Commerce Bancshares, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; comparisons are primarily with FY 2016. Commerce is a Missouri-based bank holding company serving consumer, commercial and wealth-management customers, principally across the lower Midwest. At year-end, it reported $24.8 billion in assets, $14.0 billion in loans and $20.4 billion in deposits.
Financial performance and condition
| Metric | FY 2017 | Comparison / context |
|---|---|---|
| Net interest income | $733.7 million | Up 7.9%; tax-equivalent net interest margin rose to 3.20% from 3.04%. |
| Non-interest income | $486.6 million | Up 2.6%; growth in trust, deposit and loan fees partly offset lower bank-card and capital-market fees. |
| Investment securities gains, net | $25.1 million | Compared with a $53,000 net loss in 2016. |
| Provision for loan losses | $45.2 million | Up $8.9 million; net charge-offs rose to $41.6 million from $31.9 million. |
| Non-interest expense | $769.7 million | Up 7.3%; included $32.0 million donated to a related foundation. Efficiency ratio rose to 63.0% from 62.0%. |
| Net income attributable to Commerce Bancshares, Inc. | $319.4 million | Up 16.0%; diluted EPS was $2.89, up 16.1%. ROAA was 1.28%; return on average common equity was 12.46%. |
| Loans / deposits | $14.0 billion / $20.4 billion | Loans grew 4.3%; year-end deposits fell 3.2% from 2016. |
| Capital | Tier 1 common ratio 12.65%; total risk-based capital 14.35% | Tangible common equity to tangible assets was 9.84%, up from 8.66%. |
Assets declined to $24.8 billion from $25.6 billion. Cash and cash equivalents fell $270.6 million to $511.8 million. Operating activities provided $433.2 million; investing activities provided $220.7 million, while financing activities used $924.5 million, primarily reflecting deposit and borrowing reductions, dividends and share repurchases. Long-term debt was nearly zero after repayment of $100 million in FHLB advances; year-end federal funds purchased and repurchase agreements totaled $1.5 billion. Management cited $3.4 billion of available FHLB and Federal Reserve borrowing capacity and approximately $1.4 billion of expected securities maturities and paydowns in 2018.
Material changes and notable items
- Net income growth reflected higher net interest income, securities gains and lower income taxes, partly offset by higher expenses and loan-loss provision. Average loans grew approximately 5.3%, and the average loan yield increased to 4.07% from 3.86%.
- Credit performance was mixed: non-performing assets fell to $12.7 million, or 0.09% of loans, but net charge-offs increased to 0.31% of average loans from 0.25%. Potential problem loans increased to $213.4 million from $99.5 million, largely after downgrades of commercial and industrial and lease loans.
- Consumer credit-card net charge-offs rose to $30.3 million; the charge-off ratio increased to 4.07% from 3.39%. The allowance was $159.5 million, or 1.14% of loans, versus 1.16% a year earlier.
- The $25.1 million securities gain included $31.1 million of gains on donated appreciated securities and $10.1 million of gains on stock sales, offset by bond-sale and private-equity losses. The related $32.0 million foundation contribution was recorded as expense.
- The Tax Cuts and Jobs Act reduced 2017 tax expense through deferred-tax remeasurement; the company also recorded tax benefits related to share-based compensation and the securities donation. The effective tax rate was 25.7%, versus 31.1% in 2016.
Outlook, risks and contingencies
The filing provides no earnings or revenue guidance. Management said further Federal Reserve rate increases were expected in 2018 and estimated a 2018 effective tax rate of 19%–21% following tax reform. The Board increased the first-quarter 2018 common cash dividend by nearly 10%. Management considered liquidity adequate, but noted that continued deposit declines could increase reliance on securities cash flows or borrowings. Interest-rate simulations show results depend materially on deposit attrition: under the more adverse attrition scenario, modeled net interest income declined under rising-rate scenarios.
Key risks include regional economic concentration, competition and technology investment, interest-rate and liquidity exposure, credit losses and subjective loan-loss estimates, securities valuation and impairment, regulation, cybersecurity and third-party vendor disruptions. Off-balance-sheet commitments included $10.8 billion of credit commitments and $387.8 million of standby letters of credit; these totals do not represent expected drawdowns. The company also had $114.9 million of state tax-credit purchase commitments expected to be funded in 2018. Management reported ordinary-course legal proceedings and records accruals when losses are probable and estimable; the filing text does not provide a clear quantified maximum exposure. The auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether elevated potential problem loans and higher charge-offs, particularly in credit cards and certain commercial loans, persist or result in increased provisions.
- Whether deposit balances stabilize and how funding costs and deposit attrition respond to additional rate changes.
- How much 2017 earnings depended on securities gains, the foundation donation and tax-related benefits, and whether such items recur.
- Whether the stated 19%–21% 2018 effective tax-rate expectation and planned securities maturities develop as described.
- The amount and risk profile of actual draws on credit commitments, tax-credit funding obligations, and any developments in legal or regulatory matters.