Commerce Bancshares, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. The unaudited consolidated results are not necessarily indicative of full-year performance.
Financial results and position
- Earnings: Net income attributable to Commerce Bancshares, Inc. was $65.8 million, up 8.8% from $60.5 million. Diluted EPS was $0.74 versus $0.66, up 12.1%. Consolidated net income was $66.8 million.
- Revenue and margin: Net interest income was $159.7 million, down 0.8%; non-interest income was $94.6 million, down 1.4%. Together these produced $254.3 million in revenue as defined by the filing. Net securities gains were $4.0 million, versus $1.3 million. Tax-equivalent net interest margin was 3.45%, down from 3.85% a year earlier.
- Profitability and costs: Pre-tax income was $99.7 million, up from $88.5 million. Non-interest expense declined 2.3% to $150.5 million. Return on average assets was 1.29%, return on average equity 12.04%, and the efficiency ratio 58.91%.
- Credit costs: Provision for loan losses was $8.2 million, down from $15.8 million. Net charge-offs were $11.2 million, or an annualized 0.49% of average loans, versus $18.8 million and 0.81% a year earlier. The allowance was $181.5 million, 1.96% of loans and 264% of non-accrual loans.
- Balance sheet and funding: Total assets were $20.53 billion, down from $20.65 billion; loans were $9.25 billion and deposits $16.77 billion. Core deposits were $14.25 billion, or 85.0% of deposits. Investment securities totaled $9.28 billion, including $9.12 billion available for sale.
- Liquidity and cash flow: Cash and cash equivalents ended at $434.4 million, down $83.1 million during the quarter. Operating activities provided $120.1 million; investing activities provided $5.4 million; financing activities used $208.6 million. Management cited $10.02 billion of liquid assets, including available-for-sale securities, and approximately $3.06 billion of estimated capacity for future FHLB and Federal Reserve advances.
- Debt and capital: Borrowings and repurchase funding totaled $1.23 billion at quarter-end; other borrowings were $111.5 million on the balance sheet. Tier 1 risk-based capital was 14.85%, total risk-based capital 16.19%, and Tier 1 leverage 9.70%; all exceeded stated well-capitalized minimums. The company repurchased 810,642 shares at an average $38.98 and declared a $0.230 per-share dividend.
Changes versus the prior comparable period
- Earnings rose despite slightly lower net interest income and non-interest income, primarily because the loan-loss provision fell by $7.6 million and non-interest expense declined by $3.5 million.
- Lower loan balances and yields reduced loan interest income; growth in securities balances was largely offset by lower securities yields. Lower deposit rates and costs reduced interest expense.
- Bank-card transaction fees fell $2.7 million, including a $5.9 million decline in debit interchange fees following new regulatory limits. Capital-market fees increased $2.2 million.
- Credit indicators generally improved: non-performing assets declined to $87.5 million from $93.8 million at year-end, and potential problem loans fell to $202.0 million from $250.7 million. Loans past due 90 days or more and still accruing increased to $16.4 million from $15.0 million.
Outlook, risks, contingencies, and unusual items
- No specific earnings or full-year financial guidance is provided. Management cautioned that quarterly results are not necessarily indicative of future periods.
- Management expects possible revenue pressure from debit-card fee limits and potential cost increases from regulation and compliance. Forward-looking risks include economic conditions, interest rates, loan demand, regulation, liquidity requirements, and competition.
- Management’s interest-rate simulations estimated that a gradual 100-basis-point rise would increase annual net interest income by $6.3 million (1.03%); a 200-basis-point rise by $7.7 million (1.25%); and a 300-basis-point rise by $5.4 million (0.88%). Falling-rate scenarios were not modeled because rates were already low.
- Unusual or notable items included a $3.0 million fair-value write-down on former office property held for sale, partly offset by insurance and property-sale gains; $4.0 million of net securities gains, primarily private-equity valuation gains; and $0.3 million of current-quarter credit impairment losses on certain non-agency mortgage-backed securities. Cumulative credit-related impairment on those securities was $10.4 million.
- Credit and valuation exposures include $94.9 million of troubled debt restructurings, $129.9 million of illiquid auction-rate securities valued using significant unobservable inputs, and $75.4 million of private-equity investments. Standby letters of credit had a $366.3 million contractual amount; loan commitments totaled $7.5 billion. Management did not anticipate material losses from commitments and contingencies.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved credit trends and lower provision expense continue, particularly given the increase in loans 90 days past due and still accruing.
- How loan yields, deposit pricing, asset growth, and interest-rate movements affect net interest margin and earnings.
- Whether debit interchange pressure and other regulatory or compliance costs continue to weigh on fee income and expenses.
- The assumptions and potential valuation sensitivity for auction-rate securities, non-agency mortgage-backed securities, and private-equity holdings.
- Liquidity and funding developments, including deposit mix, repurchase-agreement funding, and the use of pledged collateral and available borrowing capacity.
- The timing of declared dividends and cash payments: the cash-flow statement reports $1.1 million of dividends paid and $19.4 million payable at quarter-end, while equity reflects $20.4 million of dividends declared.