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CBSH > SEC Filings for CBSH > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for COMMERCE BANCSHARES INC /MO/

Form 10-Q for COMMERCE BANCSHARES INC /MO/


7-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2011 Annual Report on Form 10-K. Results of operations for the three and nine month periods ended September 30, 2012 are not necessarily indicative of results to be attained for any other period.

Forward Looking Information

This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, failure of litigation settlement agreements to become final in accordance with their terms, and competition with other entities that offer financial services.

Critical Accounting Policies

The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan loans losses, the valuation of certain investment securities, and accounting for income taxes. A discussion of these policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2011 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2011.


Table of Contents

Selected Financial Data
                                                           Three Months Ended          Nine Months Ended
                                                              September 30               September 30
                                                            2012         2011           2012        2011
Per Share Data
  Net income per common share - basic                  $     .75      $     .72     $   2.29     $   2.14
  Net income per common share - diluted                      .75            .72         2.29         2.13
  Cash dividends                                            .230           .219         .690         .657
  Book value                                                                           26.33        23.95
  Market price                                                                         40.33        33.10
Selected Ratios
(Based on average balance sheets)
  Loans to deposits (1)                                    56.89 %        58.29 %      55.89 %      60.27 %
  Non-interest bearing deposits to total deposits          33.30          30.49        32.18        29.75
  Equity to loans (1)                                      24.00          23.35        23.97        22.54
  Equity to deposits                                       13.65          13.61        13.40        13.59
  Equity to total assets                                   11.06          10.85        10.88        11.03
  Return on total assets                                    1.28           1.32         1.32         1.37
  Return on total equity                                   11.57          12.15        12.13        12.41
(Based on end-of-period data)
  Non-interest income to revenue (2)                       39.62          39.05        38.24        38.16
  Efficiency ratio (3)                                     59.99          58.71        59.14        58.57
  Tier I risk-based capital ratio                                                      14.92        14.58
  Total risk-based capital ratio                                                       16.25        15.92
  Tangible common equity to assets ratio (4)                                           10.47         9.72
  Tier I leverage ratio                                                                10.00         9.74

(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity ratio is calculated as stockholders' equity reduced by goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).


Table of Contents

Results of Operations

Summary
                                        Three Months Ended September 30            Nine Months Ended September 30
(Dollars in thousands)                   2012            2011      % change         2012           2011     % change
Net interest income                 $    153,811    $    158,630     (3.0 )%   $    478,653    $  484,313     (1.2 )%
Provision for loan losses                 (5,581 )       (11,395 )  (51.0 )         (18,961 )     (39,372 )  (51.8 )
Non-interest income                      100,922         101,632      (.7 )         296,321       298,882      (.9 )
Investment securities gains, net           3,180           2,587     22.9             8,556         5,870     45.8
Non-interest expense                    (153,391 )      (153,746 )    (.2 )        (460,192 )    (461,219 )    (.2 )
Income taxes                             (32,155 )       (31,699 )    1.4           (99,541 )     (91,898 )    8.3
Non-controlling interest expense            (780 )          (657 )   18.7            (2,298 )      (1,737 )   32.3
Net income attributable to Commerce
Bancshares, Inc.                    $     66,006    $     65,352      1.0  %   $    202,538    $  194,839      4.0  %

For the quarter ended September 30, 2012, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $66.0 million, an increase of $654 thousand, or 1.0%, compared to the third quarter of the previous year, and a decrease of $4.7 million compared to the previous quarter. For the current quarter, the annualized return on average assets was 1.28%, the annualized return on average equity was 11.57%, and the efficiency ratio was 59.99%. Diluted earnings per share was $.75, an increase of 4.2% compared to $.72 per share in the third quarter of 2011.

Compared to the third quarter of last year, net interest income decreased $4.8 million, or 3.0%, mainly due to a decrease of $5.2 million in interest on investment securities (which included a $2.8 million decrease in interest on holdings of U.S. Treasury inflation-protected securities), coupled with a decrease of $3.1 million in interest and fees on loans. These declines were partly offset by a decrease of $2.7 million in interest expense on deposits. Non-interest income declined $710 thousand, or .7%, and non-interest expense decreased $355 thousand, or .2%. The decrease in non-interest income was mainly attributable to declines in debit card and overdraft fees, partly offset by higher corporate card and trust fees. The decline in non-interest expense resulted from $5.9 million accrued in the third quarter of 2011 relating to debit card overdraft litigation (not repeated in the current quarter), and smaller declines in various other expense categories, partly offset by higher salaries and data processing expense. The provision for loan losses totaled $5.6 million for the current quarter, representing a decrease of $5.8 million, or 51.0%, from the third quarter of 2011.

Net income for the first nine months of 2012 was $202.5 million, an increase of $7.7 million, or 4.0%, over the same period last year and included a decline of $20.4 million, or 51.8%, in the provision for loan losses. Diluted earnings per share was $2.29, an increase of 7.5% compared to $2.13 per share in the same period last year. For the first nine months of 2012, the annualized return on average assets was 1.32%, the annualized return on average equity was 12.13%, and the efficiency ratio was 59.14%. Net interest income decreased $5.7 million, or 1.2%, due to lower earnings on the Company's loan and investment security portfolios, partly offset by lower expense incurred on deposits. Non-interest income decreased $2.6 million, or .9%, mainly due to a decline of $19.7 million in debit card interchange fees (the effect of new debit card fee regulations effective late in 2011). The decline in debit card fees was partly offset by increases of $10.8 million in merchant and corporate card fees, $4.1 million in trust fees and $1.7 million in capital market fees. Net securities gains increased $2.7 million, mainly due to fair value adjustments and sales of private equity investments. Non-interest expense decreased $1.0 million, or .2%, compared to the same period last year and included a decline in FDIC insurance costs, offset by higher salaries and benefits and data processing costs. The decline in non-interest expense also included a $5.2 million accrual in 2012 for anticipated costs resulting from Visa debit card interchange litigation, offset by $10.9 million expense recorded during the first nine months of 2011 for debit card overdraft litigation costs. Both of these lawsuits are further discussed in Note 14 of the consolidated financial statements.


Table of Contents

Net Interest Income

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income
                                    Three Months Ended September 30, 2012 vs.      Nine Months Ended September 30, 2012 vs.
                                                       2011                                          2011
                                            Change due to                                 Change due to
                                        Average         Average                       Average         Average
(In thousands)                           Volume          Rate         Total           Volume           Rate         Total
Interest income, fully taxable
equivalent basis:
Loans                               $       4,150    $   (7,140 )  $  (2,990 )   $        1,319    $  (15,361 )  $  (14,042 )
Loans held for sale                          (213 )          28         (185 )             (704 )         105          (599 )
Investment securities:
 U.S. government and federal agency
securities                                     11        (2,882 )     (2,871 )           (1,590 )      (5,740 )      (7,330 )
 Government-sponsored enterprise
obligations                                   106          (889 )       (783 )              725        (1,099 )        (374 )
 State and municipal obligations            2,136        (1,101 )      1,035              5,817        (4,880 )         937
 Mortgage-backed securities                    13        (3,168 )     (3,155 )           18,977       (19,657 )        (680 )
 Asset-backed securities                    1,376          (386 )        990              4,585        (3,598 )         987
 Other securities                            (420 )         334          (86 )             (509 )       1,166           657
   Total interest on investment
securities                                  3,222        (8,092 )     (4,870 )           28,005       (33,808 )      (5,803 )
Short-term federal funds sold and
securities purchased under
  agreements to resell                         10             1           11                 32            (7 )          25
Long-term securities purchased
under agreements to resell                    (10 )       1,010        1,000              1,346         3,184         4,530
Interest earning deposits with
banks                                        (160 )         (11 )       (171 )             (201 )          (3 )        (204 )
Total interest income                       6,999       (14,204 )     (7,205 )           29,797       (45,890 )     (16,093 )
Interest expense:
Deposits:
 Savings                                       23           (58 )        (35 )               57           (73 )         (16 )
 Interest checking and money market           475        (2,262 )     (1,787 )            1,933        (7,296 )      (5,363 )
 Time open & C.D.'s of less than
$100,000                                     (225 )        (243 )       (468 )           (1,314 )      (1,752 )      (3,066 )
 Time open & C.D.'s of $100,000 and
over                                         (266 )        (121 )       (387 )             (473 )      (1,282 )      (1,755 )
   Total interest on deposits                   7        (2,684 )     (2,677 )              203       (10,403 )     (10,200 )
Federal funds purchased and
securities sold under
  agreements to repurchase                     30          (101 )        (71 )              255        (1,233 )        (978 )
Other borrowings                                2           (76 )        (74 )               (8 )        (118 )        (126 )
Total interest expense                         39        (2,861 )     (2,822 )              450       (11,754 )     (11,304 )
Net interest income, fully taxable
equivalent basis                    $       6,960    $  (11,343 )  $  (4,383 )   $       29,347    $  (34,136 )  $   (4,789 )

Net interest income for the third quarter of 2012 was $153.8 million, a $4.8 million decrease from the third quarter of 2011. On a tax equivalent (T/E) basis, net interest income totaled $159.9 million, down from $171.2 million in the second quarter of 2012 and down from $164.3 million in the same quarter last year. The decrease in net interest income compared to the previous quarter was mainly due to declines in rates earned on loans and investment securities. The decline from the same period last year was also due to lower yields, which were partly offset by lower rates paid on deposits and higher balances of loans and investment securities. The lower overall rate earned on investment securities was partly due to lower interest earned on the Company's holdings of U.S. Treasury inflation-protected securities (TIPS), which declined $2.8 million in the current quarter compared to the same quarter last year, and declined $7.4 million in the first nine months of 2012 compared to the same period last year. The Company's net interest rate margin was 3.30% for the third quarter of 2012, compared to 3.55% in the previous quarter and 3.51% in the third quarter of 2011.
Total interest income (T/E) decreased $7.2 million, or 4.1%, from the third quarter of 2011. Interest income on loans, including loans held for sale, declined $3.2 million due to a 29 basis point decrease in average rates earned, while average loan balances increased 3.5%. The higher balances contributed $3.9 million to interest income and occurred mainly in business, consumer and personal real estate loans. The overall average rate earned on total loans declined to 4.76% during the current quarter compared


Table of Contents

to 5.05% in the third quarter of 2011, which resulted in a $7.1 million decrease in interest income. Most of the rate impact occurred in business real estate, personal real estate, business and consumer loans. The average rate earned on business real estate loans decreased 35 basis points and was partly offset by higher average balances of $59.6 million, or 2.8%. The average yield on personal real estate loans declined 44 basis points, while the average balance increased $93.1 million, or 6.5%. Average business loans increased $203.4 million, or 7.2%, which was partly offset by a decline of 17 basis points in rates earned. Average consumer loans increased $100.6 million, while the average yield fell 66 basis points. Reflected in the increase in average consumer loan balances were higher auto and fixed-rate home equity loan balances of $185.6 million, offset by a decrease of $100.7 million in marine and RV loans as that portfolio continues to pay down (since the Company no longer originates these types of loans). Average consumer credit card loans decreased $5.1 million compared to the third quarter of 2011, while the average rate earned on these balances increased to 11.83% from 11.59%.
Interest income on investment securities (T/E) was $51.1 million during the third quarter of 2012 compared to $56.0 million during the same period last year, which was a decrease of $4.9 million. As mentioned above, this decline included a $2.8 million decrease in TIPS inflation interest, which decreased from $1.4 million in the third quarter of 2011 to ($1.4) million in the current quarter. The lower inflation interest in the current quarter was directly related to the lower Consumer Price Indices published in the current quarter, on which this interest is based. Also, lower average rates were earned on the remainder of the portfolio, especially in mortgage-backed and state and municipal securities, which saw declines of 33 and 31 basis points, respectively. The average balance of the total portfolio (excluding fair value adjustments) increased $654.9 million, or 7.9%, compared to the third quarter of 2011. This growth mainly occurred in state and municipal obligations and asset-backed securities, which increased by $202.4 million and $475.9 million, respectively. The effect of the higher average total portfolio balance was offset by a lower overall average yield, which declined to 2.29% compared to 2.69% during the third quarter of 2011. Since December 31, 2011, the period end portfolio balance (excluding fair value adjustments) has declined $293.6 million.
Interest income on long-term securities purchased under agreements to resell increased $1.0 million over the third quarter of 2011 due to an increase in the average rate earned of 48 basis points.
The average tax equivalent yield on total interest earning assets was 3.49% in the third quarter of 2012 compared to 3.77% in the third quarter of 2011. Total interest expense decreased $2.8 million, or 23.1%, compared to the third quarter of 2011, primarily due to a $2.7 million decrease in interest expense on interest bearing deposits. The decrease in interest expense on deposits resulted primarily from an 11 basis point decrease in average rates paid on money market accounts, coupled with a decrease of 8 basis points in average rates paid on certificates of deposit of less than $100,000. Total average interest bearing deposits increased slightly over the third quarter of 2011, as money market account balances increased $587.6 million, or 7.8%, and certificate of deposit balances declined $498.0 million, or 19.1%. The overall average rate incurred on all interest bearing liabilities decreased to .30% in the third quarter of 2012 compared to .40% in the third quarter of 2011.
Net interest income (T/E) for the first nine months of 2012 was $496.8 million compared to $501.6 million for the same period in 2011. For the first nine months of 2012, the net yield on total interest earning assets on a tax equivalent basis was 3.43% compared to 3.73% in the first nine months of 2011. The components of net interest income for the first nine months of 2012 compared to the same period in 2011 reflected trends similar to the quarterly discussion above.
Total interest income (T/E) for the first nine months of 2012 decreased $16.1 million from the same period last year primarily due to lower interest earned on loans and investment securities, partially offset by an increase in interest earned on securities purchased under agreements to resell. Loan interest income (T/E, including loans held for sale) declined $14.6 million due to a 21 basis point decrease in the average interest rate earned, coupled with a slight decline in loan balances. Similar to trends noted in the quarterly comparison, increases occurred in average business real estate, personal real estate, and consumer loan balances, while both construction and consumer credit card loans decreased. Average business loans, however, decreased slightly in the nine month period. Investment securities interest income (T/E) decreased $5.8 million and resulted from a decrease in average rates earned of 56 basis points, partly offset by an increase in average investment securities balances. As noted in the quarterly discussion above, the year over year decline in interest income was also mainly due to lower TIPS inflation interest of $7.4 million, which totaled $11.1 million in the first nine months of 2011 compared to $3.8 million in the first nine months of 2012. Average investment securities balances (excluding fair value adjustments) were $9.1 billion for the first nine months of 2012 compared to $7.7 billion for the same period in 2011, primarily due to increases of $734.7 million and $471.2 million, respectively, in average mortgage-backed and asset-backed securities. Interest income on long-term securities purchased under agreements to resell increased $4.5 million in the first nine months of 2012 compared to the prior period due to an increase of 50 basis points in the average rate earned.


Table of Contents

The decrease of $11.3 million in interest expense for the first nine months of 2012 compared to the same period in the prior year was due to a $10.2 million, or 28.3%, decrease in interest expense on interest bearing deposits. The decrease in interest expense on deposits primarily resulted from declines in average rates paid on all deposit types, which decreased 13 basis points overall. Interest expense on repurchase agreements also declined, as the average rate paid dropped 16 basis points. For the first nine months of 2012, the overall cost of total interest bearing liabilities decreased 14 basis points to .31% compared to .45% in the same period in the prior year.
Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.

Non-Interest Income
                                          Three Months Ended September 30            Nine Months Ended September 30
(Dollars in thousands)                     2012            2011      % change         2012           2011     % change
Bank card transaction fees            $     39,488    $     42,149     (6.3 )%   $    112,655    $  120,915     (6.8 )%
Trust fees                                  23,681          22,102      7.1            70,328        66,218      6.2
Deposit account charges and other
fees                                        19,873          21,939     (9.4 )          59,184        62,028     (4.6 )
Capital market fees                          5,110           5,556     (8.0 )          16,991        15,255     11.4
Consumer brokerage services                  2,441           2,333      4.6             7,543         7,876     (4.2 )
Loan fees and sales                          1,358           2,034    (33.2 )           4,625         5,933    (22.0 )
Other                                        8,971           5,519     62.5            24,995        20,657     21.0
Total non-interest income             $    100,922    $    101,632      (.7 )%   $    296,321    $  298,882      (.9 )%
Non-interest income as a % of total
revenue*                                      39.6 %          39.0 %                     38.2 %        38.2 %

* Total revenue includes net interest income and non-interest income.

For the third quarter of 2012, total non-interest income amounted to $100.9 million compared with $101.6 million in the same quarter last year, which was a decrease of $710 thousand, or .7%. Bank card fees for the quarter declined $2.7 million, or 6.3%, from the third quarter of last year, as a result of a decline in debit card interchange fees of $6.8 million, or 43.8% (mainly the effect of new pricing limitations effective in late 2011), which was partly offset by growth in corporate card fees of $3.3 million, or 21.8%. Corporate card and debit card fees for the current quarter totaled $18.5 million and $8.7 million, respectively. Merchant fees grew by 8.1% due to higher transaction volumes, and totaled $6.5 million for the quarter, while credit card fees grew 6.2% and totaled $5.8 million. Trust fees for the quarter increased $1.6 million, or 7.1%, over the same quarter last year, resulting mainly from growth in personal, institutional and corporate trust fees. Deposit account fees declined $2.1 million, or 9.4%, compared to last year as overdraft fees declined by $2.9 million, but were partly offset by growth in various other deposit fees of $759 thousand, or 29.2%. Capital market fees for the current quarter decreased $446 thousand, to $5.1 million, while consumer brokerage services revenue increased $108 thousand, or 4.6%. Loan fees and sales revenue was down $676 thousand, or 33.2%, from the same period last year mainly due to a decline in mortgage banking revenue (mainly because the Company is retaining first mortgage loan originations in the current year). Other non-interest income for the current quarter increased $3.5 million over the same quarter last year and included higher leasing revenue, letter of credit fees, and tax credit sales income. Also, in the third quarter of 2011, the Company wrote down the value of certain banking properties held for sale by $1.7 million.

Non-interest income for the first nine months of 2012 was $296.3 million compared to $298.9 million in the first nine months of 2011, resulting in a decrease of $2.6 million, or .9%. Bank card fees decreased $8.3 million, or 6.8%, as a result of a $19.7 million, or 43.3%, decline in debit card interchange fees, partly offset by growth in corporate card and merchant fees of 21.4% and 9.4%, respectively. Trust fee income increased $4.1 million, or 6.2%, as a result of growth in personal and institutional trust fees. Deposit account fees decreased $2.8 million, or 4.6%, mainly due to a decline in overdraft and return item fees of $5.4 million, while various other deposit fees increased $2.4 million. Capital market fees increased $1.7 million, or 11.4%, resulting from growth in sales of mainly fixed income securities to correspondent banks and other commercial customers. Consumer brokerage services revenue decreased by . . .

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