Commerce Bancshares, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Commerce Bancshares is a Missouri-based bank holding company operating primarily in the Midwest, with retail, commercial banking and wealth-management businesses. It acquired Summit Bancshares on September 1, adding two Oklahoma branches. Per-share figures reflect the 5% stock dividend distributed in December 2013.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income | $619.4 million | $639.9 million |
| Non-interest income | $418.4 million | $399.6 million |
| Total revenue (net interest income plus non-interest income) | $1,037.8 million | $1,039.5 million |
| Provision for loan losses | $20.4 million | $27.3 million |
| Non-interest expense | $629.6 million | $618.5 million |
| Net income attributable to Commerce Bancshares | $261.0 million | $269.3 million |
| Diluted earnings per share | $2.72 | $2.76 |
| Net interest margin, tax-equivalent basis | 3.11% | 3.41% |
| Return on average assets / equity | 1.19% / 11.99% | 1.30% / 12.00% |
| Loans / deposits at year-end | $11.0 billion / $19.0 billion | $9.8 billion / $18.3 billion |
| Cash and cash equivalents at year-end | $1.27 billion | $779.8 million |
| Net cash from operating activities | $360.9 million | $383.1 million |
- Balance sheet and funding: Total assets were $23.1 billion, up from $22.2 billion; equity was $2.21 billion. Deposits increased 3.8%, including $232.3 million acquired with Summit. Core deposits represented 88.5% of deposits. Year-end loans-to-deposits were 57.1%.
- Debt and liquidity: Long-term debt was $455.3 million, including $350 million of structured repurchase agreements maturing in 2014. Total borrowings reported in the liquidity discussion were $1.45 billion. Management reported $3.43 billion of available FHLB and Federal Reserve borrowing capacity and approximately $1.6 billion of expected 2014 investment-security maturities and paydowns.
- Capital: The Company reported Tier 1 risk-based capital of 14.06%, total risk-based capital of 15.28%, and a leverage ratio of 9.43%; it and the Bank met applicable well-capitalized standards. Tangible common equity to assets was 9.00%, down from 9.25%.
- Credit quality: Net charge-offs fell to $31.4 million, or 0.30% of average loans, from $39.3 million, or 0.42%. Non-performing assets declined to $55.4 million (0.51% of loans) from $64.9 million. The allowance was $161.5 million, or 1.47% of loans, versus $172.5 million, or 1.75%.
Changes versus the prior year
- Net income fell 3.1%, mainly reflecting lower net interest income, higher operating expenses and a swing from $4.8 million of securities gains in 2012 to $4.4 million of net losses in 2013. Lower loan-loss provision and higher non-interest income partly offset these pressures.
- Net interest income declined 3.2%; the tax-equivalent net interest margin contracted 30 basis points as low rates reduced yields on loans and securities. Average loans grew 9.9%, while lower deposit rates reduced funding costs.
- Non-interest income rose 4.7%, led by bank-card fees (up $12.4 million) and trust fees (up $7.9 million); capital-markets fees fell $6.9 million. Non-interest expense increased 1.8%, including higher salaries and data-processing costs. The efficiency ratio worsened to 60.5% from 59.3%.
- Loans grew 11.4% at year-end, including Summit balances, with growth in business, consumer and personal real-estate lending. The securities portfolio declined to $9.0 billion from $9.7 billion. Higher market rates contributed to a decline in available-for-sale net unrealized gains to $41.1 million from $263.7 million and a $126.6 million other-comprehensive-income loss.
- Quarterly fourth-quarter net income was $65.9 million, versus $66.8 million in fourth-quarter 2012; diluted EPS was $0.69 in both quarters.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue forecast. It anticipated continued loan growth if the economy strengthened, while warning that persistently low rates could keep pressure on margins. Its year-end rate-sensitivity model estimated net interest income changes of +0.56% for a gradual 100-basis-point rise, +0.17% for 200 basis points, and −0.81% for 300 basis points over 12 months, assuming a static balance sheet.
- Management cited economic conditions in its concentrated regional markets, interest-rate and liquidity changes, credit losses, competition, fair-value estimation, cybersecurity and regulatory costs as key risks. New Basel III capital requirements were scheduled to begin phasing in from 2015; management believed year-end capital would remain well-capitalized under the new rules. The potential effect of the pending debit-interchange litigation was not determinable.
- Debit-card transaction posting changes implemented in February 2013 were expected to reduce annual overdraft income by $3.5 million to $5.5 million. The 2012 Visa interchange settlement generated a $5.2 million accrual; $2.3 million was paid in 2013 and $2.5 million remained accrued at year-end. A separate Oklahoma securities-fraud-related claim alleged investor losses exceeding $9 million; the Company reported substantial defenses and accrued $1.0 million. Other ordinary-course litigation was pending.
- Off-balance-sheet commitments included $8.4 billion of loan commitments (about $3.8 billion of unused credit-card lines) and $325.6 million of standby letters of credit. Management did not anticipate material losses from these commitments. The Company also had $181.8 million of outstanding state tax-credit purchase commitments.
- The Summit acquisition added $261.6 million of assets and was funded with Company shares valued at $43.2 million. It generated $13.3 million of goodwill and $5.6 million of core-deposit intangible. Results were included from September 1; pro forma financial information was omitted because the effect was not material.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of year-end.
Most important facts for investors to verify
- Whether loan growth and fee income can offset continued margin compression and the effects of changing interest rates.
- Credit trends behind declining non-performing assets and the reduced allowance ratio, particularly consumer credit-card losses and growing business lending.
- Available-for-sale securities valuation, unrealized losses, and the assumptions supporting Level 3 auction-rate and private-equity valuations.
- Deposit stability, 2014 structured-repurchase maturities, and the practical availability of reported contingent borrowing capacity.
- Progress and ultimate costs of the Visa and Oklahoma legal matters, debit-card revenue effects, and Summit integration.