Commerce Bancshares, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; interim financial statements are unaudited. The company conducts most operations through Commerce Bank. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net interest income | $163.8 | $146.1; up 12.1% |
| Non-interest income | $119.0 | $106.6; up 11.7% |
| Net securities gains (losses) | $(1.0) | $6.0 gain |
| Non-interest expense | $177.5 | $163.8; up 8.3% |
| Provision for loan losses | $9.4 | $4.4 |
| Net income attributable to Commerce Bancshares | $65.4 | $61.1; up 7.1% |
| Net income available to common shareholders | $63.1 | $58.8; up 7.3% |
| Diluted EPS | $0.65 | $0.58; up 12.1% |
| Net interest margin, tax-equivalent | 2.95% | 2.76% |
| Efficiency ratio | 62.62% | 64.65% |
Revenue, measured as net interest income plus non-interest income, was $282.8 million, versus $252.7 million. Return on average assets was 1.07% and return on average common equity was 11.20%. The effective tax rate was 31.0%, compared with 31.8%.
Net interest income growth reflected higher loan balances and investment-securities income. Average loans rose 9.2% year over year; average earning assets rose to $23.3 billion from $22.5 billion. Tax-equivalent yield on earning assets was 3.10%, versus 2.89%. TIPS-related interest remained negative in Q1 2016 at $1.5 million, but was less negative than the $7.0 million reported in Q1 2015.
At March 31, 2016, total assets were $24.5 billion, down from $24.6 billion at year-end. Loans were $12.7 billion, up from $12.4 billion; deposits were $20.7 billion, up from $20.0 billion. Total equity was $2.45 billion. Total borrowings were $1.06 billion, down from $2.07 billion at year-end, primarily reflecting lower federal funds and repurchase-agreement funding.
Cash and cash equivalents increased $53.5 million during the quarter to $556.2 million. Operating activities provided $195.9 million and investing activities provided $83.5 million; financing activities used $225.9 million. Financing cash use included a $1.0 billion net reduction in federal funds and repurchase-agreement funding, partly offset by $839.5 million of deposit growth, as well as $36.4 million of treasury-stock purchases and $24.0 million of dividends.
Liquidity included $10.6 billion of listed liquid assets, $18.3 billion of core deposits (88.3% of deposits), and $3.4 billion of estimated available FHLB and Federal Reserve advance capacity. The available-for-sale securities portfolio was $9.6 billion; approximately $1.6 billion was expected to mature or pay down over the next 12 months. Regulatory capital ratios included a 11.51% Tier 1 common risk-based ratio, 13.27% total risk-based ratio, and 9.11% Tier 1 leverage ratio; the company reported ratios above applicable well-capitalized thresholds.
Material changes and notable items
- Net securities results swung from a $6.0 million gain in Q1 2015 to a $1.0 million loss in Q1 2016, mainly due to private-equity fair-value adjustments; Q1 2015 included realized gains on securities sales.
- Non-interest income benefited from higher bank-card, trust, deposit, swap, and tax-credit fees and a $3.3 million pre-tax gain on sale of a former branch property. Q1 2015 included $1.6 million in branch-property write-downs.
- Non-interest expense growth was led by salaries and benefits, data processing and software, and chip-card reissuance costs.
- Provision for loan losses rose to $9.4 million, while net charge-offs were $8.8 million, or 0.28% of average loans, versus $7.4 million and 0.26% a year earlier. The allowance was $152.1 million, or 1.20% of loans, versus $151.5 million and 1.22% at year-end.
- Non-accrual loans increased to $29.4 million from $26.6 million at year-end; non-performing assets were $31.4 million, or 0.25% of loans. Total impaired loans rose to $80.4 million from $65.3 million. Management attributed much of the increase in non-accrual business loans to one automobile floor-plan loan.
- During Q1 the company reclassified $50.4 million of auto loans as held for sale and was marketing them to other financial institutions. Residential mortgage and student-loan sale programs also continued.
- The company repurchased 900,929 shares at an average $40.44 per share and paid a $0.225 common dividend per share, a 5% increase from the 2015 quarterly dividend.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management cautions that Q1 results are not necessarily indicative of full-year results. It expects routine short-term liquidity needs to be met and reports no planned defined-benefit pension contributions for the remainder of 2016, other than contributions related to its supplemental executive retirement plan.
Interest-rate simulations show materially different outcomes depending on deposit behavior. With the company’s lower-attrition assumptions, a gradual 100-, 200-, or 300-basis-point rate increase was modeled to raise 12-month net interest income by $11.9 million, $18.5 million, or $20.7 million. Under a more severe deposit-attrition scenario, the modeled changes were decreases of $3.8 million, $2.3 million, or $5.3 million, respectively. Management notes uncertainty in predicting deposit reactions to higher rates.
Key risks include economic and credit conditions, loan demand, interest-rate and deposit behavior, regulation, competition, and management estimates used in the loan-loss allowance, securities valuation, and income-tax accounting. The energy portfolio totaled $144.8 million, with $11.0 million rated substandard or on non-accrual; unfunded energy commitments were $87.0 million. Shared national credit exposure was $784.9 million, with a further $1.2 billion in unfunded commitments.
Off-balance-sheet commitments included $10.0 billion of loan commitments, approximately $4.8 billion of unused approved credit-card lines, $346.6 million of standby letters of credit, and $3.6 million of commercial letters of credit. Outstanding tax-credit purchase commitments were $62.5 million, expected to be funded during the remainder of 2016.
A Missouri class action against the Bank alleges violations of the state usury statute regarding certain overdraft fees. The class was certified and the case is stayed pending the outcome of a similar case; the company disputes the claim, and ultimate exposure cannot be determined. Other ordinary-course legal matters are also pending.
Important facts for investors to verify
- Whether loan growth and fee income continue to offset expense growth and the higher loan-loss provision.
- Trends in non-accrual, impaired, restructured, and consumer-credit-card loans, and whether the allowance remains appropriate as the portfolio grows.
- Deposit stability, funding costs, and the actual sensitivity of net interest income to changing rates and deposit outflows.
- The performance and valuation of securities and private-equity holdings, including the $39.9 million fair value of securities with previously recorded OTTI and related credit impairment.
- Completion and pricing of planned auto-loan sales, and funding requirements for loan, tax-credit, and other commitments.
- Developments in the overdraft-fee class action and any change in the estimateability or probability of legal losses.