Commerce Bancshares, Inc. Reports Record First Quarter Earnings Per Share of $.92

Apr 12, 2018 06:00 am
KANSAS CITY, Mo. -- 

Commerce Bancshares, Inc. (NASDAQ: CBSH) announced record earnings of $.92 per common share for the three months ended March 31, 2018, compared to $.65 per share in the same quarter last year and $.86 per share in the fourth quarter of 2017. Net income attributable to Commerce Bancshares, Inc. for the first quarter of 2018 amounted to $101.0 million, compared to $71.5 million in the first quarter of 2017 and $94.4 million in the prior quarter. For the current quarter, the return on average assets was 1.66%, the return on average common equity was 15.6% and the efficiency ratio was 58.2%.

In making this announcement, David W. Kemper, Chairman and CEO, said, “We continued to see strong growth in top line revenue this quarter driven by a favorable interest rate environment and growth in our fee-based businesses. Net interest income grew $14.6 million this quarter compared to the first quarter of last year, as the yield on our loan portfolio grew from 3.92% to 4.33%, and our funding costs remained low. Our net interest margin increased to 3.37%. Compared to the prior year, fee income was strong as revenues from our bank card and trust businesses grew 15.9% and 12.6%, respectively. We also saw good growth in deposit fees driven by our expanding payments businesses. Non-interest expense grew 1.6% this quarter compared to the same quarter last year and remained well controlled. Compared to the previous quarter, average loans grew $122.3 million this quarter mostly driven by agribusiness lending while average deposits declined $98.6 million.”

Mr. Kemper continued, “This quarter net loan charge-offs totaled $10.4 million, compared to $11.0 million in the prior quarter and $9.2 million in the first quarter of 2017, as the overall credit environment remained favorable. The ratio of annualized net loan charge-offs to average loans was .30% in the current quarter, .32% in the prior quarter and .28% in the same period last year. Non-performing assets also declined this quarter to $11.6 million. Net recoveries on commercial loans totaled $255 thousand in the current quarter, compared to net loan charge-offs in the prior quarter of $633 thousand. Net loan charge-offs of personal banking loans increased slightly this quarter to $10.7 million, mostly the result of higher losses in our consumer lending portfolio. During the current quarter, the provision for loan losses totaled $10.4 million and the allowance for loan losses amounted to $159.5 million at March 31, 2018, or 1.15% of period end loans.”

Total assets at March 31, 2018 were $24.6 billion, total loans were $13.9 billion, and total deposits were $20.5 billion. During the quarter, the Company paid a common cash dividend of $.235 per share, representing a 9.8% increase over the rate paid in the fourth quarter of 2017, and also paid a 6% cash dividend on its preferred stock.

Commerce Bancshares, Inc. is a regional bank holding company offering a full range of financial products to consumers and commercial customers including personal banking, lending, mortgage banking, wealth management, brokerage and capital markets services. The Company currently operates in approximately 330 locations in the central United States and has a nationwide presence in the commercial payments industry.

This financial news release, including management's discussion of first quarter results, is posted to the Company's web site at www.commercebank.com.

For additional information, contact
Jeffery Aberdeen, Controller
at 1000 Walnut Street, Suite 700
Kansas City, MO 64106
or by telephone at (816) 234-2081
Web Site: http://www.commercebank.com
Email: [email protected]

 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

FINANCIAL HIGHLIGHTS

 
    For the Three Months Ended

(Unaudited)

March 31,     December 31,     March 31,

(Dollars in thousands, except per share data)

    2018     2017     2017
FINANCIAL SUMMARY
Net interest income $192,892 $190,008 $178,273
Non-interest income 119,690       119,383       109,613  
Total revenue 312,582 309,391 287,886
Investment securities gains (losses), net 5,410 27,209 (772 )
Provision for loan losses 10,396 12,654 11,128
Non-interest expense 182,277       208,859       179,377  
Income before taxes 125,319 115,087 96,609
Income taxes 23,258 20,104 24,907
Non-controlling interest expense 1,077       628       198  
Net income attributable to Commerce Bancshares, Inc. 100,984 94,355 71,504
Preferred stock dividends 2,250       2,250       2,250  
Net income available to common shareholders $98,734       $92,105       $69,254  
Earnings per common share:
Net income — basic $.92 $.86 $.65
Net income — diluted $.92 $.86 $.65
Effective tax rate 18.72 % 17.56 % 25.83 %
Tax equivalent net interest income $196,638 $197,917 $187,322
Average total interest earning assets (1) $ 23,693,350 $ 23,926,315 $ 24,253,430
Diluted wtd. average shares outstanding     105,965,845       105,976,402       105,805,425  
RATIOS
Average loans to deposits (2) 69.09 % 68.15 % 64.39 %
Return on total average assets 1.66 1.50 1.15
Return on average common equity (3) 15.58 14.17 11.74
Non-interest income to total revenue 38.29 38.59 38.08
Efficiency ratio (4) 58.21 67.40 62.19
Net yield on interest earning assets     3.37       3.29       3.13  
EQUITY SUMMARY
Cash dividends per common share $.235 $.214 $.214
Cash dividends on common stock $25,106 $22,897 $22,913
Cash dividends on preferred stock $2,250 $2,250 $2,250
Book value per common share (5) $24.02 $24.14 $22.66
Market value per common share (5) $59.91 $55.84 $53.49
High market value per common share $61.88 $57.91 $57.72
Low market value per common share $54.85 $52.07 $50.62
Common shares outstanding (5) 106,617,497 106,615,043 106,752,265
Tangible common equity to tangible assets (6) 9.88 % 9.84 % 9.03 %
Tier I leverage ratio     10.84 %     10.39 %     9.56 %
OTHER QTD INFORMATION
Number of bank/ATM locations 325 327 336
Full-time equivalent employees     4,799       4,800       4,807  

(1)

 

Excludes allowance for loan losses and unrealized gains/(losses) on available for sale debt securities.

(2)

Includes loans held for sale.

(3)

Annualized net income available to common shareholders divided by average total equity less preferred stock.

(4)

The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

(5)

As of period end.

(6)

The tangible common equity ratio is calculated as stockholders’ equity reduced by preferred stock, goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).

 
 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 
    For the Three Months Ended

(Unaudited)

March 31,   December 31,   September 30,   June 30,   March 31,

(In thousands, except per share data)

    2018   2017   2017   2017   2017
Interest income $205,995 $201,572 $194,244 $193,594 $187,997
Interest expense 13,103     11,564     11,653     10,787     9,724  
Net interest income 192,892 190,008 182,591 182,807 178,273
Provision for loan losses 10,396     12,654     10,704     10,758     11,128  
 
Net interest income after provision for loan losses 182,496     177,354     171,887     172,049     167,145  
NON-INTEREST INCOME
Bank card transaction fees 41,453 42,888 39,166 37,295 35,751
Trust fees 36,062 35,405 34,620 33,120 32,014
Deposit account charges and other fees 22,982 22,598 22,659 22,861 21,942
Capital market fees 2,291 1,743 1,755 2,156 2,342
Consumer brokerage services 3,768 3,576 3,679 3,726 3,649
Loan fees and sales 2,862 3,099 3,590 4,091 3,168
Other 10,272     10,074     11,418     12,131     10,747  
Total non-interest income 119,690     119,383     116,887     115,380     109,613  
 
INVESTMENT SECURITIES GAINS (LOSSES), NET 5,410 27,209 (3,037 ) 1,651 (772 )
NON-INTEREST EXPENSE
Salaries and employee benefits 115,894 115,741 111,382 108,829 112,369
Net occupancy 11,584 11,280 11,459 11,430 11,443
Equipment 4,431 4,692 4,491 4,776 4,609
Supplies and communication 5,313 6,118 5,517 5,446 5,709
Data processing and software 20,690 21,090 19,968 20,035 19,905
Marketing 4,805 3,937 4,676 4,488 3,224
Deposit insurance 3,457 3,444 3,479 3,592 3,471
Community service 729 25,511 3,006 2,916 2,944
Other 15,374     17,046     15,239     15,378     15,703  
Total non-interest expense 182,277     208,859     179,217     176,890     179,377  
Income before income taxes 125,319 115,087 106,520 112,190 96,609
Less income taxes 23,258     20,104     32,294     33,201     24,907  
Net income 102,061 94,983 74,226 78,989 71,702
 
Less non-controlling interest expense (income) 1,077     628     (338 )   29     198  
 
Net income attributable to Commerce Bancshares, Inc. 100,984 94,355 74,564 78,960 71,504
Less preferred stock dividends 2,250     2,250     2,250     2,250     2,250  
 
Net income available to common shareholders $98,734     $92,105     $72,314     $76,710     $69,254  
Net income per common share — basic $.92     $.86     $.68     $.71     $.65  
 
Net income per common share — diluted     $.92     $.86     $.67     $.71     $.65  
OTHER INFORMATION
Return on total average assets 1.66 % 1.50 % 1.19 % 1.26 % 1.15 %
Return on average common equity (1) 15.58 14.17 11.35 12.48 11.74
Efficiency ratio (2) 58.21 67.40 59.73 59.21 62.19
Effective tax rate 18.72 17.56 30.22 29.60 25.83
Net yield on interest earning assets 3.37 3.29 3.17 3.18 3.13
Tax equivalent net interest income     $196,638     $197,917     $190,497     $190,865     $187,322  

(1)

 

Annualized net income available to common shareholders divided by average total equity less preferred stock.

(2)

The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

 
 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - PERIOD END

 

(Unaudited)

    March 31,     December 31,     March 31,

(In thousands)

    2018     2017     2017
ASSETS
Loans
Business $ 4,960,614 $ 4,958,554 $ 4,888,011
Real estate — construction and land 932,058 968,820 846,904
Real estate — business 2,724,584 2,697,452 2,710,595
Real estate — personal 2,069,012 2,062,787 2,013,437
Consumer 2,069,235 2,104,487 1,975,521
Revolving home equity 382,825 400,587 396,542
Consumer credit card 752,651 783,864 736,766
Overdrafts 2,382       7,123       4,733  
Total loans 13,893,361       13,983,674       13,572,509  
Allowance for loan losses (159,532 )     (159,532 )     (157,832 )
Net loans 13,733,829       13,824,142       13,414,677  
Loans held for sale 16,435 21,398 15,559
Investment securities:
Available for sale debt securities 8,432,180 8,725,442 9,618,109
Trading debt securities 32,025 18,269 20,200
Equity securities 51,512 50,591 55,691
Other securities 108,320       99,005       99,863  
Total investment securities 8,624,037       8,893,307       9,793,863  
Federal funds sold and short-term securities purchased under agreements to resell 17,000 42,775 2,205
Long-term securities purchased under agreements to resell 700,000 700,000 725,000
Interest earning deposits with banks 134,697 30,631 120,234
Cash and due from banks 423,048 438,439 416,161
Land, buildings and equipment — net 332,253 335,110 335,191
Goodwill 138,921 138,921 138,921
Other intangible assets — net 7,893 7,618 6,700
Other assets 483,129       401,074       339,660  
Total assets $ 24,611,242       $ 24,833,415       $ 25,308,171  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing $ 6,953,430 $ 7,158,962 $ 7,237,815
Savings, interest checking and money market 11,828,138 11,499,620 11,439,078
Time open and C.D.’s of less than $100,000 615,401 634,646 696,776
Time open and C.D.’s of $100,000 and over 1,141,502       1,132,218       1,718,184  
Total deposits 20,538,471       20,425,446       21,091,853  
Federal funds purchased and securities sold under agreements to repurchase 1,132,329 1,507,138 1,321,149
Other borrowings 9,214 1,758 101,975
Other liabilities 225,500       180,889       229,629  
Total liabilities 21,905,514       22,115,231       22,744,606  
Stockholders’ equity:
Preferred stock 144,784 144,784 144,784
Common stock 535,407 535,407 510,015
Capital surplus 1,802,785 1,815,360 1,544,034
Retained earnings 325,390 221,374 337,046
Treasury stock (15,681 ) (14,473 ) (7,588 )
Accumulated other comprehensive income (loss) (89,563 )     14,108       30,412  
Total stockholders’ equity 2,703,122 2,716,560 2,558,703
Non-controlling interest 2,606       1,624       4,862  
Total equity 2,705,728       2,718,184       2,563,565  
Total liabilities and equity     $ 24,611,242       $ 24,833,415       $ 25,308,171  
 
 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS

 

(Unaudited)
(In thousands)

    For the Three Months Ended
   

March 31,
2018

 

December 31,
2017

 

September 30,
2017

 

June 30,
2017

 

March 31,
2017

ASSETS:        
Loans:
Business $ 4,934,621 $ 4,818,419 $ 4,777,222 $ 4,827,439 $ 4,906,672
Real estate — construction and land 951,930 948,043 887,596 862,479 828,017
Real estate — business 2,733,812 2,720,356 2,710,453 2,701,144 2,645,531
Real estate — personal 2,062,083 2,044,651 2,017,264 2,003,997 2,012,456
Consumer 2,072,168 2,100,762 2,070,398 1,997,761 1,974,894
Revolving home equity 392,727 394,231 395,212 399,730 405,432
Consumer credit card 757,692 756,544 739,692 731,471 747,783
Overdrafts 4,628     5,295     4,373     4,505     4,185  
Total loans 13,909,661     13,788,301     13,602,210     13,528,526     13,524,970  
Allowance for loan losses (158,779 )   (157,026 )   (156,909 )   (157,003 )   (155,328 )
Net loans 13,750,882     13,631,275     13,445,301     13,371,523     13,369,642  
Loans held for sale 19,115 18,158 21,227 18,341 11,972
Investment securities:
U.S. government and federal agency obligations 916,655 917,664 917,808 910,821 913,474
Government-sponsored enterprise obligations 405,681 452,104 456,668 450,362 450,489
State and municipal obligations 1,513,243 1,630,660 1,699,365 1,771,674 1,783,103
Mortgage-backed securities 3,925,904 3,949,933 3,718,697 3,708,124 3,760,294
Asset-backed securities 1,469,488 1,622,778 2,025,415 2,335,344 2,359,644
Other debt securities 341,821 351,177 322,231 320,869 327,006
Unrealized gain (loss) on debt securities (43,238 )   36,875     73,291     57,547     14,783  
Total available for sale debt securities 8,529,554 8,961,191 9,213,475 9,554,741 9,608,793
Trading debt securities 21,966 20,401 21,149 21,062 25,165
Equity securities 50,507 82,416 51,204 53,162 56,122
Other securities 100,993     95,485     100,776     99,545     98,458  
Total investment securities 8,703,020     9,159,493     9,386,604     9,728,510     9,788,538  
Federal funds sold and short-term securities purchased under agreements to resell 44,339 27,017 23,807 13,115 9,887
Long-term securities purchased under agreements to resell 700,000 699,999 662,490 665,655 725,001
Interest earning deposits with banks 273,977 270,222 211,219 139,061 207,845
Other assets 1,145,200     1,157,289     1,122,230     1,106,528     1,139,402  
Total assets $ 24,636,533     $ 24,963,453     $ 24,872,878     $ 25,042,733     $ 25,252,287  
 
LIABILITIES AND EQUITY:
Non-interest bearing deposits $ 6,824,700 $ 7,257,102 $ 7,135,703 $ 7,065,849 $ 7,246,698
Savings 838,900 821,908 829,197 831,038 795,695
Interest checking and money market 10,737,829 10,416,221 10,387,212 10,667,042 10,603,988
Time open & C.D.’s of less than $100,000 625,319 644,951 667,710 688,047 705,135
Time open & C.D.’s of $100,000 and over 1,134,194     1,119,352     1,326,290     1,510,001     1,671,125  
Total deposits 20,160,942     20,259,534     20,346,112     20,761,977     21,022,641  
Borrowings:

Federal funds purchased and securities sold under agreements to repurchase

1,560,573 1,625,828 1,500,987 1,363,031 1,356,316
Other borrowings 1,913     42,060     101,904     105,311     102,011  
Total borrowings 1,562,486 1,667,888 1,602,891 1,468,342 1,458,327
Other liabilities 198,398     312,172     251,714     203,139     234,144  
Total liabilities 21,921,826     22,239,594     22,200,717     22,433,458     22,715,112  
Equity 2,714,707     2,723,859     2,672,161     2,609,275     2,537,175  
Total liabilities and equity     $ 24,636,533     $ 24,963,453     $ 24,872,878     $ 25,042,733     $ 25,252,287  
 
 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE RATES

 
(Unaudited)     For the Three Months Ended
   

March 31,
2018

 

December 31,
2017

 

September 30,
2017

 

June 30,
2017

 

March 31,
2017

ASSETS:        
Loans:
Business (1) 3.48 % 3.32 % 3.25 % 3.21 % 3.02 %
Real estate — construction and land 4.69 4.41 4.31 4.30 3.85
Real estate — business 4.06 3.90 3.85 3.74 3.63
Real estate — personal 3.80 3.72 3.72 3.72 3.74
Consumer 4.25 4.07 4.02 3.94 3.89
Revolving home equity 4.25 4.06 4.03 3.84 3.64
Consumer credit card 12.06 11.90 12.03 11.90 11.66
Overdrafts —     —     —     —     —  
Total loans 4.33     4.18     4.13     4.06     3.92  
Loans held for sale 6.45 5.55 5.36 5.75 6.64
Investment securities:
U.S. government and federal agency obligations 2.12 2.60 1.40 2.52 2.09
Government-sponsored enterprise obligations 1.84 1.69 1.61 1.59 1.58
State and municipal obligations (1) 3.06 3.60 3.57 3.61 3.65
Mortgage-backed securities 2.62 2.38 2.36 2.35 2.38
Asset-backed securities 2.11 1.94 1.82 1.72 1.63
Other debt securities 2.65     2.56     2.51     2.54     2.56  
Total available for sale debt securities 2.52 2.52 2.34 2.42 2.37
Trading debt securities (1) 2.73 2.63 2.51 2.70 2.77
Equity securities (1) 3.64 3.30 4.02 3.97 3.99
Other securities (1) 6.73     6.67     5.39     10.50     20.30  
Total investment securities 2.58     2.58     2.37     2.50     2.57  
Federal funds sold and short-term securities purchased under agreements to resell 1.65 1.35 1.30 1.13 .94
Long-term securities purchased under agreements to resell 2.38 2.36 2.28 2.22 2.12
Interest earning deposits with banks 1.69     1.18     1.24     1.04     .77  
Total interest earning assets 3.59     3.48     3.36     3.36     3.29  
 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings .12 .12 .12 .12 .13
Interest checking and money market .20 .17 .16 .15 .14
Time open & C.D.’s of less than $100,000 .43 .40 .40 .39 .37
Time open & C.D.’s of $100,000 and over 1.02     .88     .83     .75     .67  
Total interest bearing deposits .28     .24     .24     .23     .21  
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase 1.04 .83 .75 .60 .46
Other borrowings 2.54     3.59     3.53     3.47     3.53  
Total borrowings 1.04     .90     .93     .81     .67  
Total interest bearing liabilities .36 %   .31 %   .31 %   .29 %   .26 %
 
Net yield on interest earning assets     3.37 %   3.29 %   3.17 %   3.18 %   3.13 %

(1)

 

Stated on a tax equivalent basis using a federal income tax rate of 21% in 2018 and 35% in prior periods.

 
 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CREDIT QUALITY

 
    For the Three Months Ended

(Unaudited)

March 31,   December 31,   September 30,   June 30,   March 31,

(In thousands, except per share data)

    2018   2017   2017   2017   2017
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 159,532 $ 157,832 $ 157,832 $ 157,832 $ 155,932
Provision for losses 10,396 12,654 10,704 10,758 11,128
Net charge-offs (recoveries):
Commercial portfolio:
Business (14 ) 768 195 318 97
Real estate — construction and land (36 ) (87 ) (362 ) (207 ) (535 )
Real estate — business (205 )   (48 )   (106 )   (10 )   (39 )
(255 )   633     (273 )   101     (477 )
Personal banking portfolio:
Consumer credit card 7,566 7,724 7,631 7,750 7,148
Consumer 2,528 2,184 3,057 2,642 2,096
Overdraft 444 376 445 292 435
Real estate — personal 57 (56 ) (137 ) (131 ) 19
Revolving home equity 56     93     (19 )   104     7  
10,651     10,321     10,977     10,657     9,705  
Total net loan charge-offs 10,396     10,954     10,704     10,758     9,228  
Balance at end of period     $ 159,532     $ 159,532     $ 157,832     $ 157,832     $ 157,832  
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business — % .06 % .02 % .03 % .01 %
Real estate — construction and land (.02 ) (.04 ) (.16 ) (.10 ) (.26 )
Real estate — business (.03 )   (.01 )   (.02 )   —     (.01 )
(.01 )   .03     (.01 )   —     (.02 )
Personal banking portfolio:
Consumer credit card 4.05 4.05 4.09 4.25 3.88
Consumer .49 .41 .59 .53 .43
Overdraft 38.91 28.17 40.37 26.00 42.15
Real estate — personal .01 (.01 ) (.03 ) (.03 ) —
Revolving home equity .06     .09     (.02 )   .10     .01  
.82     .77     .83     .83     .77  
Total     .30 %   .32 %   .31 %   .32 %   .28 %
CREDIT QUALITY RATIOS
Non-performing assets to total loans .08 % .09 % .11 % .10 % .11 %
Non-performing assets to total assets .05 .05 .06 .06 .06
Allowance for loan losses to total loans     1.15     1.14     1.15     1.16     1.16  
NON-PERFORMING ASSETS
Non-accrual loans:
Business $ 5,557 $ 5,947 $ 6,821 $ 6,330 $ 7,935
Real estate — construction and land 5 5 533 544 585
Real estate — business 2,546 2,736 2,346 1,833 1,764
Real estate — personal 2,169 2,461 2,863 3,504 3,368
Consumer —     834     1,077     1,151     1,151  
Total 10,277     11,983     13,640     13,362     14,803  
Foreclosed real estate 1,300     681     1,063     515     387  
Total non-performing assets $ 11,577     $ 12,664     $ 14,703     $ 13,877     $ 15,190  
Loans past due 90 days and still accruing interest     $ 14,928     $ 18,127     $ 16,464     $ 14,630     $ 14,908  

*as a percentage of average loans (excluding loans held for sale)

 

COMMERCE BANCSHARES, INC.
Management Discussion of First Quarter Results
March 31, 2018

For the quarter ended March 31, 2018, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $101.0 million, compared to $94.4 million in the previous quarter and $71.5 million in the same quarter last year. The increase in net income over the previous quarter was the result of continued growth in net interest income coupled with lower non-interest expense and a reduction in the provision for loan losses. The net interest margin increased to 3.37%. The Company also recorded securities gains of $5.4 million this quarter, mostly related to its private equity investments. Quarterly average loans increased $122.3 million over the previous quarter, while average deposits decreased $98.6 million. For the quarter, the return on average assets was 1.66%, the return on average common equity was 15.6%, and the efficiency ratio was 58.2%.

In the current quarter, the Company adopted ASU 2014-09 - Revenue from Contracts with Customers, and as a result reclassified certain bank card related network and rewards costs from non-interest expense to bank card transaction fees and restated all prior periods for this reclassification. The effect on the 1st and 4th quarters of 2017 was to lower bank card fee income and non-interest expense by $7.5 million and $4.8 million, respectively. Additionally, the Company adopted ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires all changes in fair value of equity securities to be reflected in net income. As a result, the Company recorded $947 thousand in net securities gains this quarter due to an increase in fair value of the Company’s equity securities.

Balance Sheet Review

During the 1st quarter of 2018, average loans totaled $13.9 billion, up 3.6% (annualized) over the prior quarter, and grew $391.8 million, or 2.9%, over the same period last year. Compared to the previous quarter, average business and business real estate loans grew $116.2 million and $13.5 million, respectively. Personal real estate loans also increased $17.4 million, while consumer loans declined $28.6 million this quarter. Construction loans increased slightly but were constrained as a result of some larger principal pay downs. The growth in business loans was mainly the result of higher seasonal agribusiness lending activities and growth in both leasing and tax-free lending, but was partially offset by several seasonal loan pay downs on outstanding lines of credit. The decrease in consumer loans was mainly due to a decline in auto, marine/RV and home equity lending totaling $29.5 million, but was partially offset by growth of $13.5 million in patient health care loans. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $47.8 million, compared to $48.0 million in the prior quarter.

During the 1st quarter of 2018, total average available for sale debt securities decreased $431.6 million from the previous quarter to $8.5 billion, at fair value. The decline in investment securities was mainly the result of lower average balances of most investment categories as maturities of investment securities were reinvested to fund loan growth. Also, municipal securities totaling $148.4 million were sold at a small gain in response to recent changes in tax rules. Purchases of securities during the quarter totaled $318.1 million and were offset by sales, maturities and pay downs of $505.8 million. At March 31, 2018, the duration of the investment portfolio was 3.1 years, and maturities and pay downs of approximately $1.3 billion are expected to occur during the next 12 months.

Total average deposits decreased $98.6 million, or 2.0% (annualized), this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from a decline in business demand (decrease of $493.5 million), but was offset by growth in money market accounts (increase of $266.7 million), interest checking (increase of $54.9 million), and other demand balances (increase of $61.1 million). The decline in business demand was partly offset by growth in commercial interest checking accounts of $254.7 million as certain commercial customer accounts were moved to interest bearing account types. Compared to the previous quarter, total average consumer deposits increased $116.3 million, while commercial and private banking deposits declined by $193.7 million and $10.8 million, respectively. The average loans to deposits ratio was 69.1% in the current quarter and 68.2% in the prior quarter. The Company’s average borrowings totaled $1.6 billion, a decline of $105.4 million from the prior quarter’s balance.

Net Interest Income

Net interest income in the 1st quarter of 2018 amounted to $192.9 million, compared to $190.0 million in the previous quarter, an increase of $2.9 million. On a tax equivalent basis, net interest income for the current quarter declined $1.3 million from the previous quarter to $196.6 million, as a result of lower tax rates in effect in 2018, which reduced the tax equivalent adjustment by $4.2 million. During the current quarter, the net yield on earning assets (tax equivalent) was 3.37%, compared to 3.29% in the previous quarter and 3.13% in the same period last year. Higher loan balances and rates, coupled with relatively stable funding costs, helped drive up the net interest margin this quarter. Inflation income on the Company’s treasury inflation-protected securities (TIPS) declined $1.1 million this quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) increased $3.3 million, as a result of higher loan yields and average balances on most loan products. The average yield on the loan portfolio increased 15 basis points this quarter to 4.33%, compared to 4.18% in the previous quarter.

Interest income on investment securities (tax equivalent) decreased $3.5 million from the previous quarter, mainly due to a decline in inflation income mentioned above and a lower tax equivalent adjustment on the Company’s municipal investments. Also, the decline in total average investment securities balances of $376.4 million reduced interest income (tax-effected) by $2.3 million. The adjustment for premium amortization expense on changing prepayment speeds for mortgage-backed securities increased interest income $1.5 million this quarter, due to a higher overall interest rate environment. Total inflation income on TIPS totaled $2.0 million in the current quarter and $3.2 million in the previous quarter. The yield on total investment securities was 2.58% in both the current and previous quarter.

Interest costs on deposits remained low and totaled 28 basis points in the 1st quarter of 2018, compared to 24 basis points in the prior quarter. Interest expense on deposits increased $1.3 million this quarter compared with the previous quarter due mainly to higher rates on corporate money market accounts and short-term jumbo certificates of deposit. Borrowing costs increased $226 thousand this quarter mostly due to higher average rates paid on customer repurchase agreements. The overall rate paid on interest bearing liabilities was .36%, compared to .31% in the prior quarter.

Non-Interest Income

In the 1st quarter of 2018, total non-interest income amounted to $119.7 million, an increase of $10.1 million, or 9.2%, compared to the same period last year. Also, current quarter non-interest income increased slightly compared to the prior quarter. The increase in non-interest income over the same period last year was mainly due to growth in trust, bank card and deposit fee income.

Total bank card fees in the current quarter increased $5.7 million, or 15.9%, over the same period last year but declined $1.4 million compared to the prior quarter. As part of the adoption of ASU 2014-09 on January 1, 2018, network and rewards costs related to bank card fees were reclassified from non-interest expense to bank card fee income for all current and prior periods. This reclass lowered bank card fee income $4.8 million in the prior quarter and $7.5 million in the 1st quarter of 2017. Total bank card fees this quarter were comprised of fees on corporate card ($24.2 million), debit card ($9.4 million), merchant ($4.8 million) and credit card ($3.1 million) transactions. Corporate card fees grew $4.2 million over the same period last year due to growth in interchange income of 13.5%, coupled with lower network costs. Debit card fees grew $1.4 million as interchange income was up slightly, and network costs declined $1.3 million compared to the prior year. Overall merchant income was flat with the prior quarter on lower merchant fees offset by lower network costs, while credit card fees grew by 3.6% on higher interchange income and lower network costs, mostly offset by higher rewards costs.

In the current quarter, trust fees increased $4.0 million, or 12.6%, over the same period last year, resulting mainly from growth in both private client and institutional trust fee income. Compared to the same period last year, deposit account fees increased $1.0 million, or 4.7%, due to growth in corporate cash management, deposit and overdraft fees.

During the 1st quarter of 2018, swap fees totaled $669 thousand, an increase of $516 thousand over the same period last year, while loan fees declined $306 thousand, or 9.7%, on lower gains on sales of residential mortgages. Gains on sales of tax credits were strong this quarter and totaled $1.2 million, which was slightly higher than the same period last year. Non-interest income comprised 38.3% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities gains of $5.4 million in the current quarter and $27.2 million in the prior quarter. Net securities losses of $772 thousand were recorded in the 1st quarter of 2017. Net securities gains in the current quarter resulted mainly from unrealized fair value gains of $4.3 million in the Company’s private equity investment portfolio and $947 thousand from other equity securities owned by the Company. The Company also sold $148.4 million in municipal securities and recorded a gain of $212 thousand this quarter.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $182.3 million, compared to $179.4 million in the same period last year. The 1.6% increase in expense over the same period last year was mainly due to higher costs for salaries and benefits, offset by lower operating costs such as supplies and communication, charitable contributions, professional, and equipment.

Compared to the 1st quarter of last year, salaries and benefits expense increased $3.5 million, or 3.1%. Salaries expense grew $2.6 million, mainly due to higher full time salary costs, while benefits expense grew 4.8% as a result of seasonal growth in payroll taxes and 401(k) contributions. Full-time equivalent employees totaled 4,799 and 4,807 at March 31, 2018 and 2017, respectively.

Data processing costs increased $785 thousand, or 3.9%, mainly due to higher software costs, while other costs for supplies and communication, equipment, travel and entertainment, and professional fees declined a total of $1.2 million this quarter. Marketing costs were up $1.6 million partly due to new bank card initiatives which began this quarter.

Income Taxes

The effective tax rate for the Company was 18.7% in the current quarter, 17.6% in the previous quarter, and 25.8% in the 1st quarter of 2017. Tax benefits related to equity compensation totaled $2.9 million this quarter, compared to $4.5 million in the same period last year.

Credit Quality

Net loan charge-offs in the 1st quarter of 2018 amounted to $10.4 million, compared to $11.0 million in the prior quarter and $9.2 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .30% in the current quarter, compared to .32% in the previous quarter and .28% in the 1st quarter of last year. During the 1st quarter of 2018, the Company recorded net loan recoveries on commercial loans of $255 thousand, compared to net loan charge-offs of $633 thousand in the prior quarter. Net loan charge-offs on personal banking loans totaled $10.7 million in the current quarter and $10.3 million in the previous quarter.

In the 1st quarter of 2018, annualized net loan charge-offs on average consumer credit card loans were 4.05% in both the current and previous quarters, and 3.88% in the same period last year. Consumer loan net charge-offs were .49% of average consumer loans in the current quarter, .41% in the prior quarter and .43% in the same quarter last year. This quarter, the provision for loan losses equaled net loan charge-offs, and at March 31, 2018, the allowance totaled $159.5 million, or 1.15% of total loans.

At March 31, 2018, total non-performing assets amounted to $11.6 million, a decrease of $1.1 million from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($10.3 million and $1.3 million, respectively). At March 31, 2018, the balance of non-accrual loans, which represented .07% of loans outstanding, included business loans of $5.6 million, business real estate loans of $2.5 million, and personal real estate loans of $2.2 million. Loans more than 90 days past due and still accruing interest totaled $14.9 million at March 31, 2018.

Other

During the 1st quarter of 2018, the Company paid a cash dividend of $.235 per common share, representing a 9.8% increase over the prior quarter. The Company also paid an annualized 6% cash dividend on its preferred stock. The Company purchased 290,684 shares of treasury stock during the current quarter at an average price of $58.71.

Forward Looking Information

This information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include future financial and operating results, expectations, intentions and other statements that are not historical facts. Such statements are based on current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.

Commerce Bancshares, Inc.
Jeffery Aberdeen, 816-234-2081
Controller
[email protected]
http://www.commercebank.com