Commerce Bancshares in Kansas City, Mo., played to its strength in the second quarter: fee-based businesses, Chief Financial Officer Charles Kim says.

And that's important at a bank that relies on noninterest income for about 40% of its revenue, and at a time when lending is generally flat for most everyone.

“We are less sensitive to the net interest margin swings that a lot of banks experience,” Kim said. “The fee business can be countercyclical to the lending businesses and keep our revenues more steady than if we were just dependent on loan growth.”

Charles Kim, CFO of Commerce Bancshares in Kansas City, Mo.
Natural cushion
“We are less sensitive to the net interest margin swings that a lot of banks experience,” CFO Charles Kim says.

Noninterest income was $123.1 million in the second quarter, up 5.6% from the same period last year. The three biggest drivers of fee income for the $25.1 billion-asset bank were trust fees, bank card fees and deposit account service fees. Strong sales accounted for growth in trust fees, while bank card fees bounced back from a seasonal slowdown in the first quarter, Kim said.

Net income totaled $79 million for the quarter, up 13% compared with the year-ago period. Earnings per share were 75 cents, beating analysts’ average estimate of 70 cents per share. Total revenues increased 6% to $305.9 million.

Analysts’ assessments of Commerce’s results were fairly positive. A Barclays research note highlighted the bank’s robust fee income and said its “sharp deceleration in loan growth” was “the only real negative.” Total loans increased about 4% year over year to $13.6 billion; its linked-quarter loan growth was nearly flat.

Meanwhile, John Rodis, a research analyst with FIG Partners in Atlanta, praised Commerce’s expense controls — it has an efficiency ratio of 60.24% — and above-average return on average assets of 1.26%. He expected 6% to 8% loan growth in the rest of the year and didn’t worry too much about the recent flatness.

“I know some people are focused on the loan growth. Commerce is never going to be your highest-growth bank out there. It’s just a very stable, predictable company,” Rodis said. “This company doesn’t reach. If the growth’s not there, it’s not there.”

Kim attributed some of the slowdown in lending to normal, seasonal declines in the agricultural sector. Commerce does a fair bit of lending in that space, particularly to grain elevators, and many of those business borrowers tend to draw down their lines of credit in the first and second quarters.

“We don’t really have a heavy concentration in agricultural loans, but it’s enough that the seasonality does hit us a little bit in the first and second quarter,” Kim said.

Commerce still benefited from recent bumps in short-term interest rates. Its net interest margin increased to 3.19%, compared with 3.11% in the second quarter last year. Net interest income increased to $182.8 million, up 6.4% from $171.8 million.

Noninterest expenses increased 4.2% year over year to $184.6 million.

Commerce is primarily focused on organic growth, Kim said, but he did not rule out the possibility of an acquisition at some point.

“We’re pretty targeted towards organic growth in the markets where we currently exist,” he said. “From time to time we use M&A to supplement that organic growth and we look for those opportunities continuously, but we’re pretty selective about those acquisitions and they really have to fit our strategic organic-growth targets.”

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