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CBSH > SEC Filings for CBSH > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for COMMERCE BANCSHARES INC /MO/

Form 10-Q for COMMERCE BANCSHARES INC /MO/


5-Aug-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 and six month periods ended June 30, 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 June 30        Six Months Ended June 30
                                                          2014            2013             2014           2013
Per Share Data
  Net income per common share - basic               $        .70     $        .69 *   $      1.37    $      1.33 *
  Net income per common share - diluted                      .70              .69 *          1.37           1.32 *
  Cash dividends                                            .225             .214 *          .450           .429 *
  Book value                                                                                24.69          22.13 *
  Market price                                                                              46.50          41.48 *
Selected Ratios
(Based on average balance sheets)
  Loans to deposits (1)                                    59.71 %          56.68 %         59.53 %        55.66 %
  Non-interest bearing deposits to total deposits          33.13            32.30           33.26          32.55
  Equity to loans (1)                                      20.33            21.60           20.34          21.80
  Equity to deposits                                       12.14            12.24           12.11          12.13
  Equity to total assets                                   10.10             9.97           10.08           9.95
  Return on total assets                                    1.18             1.20            1.17           1.17
  Return on total equity                                   11.69            12.07           11.62          11.73
  Return on common equity                                  11.79            12.07           11.67          11.73
(Based on end-of-period data)
  Non-interest income to revenue (2)                       40.39            39.17           40.27          39.53
  Efficiency ratio (3)                                     60.30            59.73           61.75          60.72
  Tier I risk-based capital ratio                                                           13.39          13.58
  Total risk-based capital ratio                                                            14.58          14.85
  Tangible common equity to assets ratio (4)                                                 8.61           9.06
  Tier I leverage ratio                                                                      9.12           9.08

* 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.

                                                          June 30
(Dollars in thousands)                              2014           2013
Total equity                                   $  2,262,153   $  2,106,787
Less non-controlling interest                         2,378          3,960
Less preferred stock                                144,816              -
Less goodwill                                       138,921        125,585
Less core deposit premium                             7,456          3,915
Total tangible common equity (a)               $  1,968,582   $  1,973,327
Total assets                                   $ 23,005,179   $ 21,910,351
Less goodwill                                       138,921        125,585
Less core deposit premium                             7,456          3,915
Total tangible assets (b)                      $ 22,858,802   $ 21,780,851
Tangible common equity to assets ratio (a)/(b)         8.61 %         9.06 %


Table of contents

Results of Operations

Summary
                                          Three Months Ended June 30             Six Months Ended June 30
(Dollars in thousands)                    2014         2013     % change        2014        2013     % change
Net interest income                  $   160,493    $ 159,458        .6 %   $  313,559   $ 309,801       1.2 %
Provision for loan losses                 (7,555 )     (7,379 )     2.4        (17,215 )   (10,664 )    61.4
Non-interest income                      108,763      102,676       5.9        211,390     202,553       4.4
Investment securities gains
(losses), net                             (2,558 )     (1,568 )    63.1          7,479      (3,733 )     N.M
Non-interest expense                    (162,931 )   (156,966 )     3.8       (325,271 )  (312,003 )     4.3
Income taxes                             (30,312 )    (30,182 )      .4        (59,921 )   (59,107 )     1.4
Non-controlling interest expense             631         (234 )     N.M            823         (25 )     N.M
Net income attributable to Commerce
Bancshares, Inc.                          66,531       65,805       1.1        130,844     126,822       3.2
Less preferred stock dividends                 -            -         -              -           -         -
Net income available to common
shareholders                         $    66,531    $  65,805       1.1 %   $  130,844   $ 126,822       3.2 %

For the quarter ended June 30, 2014, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $66.5 million, an increase of $726 thousand, or 1.1%, compared to the second quarter of the previous year, and an increase of $2.2 million, or 3.4%, compared to the previous quarter. For the current quarter, the annualized return on average assets was 1.18%, the annualized return on total average equity was 11.69%, and the efficiency ratio was 60.30%. Diluted earnings per common share was $.70, an increase of 1.4% compared to $.69 per share in the second quarter of 2013 and an increase of 4.5% compared to $.67 per share in the previous quarter.

Compared to the second quarter of last year, net interest income increased $1.0 million, or .6%, mainly due to a $3.4 million increase in interest income on loans and a $762 thousand decline in deposit expense, partially offset by a $2.9 million decrease in interest income on long-term securities purchased under agreements to resell. The provision for loan losses totaled $7.6 million for the current quarter, representing an increase of $176 thousand over the second quarter of 2013. Non-interest income increased $6.1 million, or 5.9%, due to higher bank card and trust fee income. Non-interest expense for the second quarter increased $6.0 million, or 3.8%, compared to the second quarter of 2013, mainly due to increases in salaries and employee benefits. Net investment securities losses were $2.6 million in the current quarter, due mainly to fair value losses in the private equity securities portfolio, compared to net losses of $1.6 million in the same quarter last year.

Net income for the first six months of 2014 was $130.8 million, an increase of $4.0 million, or 3.2%, over the same period last year. Diluted earnings per common share was $1.37, an increase of 3.8% compared to $1.32 per share in the same period last year. For the first six months of 2014, the annualized return on average assets was 1.17%, the annualized return on total average equity was 11.62% and the efficiency ratio was 61.75%. Net interest income increased $3.8 million, or 1.2%, over the same period last year. This increase followed similar trends as noted above for the quarter, as growth of $6.2 million in loan interest and a decline of $2.3 million in deposit expense were partly offset by lower income of $4.5 million on long term securities purchased under agreements to resell. The provision for loan losses was $17.2 million for the first six months of 2014, up $6.6 million, or 61.4%, over the same period last year. Non-interest income increased $8.8 million, or 4.4%, over the first six months of last year largely due to continued growth in both bank card and trust fee income. Non-interest expense increased $13.3 million, or 4.3%, with salaries and benefits expense contributing $8.7 million of the increase. Net investment securities gains totaled $7.5 million in the first six months of 2014 compared to net investment securities losses of $3.7 million in the first six months of 2013. The increase in investment securities gains was mainly due to activity in 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 June 30, 2014 vs. 2013             Six Months Ended June 30, 2014 vs. 2013
                                                   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                                   $       10,048    $       (6,157 )  $      3,891     $      21,392    $       (14,139 )  $      7,253
Loans held for sale                                (91 )               -             (91 )            (176 )                -            (176 )
Investment securities:
 U.S. government and federal agency
securities                                       1,205             1,725           2,930             1,100              4,504           5,604
 Government-sponsored enterprise
obligations                                      1,520              (165 )         1,355             2,932               (553 )         2,379
 State and municipal obligations                   280              (824 )          (544 )             311             (1,212 )          (901 )
 Mortgage-backed securities                     (1,327 )            (634 )        (1,961 )          (4,556 )              956          (3,600 )
 Asset-backed securities                          (770 )            (172 )          (942 )          (1,578 )             (429 )        (2,007 )
 Other securities                                 (662 )             106            (556 )          (1,176 )              (73 )        (1,249 )
   Total interest on investment
securities                                         246                36             282            (2,967 )            3,193             226
Short-term federal funds sold and
securities purchased under
  agreements to resell                               1                (5 )            (4 )              18                 (5 )            13
Long-term securities purchased under
agreements to resell                            (1,119 )          (1,748 )        (2,867 )          (1,506 )           (3,039 )        (4,545 )
Interest earning deposits with banks                16                (3 )            13                34                  2              36
Total interest income                            9,101            (7,877 )         1,224            16,795            (13,988 )         2,807
Interest expense:
Deposits:
 Savings                                            12                24              36                25                 25              50
 Interest checking and money market                153              (206 )           (53 )             222               (907 )          (685 )
 Time open & C.D.'s of less than
$100,000                                          (144 )            (449 )          (593 )            (286 )             (936 )        (1,222 )
 Time open & C.D.'s of $100,000 and
over                                               215              (367 )          (152 )             479               (878 )          (399 )
   Total interest on deposits                      236              (998 )          (762 )             440             (2,696 )        (2,256 )
Federal funds purchased and securities
sold under
  agreements to repurchase                        (105 )              98              (7 )            (117 )               95             (22 )
Other borrowings                                   108               (62 )            46               199               (114 )            85
Total interest expense                             239              (962 )          (723 )             522             (2,715 )        (2,193 )
Net interest income, fully taxable
equivalent basis                        $        8,862    $       (6,915 )  $      1,947     $      16,273    $       (11,273 )  $      5,000

Net interest income for the second quarter of 2014 was $160.5 million, a $1.0 million increase over the second quarter of 2013. On a tax equivalent (T/E) basis, net interest income totaled $167.9 million in the second quarter of 2014, up $8.1 million over the previous quarter and up $1.9 million over the second quarter of 2013. The increase in net interest income compared to the same quarter last year was mainly due to higher loan volume, partly offset by lower rates earned on loans. 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 (TIPS) by $2.8 million compared to the same quarter last year. Additionally, premium amortization expense was reduced by $218 thousand this quarter due to an adjustment reflecting slowing prepayment speeds on mortgage-backed securities. Interest and dividends related to sales of private equity investments totaled $1.9 million in the second quarter of 2014 and $2.6 million in the second quarter of 2013. The increase in net interest income compared to the first quarter of 2014 was mainly the result of higher rates earned on investment securities (mainly TIPS inflation interest and private equity dividends), coupled with higher average balances in both loans and securities. The Company's net interest rate margin was 3.13% in the second quarter of 2014, compared to 3.03% in the first quarter of 2014 and 3.21% in the second quarter of 2013.
Total interest income (T/E) increased $1.2 million over the second quarter of 2013. Interest income on loans increased $3.9 million due to an 11.0% increase in average loan balances, partly offset by a 29 basis point decrease in average rates earned. The


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higher balances contributed $10.0 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 4.05% during the current quarter compared to 4.34% in the second quarter of 2013, which resulted in a $6.2 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 28 basis points, while average balances grew $76.0 million. The average yield on personal real estate loans declined 17 basis points, while the average balance increased $125.7 million, or 7.5%. Average business loans increased $688.0 million, or 21.1%, which was offset by a decline of 22 basis points in rates earned. Average consumer loans increased $171.3 million, or 12.0%, while the average yield fell 45 basis points. Most of the increase in consumer loan balances resulted from growth of $165.7 million in auto loans and $39.7 million in fixed-rate home equity loans. This growth was partly offset by a decrease of $69.2 million in marine and RV loans, as that portfolio continues to pay down. Average consumer credit card loans increased $4.7 million compared to the second quarter of 2013, and the average rate earned on these balances increased to 11.42% from 11.20%.
Interest income on investment securities (T/E) was $58.5 million during the second quarter of 2014, which was a $282 thousand increase over the second quarter of last year. Total average balances (excluding fair value adjustments) declined $106.5 million compared to the same quarter last year. Mortgage and asset-backed securities decreased $531.4 million, which was partly offset by growth in government sponsored enterprise obligations (up $350.5 million), TIPS (up $93.9 million) and municipal obligations (up $31.1 million). The overall average rate earned was 2.56% in the current quarter compared to 2.52% during the second quarter of 2013. This rate increase included a $2.8 million increase in inflation interest on TIPS.
Interest income on long-term securities purchased under agreements to resell decreased $2.9 million from the second quarter of 2013, due to declines in both volumes and average rates earned.
The average tax equivalent yield on total interest earning assets was 3.26% in the second quarter of 2014 compared to 3.36% in the second quarter of 2013. Total interest expense decreased $723 thousand compared to the second quarter of 2013, mainly due to lower rates paid on interest bearing deposits. The decrease in interest expense on deposits resulted primarily from a 10 basis point decline in the average rate paid on certificates of deposit, coupled with a slight decline in money market deposit rates. Total average interest bearing deposits increased $487.7 million, or 4.0%, over the second quarter of 2013, as money market account balances increased $521.1 million, while certificate of deposit balances decreased $113.1 million. The overall average rate incurred on all interest bearing liabilities decreased to .20% in the second quarter of 2014 compared to .23% in the second quarter of 2013.
Net interest income (T/E) for the first six months of 2014 was $327.7 million compared to $322.7 million for the same period in 2013. For the first six months of 2014, the net interest rate margin was 3.08% compared to 3.14% for the first six months of 2013.
Total interest income (T/E) for the first six months of 2014 increased $2.8 million over the same period last year, due to higher loan balances, partly offset by lower rates earned on loans. Loan interest income (T/E) rose $7.3 million due to a $1.2 billion, or 11.7%, increase in total average loan balances, partly offset by a 33 basis point decline in the average rate earned. In addition, interest income on investment securities (T/E) increased slightly as average rates rose 8 basis points (including an increase of $5.2 million in TIPS interest), partly offset by a 3.2% decline in average balances. Interest income on long-term resell agreements fell $4.5 million due to declines in both average balances and rates earned.
Total interest expense for the first six months of 2014 declined $2.2 million compared to last year, mainly due to lower rates paid on interest bearing deposits. Interest expense on certificates of deposit declined $1.6 million, resulting mainly from a decline of 11 basis points in the average rate paid. In addition, interest expense on money market deposits decreased $725 thousand, as the average rate paid on these deposits declined 3 basis points. The overage cost of total interest bearing liabilities decreased to .20% compared to .24% 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.


Table of contents

Non-Interest Income
Three Months Ended June 30 Six Months Ended June 30 (Dollars in thousands) 2014 2013 % change 2014 2013 % change Bank card transaction fees $ 44,444 $ 40,700 9.2 % $ 86,161 $ 79,250 8.7 % Trust fees 27,765 25,734 7.9 54,338 50,903 6.7 Deposit account charges and other
fees 19,709 19,602 .5 38,299 38,314 - Capital market fees 3,246 3,305 (1.8 ) 7,116 7,696 (7.5 ) Consumer brokerage services 2,972 2,853 4.2 5,719 5,539 3.2 Loan fees and sales 1,211 1,314 (7.8 ) 2,420 2,787 (13.2 ) Other 9,416 9,168 2.7 17,337 18,064 (4.0 ) Total non-interest income $ 108,763 $ 102,676 5.9 % $ 211,390 $ 202,553 4.4 % Non-interest income as a % of total
revenue* 40.4 % 39.2 % 40.3 % 39.5 %

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

For the second quarter of 2014, total non-interest income amounted to $108.8 million compared with $102.7 million in the same quarter last year, which was an increase of $6.1 million, or 5.9%. Bank card fees for the current quarter increased $3.7 million, or 9.2%, over the second quarter of last year, as a result of a 16.5% increase in corporate card fees, which totaled $22.4 million this quarter. Debit card fees also grew by 6.5% and totaled $9.6 million this quarter, while credit card fees grew 3.7% and totaled $6.1 million. Trust fees for the quarter increased $2.0 million, or 7.9%, over the same quarter last year, resulting mainly from continued growth in personal (up 7.9%) and institutional (up 10.3%) trust fees. Deposit account fees grew slightly compared to last year, mostly from account service charges, while fees from corporate cash management and overdraft services were flat. Capital market fees decreased slightly to $3.2 million in the current quarter as a result of lower sales. Consumer brokerage services revenue increased 4.2% due to growth in advisory and fixed annuity fees, while loan fees and sales revenue declined slightly mainly due to lower loan commitment fees. Other non-interest income increased $248 thousand over the same quarter last year due to higher leasing revenue and swap fees, mostly offset by a decline in revenue from sales of tax credits.

Non-interest income for the first six months of 2014 was $211.4 million compared to $202.6 million in the first six months of 2013, resulting in an increase of $8.8 million, or 4.4%. Bank card fees increased $6.9 million, or 8.7%, as a result of growth in corporate card fees of $5.6 million, or 14.7%. In addition, debit card fees increased $1.1 million, or 6.2%, while credit card fees increased by 2.8%. Trust fee income increased $3.4 million, or 6.7%, as a result of growth in both personal and institutional trust fees. Deposit account fees were flat due to lower overdraft fees, which was mostly offset by higher account service charges. Capital market fees decreased $580 thousand, or 7.5%, due to lower sales volumes, while loan fees and sales decreased $367 thousand, or 13.2%, due to lower loan commitment fees. Consumer brokerage services revenue increased 3.2% mainly due to higher advisory and fixed annuity fees. Other non-interest income decreased by $727 thousand, or 4.0%, which included a $1.4 million reduction due to fair value adjustments and lower gains on bank . . .

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