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

Show all filings for COMMERCE BANCSHARES INC /MO/

Form 10-Q for COMMERCE BANCSHARES INC /MO/


6-Aug-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 and six month periods ended June 30, 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 June 30         Six Months Ended June 30
                                                             2013            2012              2013           2012
Per Share Data
  Net income per common share - basic                  $        .72     $        .77      $      1.39    $      1.47
  Net income per common share - diluted                         .72              .76             1.39           1.46
  Cash dividends                                               .225             .219             .450           .438
  Book value                                                                                    23.23          24.26
  Market price                                                                                  43.55          36.10
Selected Ratios
(Based on average balance sheets)
  Loans to deposits (1)                                       56.68 %          55.26 %          55.66 %        55.39 %
  Non-interest bearing deposits to total deposits             32.30            32.29            32.55          31.61
  Equity to loans (1)                                         21.60            24.04            21.80          23.95
  Equity to deposits                                          12.24            13.28            12.13          13.27
  Equity to total assets                                       9.97            10.82             9.95          10.78
  Return on total assets                                       1.20             1.38             1.17           1.34
  Return on total equity                                      12.07            12.80            11.73          12.42
(Based on end-of-period data)
  Non-interest income to revenue (2)                          39.17            37.91            39.53          37.56
  Efficiency ratio (3)                                        59.73            58.53            60.72          58.72
  Tier I risk-based capital ratio                                                               13.58          14.80
  Total risk-based capital ratio                                                                14.85          16.13
  Tangible common equity to assets ratio (4)                                                     9.06          10.16
  Tier I leverage ratio                                                                          9.08           9.73

(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 June 30           Six Months Ended June 30
(Dollars in thousands)                  2013        2012     % change       2013        2012     % change
Net interest income                 $  159,458   $ 165,105     (3.4 )%   $ 309,801   $ 324,842     (4.6 )%
Provision for loan losses               (7,379 )    (5,215 )   41.5        (10,664 )   (13,380 )  (20.3 )
Non-interest income                    102,676     100,816      1.8        202,553     195,399      3.7
Investment securities gains
(losses), net                           (1,568 )     1,336     N.M.         (3,733 )     5,376     N.M.
Non-interest expense                  (156,966 )  (156,340 )     .4       (312,003 )  (306,801 )    1.7
Income taxes                           (30,182 )   (34,466 )  (12.4 )      (59,107 )   (67,386 )  (12.3 )
Non-controlling interest expense          (234 )      (503 )  (53.5 )          (25 )    (1,518 )  (98.4 )
Net income attributable to Commerce
Bancshares, Inc.                    $   65,805   $  70,733     (7.0 )%   $ 126,822   $ 136,532     (7.1 )%

For the quarter ended June 30, 2013, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $65.8 million, a decrease of $4.9 million, or 7.0%, compared to the second quarter of the previous year, and an increase of $4.8 million, or 7.8%, compared to the previous quarter. For the current quarter, the annualized return on average assets was 1.20%, the annualized return on average equity was 12.07%, and the efficiency ratio was 59.73%. Diluted earnings per share was $.72, a decrease of 5.3% compared to $.76 per share in the second quarter of 2012, and an increase of 7.5% compared to $.67 in the previous quarter.

Compared to the second quarter of last year, net interest income decreased $5.6 million, or 3.4%, partly due to a decrease of $4.3 million in interest on investment securities (mainly in mortgage-backed securities). This decline was partly offset by the reclassification of $2.6 million of interest received on the sale of a private equity investment which had been previously recorded as securities gains. Interest income on loans decreased $4.2 million (mainly in business and business real estate loans). These declines in interest income were partly offset by a decrease of $1.8 million in interest expense on deposits. The provision for loan losses totaled $7.4 million for the current quarter, representing an increase of $2.2 million, or 41.5%, over the second quarter of 2012. Non-interest income increased $1.9 million, or 1.8%, due to continued growth in bank card and trust fee income, while non-interest expense remained flat. Net investment securities losses for the second quarter of 2013 amounted to $1.6 million compared to net gains of $1.3 million during the second quarter of last year. The current quarter losses included the previously mentioned reclassification, partly offset by a gain of $1.4 million resulting from the donation of appreciated securities.

Net income for the first six months of 2013 was $126.8 million, a decrease of $9.7 million, or 7.1%, from the same period last year. Diluted earnings per share was $1.39, a decrease of 4.8% compared to $1.46 per share in the same period last year. For the first six months of 2013, the annualized return on average assets was 1.17%, the annualized return on average equity was 11.73%, and the efficiency ratio was 60.72%. Net interest income declined $15.0 million, or 4.6%, from the same period last year due to lower earnings on the loan and investment securities portfolios of $8.2 million and $13.1 million, respectively. These declines in income were partially offset by an increase of $2.8 million in interest income on long-term resell agreements and a decline of $3.5 million in deposit interest expense. The provision for loan losses was $10.7 million for the first six months of 2013, down $2.7 million from the same period last year. Non-interest income increased by $7.2 million, or 3.7%, over the same period as last year due to continued growth bank card and trust fee income. Non-interest expense increased by $5.2 million due to increases in salaries and employee benefits expense and data processing and software costs. Net investment securities losses were $3.7 million in the first six months of 2013 compared to net securities gains of $5.4 million in the first six months of 2012. The higher losses were largely due to lower gains in fair value on private equity securities and the interest reclassification mentioned above, partly offset by the securities donation gain.


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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 June 30, 2013 vs. 2012             Six Months Ended June 30, 2013 vs. 2012
                                                   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                                   $      10,631    $       (14,752 )  $      (4,121 )   $     19,008    $      (27,050 )  $       (8,042 )
Loans held for sale                                 -                  3                3              (28 )              11               (17 )
Investment securities:
 U.S. government and federal agency
securities                                      1,311             (2,404 )         (1,093 )          1,674            (5,050 )          (3,376 )
 Government-sponsored enterprise
obligations                                       891               (347 )            544            1,804              (530 )           1,274
 State and municipal obligations                3,124             (1,651 )          1,473            6,613            (3,273 )           3,340
 Mortgage-backed securities                    (5,315 )             (913 )         (6,228 )        (10,074 )          (3,349 )         (13,423 )
 Asset-backed securities                          843             (1,684 )           (841 )          2,104            (3,579 )          (1,475 )
 Other securities                                 624              1,483            2,107              954               256             1,210
   Total interest on investment
securities                                      1,478             (5,516 )         (4,038 )          3,075           (15,525 )         (12,450 )
Short-term federal funds sold and
securities purchased under
  agreements to resell                              2                 (3 )             (1 )             (5 )              (4 )              (9 )
Long-term securities purchased under
agreements to resell                            1,894               (666 )          1,228            3,533              (751 )           2,782
Interest earning deposits with banks              (33 )               (4 )            (37 )             (3 )             (12 )             (15 )
Total interest income                          13,972            (20,938 )         (6,966 )         25,580           (43,331 )         (17,751 )
Interest expense:
Deposits:
 Savings                                           17                (24 )             (7 )             38               (71 )             (33 )
 Interest checking and money market               273             (1,525 )         (1,252 )            759            (3,142 )          (2,383 )
 Time open & C.D.'s of less than
$100,000                                         (127 )             (221 )           (348 )           (272 )            (433 )            (705 )
 Time open & C.D.'s of $100,000 and
over                                              105               (266 )           (161 )            (22 )            (351 )            (373 )
   Total interest on deposits                     268             (2,036 )         (1,768 )            503            (3,997 )          (3,494 )
Federal funds purchased and securities
sold under
  agreements to repurchase                        155                (62 )             93              108               (22 )              86
Other borrowings                                   41                (88 )            (47 )             61              (202 )            (141 )
Total interest expense                            464             (2,186 )         (1,722 )            672            (4,221 )          (3,549 )
Net interest income, fully taxable
equivalent basis                        $      13,508    $       (18,752 )  $      (5,244 )   $     24,908    $      (39,110 )  $      (14,202 )

Net interest income for the second quarter of 2013 was $159.5 million, a $5.6 million decline from the second quarter of 2012. On a tax equivalent (T/E) basis, net interest income totaled $165.9 million in the second quarter of 2013, up $9.2 million over the previous quarter and down $5.2 million from the second quarter of 2012. The decline from the same period last year was mainly the result of lower yields on loans and investment securities in the current quarter, which were partly offset by lower rates paid on deposits and higher loan balances. The Company's net interest rate margin was 3.21% in the second quarter of 2013, compared to 3.07% in the previous quarter and 3.55% in the second quarter of 2012.
Total interest income (T/E) decreased $7.0 million, or 3.9%, from the second quarter of 2012. Interest income on loans, including loans held for sale, declined $4.1 million due to a 61 basis point decrease in average rates earned, while average loan balances increased 9.5%. The higher balances contributed $10.6 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 4.34% during the current quarter compared to 4.95% in the second quarter of 2012, which resulted in a $14.8 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 51 basis points, with a minor increase in average balances. The average yield on personal real estate loans declined 49 basis points, while the average balance increased $189.1 million, or 12.8%. Average business loans increased $358.4 million,


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or 12.4%, which was offset by a decline of 51 basis points in rates earned. Average consumer loans increased $296.0 million, while the average yield fell 104 basis points. Most of the increase in consumer loan balances resulted from higher auto and fixed-rate home equity loans, which were partly offset by a decrease of $84.5 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 $29.1 million compared to the second quarter of 2012, while the average rate earned on these balances decreased to 11.20% from 11.87%.
Interest income on investment securities (T/E) was $58.2 million during the second quarter of 2013 compared to $62.2 million during the same period last year, which was a decrease of $4.0 million. This decline included a $1.1 million decrease 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. Also, lower average rates were earned on the remainder of the available for sale portfolio, especially in state and municipal and asset-backed securities with rate declines of 42 and 22 basis points, respectively. These declines were partly offset by the recognition of $2.6 million in interest income upon the sale of a private equity investment
(classified as non-marketable in the accompanying consolidated balance sheet)
which had been recorded in previous periods as securities gains. The average balance of the total portfolio (excluding fair value adjustments) increased $163.8 million, or 1.8%, compared to the second quarter of 2012. This growth mainly occurred in state and municipal obligations. asset-backed securities, and government sponsored obligations, which increased by $311.2 million, $299.3 million and $173.5 million, respectively, while the average balance of mortgage-backed securities declined $737.7 million. The effect of the higher average total portfolio balance was offset by a lower overall average yield, which declined to 2.52% compared to 2.75% during the second quarter of 2012. Interest income on long-term securities purchased under agreements to resell increased $1.2 million over the second quarter of 2012. This increase included $265 thousand of interest on collateral swaps, which are discussed in Note 12 to the consolidated financial statements. The remainder of the increase was due to higher average balances of other resell agreements, which increased$350.0 million, or 41.2%.
The average tax equivalent yield on total interest earning assets was 3.36% in the second quarter of 2013 compared to 3.75% in the second quarter of 2012. Total interest expense decreased $1.7 million, or 18.1%, compared to the second quarter of 2012, mainly due to a $1.8 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 money market accounts and 12 basis point in rates paid on certificates of deposit. Total average interest bearing deposits increased $757.3 million, or 6.7%, over the second quarter of 2012, as money market account balances increased $490.0 million, or 6.1%, and certificate of deposit balances increased $138.1 million, or 5.8% (mainly in short-term jumbo certificates of deposit. The overall average rate incurred on all interest bearing liabilities decreased to .23% in the second quarter of 2013 compared to .30% in the second quarter of 2012. Net interest income (T/E) for the first six months of 2013 was $322.7 million compared to $336.9 million for the same period in 2012. For the first six months of 2013, the net yield on total interest earning assets on a tax equivalent basis was 3.14% compared to 3.50% in the first six months of 2012. Total interest income (T/E) for the first six months of 2013 decreased $17.8 million from the same period last year, due to lower loan and investment securities yields offset by lower rates paid on deposits and higher loan balances. Loan interest income (T/E) fell $8.1 million overall due to 53 basis point decrease in the average rate earned, partly offset by a $770.8 million, or 8.3%, increase in total average loan balances. Investment securities interest income (T/E) fell $12.5 million overall due to a 34 basis point decline in the average yield (including a decline of $3.1 million in TIPS income), offset by an increase in average balances of $277.1 million, or 3.0%. In addition, income on long-term resell agreements rose $2.8 million over the prior period, largely due to higher average balances and higher collateral swap income included in this category.
Total interest expense for the first six months of 2013 declined $3.5 million compared to last year, largely due to lower rates paid on interest bearing deposits. Interest expense on money market accounts decreased $2.4 million (mainly due to a decline of 7 basis points in rates paid), while interest expense on certificates of deposits declined $1.1 million (due to a decline of 9 basis points). The overall cost of total interest bearing liabilities decreased to .24% compared to .31% 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.


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Non-Interest Income
Three Months Ended June 30 Six Months Ended June 30 (Dollars in thousands) 2013 2012 % change 2013 2012 % change Bank card transaction fees $ 40,700 $ 38,434 5.9 % $ 79,250 $ 73,167 8.3 % Trust fees 25,734 23,833 8.0 50,903 46,647 9.1 Deposit account charges and other
fees 19,602 19,975 (1.9 ) 38,314 39,311 (2.5 ) Capital market fees 3,305 5,010 (34.0 ) 7,696 11,881 (35.2 ) Consumer brokerage services 2,853 2,576 10.8 5,539 5,102 8.6 Loan fees and sales 1,314 1,706 (23.0 ) 2,787 3,267 (14.7 ) Other 9,168 9,282 (1.2 ) 18,064 16,024 12.7 Total non-interest income $ 102,676 $ 100,816 1.8 % $ 202,553 $ 195,399 3.7 % Non-interest income as a % of total
revenue* 39.2 % 37.9 % 39.5 % 37.6 %

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

For the second quarter of 2013, total non-interest income amounted to $102.7 million compared with $100.8 million in the same quarter last year, which was an increase of $1.9 million, or 1.8%. Bank card fees for the quarter increased $2.3 million, or 5.9%, over the second quarter of last year, as a result of an 8.6% increase in corporate card fees, which totaled $19.3 million this quarter. Credit card fees also grew by 5.8% and totaled $5.9 million this quarter, while debit card fees grew 3.2% and totaled $9.0 million. Trust fees for the quarter increased $1.9 million, or 8.0%, over the same quarter last year, resulting mainly from growth in personal (up 9.3%) and institutional (up 7.9%) trust fees. Deposit account fees declined $373 thousand, or 1.9%, compared to last year as overdraft fees declined by $1.2 million, but were partly offset by combined growth in corporate cash management fees and other deposit fees of $847 thousand, or 7.5%. Capital market fees for the current quarter decreased $1.7 million, to $3.3 million, as demand from correspondent banks and other customers slowed later in the second quarter of 2013. Consumer brokerage services revenue increased $277 thousand, or 10.8%, while loan fees and sales revenue was down $392 thousand, or 23.0%.

Non-interest income for the first six months of 2013 was $202.6 million compared to $195.4 million in the first six months of 2012, resulting in an increase of $7.2 million, or 3.7%. Bank card fees increased $6.1 million, or 8.3%, as a result of growth in corporate card fees of $4.6 million, or 13.7%. In addition, higher transaction volumes resulted in growth of 6.9% in merchant fees, while credit card fees increased by 5.7%. Trust fee income increased $4.3 million, or 9.1%, as a result of growth in both personal and institutional trust fees. Deposit account fees decreased $997 thousand, or 2.5%, mainly due to a decline in overdraft and return item fees of $2.2 million. This decline was mainly the result of a new posting routine on debit transactions which took effect in February. The change is currently expected to reduce overdraft fees by $3.3 million to $5.5 million on an annualized basis, which is a lower impact than originally estimated. Helping to offset this effect was an increase in various other deposit fees and cash management fees of $1.2 million. Capital market fees decreased $4.2 million, or 35.2%, and were impacted by rising rates and loan demand at correspondent banks. Consumer brokerage services revenue increased by $437 thousand, or 8.6%, mainly due to growth in advisory fees, partly offset by lower fixed annuity fees. Loan fees and sales decreased $480 thousand, or 14.7%, due to declines in student loan sales gains and loan commitment fees. Other non-interest income increased by $2.0 million, or 12.7%, 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 declines in the current period in tax credit sales income and lease syndication revenue.

Investment Securities Gains (Losses), Net

Net gains and losses on investment securities which were recognized in earnings during the three months and six months ended June 30, 2013 and 2012 are shown in the table below. Net securities losses amounted to $1.6 million in the second quarter of 2013, while net securities losses of $3.7 million were recorded in the first six months of 2013. Included in these net 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 $86.2 million at June 30, 2013. During the current quarter, additional credit-related impairment losses of $488 thousand were recorded, bringing the total credit-related impairment losses for the first six months of 2013 to $930 thousand. The cumulative credit-related impairment loss initially recorded on these securities amounted to $12.5 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 . . .

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