Exhibit 99.1
FOR IMMEDIATE RELEASE:
Tuesday, July 13, 2004
COMMERCE BANCSHARES, INC. REPORTS FIRST SIX
MONTHS EARNINGS PER SHARE GROWTH OF 12%
Commerce Bancshares, Inc. announced record earnings of $.79 per share for the three months ended June 30, 2004, an increase of 10% compared to $.72 per share in 2003. Net income for the second quarter amounted to $53.8 million compared with $50.5 million in the same period last year. For the quarter, the return on average equity was 14.9% and the return on assets was 1.51%. The efficiency ratio for the quarter decreased to 58.0% compared to 58.8% in the same period last year.
For the first six months ended June 30, 2004, earnings per share totaled $1.54, an increase of 12% compared with $1.38 in 2003. Net income amounted to $105.2 million compared with $97.7 million for 2003, an increase of 8%.
In announcing these results, David W. Kemper, Chairman and CEO, said, “We are pleased to report double digit earnings per share growth for both the quarter and the first six months of the year. In each instance, the results were driven by sustained growth in fee income and good operating expense management. In particular, bankcard and deposit fees increased in excess of 10% compared to the same quarter last year, while non-interest expenses increased only 2%. Non-interest income for the first six months totaled 41% of total revenue. However, net interest income for the quarter was down 2% compared with the same period last year and reflects continued downward pressure on the net interest margin and sluggish loan demand.”
Mr. Kemper continued, “Asset quality remained strong this quarter with net charge-offs totaling $6.2 million, a decrease of $6.1 million from the prior quarter and a decrease of $3.2 million from the second quarter of last year. Our allowance for loan losses at June 30, 2004 totaled $133.1 million and was 481% of non-performing loans. Net charge-offs for the first six months were ..46% of average loans and our loan loss reserve remains at 1.64% of total loans.”
Total assets at June 30, 2004 were $14.4 billion, total loans were $8.1 billion, and total deposits were $10.4 billion. Non-performing loans totaled $27.7 million or .34% of total loans. During the second quarter, Moody’s Investors Service upgraded the long-term deposits rating of the Company’s principal banking subsidiary to Aa3 and increased its bank financial strength rating to B.
(more)
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 banking locations in Missouri, Illinois, and Kansas. The Company also has operating subsidiaries involved in mortgage banking, credit related insurance, venture capital, and real estate activities.
Posted to the Company’s web site is management’s discussion of second quarter results. To see this information please visit our web site at www.commercebank.com.
* * * * * * * * * * * * * * *
For additional information, contact
Jeffery Aberdeen, Controller
at PO Box 13686, Kansas City, MO
or by telephone at (816) 234-2081
Web Site: http://www.commercebank.com
Email: mymoney@commercebank.com
| (Amounts in thousands) | 3/31/04 | 6/30/04 | 6/30/03 | |||||||||
| Non-Accrual Loans | $ | 33,292 | $ | 27,654 | $ | 30,444 | ||||||
| Foreclosed Real Estate | $ | 2,593 | $ | 1,877 | $ | 1,836 | ||||||
| Total Non-Performing Assets | $ | 35,885 | $ | 29,531 | $ | 32,280 | ||||||
| Non-Performing Assets to Loans | .44 | % | .36 | % | .40 | % | ||||||
| Non-Performing Assets to Total Assets | .25 | % | .20 | % | .23 | % | ||||||
| Loans 90 Days & Over Past Due – Still Accruing | $ | 14,772 | $ | 16,481 | $ | 20,232 | ||||||
COMMERCE BANCSHARES, INC. AND SUBSIDIARIES
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||
| March 31 | June 30 | June 30 | June 30 | June 30 | ||||||||||||||||
| (Unaudited) | 2004 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||
FINANCIAL SUMMARY(In thousands, except per share data) | ||||||||||||||||||||
| Net interest income | $ | 122,984 | $ | 126,461 | $ | 128,687 | $ | 249,445 | $ | 252,897 | ||||||||||
| Taxable equivalent net interest income | 123,572 | 127,025 | 129,331 | 250,597 | 254,185 | |||||||||||||||
| Non-interest income | 85,969 | 84,289 | 73,701 | 170,258 | 148,307 | |||||||||||||||
| Provision for loan losses | 10,250 | 6,280 | 9,999 | 16,530 | 20,019 | |||||||||||||||
| Non-interest expense | 118,912 | 120,936 | 118,215 | 239,848 | 238,949 | |||||||||||||||
| Net income | 51,324 | 53,838 | 50,487 | 105,162 | 97,715 | |||||||||||||||
| Cash dividends | 15,501 | 15,340 | 10,873 | 30,841 | 21,865 | |||||||||||||||
| Net total loan charge-offs | 12,379 | 6,248 | 9,455 | 18,627 | 18,431 | |||||||||||||||
| Net business charge-offs (recov) | 5,502 | (270 | ) | 2,550 | 5,232 | 4,400 | ||||||||||||||
| Net credit card charge-offs | 4,934 | 5,040 | 4,641 | 9,974 | 9,350 | |||||||||||||||
| Net personal banking charge-offs | 1,972 | 1,260 | 1,549 | 3,232 | 3,940 | |||||||||||||||
| Net real estate charge-offs (recov) | 102 | 73 | 161 | 175 | (231 | ) | ||||||||||||||
| Net overdraft charge-offs (recov) | (131 | ) | 145 | 554 | 14 | 972 | ||||||||||||||
| Per share: | ||||||||||||||||||||
| Net income – basic | $ | 0.76 | $ | 0.80 | $ | 0.73 | $ | 1.56 | $ | 1.40 | ||||||||||
| Net income – diluted | $ | 0.75 | $ | 0.79 | $ | 0.72 | $ | 1.54 | $ | 1.38 | ||||||||||
| Cash dividends | $ | 0.230 | $ | 0.230 | $ | 0.157 | $ | 0.460 | $ | 0.314 | ||||||||||
| Diluted wtd. average shares o/s | 68,778 | 67,937 | 70,194 | 68,357 | 70,570 | |||||||||||||||
RATIOS | ||||||||||||||||||||
| Average loans to deposits | 79.87 | % | 78.13 | % | 80.16 | % | 78.99 | % | 80.34 | % | ||||||||||
| Return on total average assets | 1.45 | % | 1.51 | % | 1.49 | % | 1.48 | % | 1.48 | % | ||||||||||
| Return on total average stockholders’ equity | 14.09 | % | 14.91 | % | 14.02 | % | 14.50 | % | 13.66 | % | ||||||||||
| Efficiency ratio* | 59.24 | % | 57.96 | % | 58.82 | % | 58.58 | % | 60.00 | % | ||||||||||
AT PERIOD END | ||||||||||||||||||||
| Book value per share based on total stockholders’ equity | $ | 22.04 | $ | 21.13 | $ | 21.32 | ||||||||||||||
| Market value per share | $ | 47.71 | $ | 45.95 | $ | 37.07 | ||||||||||||||
| Allowance for loan losses as a percentage of loans | 1.63 | % | 1.64 | % | 1.64 | % | ||||||||||||||
| Tier I leverage ratio | 9.53 | % | 9.47 | % | 9.82 | % | ||||||||||||||
| Common shares outstanding | 67,317,054 | 66,642,550 | 69,141,851 | |||||||||||||||||
| Shareholders of record | 4,906 | 4,845 | 5,003 | |||||||||||||||||
| Number of bank/ATM locations | 327 | 327 | 332 | |||||||||||||||||
| Number of bank charters | 4 | 4 | 4 | |||||||||||||||||
| Full-time equivalent employees | 4,847 | 4,822 | 5,010 | |||||||||||||||||
| June 30 | June 30 | |||||||||||||||||||||||
| OTHER YTD INFORMATION | 2004 | 2003 | ||||||||||||||||||||||
| High market value per share | $ | 50.00 | $ | 39.52 | ||||||||||||||||||||
| Low market value per share | $ | 44.00 | $ | 33.52 | ||||||||||||||||||||
| * The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of net interest income and non-interest income (excluding gains/losses on securities transactions). |
COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||
| (Unaudited) | March 31 | June 30 | June 30 | June 30 | June 30 | |||||||||||||||
| (In thousands, except per share data) | 2004 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||
INTEREST INCOME | ||||||||||||||||||||
| Interest and fees on loans | $ | 104,009 | $ | 102,753 | $ | 109,407 | $ | 206,762 | $ | 220,379 | ||||||||||
| Interest on investment securities | 44,592 | 49,348 | 50,034 | 93,940 | 94,498 | |||||||||||||||
| Interest on federal funds sold and securities purchased under agreements to resell | 186 | 339 | 207 | 525 | 355 | |||||||||||||||
| Total interest income | 148,787 | 152,440 | 159,648 | 301,227 | 315,232 | |||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||
| Interest on deposits: | ||||||||||||||||||||
| Savings, interest checking and money market | 6,172 | 6,320 | 8,106 | 12,492 | 16,187 | |||||||||||||||
| Time open and C.D.’s of less than $100,000 | 9,899 | 9,592 | 12,704 | 19,491 | 26,561 | |||||||||||||||
| Time open and C.D.’s of $100,000 and over | 3,265 | 3,571 | 3,900 | 6,836 | 7,851 | |||||||||||||||
| Interest on other borrowings | 6,467 | 6,496 | 6,251 | 12,963 | 11,736 | |||||||||||||||
| Total interest expense | 25,803 | 25,979 | 30,961 | 51,782 | 62,335 | |||||||||||||||
| Net interest income | 122,984 | 126,461 | 128,687 | 249,445 | 252,897 | |||||||||||||||
| Provision for loan losses | 10,250 | 6,280 | 9,999 | 16,530 | 20,019 | |||||||||||||||
| Net interest income after provision for loan losses | 112,734 | 120,181 | 118,688 | 232,915 | 232,878 | |||||||||||||||
NON-INTEREST INCOME | ||||||||||||||||||||
| Trust fees | 16,164 | 16,128 | 15,074 | 32,292 | 29,598 | |||||||||||||||
| Deposit account charges and other fees | 26,814 | 28,394 | 23,420 | 55,208 | 45,996 | |||||||||||||||
| Bank card transaction fees | 16,308 | 17,884 | 16,057 | 34,192 | 30,523 | |||||||||||||||
| Trading account profits and commissions | 3,826 | 2,970 | 3,566 | 6,796 | 7,960 | |||||||||||||||
| Consumer brokerage services | 2,354 | 2,371 | 2,312 | 4,725 | 4,505 | |||||||||||||||
| Mortgage banking revenue | 488 | 274 | 1,620 | 762 | 2,651 | |||||||||||||||
| Net gains on securities transactions | 8,951 | 2,833 | 2,169 | 11,784 | 4,441 | |||||||||||||||
| Other | 11,064 | 13,435 | 9,483 | 24,499 | 22,633 | |||||||||||||||
| Total non-interest income | 85,969 | 84,289 | 73,701 | 170,258 | 148,307 | |||||||||||||||
NON-INTEREST EXPENSE | ||||||||||||||||||||
| Salaries and employee benefits | 68,016 | 65,696 | 66,006 | 133,712 | 134,599 | |||||||||||||||
| Net occupancy | 10,166 | 9,834 | 9,439 | 20,000 | 19,777 | |||||||||||||||
| Equipment | 5,858 | 5,678 | 6,209 | 11,536 | 12,087 | |||||||||||||||
| Supplies and communication | 7,944 | 8,342 | 8,402 | 16,286 | 16,940 | |||||||||||||||
| Data processing and software | 10,630 | 11,802 | 9,889 | 22,432 | 19,765 | |||||||||||||||
| Marketing | 3,704 | 4,424 | 3,957 | 8,128 | 7,063 | |||||||||||||||
| Other intangible assets amortization | 436 | 433 | 449 | 869 | 899 | |||||||||||||||
| Other | 12,158 | 14,727 | 13,864 | 26,885 | 27,819 | |||||||||||||||
| Total non-interest expense | 118,912 | 120,936 | 118,215 | 239,848 | 238,949 | |||||||||||||||
| Income before income taxes | 79,791 | 83,534 | 74,174 | 163,325 | 142,236 | |||||||||||||||
| Less income taxes | 28,467 | 29,696 | 23,687 | 58,163 | 44,521 | |||||||||||||||
NET INCOME | $ | 51,324 | $ | 53,838 | $ | 50,487 | $ | 105,162 | $ | 97,715 | ||||||||||
| Net income per share – basic | $ | 0.76 | $ | 0.80 | $ | 0.73 | $ | 1.56 | $ | 1.40 | ||||||||||
| Net income per share – diluted | $ | 0.75 | $ | 0.79 | $ | 0.72 | $ | 1.54 | $ | 1.38 | ||||||||||
| Cash dividends per common share | $ | 0.230 | $ | 0.230 | $ | 0.157 | $ | 0.460 | $ | 0.314 | ||||||||||
COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| (Unaudited) | March 31 | June 30 | June 30 | |||||||||
| (In thousands) | 2004 | 2004 | 2003 | |||||||||
ASSETS | ||||||||||||
| Loans, net of unearned income | $ | 8,149,141 | $ | 8,107,924 | $ | 8,113,302 | ||||||
| Allowance for loan losses | (133,092 | ) | (133,124 | ) | (132,706 | ) | ||||||
Net loans | 8,016,049 | 7,974,800 | 7,980,596 | |||||||||
| Investment securities: | ||||||||||||
| Available for sale | 5,307,223 | 4,792,606 | 4,665,669 | |||||||||
| Trading | 29,027 | 17,673 | 26,066 | |||||||||
| Non-marketable | 76,657 | 72,141 | 69,533 | |||||||||
Total investment securities | 5,412,907 | 4,882,420 | 4,761,268 | |||||||||
| Federal funds sold and securities purchased under agreements to resell | 71,645 | 134,805 | 25,660 | |||||||||
| Cash and due from banks | 409,924 | 860,203 | 661,335 | |||||||||
| Land, buildings and equipment – net | 335,084 | 339,269 | 335,852 | |||||||||
| Goodwill | 48,522 | 48,522 | 48,522 | |||||||||
| Other intangible assets – net | 1,747 | 1,321 | 3,068 | |||||||||
| Other assets | 189,339 | 183,547 | 140,108 | |||||||||
Total assets | $ | 14,485,217 | $ | 14,424,887 | $ | 13,956,409 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Deposits: | ||||||||||||
| Non-interest bearing demand | $ | 1,697,680 | $ | 1,723,109 | $ | 1,662,825 | ||||||
| Savings, interest checking and money market | 6,039,062 | 6,130,449 | 6,003,668 | |||||||||
| Time open and C.D.’s of less than $100,000 | 1,701,258 | 1,669,858 | 1,840,229 | |||||||||
| Time open and C.D.’s of $100,000 and over | 814,635 | 847,332 | 721,153 | |||||||||
Total deposits | 10,252,635 | 10,370,748 | 10,227,875 | |||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 2,068,165 | 2,157,542 | 1,680,829 | |||||||||
| Other borrowings | 499,465 | 393,625 | 416,561 | |||||||||
| Other liabilities | 181,156 | 94,883 | 156,992 | |||||||||
Total liabilities | 13,001,421 | 13,016,798 | 12,482,257 | |||||||||
| Stockholders’ equity: | ||||||||||||
| Preferred stock | — | — | — | |||||||||
| Common stock | 343,183 | 343,183 | 336,940 | |||||||||
| Capital surplus | 356,732 | 356,186 | 295,391 | |||||||||
| Retained earnings | 742,959 | 781,457 | 783,283 | |||||||||
| Treasury stock | (59,198 | ) | (89,473 | ) | (56,521 | ) | ||||||
| Other | (3,118 | ) | (2,827 | ) | (2,234 | ) | ||||||
| Accumulated other comprehensive income | 103,238 | 19,563 | 117,293 | |||||||||
Total stockholders’ equity | 1,483,796 | 1,408,089 | 1,474,152 | |||||||||
Total liabilities and stockholders’ equity | $ | 14,485,217 | $ | 14,424,887 | $ | 13,956,409 | ||||||
COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCES
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||
| (Unaudited) | March 31 | June 30 | June 30 | June 30 | June 30 | |||||||||||||||
| (Dollars in thousands) | 2004 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||
Loans: | ||||||||||||||||||||
| Business | $ | 2,045,287 | $ | 2,076,813 | $ | 2,234,452 | $ | 2,061,050 | $ | 2,247,699 | ||||||||||
| Real estate – construction | 426,182 | 439,082 | 403,705 | 432,632 | 403,399 | |||||||||||||||
| Real estate – business | 1,881,209 | 1,850,935 | 1,831,897 | 1,866,072 | 1,801,634 | |||||||||||||||
| Real estate – personal | 1,331,014 | 1,329,562 | 1,294,147 | 1,330,288 | 1,284,669 | |||||||||||||||
| Personal banking | 1,891,071 | 1,844,001 | 1,758,271 | 1,867,536 | 1,740,314 | |||||||||||||||
| Credit card | 551,957 | 557,029 | 518,356 | 554,493 | 518,192 | |||||||||||||||
| Overdrafts | 17,477 | 10,779 | 10,793 | 14,128 | 11,749 | |||||||||||||||
Total loans | 8,144,197 | 8,108,201 | 8,051,621 | 8,126,199 | 8,007,656 | |||||||||||||||
Investment securities (excluding unrealized gains and losses): | ||||||||||||||||||||
| Available for sale | 4,857,126 | 4,950,254 | 4,305,198 | 4,903,690 | 4,147,038 | |||||||||||||||
| Trading | 8,433 | 25,151 | 19,648 | 16,792 | 24,156 | |||||||||||||||
| Non-marketable | 74,651 | 77,663 | 71,953 | 76,157 | 71,082 | |||||||||||||||
Total investment securities | 4,940,210 | 5,053,068 | 4,396,799 | 4,996,639 | 4,242,276 | |||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | 60,398 | 111,170 | 59,687 | 85,784 | 50,999 | |||||||||||||||
Total interest earning assets | 13,144,805 | 13,272,439 | 12,508,107 | 13,208,622 | 12,300,931 | |||||||||||||||
Total assets | 14,193,600 | 14,323,830 | 13,550,222 | 14,258,715 | 13,344,077 | |||||||||||||||
Deposits: | ||||||||||||||||||||
| Non-interest bearing deposits | 1,233,919 | 1,275,569 | 1,038,701 | 1,254,744 | 1,016,884 | |||||||||||||||
| Interest bearing deposits: | ||||||||||||||||||||
| Savings | 392,690 | 411,260 | 384,002 | 401,975 | 373,069 | |||||||||||||||
| Interest checking | 482,905 | 503,039 | 389,671 | 492,972 | 382,064 | |||||||||||||||
| Money market | 5,627,660 | 5,661,088 | 5,580,366 | 5,644,374 | 5,542,518 | |||||||||||||||
| Time open & C.D.’s of less than $100,000 | 1,715,038 | 1,685,584 | 1,872,368 | 1,700,311 | 1,896,487 | |||||||||||||||
| Time open & C.D.’s of $100,000 and over | 745,101 | 841,283 | 778,928 | 793,192 | 756,567 | |||||||||||||||
| Total interest bearing deposits | 8,963,394 | 9,102,254 | 9,005,335 | 9,032,824 | 8,950,705 | |||||||||||||||
Total deposits | 10,197,313 | 10,377,823 | 10,044,036 | 10,287,568 | 9,967,589 | |||||||||||||||
Borrowings: | ||||||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 1,947,207 | 1,911,587 | 1,525,278 | 1,929,397 | 1,414,124 | |||||||||||||||
| Oher borrowings | 441,019 | 453,931 | 389,413 | 447,475 | 377,432 | |||||||||||||||
Total borrowings | 2,388,226 | 2,365,518 | 1,914,691 | 2,376,872 | 1,791,556 | |||||||||||||||
| Total interest bearing liabilities | 11,351,620 | 11,467,772 | 10,920,026 | 11,409,696 | 10,742,261 | |||||||||||||||
| Total stockholders’ equity | 1,464,915 | 1,452,019 | 1,444,735 | 1,458,467 | 1,442,250 | |||||||||||||||
Net yield on interest earning assets (tax-equivalent basis) | 3.78 | % | 3.85 | % | 4.15 | % | 3.82 | % | 4.17 | % | ||||||||||
COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2004
For the quarter ended June 30, 2004, net income amounted to $53.8 million, an increase of 6.6% over the 2nd quarter of the previous year. Return on assets was 1.5% and the return on equity totaled 14.9%. For the quarter, the efficiency ratio was 58.0%. The increase in net income over the 2nd quarter of last year was the result of a 14.4% increase in non-interest income, coupled with a 37.2% decrease in provision for loan losses. Non-interest expense increased 2.3% compared to the same quarter last year, and net interest income decreased $2.2 million.
Balance Sheet Review
During the 2nd quarter, average loans were down slightly compared to the 1st quarter of 2004, and were up almost 1% compared with the same period last year. Compared to the 1st quarter of this year, average business and construction loans grew by $32 million and $13 million, respectively, while business real estate loans and personal banking loans declined by $30 million and $47 million, respectively. Business real estate loans declined $30 million mainly due to larger pay offs during the quarter. The decline in personal banking loans is the result of regularly scheduled sales of student loans, which reduced average loan balances by $108 million, offset by growth in installment and home equity loans of $33 million and $14 million, respectively, during the quarter. Average personal real estate loans declined slightly during the quarter as a result of principal amortization and pay-downs, but new loan originations are up for the quarter by over 20%.
Available for sale investment securities, excluding fair value adjustments, increased on average by $93.1 million or 1.9% this quarter compared with the previous quarter. The increase in average securities resulted from purchases of new securities with liquidity obtained from an increase in deposits. The growth in securities was mainly due to increases in asset-backed securities of $204 million which were offset by decreases in mortgage-backed securities of $61 million and decreases in U.S. treasury securities of $55 million.
Total average deposits increased by $180.5 million during the 2nd quarter compared to the 1st quarter of this year, or an annualized growth rate of 7.1%. The increase was due mainly to increases in money market accounts ($33 million), jumbo certificates of deposit ($96 million), and non-interest bearing demand accounts ($42 million), offset by a decline in retail certificates of deposit ($29 million).
During the quarter, average borrowings decreased by $22.7 million primarily due to declines in federal funds purchased and securities sold under agreements to repurchase.
The average loans to deposits ratio for the quarter decreased slightly from the 1st quarter to 78.1%. The decrease in this ratio results from growth in the deposit portfolio and a modest decrease in the loan portfolio.
Net Interest Income
In the 2nd quarter, net interest income amounted to $126.5 million, a decrease of approximately $2.2 million or 1.7% compared to the 2nd quarter of last year, and an increase of $3.5 million or 2.8% compared with the previous quarter of this year. The net yield on earning assets increased 7 basis points in the current quarter to 3.85%.
The increase in net interest income in the 2nd quarter over the 1st quarter of 2004 was the result of higher earnings on the Company’s inflation indexed treasury securities, partly offset by the continued downward re-pricing of loans and stable interest costs. Compared to the 1st quarter of 2004, average rates earned on loans declined 4 basis points while rates paid on interest bearing deposits declined 1 basis point. Average rates earned on investment securities increased by 30 basis points mainly a result of a $4.8 million increase in inflation related earnings recognized in the 2nd quarter. Additionally, growth in the average balance of investment securities added $1.1 million in interest income this quarter.
During the quarter, interest income increased $3.7 million over the previous quarter as a result of higher average balances in investment securities and the increase in inflation-related income noted above. This increase was partly offset by lower rates earned on virtually all loan products and on mortgage and asset-backed investment securities. The overall yield on interest earning assets increased 7 basis points to 4.64%. Total interest expense increased $176 thousand during the current quarter compared with the previous quarter mainly due to volume increases in jumbo certificates of deposit, offset by overall lower average rates paid. The overall cost of interest bearing liabilities of .91% did not change during the quarter.
Non-Interest Income
For the 2nd quarter of 2004, total non-interest income amounted to $84.3 million compared with $73.7 million in the same quarter last year, or an increase of 14.4%. This increase resulted from growth in deposit, bankcard and trust fee income coupled with an increase in gains on sales of student loans. Bond trading and mortgage banking fee income declined from amounts recorded in the same period last year due to slowing business as rates began to rise. Bank- card fees for the quarter increased 11.4% over the same period last year, due mainly to higher fees earned on merchant and credit card transactions, both of which grew by more than 16%. Deposit account
COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2004
fees in the 2nd quarter grew by 21.2% over 2nd quarter last year due mainly to higher overdraft fees earned. Trust fees for the quarter were up 7.0% over the same quarter last year as a result of higher fees on personal and institutional trust accounts. Other income in the 2nd quarter of 2004 included a gain on a branch sale of $1.1 million. In addition, gains on student loan sales were $4.1 million in the 2nd quarter 2004, while 1st quarter 2004 gains were $2.3 million and 2nd quarter 2003 gains were $101 thousand.
Net securities gains amounted to $2.8 million for the 2nd quarter of 2004 compared to $9.0 million in the 1st quarter of 2004, and net gains of $2.2 million in the 2nd quarter of last year.
Non-Interest Expense
Non-interest expense for the quarter amounted to $120.9 million, an increase of $2.7 million, or 2.3%, compared with $118.2 million recorded in the 2nd quarter of last year.
Compared with the 2nd quarter of last year, salaries and benefits expense decreased slightly as a result of lower incentive payments and a reduction in temporary and contract labor. Full time equivalent employees totaled 4,822 and 5,010 at June 30, 2004 and 2003, respectively. Costs for supplies and communication, equipment, professional fees and operating losses all declined from amounts recorded in the 2nd quarter of last year. Data processing costs grew $1.9 million, or 19.3%, mainly as a result of higher bankcard processing network fees and software expense. Increased costs were also incurred for marketing and occupancy.
Income Taxes
The effective tax rate for the Company was 35.5% for the 2nd quarter of 2004, compared with an effective tax rate of 35.7% in the 1st quarter of this year and 31.9% in the 2nd quarter of 2003. As reported in the Company’s previously filed 10-Q and Annual Report on Form 10-K, the lower effective tax rates in the prior year resulted from the recognition of tax benefits recorded from various corporate reorganization initiatives. Additional tax benefits related to these initiatives will not be recognized into income until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the 3rd quarter of 2004 which would allow approximately $18.9 million of the remaining benefits to be recognized into income in the 3rd and 4th quarters of 2004.
Credit Quality
Net loan charge-offs for the 2nd quarter of 2004 amounted to $6.2 million compared with $12.4 million in the 1st quarter of 2004 and $9.5 million in the 2nd quarter of last year. The ratio of annualized net loan charge-offs to total average loans this quarter was .31% compared with .47% in the same quarter last year and .61% in the 1st quarter of 2004. The decrease in net charge-offs this quarter compared with the 1st quarter of this year was mainly the result of a $6.0 million charge-down in the 1st quarter of a large commercial loan in which the borrower had filed for bankruptcy.
For the 2nd quarter of 2004, annualized net charge-offs on average credit card loans increased slightly to 3.64%, compared with 3.59% in the 2nd quarter of last year. Also, personal loan charge-offs decreased this quarter and amounted to .27% of average loans compared to .35% in the same period last year. The provision for loan losses for the quarter totaled $6.3 million, and was down $4.0 million from the provision recorded in the 1st quarter of this year, and also down $3.7 million from the amount recorded in the 2nd quarter of 2003. The allowance for loan losses at June 30, 2004 amounted to $133.1 million, or 1.64% of total loans, and represents 481% of total non-performing loans.
Total non-performing assets amounted to $29.5 million, a decrease of $6.4 million from the previous quarter, and amounted to .36% of loans. Non-performing assets are comprised of non-accrual loans ($27.6 million) and foreclosed real estate ($1.9 million). Loans past due more than 90 days and still accruing interest totaled $16.5 million at June 30, 2004.
Other
The Company maintains a treasury stock buyback program and effective January 2004, was authorized by the Board of Directors to repurchase up to 3 million shares of its common stock. During the quarter ended June 30, 2004, the Company purchased 759,000 shares of treasury stock at an average cost of $45.22 per share. Also during the 2nd quarter, Moody’s Investors Service upgraded the long-term deposits rating of the Company’s principal banking subsidiary to Aa3 and increased its bank financial strength rating to B.
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.
