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Commerce Bancshares Inc.$56.09($1.23)(2.15%)

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 Commerce Bancshares, Inc. Reports Fourth Quarter Earnings Per Share of $.96
   Thursday, January 17, 2019 6:00:00 AM ET

KANSAS CITY, Mo.--(BUSINESS WIRE)-- Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $.96 per common share for the three months ended December 31, 2018 compared to $.82 per share in the same quarter last year and $.98 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the fourth quarter of 2018 amounted to $109.7 million, compared to $94.4 million in the fourth quarter of 2017 and $112.6 million in the prior quarter. For the current quarter, the return on average assets was 1.75%, the return on average common equity was 15.9%, and the efficiency ratio was 54.5%.



For the year ended December 31, 2018, earnings per common share totaled $3.78 compared to $2.76 in 2017, or an increase of 37%. Net income attributable to Commerce Bancshares, Inc. for the year ended December 31, 2018 increased 36% to $433.5 million compared to $319.4 million last year. For the current year, the return on average assets was 1.76% and the return on average common equity was 16.2%.

In making this announcement, John Kemper, Chief Executive Officer, said, “This quarter we continued to see strong earnings performance as revenue increased $13.8 million, while expenses and credit costs were well controlled. Compared to the prior quarter, net interest income increased $4.5 million, while our net interest margin increased six basis points to 3.58%. The yield on our loan portfolio grew 13 basis points, while funding costs increased only modestly. The diversity of our fee businesses drove growth in non-interest income, which increased $9.4 million this quarter. This growth came from higher bank card, brokerage, swap, and tax credit fees. It also included net gains on branch sales of $7.7 million. Demand for business and business real estate loans improved this quarter and as a result, we experienced growth in new loans and increased line utilization, while seasonal paydowns on some lines of credit partially offset this growth. Average deposits declined slightly.”

Mr. Kemper added, “Overall the economy appears solid and the credit environment remains favorable. Capital and liquidity levels continue to remain very strong. Net loan charge-offs this quarter totaled $12.1 million compared to $9.8 million in the prior quarter and $11.0 million in the same quarter last year. The increase in net loan charge-offs over the prior quarter was mainly due to increased losses of $1.4 million on business loans and higher net loan charge-offs on the Company’s consumer loan portfolio. Credit card net charge-offs remained stable and declined as a percentage of loans this quarter. The ratio of annualized net loan charge-offs to average loans was .34% this quarter compared to .28% last quarter. Non-performing assets increased this quarter to $13.9 million, and the provision for loan losses totaled $12.3 million. At December 31, 2018, the allowance for loan losses amounted to $159.9 million, or 1.13% of period end loans.”

Total assets at December 31, 2018 were $25.5 billion, total loans were $14.2 billion, and total deposits were $20.3 billion. During the fourth quarter, the Company distributed a 5% stock dividend on its common stock. The Company also paid an annualized 6% cash dividend on its preferred stock and a cash dividend of $.224 per common share, as restated for the 5% stock dividend.

Commerce Bancshares, Inc. is a registered bank holding company offering a full line of banking services, including investment management and securities brokerage. The Company currently operates banking facilities in nine key markets including St. Louis, Kansas City, Springfield, Central Missouri, Central Illinois, Wichita, Tulsa, Oklahoma City and Denver. The Company also maintains commercial offices in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids.

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

 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

         
  For the Three Months Ended     For the Year Ended

(Unaudited)
(Dollars in thousands, except per share data)

  December 31,
2018
  September 30,
2018
  December 31,
2017
December 31,
2018
  December 31,
2017
FINANCIAL SUMMARY      
Net interest income $212,220 $207,754 $190,008 $823,825 $733,679
Non-interest income 133,087     123,714     119,383   501,341     461,263  
Total revenue 345,307 331,468 309,391 1,325,166 1,194,942
Investment securities gains (losses), net (7,129 ) 4,306 27,209 (488 ) 25,051
Provision for loan losses 12,256 9,999 12,654 42,694 45,244
Non-interest expense 188,625     185,059     208,859   737,821     744,343  
Income before taxes 137,297 140,716 115,087 544,163 430,406
Income taxes 26,537 26,647 20,104 105,949 110,506
Non-controlling interest expense 1,108     1,493     628   4,672     517  
Net income attributable to Commerce Bancshares, Inc. 109,652 112,576 94,355 433,542 319,383
Preferred stock dividends 2,250     2,250     2,250   9,000     9,000  
Net income available to common shareholders $107,402     $110,326     $92,105   $424,542     $310,383  
Earnings per common share:
Net income — basic $.96 $.99 $.82 $3.79 $2.77
Net income — diluted $.96 $.98 $.82 $3.78 $2.76
Effective tax rate 19.49 % 19.14 % 17.56 % 19.64 % 25.71 %
Tax equivalent net interest income $216,281 $211,368 $197,917 $840,062 $766,601
Average total interest earning assets (1) $ 23,974,108 $ 23,826,980 $ 23,926,315 $ 23,795,364 $ 24,011,034
Diluted wtd. average shares outstanding   110,770,084     111,260,225     111,275,222   111,155,264     111,223,563  
 
RATIOS
Average loans to deposits (2) 69.87 % 69.28 % 68.15 % 69.27 % 66.18 %
Return on total average assets 1.75 1.81 1.50 1.76 1.28
Return on average common equity (3) 15.85 16.43 14.17 16.16 12.46
Non-interest income to total revenue 38.54 37.32 38.59 37.83 38.60
Efficiency ratio (4) 54.53 55.73 67.40 55.58 62.18
Net yield on interest earning assets   3.58     3.52     3.29   3.53     3.19  
 
EQUITY SUMMARY
Cash dividends per common share $.224 $.224 $.204 $.895 $.816
Cash dividends on common stock $24,997 $25,059 $22,897 $100,238 $91,619
Cash dividends on preferred stock $2,250 $2,250 $2,250 $9,000     $9,000  
Book value per common share (5) $25.13 $23.84 $22.99
Market value per common share (5) $56.37 $62.88 $53.18
High market value per common share $64.70 $69.10 $55.15
Low market value per common share $53.40 $61.26 $49.59
Common shares outstanding (5) 111,331,350 111,691,094 111,945,795
Tangible common equity to tangible assets (6) 10.45 % 10.10 % 9.84 %
Tier I leverage ratio   11.52 %   11.38 %   10.39 %
 
OTHER QTD INFORMATION
Number of bank/ATM locations 320 322 327
Full-time equivalent employees   4,795     4,797     4,800  

(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).

 

All share and per share amounts have been restated to reflect the 5% stock dividend distributed in December 2018.

 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

 
    For the Three Months Ended     For the Year Ended

(Unaudited)
(In thousands, except per share data)

    December 31,
2018
  September 30,
2018
  June 30,
2018
  March 31,
2018
  December 31,
2017
December 31,
2018
  December 31,
2017
Interest income $232,832   $224,751   $225,623   $205,995   $201,572 $889,201   $777,407
Interest expense 20,612     16,997     14,664     13,103     11,564   65,376     43,728  
Net interest income 212,220 207,754 210,959 192,892 190,008 823,825 733,679
Provision for loan losses 12,256     9,999     10,043     10,396     12,654   42,694     45,244  
Net interest income after provision for loan losses 199,964     197,755     200,916     182,496     177,354   781,131     688,435  
NON-INTEREST INCOME
Bank card transaction fees 44,481 42,427 43,215 41,453 42,888 171,576 155,100
Trust fees 37,466 37,400 37,036 36,062 35,405 147,964 135,159
Deposit account charges and other fees 23,887 23,755 23,893 22,982 22,598 94,517 90,060
Capital market fees 1,843 1,595 1,992 2,291 1,743 7,721 7,996
Consumer brokerage services 4,184 3,884 3,971 3,768 3,576 15,807 14,630
Loan fees and sales 3,053 3,579 3,229 2,862 3,099 12,723 13,948
Other 18,173     11,074     11,514     10,272     10,074   51,033     44,370  
Total non-interest income 133,087     123,714     124,850     119,690     119,383   501,341     461,263  
INVESTMENT SECURITIES GAINS (LOSSES), NET (7,129 ) 4,306 (3,075 ) 5,410 27,209 (488 ) 25,051
NON-INTEREST EXPENSE
Salaries and employee benefits 120,517 116,194 115,589 115,894 115,741 468,194 448,321
Net occupancy 11,711 11,631 11,118 11,584 11,280 46,044 45,612
Equipment 4,508 4,592 4,594 4,431 4,692 18,125 18,568
Supplies and communication 5,095 5,103 5,126 5,313 6,118 20,637 22,790
Data processing and software 22,216 22,056 21,016 20,690 21,090 85,978 80,998
Marketing 5,602 4,999 5,142 4,805 3,937 20,548 16,325
Deposit insurance 1,796 3,167 3,126 3,457 3,444 11,546 13,986
Community service 480 580 656 729 25,511 2,445 34,377
Other 16,700     16,737     15,493     15,374     17,046   64,304     63,366  
Total non-interest expense 188,625     185,059     181,860     182,277     208,859   737,821     744,343  
Income before income taxes 137,297 140,716 140,831 125,319 115,087 544,163 430,406
Less income taxes 26,537     26,647     29,507     23,258     20,104   105,949     110,506  
Net income 110,760 114,069 111,324 102,061 94,983 438,214 319,900
Less non-controlling interest expense 1,108     1,493     994     1,077     628   4,672     517  
Net income attributable to Commerce Bancshares, Inc. 109,652 112,576 110,330 100,984 94,355 433,542 319,383
Less preferred stock dividends 2,250     2,250     2,250     2,250     2,250   9,000     9,000  
Net income available to common shareholders $107,402     $110,326     $108,080     $98,734     $92,105   $424,542     $310,383  
Net income per common share — basic $.96     $.99     $.96     $.88     $.82   $3.79     $2.77  
Net income per common share — diluted     $.96     $.98     $.96     $.88     $.82   $3.78     $2.76  
 
OTHER INFORMATION
Return on total average assets 1.75 % 1.81 % 1.80 % 1.66 % 1.50 % 1.76 % 1.28 %
Return on average common equity (1) 15.85 16.43 16.78 15.58 14.17 16.16 12.46
Efficiency ratio (2) 54.53 55.73 54.06 58.21 67.40 55.58 62.18
Effective tax rate 19.49 19.14 21.10 18.72 17.56 19.64 25.71
Net yield on interest earning assets 3.58 3.52 3.65 3.37 3.29 3.53 3.19
Tax equivalent net interest income     $216,281     $211,368     $215,775     $196,638     $197,917   $840,062     $766,601  

(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

 
(Unaudited)

(In thousands)

    December 31,
2018
    September 30,
2018
    December 31,
2017
ASSETS            
Loans
Business $ 5,106,427 $ 4,966,722 $ 4,958,554
Real estate — construction and land 869,659 999,691 968,820
Real estate — business 2,875,788 2,726,042 2,697,452
Real estate — personal 2,127,083 2,120,672 2,062,787
Consumer 1,955,572 1,967,465 2,104,487
Revolving home equity 376,399 375,322 400,587
Consumer credit card 814,134 788,111 783,864
Overdrafts 15,236       11,534       7,123  
Total loans 14,140,298       13,955,559       13,983,674  
Allowance for loan losses (159,932 )     (159,732 )     (159,532 )
Net loans 13,980,366       13,795,827       13,824,142  
Loans held for sale 20,694 16,890 21,398
Investment securities:
Available for sale debt securities 8,538,041 8,674,986 8,725,442
Trading debt securities 27,059 19,676 18,269
Equity securities 4,409 4,467 50,591
Other securities 129,157       127,120       99,005  
Total investment securities 8,698,666       8,826,249       8,893,307  
Federal funds sold and short-term securities purchased under agreements to resell 3,320 14,375 42,775
Long-term securities purchased under agreements to resell 700,000 700,000 700,000
Interest earning deposits with banks 689,876 334,752 30,631
Cash and due from banks 507,892 443,004 438,439
Land, buildings and equipment — net 333,119 331,869 335,110
Goodwill 138,921 138,921 138,921
Other intangible assets — net 8,794 8,470 7,618
Other assets 382,194       452,035       401,074  
Total assets $ 25,463,842       $ 25,062,392       $ 24,833,415  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing $ 6,980,298 $ 6,728,605 $ 7,158,962
Savings, interest checking and money market 11,685,239 11,733,057 11,499,620
Certificates of deposit of less than $100,000 586,091 585,765 634,646
Certificates of deposit of $100,000 and over 1,072,031       1,086,193       1,132,218  
Total deposits 20,323,659       20,133,620       20,425,446  
Federal funds purchased and securities sold under agreements to repurchase 1,956,389 1,862,117 1,507,138
Other borrowings 8,702 1,534 1,758
Other liabilities 237,943       257,311       180,889  
Total liabilities 22,526,693       22,254,582       22,115,231  
Stockholders’ equity:
Preferred stock 144,784 144,784 144,784
Common stock 559,432 535,407 535,407
Capital surplus 2,084,824 1,804,031 1,815,360
Retained earnings 241,163 493,641 221,374
Treasury stock (34,236 ) (33,174 ) (14,473 )
Accumulated other comprehensive income (loss) (64,669 )     (141,596 )     14,108  
Total stockholders’ equity 2,931,298 2,803,093 2,716,560
Non-controlling interest 5,851       4,717       1,624  
Total equity 2,937,149       2,807,810       2,718,184  
Total liabilities and equity     $ 25,463,842       $ 25,062,392       $ 24,833,415  
 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

 

(Unaudited)
(In thousands)

    For the Three Months Ended
   

December 31,
2018

 

September 30,
2018

 

June 30,
2018

 

March 31,
2018

 

December 31,
2017

ASSETS:        
Loans:
Business $ 5,028,635 $ 4,926,063 $ 4,962,171 $ 4,934,621 $ 4,818,419
Real estate — construction and land 953,166 992,045 971,854 951,930 948,043
Real estate — business 2,757,595 2,732,968 2,726,697 2,733,812 2,720,356
Real estate — personal 2,122,357 2,110,945 2,078,972 2,062,083 2,044,651
Consumer 1,962,401 1,984,643 2,025,585 2,072,168 2,100,762
Revolving home equity 374,216 373,819 378,366 392,727 394,231
Consumer credit card 788,353 774,512 754,199 757,692 756,544
Overdrafts 5,277     4,704     4,497     4,628     5,295  
Total loans 13,992,000     13,899,699     13,902,341     13,909,661     13,788,301  
Allowance for loan losses (158,880 )   (158,840 )   (158,664 )   (158,779 )   (157,026 )
Net loans 13,833,120     13,740,859     13,743,677     13,750,882     13,631,275  
Loans held for sale 18,475 18,201 22,202 19,115 18,158
Investment securities:
U.S. government and federal agency obligations 923,545 923,557 923,183 916,655 917,664
Government-sponsored enterprise obligations 214,913 261,938 354,156 405,681 452,104
State and municipal obligations 1,361,079 1,375,768 1,394,766 1,513,243 1,630,660
Mortgage-backed securities 4,379,805 4,434,119 4,067,152 3,925,904 3,949,933
Asset-backed securities 1,518,706 1,427,041 1,407,300 1,469,488 1,622,778
Other debt securities 339,841 339,952 340,246 341,821 351,177
Unrealized gain (loss) on debt securities (166,181 )   (119,319 )   (122,114 )   (43,238 )   36,875  
Total available for sale debt securities 8,571,708 8,643,056 8,364,689 8,529,554 8,961,191
Trading debt securities 26,322 24,490 26,101 21,966 20,401
Equity securities 4,432 4,466 47,179 50,507 82,416
Other securities 127,634     120,206     108,563     100,993     95,485  
Total investment securities 8,730,096     8,792,218     8,546,532     8,703,020     9,159,493  
Federal funds sold and short-term securities purchased under agreements to resell 14,415 13,042 36,791 44,339 27,017
Long-term securities purchased under agreements to resell 699,999 685,869 700,000 700,000 699,999
Interest earning deposits with banks 352,942 298,632 353,607 273,977 270,222
Other assets 1,158,816     1,147,250     1,119,454     1,145,200     1,157,289  
Total assets $ 24,807,863     $ 24,696,071     $ 24,522,263     $ 24,636,533     $ 24,963,453  
 
LIABILITIES AND EQUITY:
Non-interest bearing deposits $ 6,666,715 $ 6,677,665 $ 6,749,104 $ 6,824,700 $ 7,257,102
Savings 870,844 877,347 881,045 838,900 821,908
Interest checking and money market 10,840,048 10,839,310 10,850,123 10,737,829 10,416,221
Certificates of deposit of less than $100,000 584,828 593,936 609,011 625,319 644,951
Certificates of deposit of $100,000 and over 1,090,546     1,100,299     1,134,900     1,134,194     1,119,352  
Total deposits 20,052,981     20,088,557     20,224,183     20,160,942     20,259,534  
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase 1,655,997 1,499,837 1,339,278 1,560,573 1,625,828
Other borrowings 1,335     1,833     1,913     1,913     42,060  
Total borrowings 1,657,332 1,501,670 1,341,191 1,562,486 1,667,888
Other liabilities 264,449     296,884     229,080     198,398     312,172  
Total liabilities 21,974,762     21,887,111     21,794,454     21,921,826     22,239,594  
Equity 2,833,101     2,808,960     2,727,809     2,714,707     2,723,859  
Total liabilities and equity     $ 24,807,863     $ 24,696,071     $ 24,522,263     $ 24,636,533     $ 24,963,453  
 
COMMERCE BANCSHARES, INC. and SUBSIDIARIES

 

(Unaudited)     For the Three Months Ended
   

December 31,
2018

 

September 30,
2018

 

June 30,
2018

 

March 31,
2018

 

December 31,
2017

ASSETS:        
Loans:
Business (1) 3.93 % 3.80 % 3.69 % 3.48 % 3.32 %
Real estate — construction and land 5.47 5.21 5.06 4.69 4.41
Real estate — business 4.53 4.35 4.22 4.06 3.90
Real estate — personal 3.87 3.83 3.84 3.80 3.72
Consumer 4.62 4.46 4.39 4.25 4.07
Revolving home equity 4.98 4.72 4.51 4.25 4.06
Consumer credit card 11.91 11.99 12.05 12.06 11.90
Overdrafts                  
Total loans 4.72     4.59     4.49     4.33     4.18  
Loans held for sale 6.59 6.87 6.72 6.45 5.55
Investment securities:
U.S. government and federal agency obligations 1.90 2.23 3.18 2.12 2.60
Government-sponsored enterprise obligations 2.24 2.10 1.88 1.84 1.69
State and municipal obligations (1) 3.06 2.98 3.06 3.06 3.60
Mortgage-backed securities 2.75 2.65 2.60 2.62 2.38
Asset-backed securities 2.55 2.42 2.32 2.11 1.94
Other debt securities 2.60     2.59     2.63     2.65     2.56  
Total available for sale debt securities 2.65 2.60 2.66 2.52 2.52
Trading debt securities (1) 3.21 3.13 3.15 2.73 2.63
Equity securities (1) 39.92 32.69 89.68 3.64 3.30
Other securities (1) 15.51     13.00     6.68     6.73     6.67  
Total investment securities 2.86     2.76     3.19     2.58     2.58  
Federal funds sold and short-term securities purchased under agreements to resell 2.56 2.10 1.93 1.65 1.35
Long-term securities purchased under agreements to resell 2.31 2.26 2.17 2.38 2.36
Interest earning deposits with banks 2.28     1.96     1.80     1.69     1.18  
Total interest earning assets 3.92     3.80     3.90     3.59     3.48  
 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings .11 .11 .11 .12 .12
Interest checking and money market .30 .26 .23 .20 .17
Certificates of deposit of less than $100,000 .70 .56 .46 .43 .40
Certificates of deposit of $100,000 and over 1.61     1.41     1.23     1.02     .88  
Total interest bearing deposits .41     .35     .32     .28     .24  
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase 1.60 1.33 1.18 1.04 .83
Other borrowings 2.67     2.60     2.52     2.54     3.59  
Total borrowings 1.60     1.33     1.19     1.04     .90  
Total interest bearing liabilities .54 %   .45 %   .40 %   .36 %   .31 %
 
Net yield on interest earning assets     3.58 %   3.52 %   3.65 %   3.37 %   3.29 %

(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

 
    For the Three Months Ended     For the Year Ended

(Unaudited)
(In thousands, except per share data)

   

December 31,
2018

 

September 30,
2018

 

June 30,
2018

 

March 31,
2018

 

December 31,
2017

December 31,
2018

 

December 31,
2017

ALLOWANCE FOR LOAN LOSSES          
Balance at beginning of period $ 159,732 $ 159,532 $ 159,532 $ 159,532 $ 157,832 $ 159,532 $ 155,932
Provision for losses 12,256 9,999 10,043 10,396 12,654 42,694 45,244
Net charge-offs (recoveries):
Commercial portfolio:
Business 1,748 332 36 (14 ) 768 2,102 1,378
Real estate — construction and land (183 ) (119 ) (297 ) (36 ) (87 ) (635 ) (1,191 )
Real estate — business (91 )   (42 )   (40 )   (205 )   (48 ) (378 )   (203 )
1,474     171     (301 )   (255 )   633   1,089     (16 )
Personal banking portfolio:
Consumer credit card 7,421 7,340 8,251 7,566 7,724 30,578 30,253
Consumer 2,805 2,091 1,862 2,528 2,184 9,286 9,979
Overdraft 500 351 326 444 376 1,621 1,548
Real estate — personal (144 ) (153 ) (95 ) 57 (56 ) (335 ) (305 )
Revolving home equity     (1 )       56     93   55     185  
10,582     9,628     10,344     10,651     10,321   41,205     41,660  
Total net loan charge-offs 12,056     9,799     10,043     10,396     10,954   42,294     41,644  
Balance at end of period     $ 159,932     $ 159,732     $ 159,532     $ 159,532     $ 159,532   $ 159,932     $ 159,532  
 
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business .14 % .03 % % % .06 % .04 % .03 %
Real estate — construction and land (.08 ) (.05 ) (.12 ) (.02 ) (.04 ) (.07 ) (.14 )
Real estate — business (.01 )   (.01 )   (.01 )   (.03 )   (.01 ) (.01 )   (.01 )
.07     .01     (.01 )   (.01 )   .03   .01      
Personal banking portfolio:
Consumer credit card 3.73 3.76 4.39 4.05 4.05 3.98 4.07
Consumer .57 .42 .37 .49 .41 .46 .49
Overdraft 37.59 29.60 29.08 38.91 28.17 33.93 33.71
Real estate — personal (.03 ) (.03 ) (.02 ) .01 (.01 ) (.02 ) (.02 )
Revolving home equity             .06     .09   .01     .05  
.80     .73     .79     .82     .77   .78     .80  
Total     .34 %   .28 %   .29 %   .30 %   .32 % .30 %   .31 %
 
CREDIT QUALITY RATIOS
Non-performing assets to total loans .10 % .07 % .08 % .08 % .09 %
Non-performing assets to total assets .05 .04 .04 .05 .05
Allowance for loan losses to total loans     1.13     1.14     1.14     1.15     1.14  
 
NON-PERFORMING ASSETS
Non-accrual loans:
Business $ 8,985 $ 5,131 $ 5,114 $ 5,557 $ 5,947
Real estate — construction and land 4 4 5 5 5
Real estate — business 1,715 1,467 2,465 2,546 2,736
Real estate — personal 1,832 1,767 1,888 2,169 2,461
Consumer                 834  
Total 12,536     8,369     9,472     10,277     11,983  
Foreclosed real estate 1,413     1,181     1,039     1,300     681  
Total non-performing assets $ 13,949     $ 9,550     $ 10,511     $ 11,577     $ 12,664  
Loans past due 90 days and still accruing interest     $ 16,658     $ 13,991     $ 13,453     $ 14,928     $ 18,127  

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

 

COMMERCE BANCSHARES, INC.
Management Discussion of Fourth Quarter Results
December 31, 2018

For the quarter ended December 31, 2018, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $109.7 million, compared to $112.6 million in the previous quarter and $94.4 million in the same quarter last year. During the 4th quarter of 2018, non-recurring income totaling $2.9 million ($2.3 million net of tax) was recorded and included a net gain of $7.7 million from the disposition of several branch properties, net securities losses of $7.3 million, and discrete interest and dividends of $2.5 million from the Company’s private equity investments (net of minority interest). Overall the net interest margin grew six basis points, mainly due to higher loan rates and stable funding costs. Excluding the branch gains, non-interest income grew $1.7 million compared to the prior quarter from continued growth in the Company’s diverse revenue sources including bank card, tax credit, swap and brokerage fees. Non-interest expense increased $3.6 million this quarter due to higher salaries and marketing costs. Quarterly average loans increased $92.6 million this quarter over the previous quarter, while average deposits decreased $35.6 million. For the quarter, the return on average assets was 1.75%, the return on average common equity was 15.9%, and the efficiency ratio was 54.5%.

Balance Sheet Review

During the 4th quarter of 2018, average loans totaled $14.0 billion, an increase of $92.6 million over the prior quarter, and grew $204.0 million, or 1.5%, over the same period last year. Period-end loans, however, increased $188.5 million over the prior quarter. Compared to the previous quarter, average business, business real estate, consumer card, and personal real estate loans grew $102.6 million, $24.6 million, $13.8 million, and $11.4 million, respectively. However, this growth was partly offset by a decline in average construction (decline of $38.9 million) and auto (decline of $12.5 million) lending activities. Business loan demand was solid this quarter with several new large loans closed and increased line utilization, notably from agribusiness customers, but this growth was partly offset by some large seasonal loan paydowns. Several larger business real estate loans were also closed this quarter. The decline in construction loans resulted from projects being completed and loans either moved to permanent financing on balance sheet (business real estate) or financed outside of the bank. Also, personal real estate loans grew modestly due to continued demand for adjustable rate mortgages which are kept on-balance sheet. Consumer loans declined $22.2 million due to lower demand for automobile lending and fixed home equity loans. Consumer card balances grew throughout the year and were seasonally higher in the 4th quarter of 2018. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $49.7 million, compared to $56.1 million in the prior quarter.

During the 4th quarter of 2018, total average available for sale debt securities decreased $71.3 million from the previous quarter to $8.6 billion, at fair value. The decrease in investment securities was mainly the result of lower mortgage-backed, government-sponsored enterprise obligations and municipal securities, partly offset by higher average balances of asset-backed securities. Purchases of securities during the quarter totaled $597.8 million and were offset by sales, maturities and pay downs of $820.0 million. At December 31, 2018, the duration of the investment portfolio was 3.2 years, and maturities and pay downs of approximately $1.0 billion are expected to occur during the next 12 months.

Total average deposits decreased $35.6 million this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from lower balances of certificates of deposit (decline of $18.9 million), savings (decline of $6.5 million), and personal and government demand deposits (decline of $79.9 million). These declines were partially offset by a $60.9 million increase in business demand deposits this quarter. Overall, compared to the previous quarter, total average consumer and wealth (including private banking) deposits decreased $59.2 million and $20.4 million, respectively, while average commercial banking deposits grew $46.9 million. The average loans to deposits ratio was 69.9% in the current quarter and 69.3% in the prior quarter. The Company’s average borrowings were $1.7 billion in the 4th quarter of 2018, an increase of $155.7 million over the prior quarter’s balance.

Net Interest Income

Net interest income in the 4th quarter of 2018 amounted to $212.2 million compared to $207.8 million in the previous quarter, an increase of $4.5 million. On a tax equivalent basis, net interest income for the current quarter increased $4.9 million over the previous quarter to $216.3 million. As noted previously, net interest income included non-recurring dividend and interest of $3.1 million in the current quarter and $2.0 million in the prior quarter from the Company’s private equity investments. Also, inflation income on the Company’s inflation protected securities (TIPs) declined $980 thousand this quarter. Excluding these items, net interest income grew $4.5 million and the adjusted net yield on earning assets (tax equivalent) was 3.50% compared to 3.45% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) increased $5.6 million as a result of higher overall loan yields coupled with growth, mainly in business loan balances. The average tax-equivalent yield on the loan portfolio increased 13 basis points this quarter to 4.72%, compared to 4.59% in the previous quarter.

Interest income on investment securities (tax equivalent) increased $2.2 million over the previous quarter, mainly due to higher rates and balances on the Company’s asset-backed securities and the discrete dividends received on the Company’s equity investments noted above. Also, the adjustment for premium amortization expense on slowing prepayment speeds for mortgage-backed and asset-backed securities increased interest income $670 thousand this quarter. However, inflation income on TIPs securities declined $980 thousand to $1.5 million this quarter. The yield on total investment securities was 2.86% in the current quarter and 2.76% in the previous quarter.

Interest costs on deposits remained low and totaled 41 basis points in the 4th quarter of 2018, compared to 35 basis points in the prior quarter. Interest expense on deposits increased $2.0 million this quarter compared to the previous quarter mainly due to higher rates on most deposit categories. Borrowing costs increased $1.7 million this quarter mainly due to higher rates and balances of customer repurchase agreements. The overall rate paid on interest bearing liabilities was .54% in the current quarter, compared to 45% in the prior quarter.

Non-Interest Income

In the 4th quarter of 2018, total non-interest income amounted to $133.1 million, an increase of $13.7 million, or 11.5%, compared to the same period last year and increased $9.4 million compared to the prior quarter. The current quarter includes net gains of $7.7 million from the disposition of several branch properties (included in other income). Excluding this gain, the increase in non-interest income over the same period last year was mainly due to growth in trust, bank card, deposit, tax credit and brokerage fees.

Total bank card fees in the current quarter increased $1.6 million, or 3.7%, over the same period last year and grew $2.1 million, or 4.8%, compared to the prior quarter. Corporate card net fees grew $2.7 million, or 11.6%, over the same quarter last year mainly due to growth in interchange income from increased customer activity. Debit card net fees grew $219 thousand, or 2.2%, driven by growth in fees of 5.9% but offset by higher network processing costs. Overall net merchant income declined $662 thousand due to lower interchange fees and higher processing costs, while net credit card fees declined $674 thousand on higher rewards costs, partly offset by higher interchange revenue. Total net bank card fees this quarter were comprised of fees on corporate card ($26.1 million), debit card ($10.2 million), merchant ($4.4 million) and credit card ($3.8 million) transactions.

In the current quarter, trust fees increased $2.1 million, or 5.8%, over the same period last year, resulting from growth in private client fee income. Compared to the same period last year, deposit account fees increased $1.3 million, or 5.7%, mainly due to growth in corporate cash management fees and consumer deposit fees.

During the 4th quarter of 2018, brokerage fees grew 17.0% over the same period last year to $4.2 million, while cash sweep fees grew 26.4% to $2.6 million. Gains on sales of tax credits totaled $2.0 million this quarter, reflecting an increase of $1.3 million over amounts reported in the same quarter last year. Non-interest income comprised 38.5% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $7.1 million in the current quarter, compared to net securities gains of $4.3 million in the prior quarter and $27.2 million in the 4th quarter of 2017. This quarter, the Company sold securities with a book value of $523.9 million, mainly U.S. Treasury securities, and recorded securities losses of $10.1 million. The proceeds from this sale were reinvested in similar securities with higher rates. Also, gains of $3.1 million (realized and fair value adjustments) were recorded on the Company’s private equity portfolio this quarter.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $188.6 million, compared to $208.9 million in the same period last year and $185.1 million in the prior quarter. The decrease in expense compared to the same period last year was mainly due to a $25.0 million contribution of appreciated securities and a $3.3 million discretionary bonus accrual in 2017 that did not reoccur in 2018, partly offset by higher salaries and benefits, data processing and marketing costs in 2018.

Compared to the 4th quarter of last year, salaries and benefits expense increased $4.8 million, or 4.1%. Salaries expense grew $3.5 million, due to higher full-time salary costs of $6.3 million, while incentive compensation decreased $3.2 million due to the discretionary bonus mentioned above. Benefits expense increased $1.3 million, due to higher medical, payroll taxes and retirement plan costs. Full-time equivalent employees totaled 4,795 and 4,800 at December 31, 2018 and 2017, respectively.

Marketing costs increased $1.7 million partly due to increased marketing efforts to consumer deposit customers and new bank card initiatives. However, deposit insurance expense declined $1.6 million due to reduced FDIC insurance rates in effect this quarter, partly offsetting the increase in marketing expense. Also, supplies and communication expense declined $1.0 million this quarter on lower data network and postage costs, while data processing costs increased $1.1 million due to higher software expense.

Income Taxes

The effective tax rate for the Company was 19.5% in the current quarter, 19.1% in the previous quarter, and 17.6% in the 4th quarter of 2017.

Credit Quality

Net loan charge-offs in the 4th quarter of 2018 amounted to $12.1 million, compared to $9.8 million in the prior quarter and $11.0 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .34% in the current quarter, compared to .28% in the previous quarter and .32% in the 4th quarter of last year. During the 4th quarter of 2018, the Company recorded net loan charge-offs on commercial loans of $1.5 million mainly representing one larger business loan. Net loan charge-offs on personal banking loans totaled $10.6 million in the current quarter and $9.6 million in the previous quarter.

In the 4th quarter of 2018, annualized net loan charge-offs on average consumer credit card loans were 3.73%, compared to 3.76% in the previous quarter, and 4.05% in the same quarter last year. Consumer loan net charge-offs were .57% of average consumer loans in the current quarter, .42% in the prior quarter and .41% in the same quarter last year. This quarter, the provision for loan losses totaled $12.3 million, slightly higher than net loan charge-offs taken this quarter. At December 31, 2018, the allowance totaled $159.9 million, or 1.13% of total loans.

At December 31, 2018, total non-performing assets amounted to $13.9 million, an increase of $4.4 million over the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($12.5 million and $1.4 million, respectively). At December 31, 2018, the balance of non-accrual loans, which represented .09% of loans outstanding, included business loans of $9.0 million, business real estate loans of $1.7 million, and personal real estate loans of $1.8 million. Loans more than 90 days past due and still accruing interest totaled $16.7 million at December 31, 2018.

Other

During the 4th quarter of 2018, the Company distributed a 5% stock dividend on its common stock and paid a cash dividend of $.224 per common share (as restated for the stock dividend), representing a 9.8% increase over the same period last year. The Company also paid an annualized 6% cash dividend on its preferred stock. The Company purchased 578,557 shares of treasury stock during the current quarter at an average price of $61.63.

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, Controller
1000 Walnut Street, Suite 700
Kansas City, MO 64106
Telephone: (816) 234-2081
Web Site: http://www.commercebank.com
Email: mymoney@commercebank.com

Source: Commerce Bancshares, Inc.



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