Commerce Bancshares, Inc. — Q1 2013 Form 10-Q
Business context and reporting period: The company is a bank holding company whose principal operations are conducted through Commerce Bank. This unaudited filing covers the three months ended March 31, 2013; results for the quarter are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net interest income | $150.3 million | $159.7 million; down 5.9% |
| Non-interest income | $99.9 million | $94.6 million; up 5.6% |
| Net interest income plus non-interest income | $250.2 million | $254.3 million |
| Investment securities gains (losses), net | $(2.2) million | $4.0 million gain |
| Non-interest expense | $155.0 million | $150.5 million; up 3.0% |
| Net income attributable to Commerce Bancshares, Inc. | $61.0 million | $65.8 million; down 7.3% |
| Diluted earnings per share | $0.67 | $0.70 |
| Net interest margin, tax-equivalent basis | 3.07% | 3.45% |
| Efficiency ratio | 61.76% | 58.91% |
| Return on average assets / equity | 1.13% / 11.38% | 1.29% / 12.04% |
Balance sheet, credit, liquidity and capital
- Total assets were $22.23 billion at March 31, 2013, compared with $22.16 billion at year-end 2012. Loans were $9.98 billion, up from $9.83 billion; deposits were $18.51 billion, up from $18.35 billion.
- Cash and cash equivalents were $620.8 million, down $159.0 million during the quarter. Operating activities provided $98.1 million; investing activities used $424.4 million; financing activities provided $167.3 million.
- Reported borrowings were approximately $1.23 billion, principally repurchase agreements and FHLB advances. The loan-to-deposit ratio was 54.7%. Core deposits totaled $16.0 billion, or 86.3% of deposits; liquid assets as defined by management totaled $10.98 billion.
- The allowance for loan losses was $168.0 million, or 1.68% of loans excluding loans held for sale, and 376% of non-accrual loans. Quarterly provision was $3.3 million, versus $8.2 million a year earlier; net charge-offs were $7.8 million, versus $11.2 million.
- Non-accrual loans declined to $44.7 million from $51.4 million at year-end. Non-performing assets were $58.9 million, or 0.27% of total assets, compared with $64.9 million, or 0.29%. Potential problem loans were $135.9 million, down 4.2% from year-end.
- Regulatory capital ratios at March 31 were 13.63% Tier 1 risk-based, 14.94% total risk-based and 8.92% Tier 1 leverage. Management said these exceeded well-capitalized minimums.
Material changes and management commentary
- Net interest income declined as lower yields on loans and securities outweighed higher average balances and reduced deposit funding costs. The average yield on interest-earning assets fell to 3.23% from 3.66%; management cited lower TIPS inflation interest and lower securities yields.
- Fee income growth was led by bank card transaction fees, up 11.0%, and trust fees, up 10.3%. Capital market fees fell 36.1%, reflecting strong prior-year activity and reduced customer demand in the low-rate environment.
- Net securities losses of $2.2 million, versus gains of $4.0 million, mainly reflected fair-value losses on private equity investments. Non-interest expenses rose, notably data processing and software costs and other expenses, which included a $1.0 million provision on a letter-of-credit exposure.
- Management reported improving credit trends and lower non-accrual loans. Loan balances and deposits grew; approximately $2.1 billion of available-for-sale securities were expected to mature or pay down over the next 12 months. No specific earnings or financial guidance was provided.
- In the company’s static-balance-sheet interest-rate model, a gradual 100-basis-point rise was estimated to increase 12-month net interest income by $3.2 million (0.54%); a 200-basis-point rise by $0.3 million (0.05%); and a 300-basis-point rise to reduce it by $6.1 million (1.03%). Falling-rate scenarios were not modeled.
Risks, contingencies and unusual items
- A debit-card transaction posting change implemented in February following a settlement is expected to reduce annual overdraft income by $6 million to $8 million. The company recorded a $5.2 million liability in 2012 for an anticipated interchange-income reduction under the proposed Visa/Mastercard settlement.
- A lawsuit related to alleged securities fraud at a previously acquired bank asserts investor losses exceeding $8 million. The company said the loss was not then estimable or considered probable, recorded no liability, and expected resolution without material loss. Other ordinary-course legal matters remain pending.
- Loan commitments totaled $8.4 billion, including approximately $3.9 billion in unused approved credit-card lines. Standby letters of credit totaled $334.2 million; related recorded liability was $4.3 million. Outstanding commitments to purchase state tax credits were $160.7 million.
- The available-for-sale portfolio included $128.1 million of auction-rate securities valued using significant unobservable inputs and $96.4 million fair value of certain impaired non-agency mortgage-backed securities. Management said it did not intend to sell the impaired securities and did not expect to be required to sell them before recovery.
- Share repurchases totaled 807,893 shares at an average $37.13 per share during the quarter. The first-quarter dividend was $0.225 per share.
Important facts for investors to verify
- Whether loan and deposit growth, improving credit quality and lower charge-offs persist, and how reserve adequacy develops relative to losses.
- Whether net interest margin stabilizes amid low yields, changing deposit costs, securities prepayments and interest-rate sensitivity.
- The realized impact of the debit-card posting change and interchange settlement on fee income.
- Developments in the securities portfolio, including auction-rate valuations, impairment assumptions and private-equity fair-value changes.
- Updates on the unaccrued litigation matter, tax-credit purchase commitments, and other off-balance-sheet obligations.