Commerce Bancshares, Inc. — FY 2012 Form 10-K
Business and period: Annual report for the year ended December 31, 2012, filed February 22, 2013. Commerce Bancshares is a Missouri-based bank holding company serving primarily Missouri, Kansas, and central Illinois, with operations in Oklahoma and Colorado. Its Consumer, Commercial, and Wealth segments contributed 23%, 63%, and 14% of 2012 segment pretax income, respectively.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net interest income | $639.9 million | $646.1 million |
| Non-interest income | $399.6 million | $392.9 million |
| Net securities gains | $4.8 million | $10.8 million |
| Provision for loan losses | $27.3 million | $51.5 million |
| Non-interest expense | $618.5 million | $617.2 million |
| Net income attributable to Commerce Bancshares | $269.3 million | $256.3 million |
| Diluted EPS | $2.90 | $2.69 |
| Net interest margin, tax-equivalent | 3.41% | 3.65% |
| Return on average assets / equity | 1.30% / 12.00% | 1.32% / 12.15% |
| Assets / loans / deposits / equity at year end | $22.2 billion / $9.8 billion / $18.3 billion / $2.2 billion | $20.6 billion / $9.2 billion / $16.8 billion / $2.2 billion |
Cash flow and liquidity: Operating activities provided $383.1 million; investing activities used $1.16 billion; financing activities provided $1.04 billion. Cash and cash equivalents increased $262.3 million to $779.8 million. Deposits rose 9.2%, while loans grew 7.1%. The year-end loans-to-deposits ratio was 55.8%; core deposits were $16.1 billion, or 87.8% of deposits. Management reported $3.15 billion of available FHLB and Federal Reserve borrowing capacity.
Debt and capital: Long-term debt, including structured repurchase agreements, was $503.7 million. Total borrowings reported on the balance sheet were $1.19 billion. The consolidated Tier 1 risk-based, total risk-based, and leverage ratios were 13.60%, 14.93%, and 9.14%, respectively; the Bank exceeded regulatory “well-capitalized” thresholds. The tangible common equity-to-assets ratio was 9.25%, down from 9.91%.
Fourth-quarter snapshot: Q4 net income attributable to the Company was $66.8 million and diluted EPS was $0.72, compared with $61.5 million and $0.66 in Q4 2011. Q4 2012 included a $3.7 million net securities loss.
Material changes from 2011
- Net income rose 5.1% and diluted EPS rose 7.8%, primarily reflecting a $24.2 million reduction in loan-loss provision and higher non-interest income.
- Net interest income declined $6.2 million and tax-equivalent net interest margin fell 24 basis points, as lower asset yields outweighed the benefit of lower deposit and borrowing costs.
- Net loan charge-offs declined $25.2 million to $39.3 million, or 0.42% of average loans. Non-performing assets fell $28.9 million to $64.9 million, or 0.66% of loans.
- Non-interest income increased 1.7%. Corporate card revenue grew $13.0 million, but debit-card interchange income declined $19.3 million following regulatory fee limits.
- Non-interest expense was nearly flat. Higher salaries, benefits, and data-processing costs were partly offset by lower FDIC insurance expense and the absence of 2011’s $18.3 million overdraft-litigation charge.
- Deposits increased $1.5 billion and loans increased $653.9 million. The Company paid a special dividend of approximately $1.43 per share in addition to regular dividends, and continued its 5% annual stock dividend.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cited persistent low interest rates and weak loan demand as pressures on margins, while noting 7% loan growth and improving credit trends in 2012.
- Management estimated that the agreed change to debit-card transaction posting order could reduce annual overdraft income by $6–$8 million. The Company also accrued $5.2 million for anticipated costs associated with the preliminary Visa/MasterCard interchange settlement, including an expected temporary interchange-fee reduction.
- A lawsuit filed in January 2013 alleges more than $8 million of investor losses tied to a predecessor bank. The Company said the loss was not then probable or estimable, recorded no liability, and expected resolution without material loss; the matter remained subject to ongoing evaluation.
- Principal risks include regional economic concentration, credit losses, interest-rate and liquidity exposure, competitive pressure, regulatory change and compliance costs, cybersecurity and customer privacy, and valuation uncertainty for securities and other assets.
- Fair-value-sensitive holdings include $126.4 million of illiquid auction-rate securities and $68.2 million of private-equity investments measured using significant unobservable inputs. Non-agency mortgage-backed securities with $101.7 million fair value had cumulative recognized credit impairment of $11.6 million.
- Basel III implementation timing was unsettled at filing. Management stated that current capital ratios exceeded the levels in the then-proposed rules. The Company expected approximately $2.2 billion of investment-security maturities and paydowns in 2013.
Important facts for investors to verify
- Whether loan growth and improving delinquencies continue, especially in consumer credit cards, construction, and commercial real estate; review allowance coverage and charge-offs.
- Actual effects and final costs of the interchange settlement and debit-card posting change, including the projected $6–$8 million annual overdraft-income impact.
- Whether margin pressure eases as rates, loan demand, and the investment portfolio’s yield and maturities change.
- Liquidity and capital trends after the special dividend and share repurchases, including the availability and quality of funding sources.
- Developments in the Oklahoma lawsuit and other legal matters, and any changes in accrued contingencies.
- Valuation assumptions and impairment developments for auction-rate, non-agency mortgage-backed, and private-equity holdings.
The independent auditor gave an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2012.