Commerce Bancshares, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Commerce Bancshares is a Missouri-based bank holding company serving primarily the lower Midwest, with retail, commercial and wealth-management businesses. At year-end it reported $24.0 billion in assets, $11.5 billion in loans, $19.5 billion in deposits and $2.3 billion in equity.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income | $620.2 million | $619.4 million |
| Non-interest income | $436.0 million | $418.4 million |
| Total revenue (net interest income plus non-interest income) | $1,056.2 million | $1,037.8 million |
| Net securities gains (losses) | $14.1 million | $(4.4) million |
| Net income attributable to Commerce Bancshares | $261.8 million | $261.0 million |
| Net income available to common shareholders | $257.7 million | $261.0 million |
| Diluted earnings per common share | $2.61 | $2.59 |
| Net interest margin, tax-equivalent | 3.00% | 3.11% |
| Return on average assets | 1.15% | 1.19% |
| Return on average common equity | 11.65% | 11.99% |
| Efficiency ratio | 62.08% | 60.49% |
| Loans / deposits | 59.91% | 57.12% |
- Balance sheet and funding: Assets increased 4.0% to $24.0 billion; loans rose 4.7% to $11.5 billion and deposits rose 2.2% to $19.5 billion. Core deposits were $17.4 billion, or 89.1% of deposits. Year-end federal funds purchased and repurchase agreements were $1.9 billion, up from $1.3 billion; FHLB advances were $104.1 million. The company described liquidity as strong, citing its deposit base, securities portfolio and $3.3 billion of available FHLB/Federal Reserve borrowing capacity.
- Credit quality: The allowance for loan losses was $156.5 million, or 1.36% of loans, versus $161.5 million, or 1.47%, a year earlier. Net charge-offs increased to $34.5 million from $31.4 million; non-performing assets declined to $46.3 million from $55.4 million, equal to 0.40% of loans.
- Cash flow: Operating activities provided $360.8 million; investing activities used $1,062.7 million; financing activities provided $533.0 million. Cash and cash equivalents declined $168.8 million to $1.10 billion.
- Capital: Consolidated Tier 1 risk-based, total risk-based and leverage ratios were 13.74%, 14.86% and 9.36%, respectively. Management estimated a fully phased-in Basel III common equity Tier 1 ratio of 11.99%, above the stated 7.0% minimum including the conservation buffer.
Material changes and notable items
- Total revenue increased 1.8%; non-interest income growth, particularly trust fees and bank-card fees, and a swing to net securities gains supported results. Trust fees rose 9.4% and bank-card fees 5.5%.
- Net interest income was nearly flat and the tax-equivalent margin narrowed 11 basis points, as lower rates on loans and investments offset loan growth and lower deposit funding costs.
- Non-interest expense increased 4.5% to $657.8 million, led by salaries and benefits, other operating costs and bank-card rewards. The efficiency ratio worsened by 1.59 percentage points.
- Provision for loan losses increased 45.1% to $29.5 million. Net charge-offs rose modestly, while non-performing assets and potential problem loans declined.
- The company issued $150 million of 6% non-cumulative perpetual preferred stock in June and used the proceeds in part to fund a $200 million accelerated common-share repurchase. It repurchased $211.0 million of common shares in 2014 and paid $84.2 million in common dividends. A 5% stock dividend was distributed in December; per-share figures are restated for it.
- The company sold three Missouri branches in July, recognizing a $2.1 million gain. The $14.1 million net securities gain included a $19.6 million gain on sale of a private-equity investment, offset in part by a $5.2 million loss on Treasury inflation-protected securities.
- The 2013 Summit Bancshares acquisition added Oklahoma branches and is reflected in comparisons; in 2014 the company sold certain branch assets, loans and deposits in eastern Missouri.
Outlook, risks and contingencies
No quantitative earnings or revenue guidance is provided. Management expected loan growth to continue with a strengthening economy, while warning that persistently low rates could continue to pressure margins. Its rate-sensitivity model projected 12-month net interest income increases of 1.43%, 1.34% and 0.87% under gradual 100-, 200- and 300-basis-point rate increases, respectively, using assumptions that included deposit runoff. Under alternative, slower deposit-runoff assumptions, projected increases were higher. These are scenario estimates, not guidance.
- Key risks include regional economic concentration, competition, changing regulation and capital requirements, interest-rate and liquidity exposure, credit losses, counterparty risk, securities valuation and cybersecurity/privacy incidents.
- Unfunded commitments to extend credit totaled $8.4 billion, including $3.5 billion in unused approved credit-card lines; standby letters of credit totaled $324.8 million. Management did not anticipate material losses from these commitments.
- A Missouri customer class action alleges violations of the state usury statute related to overdraft fees on debit-card and ATM transactions. The company disputed the claim; ultimate exposure was not determinable. It also disclosed other ordinary-course lawsuits and a $1.3 million liability for unrecognized tax benefits.
- Credit-related impairment losses on certain non-agency mortgage-backed securities were $1.4 million in 2014; their year-end fair value was $54.6 million. Auction-rate securities of $95.1 million and private-equity investments of $57.6 million relied on Level 3 valuation inputs.
- The company reported unqualified audit opinions on its financial statements and internal control over financial reporting; management concluded disclosure controls and financial reporting controls were effective at year-end.
Important facts for investors to verify
- Whether loan growth can sustain earnings as the net interest margin declines, and how rising rates affect deposit retention and funding costs.
- The quality and concentration of loan growth, especially consumer/auto, commercial and shared-national-credit exposures; monitor charge-offs, delinquencies, non-accruals and reserve adequacy.
- The valuation and credit performance of non-agency mortgage securities, auction-rate securities and private-equity holdings, including sensitivity to management assumptions.
- The final share count and settlement economics of the accelerated share repurchase, alongside preferred dividends, common dividends and capital levels under Basel III.
- Developments in the overdraft-fee class action, other litigation, and any changes to off-balance-sheet commitments or contingent exposures.