.

Compared to the previous quarter, interest income (tax-equivalent) on loans increased $2.5 million and was mainly due to higher average balances, especially in business, construction, business real estate, and consumer loans. However, these increases in interest income were partly offset by lower yields on consumer banking loans. Overall, the average yield on the loan portfolio increased 4 basis points this quarter to 3.89%. Total interest income (tax-equivalent) on investment securities declined $573 thousand from the previous quarter as a result of increasing prepayment speeds on mortgage-backed securities noted above, coupled with lower earnings on municipal securities due to lower average balances. The yield on investment securities totaled 2.26% in the current quarter compared to 2.27% in the prior quarter.

Interest expense on deposits increased $454 thousand this quarter compared with the previous quarter due to higher balances and slightly higher deposit rates. Borrowing costs increased $644 thousand due to higher average FHLB debt balances and higher rates paid on repurchase agreements.

Non-Interest Income

In the 1st quarter of 2016, total non-interest income amounted to $119.0 million, an increase of $12.5 million, or 11.7%, compared to the same period last year. Also, current quarter non-interest income increased $3.0 million, or 2.6%, when compared to amounts recorded in the previous quarter. The increase in non-interest income over the same period last year was mainly due to higher bank card, deposit, swap, trust, and tax credit fee income. Additionally a former branch property was sold for a pre-tax gain of $3.3 million, while in 2015, losses on sales or fair value adjustments of branch locations held for sale totaled $1.6 million.

Total bank card fees in the current quarter increased $2.2 million, or 5.1%, over the same period last year. The increase was mainly the result of growth in merchant, debit, and corporate card interchange fees of 16.8%, 5.3% and 2.0%, respectively. Credit card fees also increased 4.3% this quarter. Total bank card fees this quarter were comprised of fees on corporate card ($22.3 million), debit card ($9.4 million), merchant ($7.1 million) and credit card ($5.6 million) transactions.

In the current quarter, trust fees increased $784 thousand, or 2.6%, compared to the same period last year, resulting mainly from continued growth in both private client and institutional trust activities. Deposit account fees also increased $2.2 million, or 11.8%, compared to the same period last year as a result of higher deposit account service fees and growth of 7.5% in overdraft fees.

Capital market fees decreased $277 thousand, or 9.2%, from the same quarter last year on lower sales volumes from correspondent banks; while mortgage banking revenue increased $322 thousand, or 31.8%, due to sales of newly-originated residential mortgages, as the Company began a new program of selling longer-term fixed rate mortgages in 2015. Fees from sales of interest rate swaps (included in other non-interest income) totaled $2.2 million thousand this quarter, an increase of $1.0 million compared to the same period last year. Fees from sales of tax credits totaled $1.5 million in the current quarter, an increase of $678 thousand over the same quarter last year. Non-interest income comprised 42.1% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $995 thousand this quarter, compared with net losses of $1.5 million last quarter and net gains of $6.0 million in the same period last year. These losses mainly resulted from unrealized fair value adjustments to the Company’s private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $177.5 million, an increase of $13.6 million, or 8.3%, over the same period last year, and was higher than the previous quarter’s total by $1.7 million, or 1.0%. The increase over the same period in the previous year was mainly due to higher costs for salaries and benefits (increase of $8.8 million), supplies and communication (increase of $1.2 million), data processing (increase of $3.4 million), and operating losses (increase of $815 thousand).

Compared to the 1st quarter of last year, salaries expense grew $6.1 million, or 7.5%, mainly due to higher full-time salaries and incentive compensation costs. Benefits expense increased $2.7 million mostly due to higher medical and payroll tax costs. Growth in salaries expense resulted partly from higher staffing costs in commercial card, trust, information technology and other support units. Full-time equivalent employees totaled 4,765 and 4,769 at March 31, 2016 and 2015, respectively.

Compared to the 1st quarter of last year, data processing costs increased $3.4 million this quarter, mainly due to higher bank card processing costs, software expense and outsourced lockbox costs, while supplies and communication costs increased $1.2 million, mainly due to higher reissuance costs for new chip cards distributed to customers. Operating losses totaled $1.5 million this quarter compared to $636 thousand in the 1st quarter of 2015, mainly due to a recovery of $468 thousand in litigation costs recorded in 2015 that did not reoccur. Costs for bank card related fraud (included in operating losses) totaled $845 thousand this quarter compared to $885 thousand in the same period last year and are down from $2.5 million in the prior quarter.

Income Taxes

The effective tax rate for the Company was 31.0% in the current quarter compared to 30.3% in the previous quarter and 31.8% in the 1st quarter of 2015.

Credit Quality

Net loan charge-offs in the 1st quarter of 2016 amounted to $8.8 million, compared with $9.2 million in the prior quarter and $7.4 million in the 1st quarter of last year. The ratio of annualized net loan charge-offs to total average loans was .28% in the current quarter compared to .30% in the previous quarter and .26% in the 1st quarter of last year.

In the 1st quarter of 2016, annualized net loan charge-offs on average consumer credit card loans were 3.16%, compared with 3.40% in the previous quarter and 3.44% in the same period last year. Consumer loan net charge-offs were .54% of average consumer loans in the current quarter, .47% in the prior quarter and .41% in the same quarter last year. The provision for loan losses in the current quarter totaled $9.4 million, compared to $9.2 million in the prior quarter and $4.4 million in the 1st quarter of last year. At March 31, 2016, the allowance totaled $152.1 million, was 1.20% of total loans, and was 518% of total non-accrual loans.

At March 31, 2016, total non-performing assets amounted to $31.4 million, an increase of $2.0 million over the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($29.4 million and $2.0 million, respectively, at March 31, 2016). At March 31, 2016, the balance of non-accrual loans, which represented .23% of loans outstanding, included business loans of $16.1 million, business real estate loans of $6.2 million, personal real estate loans of $4.2 million and construction and land loans of $2.7 million. Loans more than 90 days past due and still accruing interest totaled $15.4 million at March 31, 2016.

Other

During the 1st 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 900,929 shares of treasury stock this quarter at an average price of $40.44.

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.

Contacts:

Commerce Bancshares, Inc.
Jeffery Aberdeen, 816-234-2081
Controller
http://www.commercebank.com
mymoney@commercebank.com

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