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Commerce Bancshares, Inc. (NASDAQ:CBSH)

Annual Shareholder Meeting

April 17, 2013 10:30 am ET

Executives

David W. Kemper - Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of The Board of Commerce Bank Na, Chief Executive Officer of Commerce Bank Na and President of Commerce Bank Na

James L. Swarts - Vice President and Secretary

Analysts

Michael Zavaraev - Arbat Capital Management, Research Division

David W. Kemper

Okay, everybody, if we could sit down. We're approaching 9:30 here. It's our usual sellout crowd. Well, good morning, everybody. I'd like to call the annual meeting of the shareholders of Commerce Bancshares to order. And on behalf of your Board of Directors and the officers of your company, I'm pleased to welcome those here in Kansas City and all of those attending through our Internet site to the 2013 Annual Meeting of Shareholders.

I'd like to start out, as we do every year, introducing the members of your Board of Directors, ask them to stand as their name is called: Terry Bassham, from Great Plains Energy; John Capps, BCJ Motors; Earl Trace Devanny, from TriZetto; Tom Grant, SelectQuote Insurance Services; Jim Hebenstreit, Bartlett and Company; Jonathan Kemper, Vice Chairman, Commerce Bancshares; Terry Meek, Meek Lumber Yards; Ben Rassieur, Paulo Products; Todd Schnuck, President and COO of Schnuck's Markets; Andy Taylor, Enterprise Holdings; and Kim Walker, Chief Investment Officer for Washington University. Thank you for being here.

Before asking the Secretary to present his report, are there any shareholders present who have not submitted their proxies? They can do so at this time.

Seeing none, we'll proceed. And I'll ask our Secretary, Jim Swarts, to make his report. Jim?

James L. Swarts

An affidavit has been filed by our stock transfer agent, stating that notice of annual meeting has been furnished to all shareholders of record as of February 19, 2013. The Inspectors of Election have filed with me their certificates, stating that the proxies representing 75,924,728 shares of the 90,819,015 outstanding shares have been received, so a quorum is present.

David W. Kemper

The first matter to be presented to the shareholders today is the election of 3 directors to constitute the 2016 Class of Directors to serve until 2016 Annual Meeting. If there are no questions, I'm going to request the Secretary to present the nominations for the Board of Directors and the results of the voting. So, Jim?

James L. Swarts

The Board of Directors nominated Earl H. Devanny III, Benjamin F. Rassieur III, Todd R. Schnuck and Andrew C. Taylor to the 2016 Class of Directors to be elected at this meeting. No other nominations were received and based on proxies and ballots submitted, each of the nominees for Director received at least 60,093,356 votes, a number sufficient to elect all nominees with the majority of votes cast.

David W. Kemper

On the basis of this report presented, the 4 nominees have been elected to the board for a term of 3 years. The second matter is the ratification of selection of KPMG LLC as the company's independent registered public accountants for 2013.

James L. Swarts

KPMG LLC's selection as the company's independent registered public accountants was ratified by over 90% -- 99% of the shares voted.

David W. Kemper

On the basis of the report presented, KPMG has been ratified as the company's independent registered public accountants for 2013. Proposal 3 is the say on pay proposal, which is an advisory vote on the compensation awarded to certain executive officers. So, Jim, the results?

James L. Swarts

Based on proxies submitted, 58,999,948 votes were cast for Proposal 3. 1,912,080 votes were cast against Proposal 3 and there were 398,763 abstentions. Votes for Proposal 3 represented 96.2% of the votes cast.

David W. Kemper

On the basis of the Secretary's report, Proposal 3, approving the compensation award to certain executive officers passed. Proposal 3 is an advisory vote and is not binding for the company but will be taken into consideration both by the Compensation Committee and by the board as a whole. Proposal 4 seeks shareholder approval of amendment restatement of the Commerce Bancshares 2005 Equity Incentive Plan including an increase in authorized shares and extension of the term of the plan. So, Jim?

James L. Swarts

Based on proxies submitted, 53,746,597 votes were cast for Proposal 4. 7,219,883 votes were cast against Proposal 4. And there were 344,311 abstentions. Votes for Proposal 4 represented 87.6% of the votes cast.

David W. Kemper

On the basis of the Secretary's report, Proposal 4 has been adopted. Proposal 5 seeks shareholder approval of an amendment of the stock purchase plan for non-employee directors to increase authorized shares. Jim?

James L. Swarts

Based on proxies submitted, 58,031,524 votes were cast for Proposal 5. 2,965,466 votes were cast against Proposal 5. And there were 313,801 abstentions. Votes for Proposal 5 represented 94.6% of the votes cast.

David W. Kemper

On the basis of the Secretary's report, Proposal 5 has been adopted. I'd like to now introduce our accountants from KPMG: Jeff Bierman, Mike Roos, Brad Sprong and Cassie Meschke of KPMG. Mr. Bierman, Mr. Roos and Ms. Meschke will be available to answer any questions you have during the question period a little later in the meeting. At this time, I'd offer them the opportunity to make a statement if they wish. Jeff?

Unknown Attendee

David, we have [indiscernible].

David W. Kemper

Okay. That's always good. Okay, I'd now like to give an overview of the company as we do every year here. And I know we have a lot of people who are familiar with the organization. And we also are broadcasting this on the Internet. So again, we use this just as a mapping kind of footprint of where we are. It's -- we've expanded significantly over the last 6 or 7 years, especially in some of these higher demographic markets, which we're very excited about. So you see -- and actually since our last meeting, we have now on office in Dallas and we continue to grow very nicely in Tulsa, Denver, Nashville and Cincinnati. And this has been very good for us in projecting out our services and really leveraging our overhead in what we're doing.

One very significant aspect and I think has led to our success over the number of years and certainly in the last 5 years is we've kept our super-community format. So I think a big part of our organization has been our culture -- our risk management culture and the fact that we can communicate with each other. So although we have grown significantly, we continue to look at a, what we call a super-community bank that can communicate well, keeps out of silos and really cross-sell very effectively. So that kind of flat organization has helped us both on managing expenses and communicating and cross-selling.

This slide just talks about the potential as we expand our footprint. I think it's all pretty obvious that we're in St. Louis and Kansas City, our 2 major markets, are excellent markets, but moderate growth markets. The community markets are excellent source of stable deposits but do not have as much growth. So that's why we're very interested in going into places like the Front Range and Denver, and we've had, although off a small base, significant growth in that area. And I'll talk a little bit more about that later and some of the areas of emphasis that we're going to be doing over the next several years.

As you know, we have measured our results really with 4 key measurements, a combination of financial measurements: top line growth, pretax profitability, how we're doing with our customers on satisfaction and our employee engagement. As you can see up here, probably the biggest challenge, we continue to do very well with customer satisfaction, with employee retention engagement. In fact, we're attracting some wonderful people to the organization with the turmoil in the banking industry and that's a big opportunity for us. But top line growth is a big challenge, and it's kind of masked, we're in a very unusual interest rate situation right now. It's going to have compression on margins. You'll see that in our first quarter results and I don't think that's going to change over the next year or so even though, as you'll also see, our loans are building up after a couple of years of decline as the economy has picked back up. And pretax profitability has been very good.

Again, just -- I guess, just go a few independent testimonies on the kind of recognition that we receive. We continue to be seen both from the financial analyst as a very strongly performing bank and also from a customer satisfaction kind of analysis, that we get very high marks. So, again, we think that's a very important for the future and retaining our customers.

I thought I would quickly go through 8 companies that we've highlighted in the annual report and just to talk a little bit about why these companies represent what we're trying to do. The first one is one of the major health systems in Central Illinois, OSF Healthcare. We've got a very nice operation in Central Illinois in Peoria, Bloomington and Champaign. We finance 4 helicopters. These are very expensive equipment. So this is about a $30 million lease. Leasing is something we have a lot of expertise in and we're planning to double that book of business over the next 4 or 5 years. So that's significant. Also, we have a lot of business in the healthcare space. Obviously, a big growing part of our economy.

Second example. This is interesting, Southern California, Riverside County, 2.5 million people, major processors of invoices, major customer for our purchasing card, which we now -- it's a national business for us. When you compete with something like this in California, we're competing with everybody in the country and we're winning more than our fair share. We have a number of large hospital systems around the country. So if you saw the annual report and you looked at our numbers, that's a big area of emphasis for us on payments and this is just an example of how we can project that well beyond our traditional geographical footprint.

Another example on the Front Range. This is the Colorado Springs Health Partners, the largest physician-owned outpatient group in Colorado. We have several branches in Denver, and our plan in Denver really is to project our commercial business. But again, this is a payment solution for them. Again, interesting that we don't have a physical branch in Colorado Springs but we're able to win those business. It shows the importance of electronic banking, and that's a plus and a minus as people come in and compete in our traditional geographical market.

The next one, a wonderful family-owned company in St. Louis, Grimco, the leading supplier of highway signs in the country. They're a multi-generation privately-owned company. Really, exactly our sweet spot on what we're trying to do. They've been rolling up this industry and it also shows some sectors of manufacturing are doing very well in the United States.

The example, one of the large construction companies in Kansas City, Garney Construction, we're very proud of being their main bank. And I think this is an example, when the financial markets froze in 2009, a lot of very good companies had a lot of liquidity issues. This was centered around auction rate securities, which a number of you remember was a big problem in the market. We bought all those securities back from our customers. This was not a customer then, but they saw what we had done and we're very pleased about that because they had some problems with liquidity in their securities. So this has become a major relationship for us. But I think what exemplifies is that we've really been there through both thick and through thin.

Next one is St. Louis Public Library. Those of you in St. Louis know that's a wonderful cast Gilbert building, just had a $70 million remodeling. We worked very closely with them on tax refinancing to kind of pledge the cash flow between when the grants came in and doing the construction. That project is completed and is really a part of the renaissance in downtown St. Louis.

Jasper Engines is a employee-owned, ESOP-owned, the largest remanufacturer of automobile engines in Southern Illinois. I've been out to the plant. It's 400,000 square feet under roof. This was generated from our Cincinnati office. That's been a very good market for us even though you don't think of that part of the country as being high-growth. There's a huge industrial base in Ohio, Indiana, Northern Kentucky, and again, we're able to sell into those markets, and not just sell loans, but sell our whole complement of commercial services.

And then, finally, Mennell Milling, long-time customer of the bank. We have got a lot of expertise in the agribusiness, especially the grain business really starting out in Kansas City. Mennell is actually in Indiana, but we've done a lot of business in Central and downstate Illinois since we've gone in that marketplace, too. And with the -- of course, it's been a wonderful place to be in the ag sector the last 4 or 5 years with the demand for commodities, and that's been an area that we've grown and compete again with all the major players.

Okay, switching back to the financial side. I show this pie chart, I think, every year, but it's a very important one because it shows the balance that we have between the interest spread and the fee business. And especially those 2 pie charts, you see the 23% coming out of Card and Wealth Management. And you can see that, that is more than twice what our peer banks. So we have this 42/58 kind of split compared to peer banks that are 68/32. So fee business is a steadier business. It's a growth business. We see certainly double-digit growth in the Card business, maybe high-single digit in the Wealth Management but that really has given us some balance.

And just to kind of highlight these areas. In Card, we're one of the top providers now in the country in a number of spaces, especially in purchasing card. That's been a wonderful 25% kind of growth business for us the last several years. Wealth Management, that's a very scalable kind of business. We'll do over $100 million in revenue there and as we build out, we can have the kind of expertise, not only on the asset management side, but especially in the legal and accounting and estate planning advice. So we have over $30 billion now in client assets and we're one of the largest family offices in the United States and we had a record sales year last year.

As I mentioned specialty lending. It's a -- we want to keep out commodity lending. By commodity, I mean just the deal sort of lowest-priced lending business. So we here have specialized -- I mentioned in leasing in agribusiness and other areas. And then the expansion markets, those expansion markets now represent about 12% of our commercial loans, and that's really coming out of basically no loans 5 years ago.

On Card. This just sort of fleshes out where we are. We stayed in the Card business where a lot of people got out of that, is that's consolidated on the consumer side. But what we've really seen is Cards have led a lot of the electronic kinds of payments because of an excellent system and the ability to do things electronically and the accounting side of it. So that has been a big win for us and we think a lot of our success has also been on the service side, that we've got both service and also innovation. We're adding some complete kind of payment solutions to the card base.

Trust company, again, you can see trust assets, how they have grown on that upper right-hand corner and the fee business, which I said will be $100 million this year. We've also had excellent investment results, both in fixed income and equity. So we really think the main thing is good solid service and long-term plans, but we're also very competitive on the investment side.

And talking about the expansion markets, you can see the growth in loans and deposits over the last 5 years even in a very tough economy, where basically commercial loans contracted industry-wide. But also the growth is pretty exciting. 20% growth last year compared to 7% overall and profitability has expanded. So we're going to take a very wholesale commercial approach in these markets. It's very difficult -- the banking system is over-branched. I'd say every major country -- every major city in the country is over-branched. So we're not going to go in on the retail side but more on the higher value-added commercial and eventually wealth management side.

Now just a little look back on returns. It's been a tough 4, 5 years for the banking industry, I think, as we all know. Now we got through the crisis in good shape. I mean, we had a higher loss this 1 year, but our returns have significantly exceeded the industry, although they've come down significantly as the whole industry has. And so the big question for the banking industry is going to be how they can get their competitive returns back up to that more kind of 120, 125 ROA, as opposed to sort of below 1% right now. So that's a challenge. And you can -- I'll talk about our first quarter earnings, which were good but they are showing some of the pressures that we all have right now.

Just a quick snapshot of last year. It was a record year, $269 million in earnings, $2.90 a share, even though net interest income was actually down last year but we really made that up on good expense control, very good credit experience and pretty solid growth on fees, even though we've had to work through the Durbin Amendment, which basically was a reduction fees last year of $21 million compared to 2011. So that's probably the biggest question in the industry right now, is how do you reposition your retail -- your basic retail transactional business.

As I mentioned, fees were flat but there's different moving parts underneath there, especially in the Card area, where as I mentioned because of Durbin fees, we're down $21 million even though we're only down $3 million. So our other businesses came up very nicely below that, very solid growth in Trust and some pressure on deposit fees as some other charge -- as some other regulation works through that.

We managed the expenses, I think, very well. You can see that they're basically down from 2 years ago. It's interesting, we're down in headcount significantly from where we were 4 or 5 years ago, mainly because of back office efficiencies, but we continue to hire people on the frontline. We're aggressively expanding, as I mentioned, these new markets in areas like money management. So we really need to have the people and incentivize them to produce higher top line growth.

For the first quarter, we released earnings last week. You can see we are down about $5 million, $66 million to $61 million, pretty much in line with what the analysts had expected. As I mentioned, loans were actually up 7% but we are having compression as this low interest rate environment continues on. So that's probably the biggest challenge the industry has right now. We have tremendous liquidity, the whole system has huge liquidity, but not many places to invest until you see loan demand coming back.

Now there are good signs of that. Certainly, the auto businesses rebounded very nicely. Housing is firming up. And I think even though there are a lot of uncertainties, we all know, both internationally and out of D.C. and some of the tax increases that went in, that's going to be a drag on the economy this year. We're hopeful that we will see continued loan growth. But the big question is when the Fed will allow interest rates to move back up and I don't know the answer to that. So we're staying pretty short on our investments.

This is a slide we use internally and many of you have seen this but we really think, again, going back to the super-community format, that our most valuable asset are our people. As I've said, we've attracted some great people to the organization over the last few years while retaining a very strong team. So this idea that innovation comes from within in communicating and improving our system has worked very well. And we think that's really the key to success, is everybody is thinking about how we can fine-tune the bank.

And just couple of slides on long-term performance. I think this is interesting. You can see what happened in '07, '08, '09 period as earnings weakened. As we went through the severe recession. If you would overlay the industry number, the industry actually lost money in one of those years and they're basically recovering back. And we've had a nice rebound since then both in earnings per share, which we think is the long-term driver of stock price and net income. Now you saw our first-quarter earnings, that's going to be a difficult operating environment, I think, this year, but a reasonable kind of operating environment. But more importantly, I think as I mentioned, we've got the pieces in place for long-term growth.

And so again, and I end this presentation with the slides we used in our annual report, is that the stock market has been a rocky place to be the last 10 years or so. We've outperformed -- we've outperformed the stock market and we significantly outperformed the bank's market. So even though the bank stocks had a wonderful year last year, they were rebounding off a very low bottom. That usually happens to us where we had a moderate growth last year but we're just a steadier, I think, less risky kind of asset the whole, and certainly the market showed that last year.

So with that, that is the end of my presentation. And I'll entertain questions now or I think, with our accountants, if there are any questions from them, we can go to that, too.

Question-and-Answer Session

David W. Kemper

Mike?

Michael Zavaraev - Arbat Capital Management, Research Division

Not really a question but last night, I told my wife I was going to be coming to the Commerce meeting again. And she said, "I think I own some of that stock. So how are we doing?" So we sat down at the dining room table and she informed me that -- she got her checkbook out; she's a meticulous record-keeper, by the way. And on March 28, 2003, she invested $22,944.08 in Commerce stock. As of yesterday's close, that investment was worth $61,629.75. And with a little chicken scratching here, that's a compound annual growth rate of 10.39%. Her first dividend check was in June of 2003 and that amount -- that's a quarterly dividend, that amounted to $165. The quarterly dividend check she's getting for the first quarter this year amounts to $354. And that's a 7.93% compound annual growth rate. And this doesn't include the $1.50 extra last year. And the bottom line is, I think this is outstanding if not remarkable performance. And I want to commend David, management and all the Board of Directors. You've been great stewards of the shareholder money. And my wife did say that she would keep her Commerce Bank stock and she'll probably keep me, too.

David W. Kemper

Yes, that's sort of a typical evening at the Zook [ph] household but -- I don't know how many of you know Mike, but he's been a long time bank stock analyst, investor and follower, and one of the more astute bank analysts. So I very much appreciate that Mike. And you're also having your first grandson. You said you'll pass on some Commerce Bank stock to that. So we appreciate that. But we -- I think that certainly has helped us in our long run plan as we're certainly running the organization for the shareholders. That's kind of activist shareholder I like. Okay, well, thank you. Any other questions? Okay, and there are no questions to KPMG. If not, thank you very much for attending this morning and we stand adjourned.

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