Commerce Bancshares, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Commerce Bancshares is a regional bank holding company whose operations are conducted primarily through Commerce Bank. This unaudited report covers the three and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015.
Financial performance and position
| Metric | Q3 2016 / September 30, 2016 | Comparison |
|---|---|---|
| Net interest income | $171.2 million | Up 5.7% from Q3 2015 |
| Net interest margin, tax-equivalent | 3.08% | 3.00% in Q3 2015; 3.05% for first nine months versus 2.93% |
| Net income attributable to Commerce Bancshares | $68.5 million | Up 6.1% from Q3 2015; down 1.9% from Q2 2016 |
| Net income available to common shareholders | $66.3 million; diluted EPS $0.68 | Q3 2015: $62.4 million and $0.63 per diluted share |
| First-nine-month net income attributable to Commerce Bancshares | $203.8 million; diluted EPS $2.03 | Up 1.9% and 5.2%, respectively, from 2015 |
| Non-interest income / expense | $119.3 million / $181.2 million | Q3 year-over-year increases of 7.2% / 5.7% |
| Efficiency ratio | 62.25% | 62.55% in Q3 2015; 62.04% for first nine months versus 62.12% |
| Total assets / loans / deposits | $24.7 billion / $13.23 billion / $20.17 billion | Loans up 6.4% and deposits up $187.3 million from year-end 2015 |
| Allowance for loan losses | $154.5 million; 1.17% of loans | $151.5 million and 1.22% at year-end 2015 |
| Borrowings | $1.59 billion | Down from $2.07 billion at year-end 2015 |
| Operating cash flow, first nine months | $346.2 million | Cash and cash equivalents declined $35.6 million to $467.1 million |
| Regulatory capital ratios | Tier 1 common 11.66%; Tier 1 12.44%; total risk-based 13.39%; leverage 9.58% | Company reported ratios above applicable well-capitalized thresholds |
Material changes and operating trends
- Q3 net interest income benefited mainly from loan growth; average loans were up 9.1% year over year. Loan interest rates eased slightly, while deposit and borrowing costs increased.
- Non-interest income growth reflected bank card, trust, deposit, cash-sweep and mortgage-related fees. Non-interest expense rose with salaries and benefits, data processing and software, occupancy, and deposit insurance costs.
- For the first nine months, provision for loan losses rose to $25.9 million from $19.5 million in 2015, although net charge-offs declined to $22.9 million from $24.5 million.
- Non-performing assets fell to $16.6 million, or 0.13% of loans, from $29.4 million at year-end 2015. Non-accrual loans declined to $15.6 million; potential problem loans were broadly stable at $113.6 million.
- Comprehensive income was affected by securities valuation movements: other comprehensive income was $88.6 million for the first nine months, largely reflecting unrealized securities gains. The Q3 net securities loss was $2.0 million, mainly from private-equity fair-value adjustments.
- Core deposits were $18.2 billion, or 90.0% of deposits. Available-for-sale securities were $9.44 billion, including approximately $3.49 billion unpledged and available for pledging; management cited substantial liquidity resources and approximately $1.6 billion of expected securities maturities and paydowns over the next 12 months.
Outlook, risks, contingencies and unusual items
- The filing provides no formal earnings or revenue guidance. Management said routine short-term liquidity needs were not expected to vary significantly and believed they could be met; results for the interim periods are not necessarily indicative of full-year results.
- Interest-rate simulations showed estimated 12-month net interest income increases of $12.8 million to $22.3 million for gradual 100–300 basis-point increases under one deposit-attrition scenario. Under a more severe deposit-outflow scenario, results ranged from a $1.9 million decline to essentially flat. These are modeled scenarios, not forecasts.
- Credit exposures to monitor include energy loans of $145.4 million, with $22.8 million rated substandard or on non-accrual, versus $4.4 million at year-end 2015; shared national credits of $880.7 million, plus $1.4 billion in unfunded commitments; and $10.4 billion in total loan commitments, including about $5.0 billion of unused approved credit-card lines.
- Other commitments include $352.1 million of standby letters of credit and tax-credit purchase commitments of $48.6 million for the remainder of 2016 and $99.7 million for 2017. These amounts do not necessarily represent expected cash outflows.
- A Missouri customer class action concerning overdraft fees is stayed pending the outcome of a similar case; the company disputes the claim, and ultimate exposure cannot be determined. The company is also discussing an ERISA-related managed-trust investigation with the U.S. Department of Labor; timing and outcome are uncertain.
- Unusual items included a $3.3 million gain on sale of a former branch property during the first quarter, an $897,000 trust-related settlement accrual in the second quarter, and $6.6 million of net private-equity fair-value losses in the first nine months. The company also recorded a $1.8 million gain on a private-equity fund withdrawal to comply with Volcker Rule restrictions.
- Management identified economic conditions, interest rates, deposit behavior, loan demand, regulation, competition and accounting or tax changes as risks to forward-looking results. The filing says the company met capital adequacy requirements; its disclosure controls were effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, particularly in commercial construction, business real estate, energy and shared national credits, is accompanied by stable credit quality and adequate loss provisioning.
- Whether deposit mix and funding costs remain favorable, especially under rising-rate or accelerated deposit-outflow conditions.
- How much reported earnings growth depends on fee income and nonrecurring items, and whether operating expense growth continues to outpace revenue.
- Future private-equity and securities valuation changes, and developments in the overdraft-fee litigation and Department of Labor investigation.
- The eventual allowance impact and implementation readiness for the expected-credit-loss standard, which the company said was expected to increase the allowance when adopted.