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CBSH > SEC Filings for CBSH > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for COMMERCE BANCSHARES INC /MO/

Form 10-Q for COMMERCE BANCSHARES INC /MO/


7-May-2014

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 2013 Annual Report on Form 10-K. Results of operations for the three month period ended March 31, 2014 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, changes in accounting and tax principles, estimates made on income taxes, failure of litigation settlement agreements to become final in accordance with their terms, and competition with other entities that offer financial services. For more discussion about each of these factors, see Part I Item 1A - "Risk Factors" in the Company's 2013 Annual Report on Form 10-K.

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 2013 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2013.


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Selected Financial Data
                                                       Three Months Ended March 31
                                                          2014             2013
Per Share Data
  Net income per common share - basic               $         .67     $         .64 *
  Net income per common share - diluted                       .67               .63 *
  Cash dividends                                             .225              .214 *
  Book value                                                23.75             22.87 *
  Market price                                              46.42             38.89 *
Selected Ratios
(Based on average balance sheets)
  Loans to deposits (1)                                     59.35 %           54.65 %
  Non-interest bearing deposits to total deposits           33.40             32.79
  Equity to loans (1)                                       20.36             22.00
  Equity to deposits                                        12.09             12.02
  Equity to total assets                                    10.06              9.92
  Return on total assets                                     1.16              1.13
  Return on total equity                                    11.56             11.38
(Based on end-of-period data)
  Non-interest income to revenue (2)                        40.14             39.92
  Efficiency ratio (3)                                      63.28             61.76
  Tier I risk-based capital ratio                           13.98             13.63
  Total risk-based capital ratio                            15.16             14.94
  Tangible common equity to assets ratio (4)                 9.36              9.26
  Tier I leverage ratio                                      9.41              8.92

* Restated for the 5% stock dividend distributed in December 2013.
(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. Other companies may define or calculate these measures differently. Non-GAAP measures should not be viewed as a substitute for, or superior to, data prepared in accordance with GAAP.

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.

                                                         March 31
(Dollars in thousands)                              2014           2013
Total equity                                   $  2,273,511   $  2,179,191
Less non-controlling interest                         3,132          4,046
Less goodwill                                       138,921        125,585
Less core deposit premium                             7,968          4,367
Total tangible common equity (a)               $  2,123,490   $  2,045,193
Total assets                                   $ 22,837,120   $ 22,227,208
Less goodwill                                       138,921        125,585
Less core deposit premium                             7,968          4,367
Total tangible assets (b)                      $ 22,690,231   $ 22,097,256
Tangible common equity to assets ratio (a)/(b)         9.36 %         9.26 %


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Results of Operations

Summary
                                                Three Months Ended March 31           Increase (Decrease)
(Dollars in thousands)                             2014              2013              Amount      % change
Net interest income                          $      153,066    $      150,343      $     2,723        1.8  %
Provision for loan losses                            (9,660 )          (3,285 )          6,375       N.M.
Non-interest income                                 102,627            99,877            2,750        2.8
Investment securities gains (losses), net            10,037            (2,165 )         12,202       N.M.
Non-interest expense                               (162,340 )        (155,037 )          7,303        4.7
Income taxes                                        (29,609 )         (28,925 )            684        2.4
Non-controlling interest income                         192               209              (17 )     (8.1 )
Net income attributable to Commerce
Bancshares, Inc.                             $       64,313    $       61,017      $     3,296        5.4  %

For the quarter ended March 31, 2014, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $64.3 million, an increase of $3.3 million, or 5.4%, compared to the first quarter of the previous year, and a decrease of $1.6 million, or 2.4%, compared to the previous quarter. For the current quarter, the annualized return on average assets was 1.16%, the annualized return on average equity was 11.56%, and the efficiency ratio was 63.28%. Diluted earnings per share was $.67, an increase of 6.3% compared to $.63 per share in the first quarter of 2013 and a decrease of 2.9% compared to $.69 per share in the previous quarter.

Compared to the first quarter of last year, net interest income increased $2.7 million, or 1.8%, mostly due to a $2.9 million increase in interest income on loans, along with a $1.5 million decrease in deposit interest expense. The increase in net interest income was partially offset by a $1.7 million decrease in interest on long-term securities purchased under agreements to resell. The provision for loan losses totaled $9.7 million for the current quarter, representing an increase of $6.4 million over the first quarter of 2013. Non-interest income increased $2.8 million, or 2.8%, due to continued growth in bank card and trust fee income. Non-interest expense for the first quarter increased $7.3 million, or 4.7%, compared to the same quarter last year, largely due to an increase of $3.4 million, or 3.7%, in salaries and benefits expense. Additionally, a litigation provision increased non-interest expense by $1.5 million in the first quarter of 2014. Net investment securities gains increased $12.2 million in the current quarter compared to the first quarter of last year, mainly due to increases in fair value adjustments of the private equity securities portfolio.

In September 2013, the Company acquired Summit Bancshares, Inc., an Oklahoma-based franchise with $261.6 million in assets and branch locations in Tulsa and Oklahoma City. The acquisition is further discussed in Note 2 to the consolidated financial statements.


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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, 2014 vs. 2013
                                                                        Change due to
                                                                  Average           Average
(In thousands)                                                    Volume             Rate             Total
Interest income, fully taxable equivalent basis:
Loans                                                        $       11,399    $       (8,037 )  $       3,362
Loans held for sale                                                     (85 )               -              (85 )
Investment securities:
 U.S. government and federal agency securities                         (144 )           2,818            2,674
 Government-sponsored enterprise obligations                          1,404              (380 )          1,024
 State and municipal obligations                                         25              (382 )           (357 )
 Mortgage-backed securities                                          (3,163 )           1,524           (1,639 )
 Asset-backed securities                                               (809 )            (256 )         (1,065 )
 Other securities                                                      (501 )            (192 )           (693 )
   Total interest on investment securities                           (3,188 )           3,132              (56 )
Short-term federal funds sold and securities purchased under
  agreements to resell                                                   17                 -               17
Long-term securities purchased under agreements to resell              (377 )          (1,301 )         (1,678 )
Interest earning deposits with banks                                     18                 5               23
Total interest income                                                 7,784            (6,201 )          1,583
Interest expense:
Deposits:
 Savings                                                                 14                 -               14
 Interest checking and money market                                      65              (697 )           (632 )
 Time open & C.D.'s of less than $100,000                              (142 )            (487 )           (629 )
 Time open & C.D.'s of $100,000 and over                                269              (516 )           (247 )
   Total interest on deposits                                           206            (1,700 )         (1,494 )
Federal funds purchased and securities sold under
  agreements to repurchase                                               (5 )             (10 )            (15 )
Other borrowings                                                         16                23               39
Total interest expense                                                  217            (1,687 )         (1,470 )
Net interest income, fully taxable equivalent basis          $        7,567    $       (4,514 )  $       3,053

Net interest income for the first quarter of 2014 was $153.1 million, a $2.7 million increase over the first quarter of 2013. On a tax equivalent (T/E) basis, net interest income totaled $159.8 million in the first quarter of 2014, down $2.4 million from the previous quarter and up $3.1 million over the first quarter of 2013. The decline in net interest income compared to the previous quarter was partly due to fewer days in the current quarter, coupled with lower rates earned on loans and a decrease in interest and dividends received on the Company's private equity investments. The Consumer price index published this quarter increased somewhat, which increased inflation interest on the Company's holdings of U.S. Treasury inflation-protected securities by $844 thousand compared to the previous quarter. Additionally, premium amortization expense was reduced by $539 thousand this quarter due to an adjustment reflecting slowing prepayment speeds on mortgage-backed securities. 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 3.03% in the first quarter of 2014, compared to 3.06% in the previous quarter and 3.07% in the first quarter of 2013.
Total interest income (T/E) increased $1.6 million over the first quarter of 2013. Interest income on loans increased $3.3 million due to a 12.2% increase in average loan balances, partly offset by a 37 basis point decrease in average rates earned. The higher balances contributed $11.3 million to interest income and occurred mainly in business, consumer and personal real estate loans.


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The overall average rate earned on total loans declined to 4.12% during the current quarter compared to 4.49% in the first quarter of 2013, which resulted in an $8.0 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, while average balances grew $92.8 million. The average yield on personal real estate loans declined 22 basis points, while the average balance increased $178.4 million, or 11.2%. Average business loans increased $686.8 million, or 21.8%, which was offset by a decline of 27 basis points in rates earned. Average consumer loans increased $190.3 million, or 14.2%, while the average yield fell 62 basis points. Most of the increase in consumer loan balances resulted from growth of $166.8 million in auto loans and $65.1 million in fixed-rate home equity loans. This growth was was partly offset by a decrease of $73.1 million in marine and RV loans, as that portfolio continues to pay down. Average consumer credit card loans increased $2.3 million compared to the first quarter of 2013 and the average rate earned on these balances increased to 11.43% from 11.38%.
Interest income on investment securities (T/E) was $49.8 million during the first quarter of 2014, which was a slight decrease in total from the first quarter of last year. A $498.3 million decline in total average balances (excluding fair value adjustments) reduced interest income by $3.2 million, while a 12 basis point rise in the overall average rate earned contributed $3.1 million. The overall average rate earned was 2.24% in the current quarter compared to 2.12% during the first quarter of 2013. This rate increase included a $2.5 million increase in inflation interest on inflation-protected securities. Also, higher average rates were earned on mortgage-backed securities, which rose 21 basis points. This increase was partly due to a $539 thousand reduction in premium amortization expense in the current quarter, as mentioned above. The decline in total average balances occurred mainly in mortgage-backed and asset-backed securities, which declined $495.2 million and $352.7 million, respectively, and was partly offset by growth of $306.1 million in government-sponsored enterprise obligations.
Interest income on long-term securities purchased under agreements to resell decreased $1.7 million from the first quarter of 2013, mainly due to a decline of 48 basis points in average rates earned.
The average tax equivalent yield on total interest earning assets was 3.16% in the first quarter of 2014 compared to 3.23% in the first quarter of 2013. Total interest expense decreased $1.5 million, or 17.5%, compared to the first quarter of 2013, mainly due to lower interest expense on interest bearing deposits. The decrease in interest expense on deposits resulted primarily from declines of 4 basis points in average rates paid on money market accounts and 13 basis points on certificates of deposit. Total average interest bearing deposits increased $287.0 million, or 2.4%, over the first quarter of 2013, as money market account balances increased $294.4 million, while certificate of deposit balances decreased $90.2 million (mainly in certificates of deposit under $100,000). The overall average rate incurred on all interest bearing liabilities decreased to .20% in the first quarter of 2014 compared to .25% in the first quarter of 2013.
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)                                    2014             2013             Amount      % change
Bank card transaction fees                         $        41,717    $      38,550      $    3,167        8.2  %
Trust fees                                                  26,573           25,169           1,404        5.6
Deposit account charges and other fees                      18,590           18,712            (122 )      (.7 )
Capital market fees                                          3,870            4,391            (521 )    (11.9 )
Consumer brokerage services                                  2,747            2,686              61        2.3
Loan fees and sales                                          1,209            1,473            (264 )    (17.9 )
Other                                                        7,921            8,896            (975 )    (11.0 )
Total non-interest income                          $       102,627    $      99,877      $    2,750        2.8  %
Non-interest income as a % of total revenue*                  40.1 %           39.9 %

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


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For the first quarter of 2014, total non-interest income amounted to $102.6 million compared with $99.9 million in the same quarter last year, which was an increase of $2.8 million, or 2.8%. Bank card fees for the current quarter increased $3.2 million, or 8.2%, over the first quarter of last year, as a result of a 12.8% increase in corporate card fees, which totaled $21.1 million this quarter. Debit card fees also grew by 5.8% and totaled $8.7 million this quarter. Trust fees for the quarter increased $1.4 million, or 5.6%, over the same quarter last year, resulting mainly from growth in personal (up 6.3%) and institutional (up 5.7%) trust fees. Deposit account fees decreased slightly compared to last year as overdraft fees declined by $718 thousand, or 9.7%, but were offset by combined growth in corporate cash management and other deposit fees of $596 thousand. Capital market fees decreased $521 thousand (totaling $3.9 million in the current quarter) as customer demand for fixed income securities was down from the previous year. Loan fees and sales revenue declined $264 thousand mainly due to lower loan commitment fees. Other income decreased $975 thousand from the same quarter last year due to a reduction in fair value of $688 thousand on certain bank-owned properties held for sale, in addition to net gains of $809 thousand related to branch facilities that were recorded in the first quarter of 2013. Growth of swap fee income and higher revenue from sales of tax credits partially offset the reductions to other non-interest income.

Investment Securities Gains (Losses), Net

                                                   Three Months Ended March 31
(In thousands)                                        2014              2013
Available for sale:
U.S. government bonds                           $       (5,197 )  $            -
OTTI losses on non-agency mortgage-backed bonds           (346 )            (442 )
Non-marketable:
Private equity investments                              15,580            (1,723 )
Total investment securities gains (losses), net $       10,037    $       (2,165 )

Net gains and losses on investment securities which were recognized in earnings during the three months ended March 31, 2014 and 2013 are shown in the table above. Net securities gains amounted to $10.0 million in the first quarter of 2014, while net securities losses of $2.2 million were recorded in the first quarter of 2013. Included in these net 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 $66.1 million at March 31, 2014. During the current quarter, additional credit-related impairment losses of $346 thousand were recorded. The cumulative credit-related impairment loss initially recorded on these securities amounted to $13.2 million at March 31, 2014. Also shown above 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. Most of the net gains in 2014 resulted from fair value adjustments to the investments in this portfolio and included a large gain of $18.4 million on one investment the Company has held for many years. The portion of the private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in income of $333 thousand and $350 thousand during the first three months of 2014 and 2013, respectively. During 2014, the Company also sold $36.2 million of U.S. Treasury inflation-protected bonds, realizing a loss of $5.2 million.

Non-Interest Expense
                                               Three Months Ended March 31        Increase (Decrease)
(Dollars in thousands)                              2014           2013            Amount      % change
Salaries and employee benefits                $        94,263   $  90,881      $     3,382        3.7  %
Net occupancy                                          11,616      11,235              381        3.4
Equipment                                               4,504       4,683             (179 )     (3.8 )
Supplies and communication                              5,699       5,589              110        2.0
Data processing and software                           19,087      18,951              136         .7
Marketing                                               3,681       3,359              322        9.6
Deposit insurance                                       2,894       2,767              127        4.6
Other                                                  20,596      17,572            3,024       17.2
Total non-interest expense                    $       162,340   $ 155,037      $     7,303        4.7  %

Non-interest expense for the first quarter of 2014 amounted to $162.3 million, an increase of $7.3 million, or 4.7%, compared with $155.0 million in the first quarter of last year. Salaries and benefits expense increased $3.4 million, or 3.7%, mainly due to


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an increase in full-time salary costs of $2.3 million, or 3.8%, and an increase in medical costs of $546 thousand, partly offset by lower retirement plan expenses. Growth in salaries and benefits expense resulted from added staffing mainly in the areas of commercial banking, wealth and commercial card, coupled with higher staffing costs of $863 thousand related to the Summit acquisition that were not present in the first quarter of 2013. Full-time equivalent employees totaled 4,745 at March 31, 2014 compared to 4,725 at March 31, 2013. Compared to the first quarter of last year, occupancy expense grew $381 thousand, or 3.4%, on higher utilities and snow removal costs, while marketing costs grew $322 thousand, or 9.6%, due to lower spending levels last year. Data processing and software costs grew by $136 thousand, or .7%, mainly due to lower software expense, partly offset by higher bank card transaction processing costs. Other non-interest expense increased $3.0 million compared to the first quarter of last year, and included a litigation provision of $1.5 million and write downs of $720 thousand on certain surplus branch properties. The current quarter included operating expenses related to Summit totaling $432 thousand (excluding salaries and benefits) which were not present in the same quarter last year. In the first quarter of 2013, the Company recorded a provision of $1.0 million on a letter of credit exposure.

Provision and Allowance for Loan Losses

                                                 Three Months Ended
. . .
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