merce Bancshares(CBSH) - 2024 Q4 - Annual Report

Financial Performance - In 2024, the Commercial, Consumer, and Wealth segments contributed 47%, 31%, and 22% of total segment pre-tax income, respectively[19]. - The Company's net interest income represented 63% of total revenue for the year ended December 31, 2024[52]. - The Federal Reserve raised benchmark interest rates from nearly zero at the start of 2022 to between 5.25% and 5.50% by the end of July 2023, impacting the Company's financial performance[53]. - A significant reduction in the Company's deposits could materially impact its liquidity and ability to fund loans[56]. - The economic conditions in the U.S. are expected to remain uncertain, with inflationary pressures easing but concerns around tax reform and tariffs persisting[46]. Regulatory Compliance - The Company maintains regulatory capital ratios above the "well-capitalized" standards, with a Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a total capital ratio of at least 10%[36]. - The Company is subject to the Bank Secrecy Act (BSA) to help combat money laundering and other crimes, with compliance monitored by the Federal Reserve[25]. - The Company is regulated under the Dodd-Frank Act, which established the Consumer Financial Protection Bureau (CFPB) to supervise certain financial services companies[28]. - The Dodd-Frank Act required stress-testing for certain financial services companies, but the Company is not required to prepare stress testing as specified by the Dodd-Frank Act due to its asset size[29][37]. - The Federal Reserve Board may prohibit the payment of cash dividends if actions constitute unsafe or unsound practices, with dividends limited to the net profit of the current year combined with retained net profits of the preceding two years[33]. Risk Management - The Company has exposure to credit risk due to its transactions with various financial institutions, which could lead to liquidity problems[54]. - The Company’s allowance for credit losses on loans reflects management's estimate of expected credit losses, which may be insufficient if future credit losses increase[62]. - The volatility of the Company's provision for credit losses may change from year to year due to macroeconomic variables, which could materially impact earnings[63]. - The Company may experience adverse effects on its operations and financial results due to public health threats or outbreaks of communicable diseases[71]. - The Company’s efforts to mitigate risks associated with climate change may not effectively protect it from new laws and regulations or changes in consumer behavior[73]. Operational Challenges - The Company is subject to extensive federal and state regulation, which affects its lending practices and capital structure[48]. - The Company faces competition from larger national banks that may lower fees to gain market share, potentially reducing the Company's revenues[47]. - The Company must continue to invest in its products and delivery systems to remain competitive in the financial services industry[47]. - The Company relies on third-party vendors for essential services, exposing it to risks related to vendor performance and operational errors[61]. - The Company may face significant operational risks after system conversions due to rapid technological changes in the financial services industry[69]. - The Company is exposed to potential losses related to security breaches at unaffiliated retailers, which could include costs for card reissuance and losses from fraudulent transactions[61]. Investment and Capital - The Company’s capital ratios are well in excess of the minimum ratios required by Basel III, which includes a minimum common equity Tier 1 capital ratio of 4.5%[35]. - The Company's deposit insurance expense was $33.2 million in 2023, compared to $10.6 million in 2022, and was $16.5 million for the year ended December 31, 2024[32]. - The FDIC raised the minimum designated reserve ratio from 1.15% to 1.35% of estimated insured deposits, affecting deposit insurance assessments[31]. - The fair value of the Company's available for sale debt securities included a net unrealized loss of $991 million as of December 31, 2024, primarily due to rising interest rates during 2022 and 2023[65]. - The Company relies on dividends from its subsidiary bank for most of its revenue, which are limited by federal and state regulations[57].