Commerce Bancshares, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; filed February 24, 2016. This is an annual report, not a quarterly filing. Commerce is a Missouri-based bank holding company offering consumer and commercial banking, wealth management, payments, mortgage, leasing, and related services, primarily across the lower Midwest.
Business context and financial performance
At year-end, the Company reported $24.6 billion in assets, $12.4 billion in loans, $20.0 billion in deposits, and $2.4 billion in equity. Commercial, Consumer, and Wealth contributed 60%, 21%, and 19% of segment pre-tax income, respectively.
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net interest income | $634.3 million | $620.2 million |
| Non-interest income | $447.6 million | $436.0 million |
| Total revenue, as defined by the Company | $1,081.9 million | $1,056.2 million |
| Investment securities gains, net | $6.3 million | $14.1 million |
| Provision for loan losses | $28.7 million | $29.5 million |
| Net income attributable to Commerce Bancshares, Inc. | $263.7 million | $261.8 million |
| Net income available to common shareholders | $254.7 million | $257.7 million |
| Diluted earnings per common share | $2.56 | $2.49 |
| Net cash provided by operating activities | $289.1 million | $360.8 million |
Return on average assets was 1.11% (1.15% in 2014), return on average common equity was 11.43% (11.65%), and the net interest margin on a fully taxable equivalent basis was 2.94% (3.00%). The efficiency ratio rose to 62.32% from 61.95%. Non-interest expense increased 3.0% to $675.9 million, including higher compensation and data-processing/software costs.
Balance sheet, credit quality, and liquidity
- Loans increased 8.4% to $12.4 billion; deposits rose 2.6% to $20.0 billion. The loan-to-deposit ratio increased to 61.4% from 59.9%.
- The allowance for loan losses was $151.5 million, or 1.22% of loans, compared with $156.5 million, or 1.36%, in 2014. Net charge-offs were $33.7 million, or 0.28% of average loans, versus $34.5 million, or 0.31%.
- Non-performing assets declined to $29.4 million from $46.3 million, or 0.24% of loans. However, potential problem loans increased to $113.1 million from $81.2 million, mainly due to downgrades of several commercial and industrial loans. Consumer credit-card net charge-offs were $25.0 million and represented 74.2% of total net charge-offs.
- Available-for-sale securities totaled $9.8 billion at fair value. The Company reported $2.1 billion in year-end federal funds purchased and repurchase agreements and $103.8 million in FHLB advances. Long-term debt was modest relative to total liabilities.
- Cash and cash equivalents fell by $598.0 million to $502.7 million. Investing activities used $1.20 billion, largely reflecting loan growth and securities activity; financing activities provided $308.3 million. Management cited $18.0 billion in core deposits, approximately $1.6 billion of expected 2016 securities maturities and paydowns, and $3.2 billion of available FHLB/Federal Reserve borrowing capacity as liquidity sources.
- Under Basel III, consolidated common equity Tier 1, Tier 1, total risk-based capital, and leverage ratios were 11.52%, 12.33%, 13.28%, and 9.23%, respectively. The Company said it met capital adequacy requirements on a fully phased-in basis; the Bank remained well-capitalized.
Material changes versus 2014
Net income attributable to the Company rose 0.8%, while net income available to common shareholders declined 1.2%, reflecting higher preferred dividends. Net interest income increased 2.3% and non-interest income increased 2.7%, but securities gains fell 55.3% and expenses rose 3.0%. Loan growth was stronger than deposit growth, while the net interest margin and profitability ratios declined. Trust fees, bank-card fees, and mortgage banking revenue supported fee growth; mortgage banking revenue rose as the Company began selling certain newly originated longer-term fixed-rate mortgages.
Outlook, commentary, risks, and unusual items
- Management anticipated further loan growth as the economy continued to expand gradually, but provided no specific earnings, revenue, or margin guidance. It warned that rate changes, deposit attrition, loan demand, and funding costs could affect results. Interest-rate simulations showed higher net interest income in rising-rate scenarios under one deposit-attrition assumption, but declines under a more severe deposit-outflow scenario.
- Key risks include the Company’s regional concentration, intense competition, interest-rate and liquidity exposure, credit losses, regulatory and compliance costs, cybersecurity and third-party service-provider risks, and the sensitivity of fair-value estimates to unobservable inputs.
- Construction and land loans increased 54.7% to $624.1 million. Management described exposure to larger speculative commercial properties as low, but noted that real estate lending remains sensitive to economic and property-market conditions.
- Investment securities gains included private-equity valuation and sale activity. The Company recorded $6.3 million of net securities gains in 2015, versus $14.1 million in 2014. It also reported $14.1 million of cumulative credit-related impairment on certain non-agency mortgage-backed securities, whose year-end fair value was $44.0 million.
- Off-balance-sheet commitments included $10.0 billion of commitments to extend credit, including $4.7 billion in unused credit-card lines, and $311.8 million of standby letters of credit. Management did not anticipate material losses from these commitments.
- A purported Missouri class action alleges that certain overdraft fees violated state usury law. The Company said it would defend the case; the amount of any ultimate exposure could not be determined. Other lawsuits were also pending in the ordinary course of business.
- The Company paid $0.857 per common share in cash dividends, issued its 22nd consecutive 5% stock dividend, and repurchased $123.2 million of common stock during 2015. Its financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, particularly in construction lending, is accompanied by stable underwriting and asset quality; monitor the rise in potential problem loans.
- Whether credit-card losses and the allowance for loan losses remain appropriate as the loan portfolio grows.
- How deposit behavior and interest rates affect funding costs, net interest margin, and liquidity, especially under faster deposit outflows.
- Whether securities marks, private-equity valuations, and mortgage-backed securities impairment estimates change materially.
- The progress and potential exposure from the overdraft-fee class action, as well as the utilization of large credit commitments and tax-credit funding commitments.