Commerce Bancshares, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are noted where useful. Commerce is a Missouri-based bank holding company operating primarily in Missouri, Kansas, Illinois, Oklahoma and Colorado through Consumer, Commercial and Wealth businesses.
Financial performance and condition
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net interest income | $645.9 million | $635.5 million | Up 1.6% |
| Non-interest income | $405.1 million | $396.3 million | Up 2.2% |
| Total revenue (net interest income plus non-interest income) | $1,051.0 million | $1,031.8 million | Up 1.9% |
| Provision for loan losses | $100.0 million | $160.7 million | Down 37.8% |
| Non-interest expense | $631.1 million | $621.7 million | Up 1.5% |
| Net income | $221.7 million | $169.1 million | Up 31.1% |
| Diluted earnings per share | $2.52 | $1.97 | Up 27.9% |
- Profitability and margins: Return on average assets was 1.22% versus 0.96%; return on average equity was 11.15% versus 9.76%. Tax-equivalent net interest margin was 3.89%, down from 3.93%; efficiency ratio improved slightly to 59.7% from 59.9%.
- Credit quality: Net charge-offs were $96.9 million, or 1.00% of average loans, compared with $138.8 million, or 1.31%, in 2009. Non-performing assets fell to $97.3 million (1.03% of loans) from $116.7 million (1.15%). The allowance was $197.5 million, equal to 2.10% of loans, versus $194.5 million and 1.92% a year earlier.
- Balance sheet: Assets were $18.5 billion, loans $9.5 billion, deposits $15.1 billion and equity $2.0 billion at year-end. Loans declined 7.2%; deposits grew 6.2%. Investment securities totaled $7.4 billion, up from $6.5 billion.
- Funding, debt and liquidity: Average loans-to-deposits declined to 70.0% from 79.8%. Cash and cash equivalents were $460.7 million at year-end. Other borrowings were $112.3 million and federal funds purchased and repurchase agreements were $982.8 million; the latter included $400 million of structured repurchase agreements. The filing reports total long-term debt of $512.3 million, including structured repurchase agreements. Available-for-sale securities were $7.3 billion; core deposits were $12.3 billion. The company reported substantial additional FHLB and Federal Reserve borrowing capacity.
- Cash flow: Operating activities provided $671.2 million; investing activities used $654.5 million; financing activities used $19.9 million. Cash and cash equivalents decreased $3.2 million over the year.
- Capital: Consolidated Tier 1 risk-based capital was 14.38%, total risk-based capital 15.75%, and leverage ratio 10.17%. The Bank was described as well-capitalized.
- Shareholder returns: Cash dividends were $78.2 million ($0.895 per share, restated for the 5% stock dividend). The company repurchased approximately 1.1 million shares during 2010.
Material changes versus 2009
- Net income rebounded primarily because the loan-loss provision fell $60.7 million; lower charge-offs were reported across most loan categories. Commercial segment pre-tax income rose 44.2%, while Consumer and Wealth pre-tax income increased 2.7% and 2.5%, respectively.
- Net interest income increased modestly as lower deposit and borrowing costs and higher average securities balances offset declining loan balances and yields. Average loans fell 8.8%; deposits grew, particularly money market balances.
- Bank-card fees rose 21.9% to $148.9 million, led by corporate card growth. Deposit account charges fell 12.9% to $92.6 million, mainly due to lower overdraft fees following new opt-in rules.
- Loans fell $734 million, including a $204 million decline in construction and land loans and the sale of the $311 million held-to-maturity student loan portfolio. Deposits increased $875 million.
- Other borrowings declined substantially after scheduled maturities and repayment of $125 million in FHLB advances; this early repayment generated an $11.8 million penalty.
Outlook, risks, contingencies and unusual items
- Management did not provide specific earnings or revenue guidance and said it did not expect significant economic improvement in the near term. Loan growth depends on economic recovery and customer demand; interest rates, credit quality and deposit behavior remain significant uncertainties.
- Management estimated overdraft-rule changes would reduce annualized pre-tax revenue by $15–$16 million. The Federal Reserve’s proposed debit interchange limits could materially reduce fees; Commerce reported $57 million of debit interchange fees subject to the proposal in 2010. The company also expected proposed FDIC assessment changes, if adopted, to reduce 2011 expense by $4–$5 million.
- The Dodd-Frank Act and Basel III were expected to bring further regulatory changes; the company said their full effects could not yet be assessed. The company also ended federally guaranteed student-loan originations effective July 1, 2010.
- Investment securities produced a net loss of $1.8 million. Non-agency mortgage-backed securities had $7.5 million of cumulative credit-related impairment recognized in earnings and $12.2 million of pre-tax noncredit-related impairment in other comprehensive income. Auction-rate securities valued at $150.1 million relied on Level 3 valuation inputs.
- Other notable items included a $6.9 million gain on sale of student loans, a $4.4 million reduction in the Visa litigation indemnification liability, and $2.0 million of impairment charges on premises and other fixed assets. The combined effect of identified significant income and expense items reduced pre-tax income by approximately $0.5 million.
- Off-balance-sheet commitments included $7.4 billion of commitments to extend credit and $338.7 million of standby letters of credit; management said many commitments may expire unused and did not expect material losses. State tax-credit purchase commitments were $131.5 million.
- Two 2010 class-action suits alleged unfair assessment of debit-card overdraft fees. The outcomes were not determinable at the filing date. Management stated other pending lawsuits were not expected to have a significant financial effect.
- Key risks include regional economic weakness, commercial real estate and consumer credit losses, valuation uncertainty in securities, interest-rate and liquidity exposure, regulatory costs, competition, and operational or customer-data security events.
Important facts for investors to verify
- Whether credit trends continue to improve, especially in construction and land lending, consumer credit cards, and troubled debt restructurings; review allowance assumptions and the $233.5 million of potential problem loans.
- Whether non-agency mortgage-backed and auction-rate security valuations and related impairment estimates remain supportable, and whether further losses are recognized.
- The realized revenue and expense effects of overdraft and debit interchange rules, FDIC assessments, Dodd-Frank implementation and Basel III.
- Deposit mix and stability, refinancing and maturity needs for borrowings, and the continued availability of pledged collateral and contingent funding sources.
- Developments in the overdraft-fee litigation and the company’s Visa indemnification obligation.
The independent auditor issued an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2010.