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CBSH > SEC Filings for CBSH > Form 10-Q on 6-May-2013All Recent SEC Filings

Show all filings for COMMERCE BANCSHARES INC /MO/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COMMERCE BANCSHARES INC /MO/


6-May-2013

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 2012 Annual Report on Form 10-K. Results of operations for the three month period ended March 31, 2013 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 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 2012 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2012.


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Selected Financial Data
                                                       Three Months Ended March 31
                                                          2013             2012
Per Share Data
  Net income per common share - basic               $         .67     $         .70
  Net income per common share - diluted                       .67               .70
  Cash dividends                                             .225              .219
  Book value                                                24.02             23.64
  Market price                                              40.83             38.59
Selected Ratios
(Based on average balance sheets)
  Loans to deposits (1)                                     54.65 %           55.53 %
  Non-interest bearing deposits to total deposits           32.79             30.93
  Equity to loans (1)                                       22.00             23.86
  Equity to deposits                                        12.02             13.25
  Equity to total assets                                     9.92             10.74
  Return on total assets                                     1.13              1.29
  Return on total equity                                    11.38             12.04
(Based on end-of-period data)
  Non-interest income to revenue (2)                        39.92             37.19
  Efficiency ratio (3)                                      61.76             58.91
  Tier I risk-based capital ratio                           13.63             14.85
  Total risk-based capital ratio                            14.94             16.19
  Tangible common equity to assets ratio (4)                 9.26             10.12
  Tier I leverage ratio                                      8.92              9.70

(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).


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Results of Operations

Summary
                                                Three Months Ended March 31           Increase (Decrease)
(Dollars in thousands)                             2013              2012              Amount      Percent
Net interest income                          $      150,343    $      159,737      $    (9,394 )     (5.9 )%
Provision for loan losses                            (3,285 )          (8,165 )         (4,880 )    (59.8 )
Non-interest income                                  99,877            94,583            5,294        5.6
Investment securities gains (losses), net            (2,165 )           4,040           (6,205 )     N.M
Non-interest expense                               (155,037 )        (150,461 )          4,576        3.0
Income taxes                                        (28,925 )         (32,920 )         (3,995 )    (12.1 )
Non-controlling interest income (expense)               209            (1,015 )         (1,224 )     N.M
Net income attributable to Commerce
Bancshares, Inc.                             $       61,017    $       65,799      $    (4,782 )     (7.3 )%

For the quarter ended March 31, 2013, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $61.0 million, a decrease of $4.8 million, or 7.3%, compared to the first quarter of the previous year, and a decrease of $5.8 million compared to the previous quarter. For the current quarter, the annualized return on average assets was 1.13%, the annualized return on average equity was 11.38%, and the efficiency ratio was 61.76%. Diluted earnings per share was $.67, a decrease of 4.3% compared to $.70 per share in the first quarter of 2012.

Compared to the first quarter of last year, net interest income decreased $9.4 million, or 5.9%, mainly due to a decrease of $8.8 million in interest on investment securities, coupled with a decrease of $4.0 million in interest and fees on loans. These declines were partly offset by a decrease of $1.7 million in interest expense on deposits. Non-interest income increased $5.3 million, or 5.6%, due to continued growth in bank card and trust fee income, and non-interest expense grew $4.6 million, or 3.0%, largely due to increases in data processing costs and salaries and benefits expense. Investment securities losses for the first quarter of 2013 amounted to $2.2 million compared to gains of $4.0 million during the first quarter of last year. The losses during the first quarter of 2013 related mainly to fair value adjustments on private equity investments. The provision for loan losses totaled $3.3 million for the current quarter, representing a decrease of $4.9 million, or 59.8%, from the first quarter of 2012.


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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 March 31, 2013 vs. 2012
                                                                        Change due to
                                                                  Average           Average
(In thousands)                                                    Volume              Rate             Total
Interest income, fully taxable equivalent basis:
Loans                                                        $        8,348    $       (12,269 )  $       (3,921 )
Loans held for sale                                                     (26 )                6               (20 )
Investment securities:
 U.S. government and federal agency securities                          360             (2,643 )          (2,283 )
 Government-sponsored enterprise obligations                            917               (187 )             730
 State and municipal obligations                                      3,493             (1,626 )           1,867
 Mortgage-backed securities                                          (4,755 )           (2,440 )          (7,195 )
 Asset-backed securities                                              1,273             (1,907 )            (634 )
 Other securities                                                       364             (1,261 )            (897 )
   Total interest on investment securities                            1,652            (10,064 )          (8,412 )
Short-term federal funds sold and securities purchased under
  agreements to resell                                                   (6 )               (2 )              (8 )
Long-term securities purchased under agreements to resell             1,635                (81 )           1,554
Interest earning deposits with banks                                     26                 (4 )              22
Total interest income                                                11,629            (22,414 )         (10,785 )
Interest expense:
Deposits:
 Savings                                                                 20                (46 )             (26 )
 Interest checking and money market                                     493             (1,624 )          (1,131 )
 Time open & C.D.'s of less than $100,000                              (145 )             (212 )            (357 )
 Time open & C.D.'s of $100,000 and over                               (121 )              (91 )            (212 )
   Total interest on deposits                                           247             (1,973 )          (1,726 )
Federal funds purchased and securities sold under
  agreements to repurchase                                              (17 )               10                (7 )
Other borrowings                                                         21               (115 )             (94 )
Total interest expense                                                  251             (2,078 )          (1,827 )
Net interest income, fully taxable equivalent basis          $       11,378    $       (20,336 )  $       (8,958 )

Net interest income for the first quarter of 2013 was $150.3 million, compared to $159.7 million in the first quarter of 2012 and $161.3 million in the fourth quarter of 2012. On a tax equivalent (T/E) basis, net interest income totaled $156.7 million, a decline of $11.7 million from the fourth quarter of 2012 and a decline of $9.0 million from the same quarter last year. These declines were due to lower yields in the current quarter, which were partly offset by lower rates paid on deposits and higher balances of loans and investment securities. The lower rate earned on investment securities was partly due to declines in inflation interest on the Company's inflation-protected securities (TIPS) as a result of the lower Consumer Price Indices published this quarter, on which this interest is based. Current quarter inflation interest declined $4.8 million from the previous quarter and $2.0 million from the same quarter last year. Also, in the previous quarter the Company received a special dividend on a private equity investment totaling $2.2 million, and premium amortization was lowered by $1.7 million due to a slowing of prepayment speeds on mortgage-backed securities. The Company's net interest rate margin was 3.07% for the first quarter of 2013, compared to 3.35% in the previous quarter and 3.45% in the first quarter of 2012.
Total interest income (T/E) decreased $10.8 million, or 6.1%, from the first quarter of 2012. Interest income on loans, including loans held for sale, declined $3.9 million due to a 45 basis point decrease in average rates earned, while average loan balances increased 7.2%. The higher balances contributed $8.3 million to interest income and occurred mainly in business, consumer and


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personal real estate loans. The overall average rate earned on total loans declined to 4.49% during the current quarter compared to 4.94% in the first quarter of 2012, which resulted in a $12.3 million decrease in interest income. Most of the rate impact occurred in business, consumer, business real estate and personal real estate loans. The average rate earned on business real estate loans decreased 40 basis points and was partly offset by higher average balances of $45.6 million, or 2.1%. The average yield on personal real estate loans declined 50 basis points, while the average balance increased $158.6 million, or 11.0%. Average business loans increased $262.6 million, or 9.1%, which was offset by a decline of 35 basis points in rates earned. Average consumer loans increased $235.3 million, while the average yield fell 90 basis points. Reflected in the increase in average consumer loan balances were higher auto and fixed-rate home equity loan balances of $378.3 million, partly offset by a decrease of $89.3 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 increased $24.1 million compared to the first quarter of 2012, while the average rate earned on these balances decreased to 11.38% from 11.78%.
Interest income on investment securities (T/E) was $49.9 million during the first quarter of 2013 compared to $58.3 million during the same period last year, which was a decrease of $8.4 million. As mentioned above, this decline included a $2.0 million decrease in TIPS inflation interest, which decreased from $341 thousand in the first quarter of 2012 to ($1.7) million in the current quarter. Also, lower average rates were earned on the remainder of the portfolio, with rate declines in state and municipal, mortgage-backed, and asset-backed securities of 38, 26 and 23 basis points, respectively. The average balance of the total portfolio (excluding fair value adjustments) increased $391.8 million, or 4.3%, compared to the first quarter of 2012. This growth mainly occurred in state and municipal obligations and asset-backed securities, which increased by $339.8 million and $445.0 million, respectively, while the average balance of mortgage-backed securities declined $676.6 million. The effect of the higher average total portfolio balance was offset by a lower overall average yield, which declined to 2.12% compared to 2.56% during the first quarter of 2012.
Interest income on long-term securities purchased under agreements to resell increased $1.6 million over the first quarter of 2012. This increase included $669 thousand of interest on collateral swaps, which are discussed in Note 11 to the consolidated financial statements. The remainder of the increase was due to higher average balances of $328.3 million, or 38.6%.
The average tax equivalent yield on total interest earning assets was 3.23% in the first quarter of 2013 compared to 3.66% in the first quarter of 2012. Total interest expense decreased $1.8 million, or 17.9%, compared to the first quarter of 2012, mainly due to a $1.7 million decrease in interest expense on interest bearing deposits. The decrease in interest expense on deposits resulted primarily from declines of 7 basis points in average rates paid on both money market accounts and certificates of deposit of less than $100,000. Total average interest bearing deposits increased $689.5 million, or 6.0%, over the first quarter of 2012, as money market account balances increased $792.2 million, or 9.9%, while certificate of deposit balances declined $194.5 million, or 7.5%. The overall average rate incurred on all interest bearing liabilities decreased to .25% in the first quarter of 2013 compared to .32% in the first quarter of 2012.
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 March 31           Increase (Decrease)
(Dollars in thousands)                             2013              2012              Amount      Percent
Bank card transaction fees                   $       38,550    $       34,733       $    3,817       11.0  %
Trust fees                                           25,169            22,814            2,355       10.3
Deposit account charges and other fees               18,712            19,336             (624 )     (3.2 )
Capital market fees                                   4,391             6,871           (2,480 )    (36.1 )
Consumer brokerage services                           2,686             2,526              160        6.3
Loan fees and sales                                   1,473             1,561              (88 )     (5.6 )
Other                                                 8,896             6,742            2,154       31.9
Total non-interest income                    $       99,877    $       94,583       $    5,294        5.6  %
Non-interest income as a % of total revenue*           39.9 %            37.2 %

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


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For the first quarter of 2013, total non-interest income amounted to $99.9 million compared with $94.6 million in the same quarter last year, which was an increase of $5.3 million, or 5.6%. Bank card fees for the quarter increased $3.8 million, or 11.0%, over the first quarter of last year, as a result of a 19.4% increase in corporate card fees, which totaled $18.7 million this quarter. Merchant fees grew by 12.2% due to higher transaction volumes, and totaled $6.3 million for the quarter, while credit card fees grew 5.5% and totaled $5.3 million. Trust fees for the quarter increased $2.4 million, or 10.3%, over the same quarter last year, resulting mainly from growth in personal (up 12.0%) and institutional (up 11.1%) trust fees. Deposit account fees declined $624 thousand, or 3.2%, compared to last year as overdraft fees declined by $958 thousand, but were partly offset by growth in various other deposit fees of $310 thousand, or 10.4%. A new debit posting routine mandated by a previously disclosed legal settlement took effect in late February 2013 and had the effect of reducing overdraft income by approximately $500 thousand this quarter. Capital market fees for the current quarter decreased $2.5 million, to $4.4 million, as fees were very strong last year and more recently have been affected by low interest rates, reducing customer demand. Consumer brokerage services revenue increased $160 thousand, or 6.3%, while loan fees and sales revenue was down $88 thousand, or 5.6%. Other non-interest income for the current quarter increased $2.2 million over the same quarter last year as a result of a $3.0 million fair value loss recorded last year on an office building which was held for sale, partly offset by a decline in tax credit sales income.

Investment Securities Gains (Losses), Net

Net gains and losses on investment securities which were recognized in earnings during the three months ended March 31, 2013 and 2012 are shown in the table below. Net securities losses amounted to $2.2 million in the first quarter of 2013, while net securities gains of $4.0 million were recorded in the first quarter of 2012. Included in these gains and losses are credit-related impairment losses on certain non-agency guaranteed mortgage-backed securities which have been identified as other-than-temporarily impaired. These identified securities had a total fair value of $96.4 million at March 31, 2013. During the current quarter, additional credit-related impairment losses of $442 thousand were recorded. The cumulative credit-related impairment loss initially recorded on these securities amounted to $12.0 million. Also shown below are net gains and losses relating to non-marketable private equity investments, which are primarily held by the Parent's majority-owned private equity subsidiaries. These include fair value adjustments, in addition to gains and losses realized upon disposition. The portion of this activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income, and resulted in income of $350 thousand during the first three months of 2013 and expense of $817 thousand during the same period last year.

                                                  Three Months Ended March 31
(In thousands)                                        2013             2012
Available for sale:
Agency mortgage-backed bonds                    $            -    $        342
OTTI losses on non-agency mortgage-backed bonds           (442 )          (320 )
Non-marketable:
Private equity investments                              (1,723 )         4,018
Total investment securities gains (losses), net $       (2,165 )  $      4,040



Non-Interest Expense
                                              Three Months Ended March 31        Increase (Decrease)
(Dollars in thousands)                             2013           2012           Amount       Percent
Salaries and employee benefits               $        90,881   $  89,543      $    1,338         1.5  %
Net occupancy                                         11,235      11,260             (25 )       (.2 )
Equipment                                              4,683       5,189            (506 )      (9.8 )
Supplies and communication                             5,589       5,613             (24 )       (.4 )
Data processing and software                          18,951      17,469           1,482         8.5
Marketing                                              3,359       3,822            (463 )     (12.1 )
Deposit insurance                                      2,767       2,520             247         9.8
Other                                                 17,572      15,045           2,527        16.8
Total non-interest expense                   $       155,037   $ 150,461      $    4,576         3.0  %

Non-interest expense for the first quarter of 2013 amounted to $155.0 million, an increase of $4.6 million, or 3.0%, compared with $150.5 million in the first quarter of last year. Salaries and benefits expense increased $1.3 million, or 1.5%, mainly due to an increase in salary costs of $2.0 million, or 3.3%, partly offset by lower incentives and medical costs. Full-time equivalent employees totaled 4,725 at March 31, 2013 compared to 4,713 at March 31, 2012. Equipment expense declined $506 thousand


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due to lower depreciation expense, while a reduction in marketing expenditures resulted in a decline of $463 thousand in expense. Data processing and software costs increased $1.5 million, or 8.5%, partly due to higher variable processing costs related to commercial card revenues. Occupancy, supplies and communications, and deposit insurance expense changed only slightly, with a combined increase of $198 thousand. Other non-interest expense increased $2.5 million, or 16.8%, over the same quarter last year. This increase mainly resulted from a provision of $1.0 million on a letter of credit exposure, in addition to a card network agreement incentive of $1.1 million received last year. Other increases in non-interest expense occurred in professional fees, examination costs, and travel and entertainment expense, which were partly offset by a decline in expense on foreclosed real estate.

Provision and Allowance for Loan Losses

                                                  Three Months Ended
(In thousands)                      Mar. 31, 2013   Dec. 31, 2012   Mar. 31, 2012
Provision for loan losses          $       3,285   $       8,326   $         8,165
Net loan charge-offs (recoveries):
 Business                                    (50 )           791               110
 Real estate-construction and land          (532 )          (517 )             220
 Real estate-business                       (104 )         1,799             1,495
 Consumer credit card                      6,048           6,095             6,173
 Consumer                                  1,709           1,731             2,631
 Revolving home equity                       139             187               360
 Real estate-personal                        373             411                69
 Overdrafts                                  202             329               107
Total net loan charge-offs         $       7,785   $      10,826   $        11,165



                                                                       Three Months Ended
                                                          Mar. 31, 2013   Dec. 31, 2012   Mar. 31, 2012
Annualized net loan charge-offs (recoveries)*:
 Business                                                      (.01 )%          .10  %           .02 %
 Real estate-construction and land                             (.61 )          (.60 )            .23
 Real estate-business                                          (.02 )           .33              .28
 Consumer credit card                                          3.25            3.24             3.40
 Consumer                                                       .52             .54              .96
 Revolving home equity                                          .13             .17              .32
 Real estate-personal                                           .09             .10              .02
 Overdrafts                                                   15.15           22.15             5.67
Total annualized net loan charge-offs                           .32  %          .45  %           .49 %

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

The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of a specific allowance component . . .

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