Commerce Bancshares, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; most operations are conducted through Commerce Bank.
Key financial metrics
| Metric | Q3 2015 | Prior comparable period / date |
|---|---|---|
| Net interest income | $162.0 million | $154.7 million in Q3 2014, up 4.7% |
| Net income attributable to Commerce Bancshares | $64.6 million | $68.2 million in Q3 2014, down 5.2% |
| Net income available to common shareholders | $62.4 million; diluted EPS $0.66 | $66.4 million; diluted EPS $0.69 in Q3 2014 |
| Non-interest income / expense | $111.1 million / $171.3 million | Income down 1.0%; expense up 5.8% year over year |
| Net loan charge-offs | $8.4 million; 0.28% annualized of average loans | $7.7 million; 0.27% in Q3 2014 |
For the first nine months, net interest income was $471.8 million, net income attributable to the company was $200.0 million, common diluted EPS was $2.02, and net income available to common shareholders was $193.3 million. Compared with the first nine months of 2014, these measures changed by 0.8%, 0.5%, 1.5%, and down 2.0%, respectively. Year-to-date provision for loan losses was $19.5 million, down 21.4%; net charge-offs were $24.5 million.
Margins and efficiency: Q3 net yield on interest-earning assets was 3.00%, versus 2.99% a year earlier. Year-to-date tax-equivalent net interest margin was 2.93%, compared with 3.05%. The Q3 efficiency ratio was 62.53%, versus 60.43%.
Balance sheet and liquidity: Total assets were $24.0 billion, broadly unchanged from December 31, 2014. Loans rose 6.6% to $12.2 billion; deposits fell 2.5% to $19.0 billion. Total borrowings were $2.30 billion, up from $1.97 billion. Cash and cash equivalents fell $642.0 million during the first nine months to $458.8 million. The company reported $10.5 billion of liquid assets, including available-for-sale securities and resale agreements. Core deposits were $17.0 billion, or 89.5% of total deposits.
Capital: Total equity was $2.37 billion. At September 30, the Tier 1 common, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 11.54%, 12.37%, 13.33%, and 9.31%, respectively. Management said the company exceeded applicable well-capitalized thresholds.
Material changes and management commentary
- Q3 earnings fell despite higher net interest income, mainly reflecting 5.8% higher non-interest expense and a swing from $3.0 million of securities gains in Q3 2014 to a $378,000 loss in Q3 2015. The 2015 quarterly loss related to private equity transactions.
- Year-to-date fee income increased 2.5%, led by trust fees, mortgage banking, and brokerage services. Expense increased 2.9%, primarily from salaries and benefits and data processing costs.
- Loan growth was concentrated in business, consumer, and construction lending. Non-performing assets declined to $28.8 million, or 0.24% of loans, from $46.3 million, or 0.40%, at year-end 2014. Non-accrual loans were $25.8 million; potential problem loans increased to $85.5 million from $81.2 million.
- The allowance for loan losses was $151.5 million, or 1.24% of loans, compared with $156.5 million, or 1.36%, at year-end. Consumer credit card charge-offs remained higher than other major loan categories.
- The company recorded approximately $3.5 million of Missouri tax benefits during Q2 and Q3 2015, contributing to a lower effective tax rate. It also adopted a method that presents affordable-housing investment amortization in income tax expense rather than non-interest expense; management said the adoption was not significant overall.
Outlook, risks, contingencies, and unusual items
The filing gives no specific earnings or revenue guidance. Management’s forward-looking statements identify risks including economic conditions, interest rates, regulation, loan demand, competition, liquidity, and tax or accounting changes. Management noted that results for the interim periods are not necessarily indicative of full-year results.
- Interest-rate simulations estimated that gradual rate increases could raise annual net interest income by $7.5 million to $9.1 million under one deposit-attrition scenario. Under a more severe deposit-outflow scenario, a 100-basis-point increase produced a $2.0 million increase, while 200- and 300-basis-point increases produced decreases of $3.5 million and $9.8 million. These are model estimates, not forecasts.
- Available-for-sale securities totaled $9.47 billion. The portfolio included $93.2 million of auction-rate securities valued using significant unobservable inputs and $66.9 million of private equity investments. Certain non-agency mortgage-backed securities had $47.4 million fair value and $14.1 million of cumulative credit-related impairment recognized in earnings.
- Off-balance-sheet loan commitments totaled $9.9 billion, including approximately $4.7 billion of unused credit-card lines. Standby letters of credit totaled $335.0 million. Outstanding tax-credit purchase commitments were $28.5 million for 2015 and $57.1 million for 2016.
- A purported Missouri class action alleges unlawful overdraft fees on point-of-sale/debit and ATM transactions. The company disputes the claim; potential exposure was not determinable. Other ordinary-course litigation was also pending.
- The company completed a $100 million accelerated share repurchase in August 2015. It paid common dividends of $0.225 per share in each of the first three quarters and increased the board-authorized share repurchase limit in October.
Important facts for investors to verify
- Whether deposit declines and increased short-term borrowings continue, and how they affect funding costs and liquidity.
- Whether loan growth, especially in consumer and construction lending, is accompanied by stable credit quality and adequate loss reserves.
- How operating-cost growth, card fraud losses, and fee trends affect the efficiency ratio and earnings.
- The valuation and liquidity assumptions for auction-rate securities, private equity, and impaired mortgage-backed securities.
- Developments in the overdraft-fee class action and the scale and timing of outstanding loan, letter-of-credit, and tax-credit commitments.