Commerce Bancshares, Inc. Announces Third Quarter Earnings Per Share of $.66

• Press Release
• Source: Commerce Bancshares, Inc.
• On 9:00 am EDT, Wednesday October 14, 2009

KANSAS CITY, Mo.--(BUSINESS WIRE)--Commerce Bancshares, Inc. (NASDAQ: CBSH - News) announced earnings of $.66 per share for the quarter ended September 30, 2009, compared to $.48 per share in the previous quarter and $.32 per share in the third quarter of 2008. Net income for the third quarter amounted to $51.6 million compared to $37.0 million in the previous quarter and $24.7 million in the same period last year. During the third quarter of 2008, the Company recorded a loss on the purchase of auction rate securities totaling approximately $21 million after tax, or $.27 per share. For the quarter, the return on average assets totaled 1.16% and the return on average equity was 11.5%.

Related Quotes

Symbol	Price	Change
CBSH	38.59	-0.72

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For the nine months ended September 30, 2009, earnings per share totaled $1.54 compared to $1.90 for the first nine months of last year. Net income amounted to $119.5 million for the first nine months of 2009 compared with $144.8 million in 2008, or a decline of $25.4 million. At September 30, 2009, the ratio of tangible common equity to total assets improved to 9.6% compared to 8.7% at the same time last year.

In making this announcement, David W. Kemper, Chairman and CEO, said, “Although the economy remains challenging, this quarter we were pleased to report an increase in net income of 40%, or $14.7 million, over the previous quarter. The increase in net income over the previous quarter was mainly the result of 4% growth in total revenue and good overall expense control. Our net interest margin increased to 4.02% from 3.91% in the previous quarter. Loan balances continued to decline this quarter as a result of weak demand, while deposits were relatively flat.”

Mr. Kemper continued, “During this quarter we strengthened our balance sheet, enhancing both our capital and liquidity positions while also building our loan loss reserves. Tangible common equity increased $153 million this quarter through retained earnings, securities portfolio appreciation and stock issuance. Liquidity also increased as our loan to deposit ratio declined to 77.4%. During the quarter we increased our allowance for loan losses by $4.5 million to $190.5 million, representing 1.85% of outstanding loans. Net loan charge-offs declined by $5.1 million from the prior quarter. Non-performing assets, consisting of non-accrual loans and foreclosed property, declined by $2.5 million to $129.2 million, or 1.26% of loans.”

Total assets at September 30, 2009, were $18.0 billion, total loans were $10.6 billion, and total deposits were $13.8 billion.

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 over 370 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.

Summary of Non-Performing Assets and Past Due Loans

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

COMMERCE BANCSHARES, INC.
Management Discussion of Third Quarter Results
September 30, 2009

For the quarter ended September 30, 2009, net income amounted to $51.6 million, an increase of $14.7 million over the previous quarter and an increase of $27.0 million over the same quarter last year. For the current quarter, the return on average assets was 1.16%, the return on average equity was 11.49%, and the efficiency ratio was 57.75%. Compared to the previous quarter, net interest income (tax equivalent) increased by $6.1 million to $168.4 million, while non-interest income increased by $3.6 million to $102.1 million. Non-interest expense for the quarter totaled $154.5 million, a decline of $5.5 million from the previous quarter, which included costs for a special FDIC assessment of $8.0 million. Compared to the previous quarter, the provision for loan losses declined $5.8 million, totaling $35.4 million in the current quarter. The 3^rd quarter of 2008 included a pre-tax loss of $33.0 million on the purchase of auction rate securities.

Balance Sheet Review

During the 3^rd quarter of 2009, average loans, excluding loans held for sale, decreased $391.1 million, or 3.6%, compared to the previous quarter. Also, average loans decreased $564.7 million, or 5.1%, this quarter compared to the same period last year. The decrease in average loans compared to the previous quarter was mainly the result of lower business loan totals, which declined $240.7 million, coupled with declining balances in most other categories, including construction, business real estate and consumer loans. Consumer credit card loans grew 4.4% this quarter compared to the previous quarter.

The decline in business loans continued to reflect lower line of credit usage, lower demand, and pay-downs by business loan customers. Average construction and business real estate loans declined by $52.1 million and $27.3 million, respectively, compared to the previous quarter. These declines were reflective of continued uncertain economic conditions in the real estate markets and lower overall demand. Average balances of personal real estate and consumer loans declined by $18.5 million and $73.9 million, respectively, as loan pay-downs continued to exceed new loan originations for these products. Also, the Company has ceased most marine and RV lending in the consumer loan portfolio. The average balance of loans held for sale (comprised mostly of student loans) declined $220.2 million this quarter as the Company sold student loans totaling $221.1 million, most of which were originated during the last 12 months.

Total available for sale investment securities (excluding fair value adjustments) increased on average by $592.9 million to $5.5 billion this quarter compared with the previous quarter. The majority of this increase was the result of purchases of U.S. Treasury inflation-protected bonds and other asset-backed securities, which increased average balances by $262.4 million and $414.9 million, respectively. At September 30, 2009, the fair value of the Company’s available for sale investment securities included an unrealized gain of $106.4 million compared to $18.6 million at June 30, 2009, reflecting improved bond prices this quarter.

Total average deposits declined $39.7 million, or .3%, during the 3^rd quarter of 2009 compared to the previous quarter, but increased $1.7 billion, or 13.9%, compared to the 3^rd quarter of 2008. Compared to the previous quarter, the decrease in average deposits resulted mainly from a decline of $240.3 million in average certificate of deposit balances, which was partly offset by growth of $200.7 million in average money market accounts. During the current quarter, the Company reduced rates on certain short-term jumbo corporate certificates of deposit because of improving liquidity which resulted in a decline of $258.9 million in these balances. Excluding this effect, total deposits would have grown on average by $219.2 million over the previous quarter. The average loans to deposits ratio in the current quarter was 77.4%, compared to 81.6% in the previous quarter.

During the current quarter, the Company’s average borrowings decreased $65.5 million compared to the previous quarter. This decrease was partly the result of a $25.1 million decline in average federal funds purchased and repurchase agreement balances, combined with a $40.4 million reduction in average advances from the Federal Home Loan Bank (FHLB).

Net Interest Income

Net interest income (tax equivalent) in the 3^rd quarter of 2009 amounted to $168.4 million, an increase of $6.1 million, or 3.7%, compared with the previous quarter and an increase of $13.0 million, or 8.3%, compared to the 3^rd quarter of last year. During the 3^rd quarter of 2009, the net yield on earning assets (tax equivalent) was 4.02%, compared with 3.91% in the previous quarter and 4.04% in the same period last year.

The increase of $6.1 million in net interest income (tax equivalent) in the 3^rd quarter of 2009 over the previous quarter was primarily the result of higher interest income earned on investment securities due to higher average balances, coupled with lower rates paid on deposits. This increase was offset somewhat by lower interest income earned on loans due to lower volumes. Interest income on loans (tax equivalent) decreased by $2.8 million this quarter due to lower average balances, especially in business and consumer loans. This effect was partly offset by an increase of $1.0 million due to higher average balances of consumer credit card loans. Interest income on investment securities increased $5.9 million (tax equivalent) as a result of a $587.8 million increase in average balances, mainly in U.S. Treasury inflation-protected (TIPS) and other asset-backed securities. At September 30, 2009, the Company owned TIPS with a book value of $372.0 million. During the current quarter, inflation-adjusted income earned on these bonds amounted to $2.4 million.

Interest expense on deposits declined $2.8 million in the 3^rd quarter of 2009 compared with the previous quarter as a result of lower rates paid on virtually all deposit products, coupled with lower certificate of deposit balances which carry higher interest rates. Interest expense on borrowings decreased $612 thousand due mainly to lower average balances of FHLB advances.

The tax equivalent yield on interest earning assets in the 3^rd quarter of 2009 increased 2 basis points over the previous quarter to 4.93%, while the overall cost of interest bearing liabilities decreased 10 basis points to 1.02%.

Non-Interest Income

For the 3^rd quarter of 2009, total non-interest income amounted to $102.1 million, an increase of $6.5 million compared to $95.6 million in the same period last year. Also, current quarter non-interest income increased $3.6 million, or 3.6%, compared to $98.6 million recorded in the previous quarter.

Bank card fees for the quarter increased 6.7% over the 3^rd quarter of last year, primarily due to continued growth in transaction fees earned on corporate card (growth of 26.4%) and debit card (growth of 3.1%) transactions, but continued to be negatively impacted by lower retail sales affecting both merchant and credit card fees. Trust fees for the quarter decreased 6.1% from the same period last year and were flat with the previous quarter, reflecting continued lower asset values and the effects of low interest rates on money market income. Deposit account fees decreased slightly from the same period last year, as overdraft fees were down 9.7%, partly offset by a 26.5% increase in corporate cash management fees. However, overdraft fee income grew 2.9% when compared to the previous quarter. Bond trading income for the current quarter totaled $4.8 million, an increase of 85.6% over the same period last year, due to higher sales of fixed income securities to correspondent banks and corporate customers. During the quarter, the Company sold $221.1 million of student loans held for sale and recorded a pre-tax gain of $4.4 million.

Investment Securities Gains and Losses

Net securities losses amounted to $945 thousand in the 3^rd quarter of 2009, compared to net losses of $2.8 million in the previous quarter and net gains of $1.1 million in the same quarter last year. During the current quarter, the Company recorded additional credit-related impairment losses of $1.5 million on certain non-agency guaranteed mortgage-backed securities identified as other than temporarily impaired. The noncredit-related loss on these securities, which was recorded in other comprehensive income, was $2.0 million. At September 30, 2009, the par value of these bonds identified as other than temporarily impaired totaled $137.8 million, compared to $102.3 million at June 30, 2009.

The current quarter also included pre-tax gains of $519 thousand, most of which related to private equity investments of the Company. Minority interest expense related to this activity totaled $255 thousand and is included in non-controlling interest in the income statement.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $154.5 million, a decrease of $5.5 million compared with amounts recorded in the previous quarter and a decrease of $30.0 million compared to the same period last year. Non-interest expense for the previous quarter included costs for an FDIC special assessment of $8.0 million that did not reoccur in the current quarter. Additionally during the 3^rd quarter of 2008, the Company recorded a loss on the purchase of auction rate securities totaling $33.0 million. Compared to the 3^rd quarter of last year, salaries and benefits expense increased $3.5 million, or 4.2%, resulting mainly from higher medical and pension costs, coupled with increased incentives paid on certain capital markets activities. Full-time equivalent employees totaled 5,148 and 5,202 at September 30, 2009 and 2008, respectively.

Compared with the 3^rd quarter of last year, supplies and communication costs declined 13.1% and occupancy costs were down .9%. Marketing costs were slightly lower than in the previous year, while data processing and software costs increased 8.9% as a result of higher costs for several new software and servicing systems put in place this year. FDIC insurance expense increased $4.3 million over the same quarter last year due to higher insurance rates assessed. Included in non-interest expense in the current quarter was a reduction of $2.5 million in certain Visa, Inc. (Visa) indemnification costs, compared to net costs of $2.9 million for Visa obligations in the 3^rd quarter of 2008.

Income Taxes

The effective tax rate for the Company was 31.2% for the current quarter, compared with 29.2% in the previous quarter and 27.9% in the 3^rd quarter of 2008.

Credit Quality

Net loan charge-offs for the 3^rd quarter of 2009 amounted to $30.9 million, compared with $36.0 million in the prior quarter and $18.7 million in the 3^rdquarter of last year. The decrease in net loan charge-offs in the 3^rd quarter of 2009 compared to the previous quarter was mainly the result of a decline in losses on construction loans of $5.9 million, coupled with lower consumer banking losses of $2.0 million and lower consumer credit card losses. Net loan charge-offs on business loans increased by $2.2 million over the previous quarter. Combined net loan charge-offs for business, business real estate and construction loans this quarter totaled $10.3 million compared to $13.8 million in both the 1^st and 2^nd quarters of 2009. The ratio of annualized net loan charge-offs to total average loans was 1.17% in the current quarter compared to 1.33% in the previous quarter.

For the 3^rd quarter of 2009, annualized net charge-offs on average consumer credit card loans decreased to 6.85%, compared with 7.60% in the previous quarter and 4.19% in the same period last year. Consumer loan net charge-offs for the quarter amounted to 1.82% of average consumer loans, compared to 2.27% in the previous quarter and 1.40% in the same quarter last year. The provision for loan losses for the current quarter totaled $35.4 million, and was $5.8 million lower than the previous quarter. However, the Company increased the allowance for loan losses by $4.5 million this quarter to $190.5 million, or 1.85% of total loans, excluding loans held for sale. The allowance for loan loss balance was 157% of total non-accrual loans.

At September 30, 2009, total non-performing assets amounted to $129.2 million, a decrease of $2.5 million from the previous quarter, and represented 1.26% of loans outstanding. Non-performing assets are comprised of non-accrual loans ($121.7 million) and foreclosed real estate ($7.5 million). At September 30, 2009, the balance of non-accrual loans included residential construction loans of $67.4 million, business real estate loans of $19.9 million and business loans of $24.1 million. Loans past due more than 90 days and still accruing interest totaled $45.6 million at September 30, 2009, but included $15.3 million in guaranteed student loans that the Company intends to hold to maturity.

Other

The Company’s purchases of treasury stock during the current quarter were not significant and related mainly to employee stock option activity. In conjunction with the Company’s previously announced at-the-market offering, the Company issued 1,845,621 shares of its common stock during the 3^rd quarter of 2009. Gross proceeds from these sales during the quarter were $63.6 million, with an average sale price of $34.48 per share. Commissions paid to the sales agent for the sale of these shares were $955 thousand. After payment of commissions and SEC, legal, and accounting fees relating to the offering during the 3^rd quarter of 2009, net proceeds totaled $62.7 million, with average net sale proceeds of $33.96 per share. On July 31, 2009, the Company terminated its Equity Distribution Agreement related to this offering and no further shares were issued.

Forward Looking Information

This information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include future financial and operating results, expectations, intentions and other statements that are not historical facts. Such statements are based on current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.

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