Commerce Bancshares, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance sheet comparisons are to December 31, 2018 unless otherwise noted. Figures are in U.S. dollars; financial amounts are rounded to millions. The interim statements are unaudited.
Financial performance
| Metric | Q1 2019 | Comparable period / change |
|---|---|---|
| Net interest income | $203.5 million | Up 5.5% from Q1 2018 |
| Non-interest income | $121.2 million | Up 1.3% from Q1 2018 |
| Investment securities gains (losses), net | $(0.9) million | Compared with $5.4 million gain in Q1 2018 |
| Non-interest expense | $191.4 million | Up 5.0% from Q1 2018 |
| Provision for loan losses | $12.5 million | Up $2.1 million from Q1 2018 |
| Net income attributable to Commerce Bancshares | $97.1 million | Down 3.8% from Q1 2018 |
| Net income available to common shareholders / diluted EPS | $94.9 million / $0.85 | Down 3.9% / from $0.88 in Q1 2018 |
| Net interest margin, tax-equivalent basis | 3.52% | 3.37% in Q1 2018 |
| Efficiency ratio | 58.76% | 58.21% in Q1 2018 |
| Return on average assets / common equity | 1.58% / 13.64% | 1.66% / 15.58% in Q1 2018 |
Net interest income benefited principally from higher loan yields and loan growth. The increase was partly offset by higher deposit and borrowing costs. The effective tax rate was 19.1%, versus 18.7% in Q1 2018.
Financial position, cash flow and capital
- Assets and loans: Total assets were $25.0 billion, down from $25.5 billion at year-end. Loans were $14.1 billion, slightly below year-end; average loans were up 1.1% year over year.
- Deposits and funding: Deposits were $20.0 billion, down $349 million from year-end. Core deposits were $18.1 billion, or 90.6% of deposits. Federal funds purchased and repurchase agreements totaled $1.723 billion, down from $1.956 billion at year-end.
- Liquidity and cash flow: Cash, cash equivalents and restricted cash ended at $606.4 million, a $602.8 million decrease during the quarter. Operating activities provided $142.2 million; investing activities used $31.3 million; financing activities used $713.7 million. The company reported $9.49 billion of liquid assets, including available-for-sale securities and resale agreements.
- Credit quality: Allowance for loan losses was $160.7 million, or 1.14% of loans. Net charge-offs were $11.7 million, an annualized 0.34% of average loans, compared with 0.30% a year earlier. Non-performing assets were $12.9 million, or 0.09% of loans.
- Capital: Tier 1 common, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 14.39%, 15.15%, 16.00% and 11.67%, respectively. The company said it exceeded applicable well-capitalized thresholds.
- Shareholder returns: The company repurchased 647,054 shares for $39.7 million and paid common dividends of $0.26 per share, up 16.1% year over year.
Material changes and operating trends
- Interest income on loans rose $19.6 million on a tax-equivalent basis, reflecting higher rates and average loan balances. Interest expense rose $11.3 million, principally as deposit rates increased.
- Non-interest income grew modestly: trust fees and cash-sweep and loan-fee income increased, while bank-card fees declined 4.4%.
- Non-interest expense rose $9.1 million. Management identified $3.2 million of non-recurring items; excluding these, it reported core expense growth of 3.2%.
- Net securities results swung to a $0.9 million loss from a $5.4 million gain, mainly due to a $1.8 million fair-value loss on private-equity investments.
- By segment, pre-tax income increased 2.7% in Consumer and 16.1% in Wealth, but declined 4.9% in Commercial.
- Available-for-sale securities had $41.2 million of unrealized losses at quarter-end, down from $99.8 million at year-end; management attributed the improvement mainly to lower interest rates.
Outlook, risks and contingencies
- The filing gives no specific earnings, revenue or loan-growth guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Interest-rate sensitivity modeling estimated net interest income would increase 0.66% under a 200-basis-point rising-rate scenario, but decrease 1.16% under a 100-basis-point falling-rate scenario. A separate rising-rate model incorporating greater deposit attrition showed decreases in modeled net interest income. These are simulations, not forecasts.
- Key stated risks include economic conditions in the company’s markets, interest-rate and liquidity changes, loan demand, regulation, competition, cybersecurity, and accounting and tax estimates.
- Loan commitments totaled $10.9 billion, including about $5.1 billion of unused approved credit-card lines. Standby letters of credit were $325.6 million; commercial letters of credit were $3.9 million. These commitments may not be fully drawn. The company also expected to fund $157.9 million of outstanding state tax-credit purchase commitments during the remainder of 2019.
- Legal and regulatory proceedings were pending in the ordinary course of business. The filing says some matters were too early to determine whether a probable and estimable loss existed; no clear aggregate exposure is provided.
- The company adopted the new lease standard on January 1, 2019, recognizing a $27.5 million right-of-use asset and a $28.1 million lease liability at adoption. CECL takes effect for the company in 2020; implementation, testing and validation work continued, with a preliminary model expected for review in Q2 2019.
- In April 2019, after quarter-end, the company entered into an additional $500 million interest-rate floor, with a $10.7 million premium and a forward start in 2020.
Most important facts for investors to verify
- Whether loan and deposit trends, especially commercial deposit outflows and funding costs, continued after March 31.
- Whether higher consumer credit-card charge-offs persist; credit-card annualized net charge-offs were 4.65% in Q1, versus 4.05% a year earlier.
- The composition and recurrence of the $3.2 million of non-recurring expenses and the extent to which core expense growth continues.
- Valuation performance of private-equity holdings and the available-for-sale securities portfolio, including the remaining credit exposure in impaired non-agency mortgage-backed securities.
- Actual liquidity and capital effects of deposit movements, share repurchases, loan commitments and the new interest-rate floor; modeled rate sensitivities depend on assumptions about deposit behavior.
- Progress and eventual balance-sheet impact of CECL implementation, and any material developments in pending legal matters.