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CBSH > SEC Filings for CBSH > Form 10-Q on 7-Nov-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/


7-Nov-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 nine month periods ended September 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           Nine Months Ended
                                                              September 30                September 30
                                                            2013         2012            2013        2012
Per Share Data
  Net income per common share - basic                  $     .75      $     .71      $   2.14     $   2.18
  Net income per common share - diluted                      .75            .72          2.14         2.18
  Cash dividends                                            .225           .219          .675         .657
  Book value                                                                            23.90        25.08
  Market price                                                                          43.81        38.41
Selected Ratios
(Based on average balance sheets)
  Loans to deposits (1)                                    58.33 %        56.89 %       56.56 %      55.89 %
  Non-interest bearing deposits to total deposits          32.77          33.30         32.62        32.18
  Equity to loans (1)                                      20.41          24.00         21.32        23.97
  Equity to deposits                                       11.91          13.65         12.06        13.40
  Equity to total assets                                    9.90          11.06          9.93        10.88
  Return on total assets                                    1.26           1.28          1.20         1.32
  Return on total equity                                   12.69          11.57         12.05        12.13
(Based on end-of-period data)
  Non-interest income to revenue (2)                       40.73          39.62         39.94        38.24
  Efficiency ratio (3)                                     59.72          59.99         60.38        59.14
  Tier I risk-based capital ratio                                                       13.65        14.92
  Total risk-based capital ratio                                                        14.89        16.25
  Tangible common equity to assets ratio (4)                                             9.10        10.47
  Tier I leverage ratio                                                                  9.43        10.00

(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 to assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity is a non-GAAP measure and represents common equity less goodwill, core deposit premium and non-controlling interest in subsidiaries. Tangible assets, also a non-GAAP measure, represents total assets less goodwill and core deposit premium.

The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.

                                                       September 30
(Dollars in thousands)                              2013           2012
Total equity                                   $  2,181,486   $  2,307,072
Less non-controlling interest                         3,953          4,636
Less goodwill                                       138,676        125,585
Less core deposit premium                             8,422          5,289
Total tangible common equity (a)               $  2,030,435   $  2,171,562
Total assets                                   $ 22,452,297   $ 20,878,769
Less goodwill                                       138,676        125,585
Less core deposit premium                             8,422          5,289
Total tangible assets (b)                      $ 22,305,199   $ 20,747,895
Tangible common equity to assets ratio (a)/(b)         9.10 %        10.47 %


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Results of Operations

Summary
                                        Three Months Ended September 30            Nine Months Ended September 30
(Dollars in thousands)                   2013            2012      % change         2013           2012     % change
Net interest income                 $    154,706    $    153,811       .6  %   $    464,507    $  478,653     (3.0 )%
Provision for loan losses                 (4,146 )        (5,581 )  (25.7 )         (14,810 )     (18,961 )  (21.9 )
Non-interest income                      106,311         100,922      5.3           308,864       296,321      4.2
Investment securities gains
(losses), net                                650           3,180    (79.6 )          (3,083 )       8,556     N.M.
Non-interest expense                    (156,312 )      (153,391 )    1.9          (468,315 )    (460,192 )    1.8
Income taxes                             (32,764 )       (32,155 )    1.9           (91,871 )     (99,541 )   (7.7 )
Non-controlling interest expense            (221 )          (780 )  (71.7 )            (246 )      (2,298 )  (89.3 )
Net income attributable to Commerce
Bancshares, Inc.                    $     68,224    $     66,006      3.4  %   $    195,046    $  202,538     (3.7 )%

For the quarter ended September 30, 2013, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $68.2 million, an increase of $2.2 million, or 3.4%, compared to the third quarter of the previous year, and an increase of $2.4 million, or 3.7%, compared to the previous quarter. For the current quarter, the annualized return on average assets was 1.26%, the annualized return on average equity was 12.69%, and the efficiency ratio was 59.72%. Diluted earnings per share was $.75, an increase of 4.2% compared to $.72 per share in both the third quarter of 2012 and the previous quarter.

Compared to the third quarter of last year, net interest income increased $895 thousand, or .6%, mostly due to a $1.9 million decrease in deposit interest expense. This decline in interest expense was partially offset by a decrease of $1.1 million in interest income on loans. The provision for loan losses totaled $4.1 million for the current quarter, representing a decrease of $1.4 million, or 25.7% from the third quarter of 2012. Non-interest income increased $5.4 million, or 5.3%, due to continued growth in bank card and trust fee income. Non-interest expense for the third quarter increased $2.9 million, or 1.9%, compared to the same quarter last year, largely due to an increase of $2.1 million, or 2.4%, in salaries and benefits expense. Net investment securities gains decreased $2.5 million, or 79.6%, in the current quarter compared to the third quarter last year. The decrease in investment securities gains reflects lower gains recorded in the Company's private equity securities portfolio during the current quarter compared to the previous period.

Net income for the first nine months of 2013 was $195.0 million, a decrease of $7.5 million, or 3.7%, from the same period last year. Diluted earnings per share was $2.14, a decrease of 1.8% compared to $2.18 per share in the same period last year. For the first nine months of 2013, the annualized return on average assets was 1.20%, the annualized return on average equity was 12.05% and the efficiency ratio was 60.38%. Net interest income decreased $14.1 million, or 3.0%, from the same period last year due to lower earnings on the loan and investment securities portfolios of $9.2 million and $13.3 million, respectively. These declines were partially offset by an increase of $3.0 million in interest income on long-term resell agreements and a decline of $5.4 million in deposit interest expense. The provision for loan losses was $14.8 million for the first nine months of 2013, down $4.2 million, or 21.9%, from the same period last year. Non-interest income increased $12.5 million, or 4.2%, over the first nine months of last year largely due to continued growth in both bank card and trust fee income. Non-interest expense increased $8.1 million, or 1.8%, due to increases in salaries and benefits expense and data processing and software costs. Net investment securities losses totaled $3.1 million in the first nine months of 2013 compared to net investment securities gains of $8.6 million in the first nine months of 2012. The increase in losses occurred in the private equity securities portfolio, and resulted mainly from lower gains in fair value. In addition, a $2.6 million loss was recorded in the previous quarter, resulting from an interest recovery upon the sale of a private equity investment.

As mentioned in Note 2 to the consolidated financial statements, the Company acquired Summit Bancshares Inc. (Summit) on September 1, 2013. Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma.


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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 September 30, 2013 vs.      Nine Months Ended September 30, 2013 vs.
                                                           2012                                          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                                   $  11,488    $  (12,417 )  $        (929 )   $       30,533    $  (39,504 )  $   (8,971 )
Loans held for sale                           (85 )           -              (85 )             (111 )           9          (102 )
Investment securities:
 U.S. government and federal agency
securities                                    (13 )       3,150            3,137              1,687        (1,926 )        (239 )
 Government-sponsored enterprise
obligations                                   627           106              733              2,410          (403 )       2,007
 State and municipal obligations            2,134        (1,378 )            756              8,707        (4,611 )       4,096
 Mortgage-backed securities                (4,882 )       1,874           (3,008 )          (15,000 )      (1,431 )     (16,431 )
 Asset-backed securities                      336        (1,691 )         (1,355 )            2,431        (5,261 )      (2,830 )
 Other securities                             573          (851 )           (278 )            1,521          (589 )         932
   Total interest on investment
securities                                 (1,225 )       1,210              (15 )            1,756       (14,221 )     (12,465 )
Short-term federal funds sold and
securities purchased under
  agreements to resell                         15            (4 )             11                 11            (9 )           2
Long-term securities purchased under
agreements to resell                        1,878        (1,696 )            182              5,415        (2,451 )       2,964
Interest earning deposits with banks           17            14               31                 19            (3 )          16
Total interest income                      12,088       (12,893 )           (805 )           37,623       (56,179 )     (18,556 )
Interest expense:
Deposits:
 Savings                                       18           (20 )             (2 )               55           (90 )         (35 )
 Interest checking and money market           266        (1,385 )         (1,119 )            1,026        (4,528 )      (3,502 )
 Time open & C.D.'s of less than
$100,000                                     (138 )        (427 )           (565 )             (413 )        (857 )      (1,270 )
 Time open & C.D.'s of $100,000 and
over                                          304          (512 )           (208 )              247          (828 )        (581 )
   Total interest on deposits                 450        (2,344 )         (1,894 )              915        (6,303 )      (5,388 )
Federal funds purchased and securities
sold under
  agreements to repurchase                      7           (62 )            (55 )              133          (102 )          31
Other borrowings                               88           (84 )              4                148          (285 )        (137 )
Total interest expense                        545        (2,490 )         (1,945 )            1,196        (6,690 )      (5,494 )
Net interest income, fully taxable
equivalent basis                        $  11,543    $  (10,403 )  $       1,140     $       36,427    $  (49,489 )  $  (13,062 )

Net interest income for the third quarter of 2013 was $154.7 million, an $895 thousand increase over the third quarter of 2012. On a tax equivalent (T/E) basis, net interest income totaled $161.1 million in the third quarter of 2013, down $4.9 million from the previous quarter and up $1.1 million over the third quarter of 2012. The decline in net interest income compared to the previous quarter resulted mainly from a $1.9 million decrease in inflation interest, coupled with the recognition last quarter of $2.6 million of interest income related to the sale of a private equity investment (as mentioned above). The increase over the same period last year was mainly the result of lower rates paid on deposits and higher loan balances, partly offset by lower loan yields. The Company's net interest rate margin was 3.11% in the third quarter of 2013, compared to 3.21% in the previous quarter and 3.30% in the third quarter of 2012.
Total interest income (T/E) decreased $805 thousand from the third quarter of 2012. Interest income on loans declined $929 thousand due to a 50 basis point decrease in average rates earned, while average loan balances increased 10.6%. The higher balances contributed $11.5 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 4.26% during the current quarter compared to 4.76% in the third quarter of 2012, which resulted in a $12.4 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 27 basis points,


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while average balances grew $74.0 million. The average yield on personal real estate loans declined 48 basis points, while the average balance increased $206.3 million, or 13.5%. Average business loans increased $396.6 million, or 13.1%, which was offset by a decline of 43 basis points in rates earned. Average consumer loans increased $267.2 million, or 22.2%, while the average yield fell 101 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 $81.0 million in marine and RV loans as that portfolio continues to pay down. Average consumer credit card loans increased $22.9 million compared to the third quarter of 2012, while the average rate earned on these balances decreased to 11.33% from 11.83%.
Interest income on investment securities (T/E) was $51.1 million during the third quarter of 2013, which was unchanged in total from the third quarter of last year. A $130.3 million decline in total average balances reduced interest income by $1.2 million, while a slight rise in the overall average rate earned contributed $1.2 million. The overall average rate earned was 2.31% in the current quarter compared to 2.29% during the third quarter of 2012. This rate increase included a $3.1 million increase in inflation interest on the Company's inflation-protected securities (TIPS) as a result of higher Consumer Price Indices published this quarter, on which this interest is based. Also, higher average rates were earned on mortgage-backed securities, which rose 24 basis points. This increase was largely due to a $2.0 million reduction in premium amortization expense in the current quarter, which reflected slowing prepayment speeds resulting from an increase in interest rates. The decline in total average balances (excluding fair value adjustments) occurred mainly in mortgage-backed securities, which declined $739.2 million, and was partly offset by growth of $217.5 million in state and municipal obligations and $150.8 million in government-sponsored enterprise obligations.
The average tax equivalent yield on total interest earning assets was 3.25% in the third quarter of 2013 compared to 3.49% in the third quarter of 2012. Total interest expense decreased $1.9 million, or 20.7%, compared to the third quarter of 2012, mainly due to lower interest expense on interest bearing deposits. The decrease in interest expense on deposits resulted primarily from declines of 6 basis points in average rates paid on money market accounts and 22 basis points in rates paid on certificates of deposit. Total average interest bearing deposits increased $958.7 million, or 8.6%, over the third quarter of 2012, as money market account balances increased $508.6 million, or 6.3%, and certificate of deposit balances increased $347.1 million, or 16.5% (mainly in short-term jumbo certificates of deposit). The overall average rate incurred on all interest bearing liabilities decreased to .22% in the third quarter of 2013 compared to .30% in the third quarter of 2012.
Net interest income (T/E) for the first nine months of 2013 was $483.7 million compared to $496.8 million for the same period in 2012. For the first nine months of 2013, the net yield on total interest earning assets on a tax equivalent basis was 3.13% compared to 3.43% in the first nine months of 2012. Total interest income (T/E) for the first nine months of 2013 decreased $18.6 million from the same period last year, due to lower loan and investment securities yields, partly offset by higher loan balances. Loan interest income (T/E) fell $9.0 million overall due to a 52 basis point decrease in the average rate earned, partly offset by an $850.7 million, or 9.2%, increase in total average loan balances. Investment securities interest income (T/E) fell $12.5 million overall due to a 21 basis point decline in the average yield, occurring primarily in asset-backed securities, which fell 22 basis points, and state and municipal obligations, which fell 37 basis points. This effect was partly offset by an increase in total average balances of $139.5 million, or 1.5%. In addition, income on long-term resell agreements rose $3.0 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 nine months of 2013 declined $5.5 million compared to last year, largely due to lower rates paid on interest bearing deposits. Interest expense on money market accounts decreased $3.5 million (mainly due to a decline of 7 basis points in rates paid), while interest expense on certificates of deposits declined $1.9 million (due to a decline of 12 basis points). The overall cost of total interest bearing liabilities decreased to .23% 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 September 30 Nine Months Ended September 30 (Dollars in thousands) 2013 2012 % change 2013 2012 % change Bank card transaction fees $ 43,891 $ 39,488 11.2 % $ 123,141 $ 112,655 9.3 % Trust fees 25,318 23,681 6.9 76,221 70,328 8.4 Deposit account charges and other
fees 20,197 19,873 1.6 58,511 59,184 (1.1 ) Capital market fees 3,242 5,110 (36.6 ) 10,938 16,991 (35.6 ) Consumer brokerage services 2,871 2,441 17.6 8,410 7,543 11.5 Loan fees and sales 1,553 1,358 14.4 4,340 4,625 (6.2 ) Other 9,239 8,971 3.0 27,303 24,995 9.2 Total non-interest income $ 106,311 $ 100,922 5.3 % $ 308,864 $ 296,321 4.2 % Non-interest income as a % of total
revenue* 40.7 % 39.6 % 39.9 % 38.2 %

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

For the third quarter of 2013, total non-interest income amounted to $106.3 million compared with $100.9 million in the same quarter last year, which was an increase of $5.4 million, or 5.3%. Bank card fees for the quarter increased $4.4 million, or 11.2%, over the third quarter of last year, as a result of an 18.2% increase in corporate card fees, which totaled $21.8 million this quarter. Debit card fees also grew by 7.0% and totaled $9.3 million this quarter, while credit card fees grew 4.7% and totaled $6.1 million. Trust fees for the quarter increased $1.6 million, or 6.9%, over the same quarter last year, resulting mainly from growth in personal (up 8.9%) and institutional (up 4.8%) trust fees. Deposit account fees increased $324 thousand, or 1.6%, compared to last year as corporate cash management and other deposit fees had combined growth of $985 thousand, or 8.9%, while overdraft fees declined by $661 thousand. Capital market fees decreased $1.9 million, and totaled $3.2 million in the current quarter, as customer demand for fixed income securities was down from the previous year. Consumer brokerage services revenue increased $430 thousand, or 17.6%, while fees related to interest rate swap sales and foreign exchange activities grew by a combined $1.1 million.

Non-interest income for the first nine months of 2013 was $308.9 million compared to $296.3 million in the first nine months of 2012, resulting in an increase of $12.5 million, or 4.2%. Bank card fees increased $10.5 million, or 9.3%, as a result of growth in corporate card fees of $7.9 million, or 15.3%. In addition, higher transaction volumes resulted in growth of 5.3% in merchant fees, while credit card fees also increased by 5.3%. Trust fee income increased $5.9 million, or 8.4%, as a result of growth in both personal and institutional trust fees. Deposit account fees decreased $673 thousand, or 1.1%, mainly due to a decline in overdraft and return item fees of $2.8 million. This decline was mainly the result of a new posting routine on debit card transactions which took effect in February 2013. Partly offsetting this effect was an increase in various other deposit fees and cash management fees of $2.2 million. Capital market fees decreased $6.1 million, or 35.6%, and were impacted by rising rates and loan demand at correspondent banks. Consumer brokerage services revenue increased by $867 thousand, or 11.5%, mainly due to growth in advisory fees, while loan fees and sales decreased $285 thousand, or 6.2%, due to a decline in loan commitment fees. Other non-interest income increased by $2.3 million, or 9.2%, as a result of a $3.0 million fair value loss recorded last year on an office building which was held for sale. In addition, higher swap and foreign exchange fees were recorded in the current quarter, which were partly offset set by a decline in tax credit sales income.

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