Commerce Bancshares, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited consolidated results. Commerce Bancshares is a bank holding company whose operations are conducted primarily through Commerce Bank.
Financial performance
- Third-quarter earnings: Net income attributable to Commerce Bancshares was $68.2 million, essentially flat versus $68.2 million a year earlier. Net income available to common shareholders was $66.4 million, down 2.7%, reflecting $1.8 million of preferred dividends. Diluted EPS was $0.72, up from $0.71.
- Nine-month earnings: Net income attributable to the company was $199.0 million, up 2.0%; common-shareholder income was $197.2 million, up 1.1%. Diluted EPS was $2.09 versus $2.03.
- Revenue and margin: Net interest income was $154.7 million in Q3, flat year over year, and $468.3 million for nine months, up 0.8%. Non-interest income rose 5.6% to $112.3 million in Q3 and 4.8% to $323.7 million year to date, led by bank-card and trust fees. Net interest margin was 2.99% in Q3 versus 3.11% a year earlier; nine-month margin was 3.05% versus 3.13%.
- Costs and returns: Q3 non-interest expense increased 3.8% to $162.2 million, principally from salaries and benefits. The efficiency ratio was 60.56% for Q3 and 61.35% for nine months. Annualized return on assets and common equity were 1.20% and 12.30% in Q3.
- Credit costs: Q3 provision for loan losses was $7.7 million, up from $4.1 million; nine-month provision was $24.9 million versus $14.8 million. Net charge-offs were $7.7 million in Q3 and $24.9 million for nine months. The allowance was $161.5 million, or 1.41% of loans and 353% of non-accrual loans.
- Cash flow: Operating activities generated $285.6 million in the first nine months. Investing activities used $210.4 million and financing activities used $622.3 million; cash and cash equivalents declined $547.1 million to $722.5 million.
Financial position, liquidity and capital
- Total assets were $22.7 billion at September 30, down from $23.1 billion at year-end 2013. Loans grew 4.5% to $11.45 billion; deposits declined 2.4% to $18.59 billion.
- Core deposits were $16.42 billion, or 88.4% of deposits. Reported liquid assets totaled $10.06 billion, including $8.88 billion of available-for-sale securities and $900 million of long-term securities purchased under resale agreements.
- Total borrowings were approximately $1.50 billion. Short-term federal funds and repurchase-agreement funding increased during the period; customer repurchase agreements generally mature overnight.
- Regulatory capital ratios at September 30 included Tier 1 risk-based capital of 13.80%, total risk-based capital of 14.99%, and Tier 1 leverage of 9.37%. Management expected the company to remain well-capitalized under Basel III rules effective January 1, 2015.
Material changes and unusual items
- Q3 securities gains were $3.0 million versus $0.7 million a year earlier; nine-month gains were $10.5 million versus a $3.1 million loss. Nine-month results included a $19.6 million gain from selling a long-held private-equity investment, a $5.2 million loss on sales of Treasury inflation-protected securities, and a $1.6 million gain on donated appreciated stock.
- The company sold three Missouri branches in July, recognizing a $2.1 million gain. The sale included about $13.3 million of loans and $60.3 million of deposits.
- In June, the company issued preferred stock with $150 million aggregate liquidation preference, receiving net proceeds of $144.8 million, and entered a $200 million accelerated common-stock repurchase agreement. Initial delivery was approximately 3.06 million shares; final settlement was expected on or before June 2015.
- Available-for-sale securities had a $121.5 million net unrealized gain at quarter-end. Securities with other-than-temporary credit impairment had fair value of $58.6 million and cumulative credit-related impairment of $13.7 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said near-term operating liquidity needs were not expected to vary significantly and believed the company could meet them.
- Management identified economic conditions, interest rates, loan demand, regulation, liquidity requirements, competition, litigation and accounting or tax changes as factors that could cause results to differ from forward-looking statements.
- Interest-rate simulations showed estimated 12-month net-interest-income changes of +1.14% under a 100-basis-point rise, +0.72% under a 200-basis-point rise, and -0.04% under a 300-basis-point rise, using assumptions that included deposit outflows. Results were materially more favorable under an alternative, lower-deposit-runoff assumption.
- Non-performing assets were $53.0 million, or 0.23% of assets; non-accrual loans were $45.8 million. Potential problem loans were $91.2 million. Troubled debt restructurings totaled $81.1 million, including $31.0 million on non-accrual status.
- Off-balance-sheet loan commitments totaled $8.2 billion, including about $3.6 billion of unused approved credit-card lines. Standby letters of credit were $343.5 million; tax-credit purchase commitments were $218.6 million. The company also reported lawsuits arising in the ordinary course, with some matters not yet sufficiently advanced to estimate a probable loss.
Important facts for investors to verify
- Whether loan and deposit trends, net interest margin compression, and higher credit provisions persist in subsequent quarters.
- The composition, valuation and liquidity risks of the securities portfolio, especially auction-rate securities, private-equity holdings and impaired non-agency mortgage-backed securities.
- The ultimate share count, cost and capital effects when the accelerated repurchase agreement is settled, alongside preferred-dividend obligations.
- Actual deposit behavior and funding costs under rising-rate scenarios, given the company’s use of significant repurchase-agreement funding.
- Developments in loan commitments, troubled restructurings, pending litigation and Basel III capital implementation.