Innovating
for the future.
2018 Annual Report & Form 10-K
Financial Highlights
Letter from the Executive Chairman
Letter from the Chief Executive Officer
Performance Highlights
Commerce by the Numbers
Consumer Banking
Commercial Banking and Payments
Wealth Management
Customer Success Stories
Commerce in the Community
Community Advisors
Officers and Directors
2
3
4
8
9
10
12
15
16
22
25
28
John Kemper, (left) Commerce president and chief operating officer,
became the Bank’s chief executive officer in August 2018 when
David Kemper (right) assumed the role of executive chairman.
1
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT $
634,320
28,727
422,444
6,320
650,792
263,730
254,730
84,961
$ 24,604,962
12,444,299
9,901,680
19,978,853
2,367,418
29,394
112,551
Financial Highlights
(In thousands, except per share data)
2014
2015
2016
2017
2018
O P E R A T I N G R E S U L T S
Net interest income
Provision for loan losses
Non-interest income
Investment securities gains (losses), net
Non-interest expense
Net income attributable to Commerce Bancshares, Inc.
Net income available to common shareholders
Cash dividends on common stock
$
620,204
29,531
410,393
14,124
630,757
261,754
257,704
84,241
$
$
680,049
36,318
446,556
(53)
686,229
275,391
266,391
87,070
733,679 $
45,244
461,263
25,051
744,343
319,383
310,383
91,619
823,825
42,694
501,341
(488)
737,821
433,542
424,542
100,238
A T Y E A R E N D
Total assets
Loans, including held for sale
Investment securities
Deposits
Equity
Non-performing assets
Common shares outstanding1
Tier I common risk-based capital ratio2
Tier I risk-based capital ratio
Total risk-based capital ratio
Tier I leverage ratio
Tangible common equity to tangible assets ratio
Efficiency ratio
$ 23,994,280
11,469,238
9,645,792
19,475,778
2,334,246
46,251
117,087
NA
13.74%
14.86
9.36
8.55
61.00
11.52%
12.33%
13.28
9.23
8.48
61.42
$ 25,641,424
13,427,192
9,770,986
21,101,095
2,501,132
14,649
111,861
11.62%
12.38%
13.32
9.55
8.66
61.04
O T H E R F I N A N C I A L D A T A (based on average balances)
Return on total assets
Return on common equity
Loans to deposits
Equity to assets
Net yield on interest earning assets (T/E)
1.15%
11.65
59.91
10.10
3.00
1.11%
11.43
61.44
10.00
2.93
P E R C O M M O N S H A R E D A T A
Net income - basic1
Net income - diluted1
Market price1
Book value1
Cash dividends1
Cash dividend payout ratio
1 Restated for the 5% stock dividend distributed December 2018.
2 New ratio under Basel III capital guidelines effective January 1, 2015.
$
$
2.16
2.15
35.78
18.70
.705
32.69%
$
2.21
2.21
36.75
19.75
.740
33.35%
1.12%
11.33
63.71
10.16
3.04
2.38
2.37
52.44
21.07
.777
32.69%
$ 24,833,415
14,005,072
8,893,307
20,425,446
2,718,184
12,664
111,946
$ 25,463,842
14,160,992
8,698,666
20,323,659
2,937,149
13,949
111,331
12.65%
13.41%
14.35
10.39
9.84
62.18
1.28%
12.46
66.18
10.53
3.19
14.22%
14.98%
15.82
11.52
10.45
55.58
1.76%
16.16
69.27
11.24
3.53
$
2.77
2.76
53.18
22.99
.816
29.52%
$ 3.79
3.78
57.37
25.13
.895
23.61%
Return on Average Common Equity
Return on Average Assets
2.0%
1.5%
1.0%
0.5%
0.0%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Commerce
Peers
Large Banks
Commerce
Peers
Large Banks
Commerce 10-Year Average: 12.0% Peers’ 10-Year Average: 7.2%
Commerce 10-Year Average: 1.2% Peers’ 10-Year Average: .8%
20.0%
15.0%
10.0%
5.0%
0.0%
2
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT
Letter to our shareholders
David W. Kemper
Executive Chairman
C O M M E R C E B A N C S H A R E S , I N C .
F E B R U A R Y 2 1 , 2 0 1 9
Commerce Bancshares had extraordinary earnings performance in 2018 with both earnings
per share and net income increasing 37%. Several factors contributed to an ideal earnings
environment for banks, including a strong domestic economy, the Federal Reserve raising
short-term interest rates and a reduction in the corporate tax rate. Commerce benefited
from these trends while executing on specific strategic objectives, and this resulted in our
financial performance producing one of the highest equity returns of the 50 largest U.S.
banks.
Longer-term, competitive trends in the global financial services industry will continue to
put pressure on traditional banks. More consolidations, distribution system rationalizations
and increased digital applications for financial services products are expected. Commerce
recognizes these challenges and has been working hard to position our Bank to focus
on products and services that deliver true value to our customers, especially in business
payments and wealth management.
We feel our continued success rests largely on our ability to cultivate a culture that embraces
change and exhibits the agility, communication skills and teamwork needed to bring value-
added solutions to our customers. As part of a thoughtfully crafted succession plan for your
Company, John Kemper, Commerce president and COO, became CEO in August 2018 when
I assumed the role of executive chairman. I look forward to working closely with John and
his seasoned and strong executive team as they continue to execute our plans for growing
with and creating value for our customers.
Consistent with our strong earnings, we increased our common dividend 16% in January
2019, our 51st consecutive year of dividend increases. Over the past fifteen years, annualized
total return for shareholders has been 8.4% compared to the KBW Bank Index of 1.7%. We
will continue to strive for superior returns for our shareholders. As always, I wish to thank our
team members, customers and shareholders for their continued support and look forward
to enhancing the long-term value of the Commerce franchise in 2019.
Long-Term Shareholder Return
Cumulative Total Return Indexed, 12/31/2003 = $100
$400
$350
$300
$250
$200
$150
$100
$50
Earnings
per Share:
year over year
Over the
Over the
last 10 years
last 15 years
8.4%
Annualized
Annualized
Shareholder
Shareholder
Return
Return
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
COMMERCE (CBSH)
NASDAQ BANK
KBW BANK
S&P
3
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Innovating for the future
John W. Kemper
President and Chief Executive Officer
C O M M E R C E B A N C S H A R E S , I N C .
F E B R U A R Y 2 1 , 2 0 1 9
Commerce continued to grow in 2018
by working alongside our customers and
bringing the best of our Bank to them every
day. In a world full of change, Commerce
has accepted the challenge of innovating
with and for our customers. This customer
focus is core to who we are as an institution
and will continue to guide us as we look to
the future.
Our 2018 financial results were exceptionally
strong, driven in large part by an expanding
net interest margin made possible by the
rising short-term interest rate environment.
In addition, we experienced strong deposit
retention, which is a reflection of the central
role Commerce plays in our customers’
cash management and payment activities.
Fee revenues experienced healthy growth,
driven most notably by our wealth
management and commercial payments
businesses. Our results also benefited from
continued
losses, disciplined
expense control and lower corporate tax
rates.
loan
low
Net Income
Available to Common Shareholders
$425
$310
$266
s
n
o
i
l
l
i
m
n
i
$
$450
$400
$350
$300
$250
$200
2016
2017
2018
Despite a very strong economy,
loan
demand across most categories was
weaker than expected in 2018. This was
not only true for Commerce, but also
4
largely for the industry overall. During the
year we saw continued hesitation among
borrowers, which may be a healthy posture
in light of high overall leverage levels and
the overhang of significant geopolitical
uncertainty. We remain committed to
meeting the credit needs of our customers
in a responsible and consistent way. Mindful
that the economy is well into the later
innings of a long expansion, we continue to
adhere to our credit underwriting standards,
despite some notable erosion in the lending
marketplace.
Return on Average Assets
2.0%
1.5%
1.76%
1.0%
1.12%
1.28%
0.5%
2016
2017
2018
Our strong financial performance, coupled
with a number of growth initiatives, positions
Commerce uniquely among our bank and
non-bank competitors. Investments in new
products and existing internal systems are
designed to fuel future growth in our bank
and customer base. Through continued
investment in our team members, we have
built a deep bench of talent across the
Bank, particularly in specialty areas like
healthcare, B2B payments, agribusiness and
insurance claims processing. The industry
knowledge and expertise of the people we
are bringing on board in these areas are key
differentiators for Commerce.
These investments all strengthen our super-
community bank model, which focuses on
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT
customer relationships and marrying high-touch
service with highly competitive products for our
commercial, retail and wealth banking customers.
Strength of our Business
Commerce’s core strengths lie in the super-
community model that distinguishes us from other
banks. We continue to build on our strong cultural
foundation to emphasize teamwork, agility and
a focus on the future. We are consistent and
prudent in the extension of the Bank’s balance
sheet through lending activities. Our strong
balance sheet and earnings, in turn, enable us
to invest in new products, services and
markets.
the
of
strength
The
Commerce franchise also
depends on diversity in
our loan classes and
fee businesses. Our
significant presence
in payments
and
wealth management
allows us to stand
apart from our peer
bank competitors and
leverage our resources
to offer differentiated new
products.
Innovation
Because the rapid rate of change affects all
aspects of our lives, it is vitally important that we
make appropriate investments in our businesses
to stay relevant, meet customer needs and
stay competitive with both banks and non-
banks. With strong capital, solid earnings and
an experienced management team, we are
fortunate to have the resources needed to make
these investments.
Several years ago, we kicked off a program to invest
in an array of innovative products, services and
systems. We are beginning to see some of these
investments bear fruit.
Innovating for our Customers
In our Consumer Banking division, our initiatives
are primarily aimed at improving the customer
experience through the enhancement of our
digital capabilities.
Late in 2017, we significantly overhauled our
online banking application, and in early 2018
we rolled out a new mobile banking app and
platform that garnered 4.7 stars in the Apple® App
Store. As a testament to our commitment to agile
product development, we pushed 14 new online
banking releases and 15 new mobile app releases
to market in 2018, with updates introduced every
few weeks. We also implemented new
mobile locking and unlocking
features for our consumer
cards, a valuable security
and began
feature,
issuing
contactless
“Tap & Go” payment
cards.
design
the
a
introducing
contemporary
We opened
newly
branch
during
five
remodeled
locations
year,
new
interior
customer
layout. The
bankers in our branches are now
cross-trained to handle all customer
requests, not simply teller or new account tasks.
Capitalizing on our strong digital capabilities, we
now offer exploration centers and video advisors
at many of our branches so visiting customers
have more immediate access to experts with
solutions to meet their needs.
service-friendly
and
In our Commercial Banking division, we continue
to grow CommerceHealthcare™, a strategy
focused on delivering a strong portfolio of
healthcare solutions
through our specialty
healthcare team. With products that address
the challenges of rising healthcare costs and
5
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT changing consumer demands, Commerce is
uniquely positioned to play a strong role in the
healthcare vertical. Our approach, supported
by investment in new capabilities, dramatically
increased the number of new-to-bank healthcare
customers, while also deepening existing
relationships. With over 500 hospitals utilizing
our payments and financial services in 45 states,
CommerceHealthcare™ is rapidly becoming a
nationally recognized brand in the healthcare
industry.
The payment solutions we have tailored to address
healthcare industry needs are a natural extension
of our existing banking technologies. Key areas of
investment include patient lending, receivables
management and accounts payable automation
programs that address healthcare provider needs
for flexible patient payment options, while also
reducing administratively burdensome payment
and receipts processing.
Over the past two years, we also teamed with
insurance companies to form an advisory council
focused on finding efficient claims payment
solutions, and we have now begun to implement
these solutions
insurance
for several
providers.
large
Our Wealth Management division, which provides
investment and financial planning services to
a wide range of individuals and institutions,
continues to attract new clients and has grown to
oversee more than $50 billion in client assets. We
attribute our growth largely to the individualized
approach we take to help clients achieve their
financial goals. From our unique tax-managed
investment portfolio strategies and in-depth,
goal-based planning processes, to the easy-to-
access account information made available by
our new digital tools and mobile app, we seek
to provide meaningful solutions that meet our
clients’ personal and financial needs.
6
Internal Innovation
Not all innovation at Commerce is directly related
to customer products. We have undertaken a
significant number of internally focused projects
with the goal of making our team members more
efficient and effective.
in
internal
investments
Ongoing
innovation
include Insight360, a new customer relationship
management (CRM) platform that launched in
Commercial Banking in the fall of 2018. A similar
upgrade in our Wealth Management’s CRM will
launch in 2019. This enhancement, along with
the roll-out of RM Point, which provides remote
account access, allows our Commerce Trust
Company advisors to have more productive and
personalized interactions with clients. Work is well
underway on a complete core deposit system
upgrade, which will go live in 2020, as well as an
end-to-end overhaul of our “life of loan” processes,
beginning with term sheet issuance all the way to
note payoff. These and other internal investments
are geared to improving our organization’s overall
effectiveness and agility, and they underpin our
ability to succeed in the future.
Focus on Culture –
The Commerce EDGE
The single biggest determinant of Commerce’s
long-term success is the culture we create for
our team members. Our culture reflects our
cumulative traits and beliefs. It is what allows us
to work collaboratively as a team and shapes our
posture toward growth. Our culture is our identity
and the bedrock foundation of our competitive
advantage.
Over 153 years in business, Commerce has
developed a distinctive and deeply rooted cultural
identity. To better understand and proactively
introduced
shape this cultural
the Commerce EDGE program in 2013. This
culture-shaping work grounded our leaders and
team members in a new, shared language and
introduced them to concepts designed to help
identity, we
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT us achieve results and think differently.
We believe culture cannot be delegated,
that it has to be lived at every level of the
Company. In 2018, our annual employee
survey results reflect continued high
engagement, with scores that exceed
national averages for high-performing
companies, as assessed by Korn Ferry
Hay Group.
Our culture reinforces the need to be
agile and innovative to drive results
and remain competitive in this rapidly
changing world. We promote the use of
agile product development methods to
achieve faster development times and
improved customer service levels. We
encourage team members to be curious,
think creatively and look for continuous
improvement opportunities in everything
we do. And as a super-community bank,
the
Commerce’s culture
need to invest time and money in the
communities we serve.
reinforces
Looking Ahead to 2019
Commerce’s 2018 financial performance
was distinctively strong. Net income
shareholders
available
totaled $425 million, up 37% over last
to common
1.76%
totaled
year and a new Commerce record.
Earnings per share were also up 37%.
Return on average assets and common
equity
16.2%,
respectively, positioning Commerce’s
financial performance as one of the best
of the nation’s largest 50 banks. Revenue
growth was robust, and credit quality
remains excellent.
and
to
attract
As we look to the future, our Bank
top-notch,
continues
experienced professionals who can
offer superior service and advice to our
customers. We continue to invest in
technologies that enhance our customer
experience, keep pace with the ever-
changing banking environment and
provide new sources of future revenue.
The markets we serve continue to be
healthy and economic activity remains
strong, with low levels of unemployment
and inflation. We have expanded our
presence in Dallas, Houston, Denver
and Nashville as these and others of our
newer expansion markets continue to
provide higher growth and significant
new business opportunities. Key to
this successful strategy has been our
ability to hire experienced bankers in
these markets, who embrace not only
our Commerce culture, but also the
competitive products and solutions
we bring to our customers. Company-
wide, we are committed to expanding
our customer relationships, both with
customers new to Commerce and by
increasing the scope of services we offer
to existing relationships.
While we have much to celebrate in our
2018 performance, we recognize that we
are operating in a changing environment.
Our future success will depend on our
ability to adapt. We remain vigilant in
tracking emerging credit trends and
continue to emphasize prudent credit
underwriting standards, as has been our
historical practice.
In the pages that follow, we will highlight
some of the ways we are “Innovating
for the Future” to remain relevant to
our customers. With our strong culture,
experienced banking team and solid
product set and resources, we look
forward to a successful 2019.
Growth in EPS and Stock Price
e
c
i
r
P
k
c
o
t
S
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
e
r
a
h
S
r
e
p
s
g
n
n
r
a
E
i
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Stock Price
Earnings per Share (EPS)
7
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT
Return on Average Common Equity
18.0%
14.0%
16.2%
10.0%
11.3%
12.5%
6.0%
2016
2017
2018
Cash Dividends per Common Share
$1.10
$1.00
$0.90
$0.80
$0.70
$0.60
$0.50
$1.04
$0.90
$0.82
2017
2018
2019*
*Based on 1st quarter 2019 declared dividend
Total Loans
$14.2
BILLION
Total Deposits
$20.3
BILLION
Net Income
Total Revenue
Available to Common Shareholders
$1,325
$425
$1,195
$310
$1,127
$266
2016
2016
2017
Includes Net Interest Income and Non-Interest Income
2018
2018
2017
s
n
o
i
l
l
i
m
n
i
$
$1,350
$450
$1,300
$400
$1,250
$350
$1,200
$1,150
$300
$1,100
$250
$1,050
$200
$1,000
8
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORTPerformance Highlights• Net income available to common shareholders increased 37% to a record $425 million in 2018, while earnings per share totaled $3.78, compared to $2.76 per share last year.• The increase in net income was the result of 12% growth in net interest income, 9% growth in fee income, continued low credit losses and good expense management.• Growth in net interest income was aided by higher rates earned on loans and investments, while funding costs remained stable. The Federal Reserve raised interest rates four times in 2018, which allowed much of our commercial loan portfolio to re-price higher.• Total shareholders’ equity grew to $2.9 billion, while our Tier I common risk-based capital ratio increased to 14.2%, compared to 12.7% last year. In 2018, we purchased $75 million in treasury stock.• In 2018, Commerce paid a regular cash dividend of $.895 per share (restated) on common shares, representing a 10% increase over the prior year. In January 2019, we announced a 16% increase in our regular cash dividend, marking the 51st consecutive year in which regular cash dividends increased. Also in 2018, for the 25th year in a row, we paid a 5% stock dividend.• Year-to-date total average loans grew 2.3% in 2018, driven mostly by increases in commercial and industrial loans and construction loans, partly offset by lower automobile and home equity lending. Residential mortgages and consumer credit card balances both grew in 2018, and our health services finance loan product grew 51% on strong new business from our healthcare clients.• Loan growth in our expansion markets continued to outpace that in the Company overall, with loans increasing 15% and totaling $2.2 billion. We opened a new Houston office in 2018 and added new commercial bankers in many of our expansion markets.• Fee income increased 9% overall, on solid growth from bank card, trust and deposit fees, which grew 11%, 10% and 5%, respectively. The diversity in our fee products continues to add consistency to our earnings and supports overall growth in revenue.• Credit quality improved this year, and our loan portfolio quality remains excellent. Net loan charge-offs in 2018 totaled $42.3 million, compared to $41.7 million last year, while the ratio of net credit losses to loans totaled .30% versus .31% in 2017. Non- performing loans continue to remain at low levels.
Commerce by the Numbers
$25.5
Billion in Assets
$6.3
Billion Market Capitalization
$50.0
Billion in Trust Assets
Under Administration
153
Years in Business
4,795
Full-Time Equivalent Employees
42 nd
Largest U.S. Bank
Based on Asset Size
20th
Largest U.S. Bank Based
on Market Capitalization
18th
Largest Among U.S. Bank-
Owned Trust Companies
Based on Assets Under
Management
N I N E K E Y M A R K E T S
1. St. Louis
2. Kansas City
3. Springfield
4. Central Missouri
5. Central Illinois
6. Wichita
7. Tulsa
8. Oklahoma City
9. Denver
C O M M E R C I A L O F F I C E S
1. Cincinnati
2. Nashville
3. Dallas
4. Des Moines
5. Indianapolis
6. Grand Rapids
7. Houston
U. S . P R E S E N C E
Branch Footprint
Extended Commercial Market Area
Commercial Payments Services
4
3
2
5
4
1
6
5
1
2
9
6
7
8
3
7
Information presented above as of December 31, 2018
Bank rankings exclude Asset Management and Specialty Finance banks. Source: S&P Global Market Intelligence
9
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT
Consumer Banking
Commerce’s Consumer Banking unit serves more than one million households with 169 full-service branches and an additional 151
stand-alone ATM locations. Commerce is a leader amongst top U.S. banks in card products. We offer a full suite of consumer products,
services and payment solutions, robust online banking features and a highly-rated mobile banking app.
We aim to engage our retail customers proactively and consistently in their channel of choice with advice, guidance and solutions
that meet their needs. They remain our primary focus.
Solutions
Distribution
We take a holistic approach that aligns new
product and service development with our
growth strategy. New solutions launched in 2018
include the CommercePremier Program, an exclusive banking
program that offers greater personal service, a dedicated
local banker and support team, and other member benefits
to select, high-value customers. We also introduced new card
alerts and lock/unlock features for our debit and credit cards to
provide greater customer security, as well as contactless “Tap
& Go” cards that make card purchases faster and safer.
Tools
In 2018, we introduced additional tools to
enhance customer service and convenience.
Advanced ATMs allow customers to make custom
withdrawals, multi-item deposits and loan payments via cash,
check or account transfer. New branch cash dispensers allow
bankers more time to assist customers, while enabling them to
process transactions more quickly and safely. CARA, the new
Customer-Advising-Referral-Assistant tool we use in customer
interactions, makes it possible for branch bankers to tailor
customer solutions while also improving the consistency of the
branch experience.
People
A new mobile banking
app launched in early 2018
offers more functionality,
consistent upgrades and a greater
response to user needs. We redesigned
our Commerce website, bringing a
new look and feel to Commerce online
banking customers, while also offering
many new features and greater customer access. The
new universal operating model for our branch operations
improves our bankers’ ability to consistently address all of
a customer’s financial needs.
Marketing
We introduced a new digital media campaign
that reflects our goal of approaching customers
in ways that are simple, human, strategic and
sincere. Our 2018 marketing efforts focused primarily on
reaching new households across our markets, with target
marketing activity to these consumers doubling over the
past year. We also expanded our digital marketing efforts to
enhance customer communication.
A new employee onboarding program allows new retail employees to immerse themselves in the Commerce culture
and values, making it possible for them to begin providing meaningful customer experiences as quickly as possible
after joining the bank. Our training programs are designed to enhance banker skillsets, enabling them to provide
more comprehensive customer experiences.
$10.2
BILLION
Consumer
Deposits
10
$4.1
BILLION
1.1
MILLION
169
#14
#20
Consumer
Loans*
*Excludes Private Banking Loans
Households
Based on Assets Under Management
Banking
Centers
Consumer
Card**
Debit
Card**
**Consistently ranked among the top issuers in Nilson Reports.
#13
Prepaid
Card**
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Among those leading the charge in transforming our branch and digital banking
experience are (from left) Stacy Regnier, business transformation program
manager, and Derrick Brooks, consumer business digital strategy manager.
11
11
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Commercial Banking and Payments
Commerce’s Commercial Banking and Payments teams serve more than 13,000 business clients. Our teams are comprised of
experienced, highly skilled bankers and payments experts with considerable knowledge of the markets in which we operate and
the industry verticals we serve. With a focus on developing innovative products, processes and solutions, we help customers
manage and grow their businesses by applying the right combination of service, experience and knowledge.
Financing Solutions
Commerce has a variety of financing options for all sizes and types of businesses. With more than 150 years of lending experience,
we expertly deliver solutions to meet our clients’ needs.
• Working Capital Lines of Credit
• Term Financing
• Construction & Real Estate Loans
• Equipment Financing
• International Financing
• Employee Stock & Ownership Financing
• Tax-exempt Financing
• Government Lending Programs
• Interest Rate Swaps
• Floor Plan Lending
We’re More Than a Bank
Claims Payments
We listen to the voice of the customer to guide
our product development and innovation.
With the help of our insurance advisory council,
Claims Payments was built for the industry with
the input of insurance experts. We help insurance
companies provide faster payments to their
customers.
Investments
Our investment professionals offer fixed income products,
services and advice to create tailored strategies for our
customers.
Receivables Payables Automation
We offer innovative payments solutions to manage payables
and receivables to improve cash flow. Our payments experts
consult with clients to develop an overall payments strategy.
Additionally, we offer a full-service international department,
staffed with experts to assist with international trade, letters
of credit and global payments.
Industry Specialists
We have specialists in a multitude of sectors. Through industry expertise, they bring unique ideas and tailored banking solutions.
• Healthcare
• Senior Living
• Energy
• Construction Services
• Agribusiness & Food Processing
• Not-for-Profit
• Aviation
• Beverage Distribution
• Municipalities
• Manufacturing
• Education
• Commercial Real Estate
$8.0
BILLION
$9.1
BILLION
Commercial
Deposits
Commercial
Loans
$548
MILLION
Total
Commercial
Revenue
$8.8
BILLION
AP Card
Volume
$5.9
BILLION
Merchant
Volume
$38.5
MILLION
Treasury
Management
Revenue
12
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT The CommerceHealthcareTM team includes healthcare and banking professionals who use industry
insights to deliver payment solutions that address patients’ financial concerns while improving
providers’ cash flow. From left, Joel Reddington, commercial division sales manager; Amy Rinard,
specialty healthcare sales manager; and Rick Heise, director of specialty healthcare services.
CommerceHealthcare™ brings together a team of
healthcare and banking professionals to serve as strategic
advisors in addressing complex financial needs. Tailored,
return on investment-based solutions enable healthcare
providers to enhance the patient experience, improve
cash flow, and leverage new opportunities in everyday
processes. CommerceHealthcare™ delivers healthcare
insight with financial foresight.
Opportunities in our Expansion Markets
We continue to invest in our Expansion Markets. In 2018,
we established a commercial banking office in Houston.
Our Expansion Market strategy is not just about loans,
it’s about bringing the entire bank to our customers.
↑92%
↑64%
Fee Income
since 2015
Gross Loans
since 2015
45
3+
THOUSAND
$170
MILLION
States Served
Healthcare Clients
Patient Loans
5
4
8
9
3
7
6
1
2
1. Cincinnati
6.
Indianapolis
2. Nashville
7. Grand Rapids
3. Dallas
8.
Tulsa
4. Des Moines
9. Oklahoma City
5. Denver
10. Houston
10
13
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT With more than $50 billion in client assets, our Wealth Management division continues to attract new clients
who value the financial strategies and solutions our team of specialists tailors to address their unique needs.
From left, Kasey Wixson, private client advisor; and Tracey Lewis, Commerce Trust Company sales manager.
14
14
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Wealth Management
Commerce provides wealth management, investment and financial planning services to individuals and institutions through
Commerce Brokerage Services, Commerce Trust Company and Commerce Family Office. These brands deliver a range of services
aligned to meet our clients’ financial needs, no matter the level of complexity. With more than $50 billion in total assets under our
care, Commerce has one of the largest wealth management divisions of any bank in the United States.
$650K
Investable Assets
$50M
Investable Assets
$1B
Investable Assets
COMMERCE
FAMILY OFFICE
Since 1906, Commerce Trust Company has been managing
investments and earning the trust of clients through a growing
suite of comprehensive wealth management solutions. While
the investment management, financial planning, trust and
private banking advice we provide is the foundation of our
work, we know it takes more to help our clients feel secure
about their families’ futures. To every client, we offer a tailored
solution and a team of specialists who implement strategies
and guidance that address their unique needs.
Commerce Brokerage provides transactional and insurance
services in addition to managed investment solutions through
its Commerce Horizon® product for more than 25,000 accounts.
Wealth Management Revenue
$230
$220
$210
$200
$190
$180
$170
s
n
o
i
l
l
i
m
n
i
$
$189
$220
$205
2016
2017
2018
Commerce Trust maintains high retention rates reflecting the
strong partnerships we form with our clients. Our relationships
go beyond what is typically expected from an investment
advisor. We believe this level of service and individualized
attention is the only way to do business and the reason we are
different from many competitors.
18th
Largest Bank-Owned
Trust Company
Based on Assets Under Management
$50.0
BILLION
Total Client
Assets in 2018
95%
Client
Satisfaction
Based on 2018 Client Survey Results
$447
MILLION
Managed
Brokerage
Assets
15
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT
Claims payments, your way
Shelter Insurance
Columbia, Missouri
After catastrophe strikes, the wait for an insurance check to arrive in the mail can seem
interminable.
Payments for some Shelter Insurance claimants, however, are now hitting their
debit cards as soon as 30 minutes after approval, thanks to an innovative claims
payment solution Commerce developed with the insurance company’s help.
“We want to be able to pay claims in a timely manner and in ways our
customers want to be paid,” says James Heavin, Shelter’s accounting
systems and reporting manager.
That’s harder than it sounds. Insurance claims often involve
multiple parties – the insured, body shops, attorneys, lien
holders and more. Shelter wanted a solution that could make
payments to multiple parties on the same claim. “There are
also security risks associated with collecting a claimant’s
account information for a one-time electronic payment,” he
explains.
After exploring available alternatives and coming up empty-
handed, Shelter considered developing a product in-house.
It also opened a dialogue with its long-time bankers at
Commerce. “Commerce had a partial solution, but not
quite what we needed,” said James.
The bank had something else, however, that appealed to
Shelter: a desire to learn more. “Commerce expressed an
interest in developing a claims payment solution that met our
needs,” says Lisa Windett, home office claims manager.
In December 2016, Shelter joined a handful of insurance
companies on a Claims advisory council formed by Commerce to
guide the new product’s development. A year later, it became the
first insurer to use the product, which it branded as Customer Choice,
with a small group of users. A full roll-out for single-party claims came
six months later.
Today, Customer Choice users are directed to a web portal, where they
choose from check, ACH or direct-to-debit card payment options. No personal
or account information they share for the one-time transaction is saved. With the
direct-to-debit option, payment arrives about 30 minutes later.
The response? “Our customers love it,” says Lisa. “Commerce has been really good to work with.
They have been quick, responsive and open-minded. If adjustments we suggested weren’t working, they
listened and developed a better way.”
Plans are underway in 2019 to implement the multi-party payment system Shelter originally envisioned. Says
Lisa, “Step by step, Commerce is helping us improve our customer experience.”
An innovative claims management solution from Commerce makes it possible for Shelter Insurance claimants to receive payment as soon
as 30 minutes after their claims are approved. From left, Shelter Insurance employees Lyn Scrivner, regional claims director; Shawn Knauts,
vice president, Claims; Lisa Windett, home office claims manager; and James Heavin, accounting systems and reporting manager.
16
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Improving cash flow and
the patient experience
Nebraska Medicine
Omaha, Nebraska
Not so long ago, Nebraska Medicine patients with high deductible health plans frequently left the hospital
with a large medical bill and the stress of knowing they had no good way to pay it. Meanwhile, the health
system, which includes the primary teaching hospital for the University of Nebraska Medical Center, saw its
accounts receivable balance grow.
“For years we made payment arrangements directly with patients,” says Sheila Augustine, Nebraska
Medicine’s director of patient financial services. By Fall 2016, the health system was self-managing $10 million
in debt through payment plans that gave patients up to three years to pay balances that often exceeded
$10,000. “It took a major effort to administer the program, and three years was a long time to await final
payment,” says Sheila.
Today, Nebraska Health’s internal patient debt load has been reduced to just $2 million, thanks to a no-interest
health services financing program made available to qualifying patients from Commerce Bank. Depending
on their balance, patients still get up to three years to repay the no-interest loan.
As for Nebraska Medicine? “We now receive funding from Commerce within 14 days of making the loan,”
says Sheila.
She considers Commerce’s Health Services Financing (HSF) product a win for all involved.
“Our patients are very thankful,” says Sheila. “Commerce makes it easy for them to obtain the loan.
We now have repeat patients who are familiar with the program and ask if they can have their balance sent
to Commerce.”
In addition to improving cash flow, the health system has slashed printing, mailing and labor
costs associated with in-house program administration, Sheila says. She credits the
HSF program’s lower-than-average default rate to Commerce’s strong credit
culture.
This wasn’t the first time Nebraska Medicine turned to Commerce
to solve a difficult challenge. In 2004, Nebraska Medicine
became the first health system in the country to implement
the bank’s electronic accounts payable card program.
Still, Sheila and her team performed their due
diligence. “We did reference checks,” says Sheila.
“The people we spoke to about Commerce’s HSF
program had nothing but great things to say.”
She now joins them in singing the bank’s
praises.
“They made
is a great partner,” says
“Commerce
Sheila.
implementation
easy, even providing IT resources with
setup. Everything about their approach
is professional.”
Nebraska Health’s internal debt load has dropped 80%,
thanks to a no-interest health services financing program
from Commerce Bank. From left, Nebraska Medicine
employees Stephanie Martin, customer service manager,
Patient Financial Services; Jana Danielson, executive
director, Revenue Cycle Wendy Hanson, support manager,
Patient Financial Services; and Sheila Augustine, director,
Patient Financial Services.
17
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Delivering solutions for growth
Precision, Inc.
Pella, Iowa
The leaders of Precision, Inc. could write a textbook on how to diversify and grow a company.
In recent years, the industrial conveyor component and food conveyor manufacturer increased sales by
innovating a product that dramatically reduces conveyor belt noise. The company also designed a better way
to convey fragile and seasoned food products without damaging them. Over the past four years, Precision
has acquired two food conveying equipment companies in the U.S., and two industrial product companies
in Canada and Chile.
In 2018 alone, the company’s revenues grew more than 20 percent, and working capital needs rose nearly
40 percent.
Amidst all these projects, Precision added one more significant undertaking to its already-full plate. It
transferred its entire banking business – from its line of credit, lockbox and investments, to its card program,
merchant services and international letters of credit – to Commerce Bank.
“When you have an international presence and all the banking requirements we have, you cringe at the
thought of changing banks,” says Roger Brown, Precision president and CEO. “But we felt like we had become
a number with our old bank, even as we grew.”
Precision’s perspective became a painful reality in 2016 when financing for an acquisition in Chile fell through
in the late stages. Commerce, which had been courting Precision the previous 18 months, quickly stepped
in to help.
“We are a 100% employee-owned company,” notes Precision CFO Sam Iogha. “We make it our business to
provide the best customer service in the industry, and we’ll go through hoops for our customers to do what
they need and request. Commerce is very similar. They didn’t just make the Chile loan happen, but delivered
every other service we needed, often improving on what we had before.”
Within months of the transition, Commerce had automated Precision’s lockbox
process, saving the company nearly 20 hours a week in manual processing
time. By adding new card functionality, Commerce made it possible
for Precision to expand its purchasing card use, according to
Charlie Daugherty, Precision’s controller. Commerce also
streamlined and added more fraud protection to
the company’s payroll process, adds Senior Vice
President Greg Stravers.
“Commerce
“Everyone who works here has a stake in
our company’s success,” says Roger.
ESOPs,
and they are used to dealing with
growing companies.
It’s a good
feeling to have a partner that
gets it.”
understands
18
Precision, Inc. moved its entire banking
business to Commerce to get the services,
financial resources and industry expertise
needed to support the company’s
growth. From left, Precision, Inc.
employees Sam Iogha, chief financial
officer; Charlie Daugherty, controller;
Roger Brown, president and chief
executive officer; and Greg Stravers,
senior vice president.
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Customized health services
financing connects with patients
Hackensack University Medical Center
Hackensack, New Jersey
Eighteen months after Hackensack Meridian Health began offering patients a way to finance their hospital
bills with no-interest loans from Commerce Bank, patient stress and bad debt at the hospital are both down.
“As a non-profit, we serve many uninsured patients,” says Anne Goodwill Pritchett, senior vice president of
revenue cycle operations at Hackensack Meridian Health, the parent organization of Hackensack University
Medical Center. “As a large cancer center, we also have many repeat patients.” Both groups face larger-than-
average out-of-pocket expenses.
“We truly believe our patients want to pay their bills,” adds Anne. For years the hospital, which serves greater
New York City, tried to accommodate them, offering those with limited financial means up to 12 months
to pay. Patients who defaulted were referred to collection agencies, often leaving Hackensack
University Medical Center with significant sums of uncollected debt.
The hospital had searched without success for a better extended payment solution
when Anne received a call from Commerce in 2016. “We liked what we heard,”
says Anne.
Commerce offered to customize its Health Services Financing (HSF) program
to accommodate the hospital’s workflow and streamline the patient
enrollment process.
“We are very patient-focused,” says Anne. “How others interact with
our patients is extremely important to us, and Commerce’s customer
service is excellent. Down to the monthly statements, Commerce’s
HSF loan program is designed from a patient’s point of view.”
Several meetings later, Hackensack University Medical Center had
a program in place that allows patients to take out interest-free
Commerce HSF loans with up to five-year terms.
“Once patients are enrolled, they often ask if they can add to their
balances after another hospital stay,” says Anne. “The answer is
yes.”
Hackensack University Medical Center, meanwhile, receives
the balance of each loan from Commerce up front, reducing its
receivables and increasing its cash on hand. In the first 18 months
after the May 2017 launch, more than $6 million in patient bills had
been financed through the program, with bad debt dropping $3
million.
“Commerce succeeded in creating a solution that is both patient-
friendly and hospital-friendly,” says Anne.
Patients who have frequent hospital stays are especially appreciative, she
says. “Serious illness is hard enough. Patients and families are worried enough
about treatment. The HSF loan takes away their financial concerns. It’s a relief for
them to know they have a way to pay.”
Anne Goodwill Pritchett, senior vice president of revenue cycle operations at Hackensack Meridian
Health, had been searching for an extended payment solution when she received a call from
Commerce Bank offering the patient- and hospital-friendly solution she was looking for.
19
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Flexible solutions
help a non-profit grow
Parents as Teachers
St. Louis, Missouri
When Parents as Teachers was first piloted in the St. Louis area in 1981, it had a modest, but important goal:
to help parents embrace their roles as their child’s first and best teacher.
“From the beginning, we have focused on increasing young children’s readiness for school,” explains
Constance Gully, the non-profit’s president and chief executive officer. “Thirty-five years of research suggests
that the best way to do that is by meeting families where they are – in their homes – and helping them thrive
there.”
Developing an evidence-based model for successful early childhood parenting is one thing,
however, being good financial stewards while growing into an international organization
is another.
Enter Commerce Bank, which has served as Parents as Teacher’s banking partner
since 1997.
“Commerce sees the big picture and understands the needs of a non-profit
organization like ours,” says Constance. “They help us make the best use
of our finances as we grow.”
When Parents as Teachers installed a new learning management
system in 2018 to share best practices with rural and frontier
communities, the upfront costs were covered by tapping into a
Commerce line of credit. The same thing happened a couple
years earlier when Parents as Teachers implemented a new
program data system.
When staff travel to train and certify new parent educators, they
use Commerce corporate cards to pay expenses. In 2018, when
40 members of a tribal organization arrived at a hotel without
credit cards, Commerce made the accommodations needed so
they could register.
Commerce also processes credit card donations to the non-
profit and provides an array of online banking services as well.
The bank serves Parents as Teachers in many other ways, including
supporting a new CFO transition and leading parent presentations
on Building Financial Literacy.
Today, the Parents as Teachers model, built on a framework of home
visits, group connections, early childhood screenings and resource
referrals, has been adopted by school districts, health centers and early
childhood organizations in all 50 states, as well as 115 Native American
tribal organizations, a U.S. territory and six foreign countries. Nearly 200,000
young families are touched each year through 1,200 family-serving or child-
serving organizations and curriculum partners.
“As we celebrate our 35th anniversary of helping children and families thrive, Commerce
continues to be a great partner to work with,” says Constance. “They are a valuable resource
for us.”
With the support of Commerce Bank’s full range of banking services, Parents as Teachers has grown from
a local early childhood parenting program to an international nonprofit serving nearly 200,000 young
families a year. Pictured: Constance Gully, Parents as Teachers president and chief executive officer.
20
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT A better approach to
funding senior living
Avanti Senior Living
Houston, Texas
Most people don’t associate memory care and assisted living with boutique hotels. Avanti Senior Living is
on a mission to change that. And Commerce is providing some of the financing needed to make it possible.
“In my first 20 years working in senior housing, very little changed,” explains Lori Alford, Avanti’s chief operating
officer. “Color schemes may have been updated, but building design and service delivery methods remained
largely the same.”
She and Tim Hekker, a 40-year senior housing industry veteran, founded Avanti in 2013 with a different idea
in mind. “We looked at who we were selling to, serving and employing,” says Lori. The audiences they saw
were primarily female.
Avanti’s facility design and programming model reflects their findings. Well-lit art rooms, wine bars and
wellness centers in Avanti senior communities mirror modern living. Scrubs have been replaced with spa
uniforms. Residents are equipped with iPads and other technologies that track healthcare needs and dining
experiences.
Given that residents are usually in their lower 80s when they move to an Avanti community and stay about 12
months, on average, Avanti’s financing needs are different, too.
“It helps to work with a bank that understands how to value and underwrite our business,
and that will work with us,” she adds. That’s one reason Avanti has twice looked
to Commerce for construction financing totaling $29 million.
One loan was for a 90-unit assisted living and memory care
community that opened in Covington, Louisiana in the
summer of 2018. The other is for a similar 94-unit project
currently under construction in Peoria, Arizona that,
when completed, will bring the total number of
Avanti communities to seven.
“Most banks will explain what they do, and
you must fit within that box,” explains Lori.
“That’s not how Commerce operates.
They are collaborative. They ask what
we’re looking for and then figure out
how to make it work. “
“One of the things we appreciate
most about Commerce is the bank’s
consistency,” she adds. “Nothing is
complicated. They make everything
easy for us. We feel like we’re all
working toward the same goal.”
With financing from Commerce Bank, Avanti
Senior Living is expanding its network of
contemporary assisted living and memory care
communities. From left, Avanti employees Lori
Alford, chief operating officer; and Tim Hekker,
chief executive officer.
21
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT A better life for all.
Challenge Accepted.®
Nowhere are the words “Challenge Accepted.®” truer than in the communities we serve. Company-wide, our team members are
actively involved as volunteers, board members and donors helping to move our communities forward. From financial literacy to
youth empowerment, we are passionate about a wide range of causes, but we are dedicated to the same thing: improving quality
of life for others throughout our markets.
Commerce in the Community
Team members throughout the organization dedicate their time to and raise funds for a variety of causes.
Clockwise from top left: Commerce team
members participate in St. Louis Pridefest.
Clayton Mail Room team members shred
paper to donate to the Animal Protective
Association.
Commerce team member volunteers for
the Salvation Army in Tulsa, OK.
Kansas City Operations team members
volunteer at Harvesters, a regional food bank.
Springfield team members volunteer at
Nuevo Pacto’s celebration of Hispanic
Heritage Month.
Financial Literacy
in programs
Commerce participates
throughout our
communities that support financial literacy efforts and ensure
all consumers have the knowledge and resources needed to
make informed financial decisions. Through organizations like
Junior Achievement and programs like Money Smart Week,
Commerce is able to impart our expertise in this area and help
our communities thrive.
Right: Commerce team members volunteer for the Junior Achievement program at Flynn
Park Elementary in the University City School District.
22
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Community Reinvestment
The Community Reinvestment Act (CRA) requires banks to
help meet the credit needs of the communities in which
they operate. To us, CRA is more than a regulation – it is a
commitment. We lead programs to foster financial literacy in
schools, sponsor housing grant proposals for nonprofits and
invest funds and time to support organizations dedicated to
fair housing. As a result, we have maintained an Outstanding
Rating from the Federal Reserve Bank of Kansas City for more
than 20 years.
Left: In partnership with 20/20 Leadership, an organization helping urban core,
lower-income teens prepare for college with career exploration and academic
preparedness, Commerce hosts “Passport to Prosperity.” Commerce team members
provide résumé reviews, conduct mock job interviews and give presentations to
attendees on the many different jobs available in a financial institution.
United Way Campaigns
In our markets, we are actively involved with United Way
campaigns. Team members
launch donation
campaigns and rally engagement with kick-off events,
fundraisers and volunteer days. A number of
creative
leaders at Commerce also participate on United Way
boards and committees.
regularly
Left: Commerce team members participate in the United Way of the Ozarks Day of Caring.
Board Membership
Leaders at Commerce Bank help nonprofits move their missions forward by serving as board members. Commerce
representatives support a variety of causes, but their service is concentrated in the following areas:
EDUCATION
COMMUNITY
DEVELOPMENT
& HOUSING
ECONOMIC
DEVELOPMENT
CHILD & FAMILY
SUPPORT
HEALTHCARE
ENVIRONMENTAL
SUSTAINABILITY
ARTS & CULTURE
Commerce team member Amy Pieper, center, presents an award on behalf of Support KC
to Metropolitan Organization to Counter Sexual Assault (MOCSA). Pieper chaired the
Excellence in Nonprofit Leadership event and serves on the board for Support KC, an
organization committed to providing nonprofit organizations with business and
development expertise, empowering them to focus on their missions.
Commerce team member and Gateway Center for Giving board member Jenny Hoelzer,
far right, hosts a “Lunch with Leaders” event, a unique professional development
program aimed at fostering the next generation of philanthropic sector leaders.
23
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Jessica Mills, like all personal bankers in Commerce branches, is cross-trained
to handle all customer requests, not simply teller or new account tasks.
2424
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Community Advisors
In each of our markets, our Community Advisors help us understand the unique needs and challenges of our customers and
communities. They are business owners, educators, professionals and civic leaders who take on the challenges of their organizations
and communities every day. We’re continually impressed by their hard work and grateful to them for sharing their valuable insights.
It is because of our Community Advisors that we’re able to say “Challenge Accepted.®” in each of our markets.
Missouri
CAPE GIRARDEAU
Tim Coad
Coad Chevrolet and Coad Toyota
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Mike Kasten
Beef Alliance
Adam Kidd
Kidd’s Gas & Convenience Store
Frank Kinder
Red Letter Communications, Inc.
Steve Sowers
Commerce Bank
Susan Layton Tomlin
Layton & Southard, LLC
Allen Toole
Schaefer’s Electrical Enclosures
Ben Traxel
Dille & Traxel
Timothy D. Woodard
Commerce Bank
CENTRAL MISSOURI
Dan Atwill
Boone County Commission
Dr. Holly Bondurant
Tiger Pediatrics
Brent Bradshaw
Orscheln Management Co.
Philip Burger
Burgers’ Smokehouse
Brad Clay
Commerce Bank
Sarah Dubbert
Commerce Bank
Mark Fenner
MFA Oil
Joe Hartman
Retired,
Commerce Bank
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
Ron Hopkins
Commerce Bank
George M. Huffman
Pearl Motor Company
Lyle Johnson
Commerce Bank
Jack W. Knipp
Knipp Enterprises
Rick Kruse
Retired,
Boone National Savings & Loan Assoc.
Dr. Mike Lutz
Mike Lutz, DDS
Dr. Clifford J. Miller
Green Hills Veterinary Clinic
Robby Miller
Mexico Heating Company
Todd Norton
Commerce Bank
Mike Petrie
Commerce Bancshares, Inc.
Robert K. Pugh
Retired,
MBS Textbook Exchange
Jim Rolls
Retired,
Associated Electric Cooperative
Steve Sowers
Commerce Bank
Mel Toellner
Gold Crest Distributing & Songbird Station
David Townsend
Agents National Title Insurance Company
Andy Waters
AW Holdings, LLC
Larry Webber
Webber Pharmacy
Robin Wenneker
CPW Partnership
Dave Whelan
Commerce Bank
Dr. John S. Williams
Retired,
Horton Animal Hospital
HANNIBAL
C. Todd Ahrens
Hannibal Regional Healthcare System
David M. Bleigh
Bleigh Construction Company,
Bleigh Ready Mix Company
Jim Humphreys
Luck, Humphreys and Associates, CPA, PC
Darin D. Redd
Commerce Bank
Mike Scholes
Reliable Termite & Pest Control, Inc.
Steve Sowers
Commerce Bank
HARRISONVILLE
Aaron Aurand
Crouch, Spangler & Douglas
Connie Aversman
Commerce Bank
Larry Dobson
Real Estate Investments
Mark Hense
iFIL USA, LLC
Scott Milner
Max Ford
Brent Probasco
Cass Regional Medical Center, Inc.
Aaron Rains
Commerce Bank
Laurence Smith
ReeceNichols Smith Realty
Dr. Larry Snider
Retired,
Insight Eyecare Specialties
Timothy Soulis
Gaslight Properties
KANSAS CITY
Kevin G. Barth
Commerce Bancshares, Inc.
Commerce Bank
Clay C. Blair, III
Clay Blair Services Corp.
Timothy S. Dunn
J.E. Dunn Construction Co., Inc.
Jon Ellis
Paradise Park, Inc.
Stephen Gound
Labconco Corp.
Jonathan M. Kemper
Commerce Bancshares, Inc.
Commerce Bank
David Kiersznowski
DEMDACO
Michael McCoy
Intercontinental Engineering-
Manufacturing Corporation
Stephen G. Mos
Central States Beverage Company
Edward J. Reardon, II
Commerce Bank
Ora H. Reynolds
Hunt Midwest Enterprises, Inc.
Dr. Nelson R. Sabates
Sabates Eye Centers
Charles S. Sosland
Sosland Publishing Company
Thomas R. Willard
Commerce Trust Company
Tower Properties
POPLAR BLUFF
Edward L. Baker
Edward L. Baker Enterprises
John A. Clark
Attorney at Law
Larry Greenwall
Greenwall Vending Co.
Charles R. Hampton, Jr.
Charles R. Hampton & Son Construction Co.
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Steve Sowers
Commerce Bank
Gregory West
Mills Iron & Supply
Timothy Woodard
Commerce Bank
ST. JOSEPH
Mark Barkman
Commerce Trust Company
Brett Carolus
Hillyard, Inc.
James H. Counts
Morton, Reed, Counts & Briggs, LLC
David Cripe
Commerce Bank
Pat Dillon
Mosaic Life Care
Corky Marquart
Commerce Bank
Todd Meierhoffer
Meierhoffer Funeral Home & Crematory
Dr. Scott Murphy
Murphy-Watson-Burr Eye Center
Mike Petrie
Commerce Bancshares, Inc.
Edward J. Reardon, II
Commerce Bank
Matt Robertson
CliftonLarsonAllen LLP
Amy Ryan
Commerce Bank
Judy Sabbert
Retired,
Heartland Foundation
Bill Severn
NPG, Inc.
Heidi Walker
CBIZ Insurance Services
Julie Walker
Commerce Trust Company
ST. LOUIS METRO
Blackford F. Brauer
Hunter Engineering Co.
Kyle Chapman
BW Forsyth Partners
Charles L. Drury, Jr.
Drury Hotels
Frederick D. Forshaw
Forshaw of St. Louis
James G. Forsyth, III
Moto, Inc.
David S. Grossman
Grossman Iron & Steel
25
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Tom Harmon
Commerce Bank
Juanita Hinshaw
H & H Advisors
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
Donald A. Jubel
Spartan Light Metal Products
David W. Kemper
Commerce Bancshares, Inc.
John W. Kemper
Commerce Bancshares, Inc.
Commerce Bank
Alois J. Koller, III
Koller Enterprises, Inc.
Kristopher G. Kosup
Buckeye International, Inc.
James B. Morgan
Subsurface Constructors, Inc.
Victor L. Richey, Jr.
ESCO Technologies, Inc.
Steven F. Schankman
Contemporary Productions, LLC
James E. Schiele
St. Louis Screw & Bolt Co.
Paul J. Shaughnessy
BSI Constructors, Inc.
Thomas H. Stillman
Summit Distributing
Christine Taylor
Enterprise Holdings, Inc.
Andrew Thome
J.W. Terrill
Gregory Twardowski
Whelan Security Co.
Kelvin R. Westbrook
KRW Advisors, LLC
ST. LOUIS METRO EAST
Hamilton Callison
Breakthru Beverage
Harlan Ferry
Retired,
Commerce Bank
Matthew Gomric
Commerce Bank
Jared Katt
Chelar Tool & Die, Inc.
Thomas Lippert
Liese Lumber Company, Inc.
Robert McClellan
Retired,
Hortica
James Rauckman
Rauckman High Voltage Sales, LLC
Dr. James T. Rosborg
McKendree University
Jack Schmitt
Jack Schmitt Family of Dealerships
Kurt Schroeder
Greensfelder, Hemker & Gale, PC
Joe Wiley
Quest Management Consultants
Dr. Charles J. Willey
Innovare Health Advocates
ST. LOUIS BUSINESS BANKING
Richard K. Brunk
Attorney at Law
James N. Foster
McMahon Berger
J.L. (Juggie) Hinduja
Sinclair Industries, Inc.
Greg Kendall
Commerce Bank
Myron J. Klevens
Organizational Development Strategies
Stuart Krawll
Beam of St. Louis, Inc.
Patrick N. Lawlor
Lawlor Corporation
Scott Lively
CliftonLarsonAllen LLP
Stephen Mattis
Allied Industrial Equipment Corporation
Lisa D. McLaughlin
Reilly & McLaughlin
McGraw Milhaven
KTRS
Sue Prapaisilp
Global Foods Market
Dennis Scharf
Scharf Tax Services
ST. CHARLES COUNTY NORTH
Kevin Bray
Commerce Bank
Susan Kalist
Commerce Bank
Greg Kendall
Commerce Bank
Peter J. Mihelich, Jr.
Goellner Promotions
Duane A. Mueller
Cissell Mueller Construction Company
Howard A. Nimmons, cpa, cfp
Nimmons Wealth Management
Tarlton J. Pitman
Pitman Funeral Home, Inc.
Lisle J. Wescott
SSM Health – St. Joseph Hospital
William J. Zollmann, III
Attorney at Law
Don Zykan
Zykan Properties
SPRINGFIELD
Brent Baldwin
Commerce Bank
Roger Campbell, Jr.
Campbell Ford
Brian Esther
Commerce Bank
James P. Ferguson
Heart of America Beverage Co.
Charles R. Greene
Husch Blackwell, LLP
Bunch Greenwade
Rancher
Robert A. Hammerschmidt, Jr.
Commerce Bank
Dr. Hal L. Higdon
Ozarks Technical Community College
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
Craig Lehman
Shelter Insurance Agency
Michael Meek
Investments
Alvin D. Meeker
Retired,
Commerce Bank
James F. Moore
Retired,
American Products
Robert Moreland
Commerce Bank
David Murray
R.B. Murray Company
Douglas D. Neff
Commerce Bank
Keith Noble
Commerce Bank
Richard Ollis
Ollis/Akers/Arney Insurance &
Business Advisors
Mike Petrie
Commerce Bancshares, Inc.
Doug Russell
The Durham Company
Rusty Shadel
Shadel’s Colonial Chapel
Dr. C. Pat Taylor
Southwest Baptist University
David Waugh
Independent Stave Company
MOKAN
Donald Cupps
Ellis Cupps & Cole
Harvey R. Dean
Pitsco, Inc.
Joe Dellasega
U.S. Awards
Adam Endicott
Unique Metal Fabrication, Inc.
Jay Hatfield
Jay Hatfield Chevrolet
Phil Hutchens
Hutchens Construction
Jerrod Hogan
Anderson Engineering
Wesley C. Houser
Retired,
Commerce Bank
David C. Humphreys
TAMKO Building Products, Inc.
Don Kirk
H & K Camper Sales, Inc.
Barbara J. Majzoub
Yorktown Properties
Douglas E. Neff
Commerce Bank
Eric Schnelle
S & H Farm Supply, Inc.
Steve W. Sloan
Midwest Minerals, Inc.
Brian Sutton
Commerce Bank
Clive Veri, Jr.
Commerce Bank
Jerry Watley
Able 2 Products Company, Inc.
Wendell L. Wilkinson
Retired,
Commerce Bank
Kansas
BUTLER COUNTY (EL DORADO)
Vince Haines
Gravity :: Works Architecture
Ryan T. Murry
ICI
Marilyn B. Pauly
Commerce Bank
Jeremy Sundgren
Sundgren Realty, Inc.
Mark Utech
Commerce Bank
GARDEN CITY
Monte Cook
Commerce Bank
Richard Harp
Commerce Bank
Gerald Miller
Commerce Bank
Mike Petrie
Commerce Bancshares, Inc.
Lee Reeve
Reeve Cattle Company
Patrick Rooney
Rooney Farms
Tamara Roth
Brungardt Hower Ward Elliott & Pfeifer, LC
Pat Sullivan
Retired,
Sullivan Analytical Service, Inc.
HAYS
D.G. Bickle, Jr.
Warehouse, Inc.
Monte Cook
Commerce Bank
Brian Dewitt
Adams, Brown, Beran & Ball, CPAs
Stuart Lowry
Sunflower Electric Power Corporation
Deron O’Connor
Commerce Bank
Marty Patterson
Rome Corporation
Mike Petrie
Commerce Bancshares, Inc.
Kevin Royer
Midland Marketing Coop
LAWRENCE
Michele Hammann
SS&C Solutions, Inc.
Mark Heider
Commerce Bank
Russ Johnson
Lawrence Memorial Hospital
Eugene W. Meyer
Retired,
Lawrence Memorial Hospital
26
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT
Allison Vance Moore
Colliers International
Martin W. Moore
Advanco, Inc.
Kevin J. O’Malley
O’Malley Beverage of Kansas, Inc.
Edward J. Reardon, II
Commerce Bank
Dan C. Simons
The World Company
Michael Treanor
TreanorHL
LEAVENWORTH
J. Sanford Bushman
DeMaranville & Associate, CPAs, LLC
Norman B. Dawson
Retired,
Commerce Bancshares, Inc.
Sherry DeMaranville
DeMaranville & Associate, CPAs, LLC
Mark Denney
J.F. Denney Plumbing & Heating
Jeremy Greenamyre
Greenamyre Rentals
Chris Klimek
Central Bag, Co.
Lawrence W. O’Donnell, Jr.
Lawrence W. O’Donnell, Jr., CPA Chartered
Bill Petrie
Commerce Bank
Edward J. Reardon, II
Commerce Bank
Robert D. Schmitt, II
Mama Mia’s, Inc.
Kurt Seelbach
Armed Forces Insurance Exchange
MANHATTAN
Mark Bachamp
Olsson Associates
Monte Cook
Commerce Bank
Shawn Drew
Commerce Bank
Tom Giller
Manhattan Catholic Schools
Neal Helmick
Griffith Lumber Co.
Dr. David Pauls
Surgical Associates
Mike Petrie
Commerce Bancshares, Inc.
WICHITA
Michael E. Bukaty
Retired,
Latshaw Enterprises, Inc.
Ray L. Connell
Connell & Connell
Monte A. Cook
Commerce Bank
Thomas E. Dondlinger
Dondlinger Construction
Craig Duerksen
Commerce Bank
Ronald W. Holt
Retired,
Sedgwick County
Eric Ireland
Commerce Bank
Paul D. Jackson
Vantage Point Properties, Inc.
Brett Mattison
Decker & Mattison Co., Inc.
Derek L. Park
Law Office of Derek Park, LLC
Marilyn B. Pauly
Commerce Bank
Mike Petrie
Commerce Bancshares, Inc.
Barry L. Schwan
House of Schwan, Inc.
Thomas D. White
White & Ellis Drilling, Inc.
Illinois
BLOOMINGTON-NORMAL
Al Bowman
Retired,
Illinois State University
Brent A. Eichelberger
Commerce Bank
Ron Greene
Afni, Inc.
Jared Hall
Visionary Eye Partners
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
Colleen Kannaday
Advocate BroMenn Medical Center
Parker Kemp
Kemp Farms, Inc.
William Phillips
Commerce Bank
Aaron Quick
Farnsworth Group, Inc.
Jay Reece
Mueller, Reece & Hinch, LLC
Alan Sender
Retired,
Chestnut Health Systems
CHAMPAIGN-URBANA
Mark Arends
Arends Hogan Walker, LLC
Matt Deering
Meyer Capel
Brian Egeberg
Commerce Bank
Brent A. Eichelberger
Commerce Bank
Donna Greene
University of Illinois
Tim Harrington
Devonshire Group
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Kim Martin
Martin, Hood, Friese & Associates, LLC
Roger Rhodes
Retired,
Horizon Hobby, Inc.
PEORIA
Bruce L. Alkire
Coldwell Banker Commercial
Devonshire Realty
David W. Altorfer
United Facilities, Inc.
Royal J. Coulter
Coulter Companies, Inc.
Peter T. Coyle
Arthur J. Gallagher & Co.
Dr. Michael A. Cruz
OSF Healthcare Systems
Brent A. Eichelberger
Commerce Bank
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
Dr. James W. Maxey
OSF Orthopedics
Richard D. Moore
Caterpillar, Inc.
Jonathan Williams
Commerce Bank
Janet M. Wright
Central Illinois Business Publishers, Inc.
Oklahoma
OKLAHOMA CITY
Gary Bridwell
Orange Power Group
Steve Brown
Red Rock Distributing Co.
Jim Cleaver
Midsouth Financial Company
Clay Cockrill
Manhattan Construction Company
Sherry Dale
The Mettise Group
Mark Fischer
Fischer Investments
Zane Fleming
Eagle Drilling Fluids
Mike McDonald
Triad Energy
Vince Orza
Retired
Family Broadcasting Corporation
Kathy Potts
Rees Associates, Inc.
Reeder Ratliff
Mason Harrison Ratliff Enterprises
Kelly Sachs
Commerce Bank
Joe Warren
Cimarron Production
TULSA
Jack Allen
HUB International Limited
Stephanie Cameron
AAON, Inc.
R. Scott Case
Case & Associates, Inc.
Gary R. Christopher
Christopher Energy
Wade Edmundson
Commerce Bank
Dr. John R. Frame
Breast Health Specialists of Oklahoma
Gip Gibson
Commerce Bank
Kent J. Harrell
Harrell Energy
Ed Keller
Titan Properties
Teresa L. Knox
Community HigherEd
Ken Lackey
The NORDAM Group, Inc.
Dr. George Mauerman
Eastern Oklahoma Orthopedic Center
Tom E. Maxwell
Retired
Flintco, LLC
Sanjay Meshri
Advanced Research Chemicals, Inc.
John Neas
Neas Investments
Shannon O’Doherty
Commerce Bank
John Peters
Adwon Properties
Tracy A. Poole
McAfee Taft
John D. Williams
John Williams Company
Daryl Woodard
SageNet
Colorado
DENVER
Robert L. Cohen
The IMA Financial Group, Inc.
Joseph Freund, Jr.
Running Creek Ranch
R. Allan Fries
i2 Construction, LLP
Darren Lemkau
Commerce Bank
James C. Lewien
Retired,
Commerce Bank
Randall H. Lortscher, M.D.
Rocky Mountain Gamma Knife Center, LLC
Alek Orloff
Alpine Waste & Recycling
David Schunk
Volunteers of America, Colorado Branch
Olivia Thompson
Retired,
AlloSource
Jason Zickerman
The Alternative Board
27
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT Officers
Directors
28
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORTDavid W. KemperExecutive Chairman John W. Kemper President and Chief Executive OfficerCharles G. Kim Chief Financial Officer and Executive Vice PresidentKevin G. Barth Executive Vice PresidentDaniel D. Callahan Chief Credit Officer and Executive Vice PresidentSara E. Foster Executive Vice PresidentJohn K. Handy Executive Vice PresidentRobert S. HolmesExecutive Vice PresidentJeffrey M. Burik Senior Vice PresidentPatricia R. Kellerhals Senior Vice PresidentDouglas D. Neff Senior Vice PresidentPaula S. Petersen Senior Vice PresidentDavid L. RollerSenior Vice PresidentThomas J. Noack Senior Vice President, Secretary and General CounselB. Lynn Tankesley Chief Risk Officer and Senior Vice President Jeffery D. AberdeenControllerAaron C. Meinert AuditorTerry D. Bassham*Chief Executive Officer and President, Evergy, Inc.John R. Capps* Vice President, Weiss ToyotaKaren L. Daniel* Retired, Chief Financial Officer and Executive Director, Black & VeatchEarl H. Devanny, III Chief Executive Officer, Tract Manager W. Thomas Grant, II President, SelectQuote Senior Insurance ServicesDavid W. KemperExecutive Chairman Commerce Bancshares, Inc.John W. Kemper President and Chief Executive Officer, Commerce Bancshares, Inc.Jonathan M. Kemper Chairman Emeritus, Commerce Bank, Kansas City RegionBenjamin F. Rassieur, III*President, Paulo Products CompanyTodd R. Schnuck* Chairman of the Board and Chief Executive Officer, Schnuck Markets, Inc.Andrew C. Taylor Executive Chairman, Enterprise Holdings, Inc.Kimberly G. Walker*Retired, Chief Investment Officer Washington University in St. Louis*Audit and Risk Committee Members UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018 — Commission File No. 0-2989
COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Missouri
(State of Incorporation)
1000 Walnut,
Kansas City, MO
(Address of principal executive offices)
(816) 234-2000
(Registrant’s telephone number, including area code)
43-0889454
(IRS Employer Identification No.)
64106
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class
$5 Par Value Common Stock
Depositary Shares, each representing a 1/1000th interest in a share of
6.0% Series B Non-Cumulative Perpetual Preferred Stock
Name of exchange on which registered
NASDAQ Global Select Market
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
(Do not check if a smaller
reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2018, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $6,364,000,000.
As of February 14, 2019, there were 110,901,627 shares of Registrant’s $5 Par Value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2019 annual meeting of shareholders, which will be filed within 120 days of December 31, 2018,
are incorporated by reference into Part III of this Report.
Commerce Bancshares, Inc.
Form 10-K
INDEX
PART I
Item 1.
Business
Item 1a.
Risk Factors
Item 1b.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7a.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9a.
Controls and Procedures
Item 9b.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
Page
3
8
12
13
13
13
15
16
16
59
59
125
125
127
127
127
127
127
127
128
129
130
2
Item 1. BUSINESS
General
PART I
Commerce Bancshares, Inc., a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, was
incorporated under the laws of Missouri on August 4, 1966. Through a second tier wholly-owned bank holding company, it owns
all the outstanding capital stock of Commerce Bank (the “Bank”), which is headquartered in Missouri. The Bank engages in
general banking business, providing a broad range of retail, mortgage banking, corporate, investment, trust, and asset management
products and services to individuals and businesses. Commerce Bancshares, Inc. also owns, directly or through the Bank, various
non-banking subsidiaries. Their activities include private equity investment, securities brokerage, insurance agency, and leasing
activities. A list of Commerce Bancshares, Inc.'s subsidiaries is included as Exhibit 21.
Commerce Bancshares, Inc. and its subsidiaries (collectively, the "Company") is one of the nation’s top 50 bank holding
companies, based on asset size. At December 31, 2018, the Company had consolidated assets of $25.5 billion, loans of $14.1
billion, deposits of $20.3 billion, and equity of $2.9 billion. The Company’s operations are consolidated for purposes of preparing
the Company’s consolidated financial statements. The Company's principal markets, which are served by 169 branch facilities,
are located throughout Missouri, Kansas, and central Illinois, as well as Tulsa and Oklahoma City, Oklahoma and Denver, Colorado.
Its two largest markets are St. Louis and Kansas City, which serve as central hubs for the Company. The Company also has offices
supporting its commercial customers in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids, and
operates a payments business with sales representatives covering the continental United States of America (“U.S.”).
The Company’s goal is to be the preferred provider of financial services in its communities, based on strong customer
relationships built through providing top quality service with a strong risk management culture, and employing a strong balance
sheet with industry-leading capital levels. The Company operates under a super-community banking format which incorporates
large bank product offerings coupled with deep local market knowledge, augmented by experienced, centralized support in select,
critical areas. The Company’s focus on local markets is supported by an experienced team of bankers assigned to each market
coupled with industry specialists. The Company also uses regional advisory boards, comprised of local business persons,
professionals and other community representatives, who assist the Company in responding to local banking needs. In addition to
this local market, community-based focus, the Company offers sophisticated financial products usually only available at much
larger financial institutions.
The markets the Bank serves, being mainly located in the lower Midwest, provide natural sites for production and distribution
facilities and serve as transportation hubs. The economy has been well-diversified in these markets with many major industries
represented, including telecommunications, automobile, technology, financial services, aircraft and general manufacturing, health
care, numerous service industries, and food and agricultural production. The real estate lending operations of the Bank are
predominantly centered in its lower Midwestern markets. Historically, these markets have tended to be less volatile than in other
parts of the country. Management believes the diversity and nature of the Bank’s markets has a mitigating effect on real estate
loan losses in these markets.
From time to time, the Company evaluates the potential acquisition of various financial institutions. In addition, the Company
regularly considers the purchase and disposition of real estate assets and branch locations as situations dictate. The Company seeks
merger or acquisition partners that are culturally similar, have experienced management and either possess significant market
presence or have potential for improved profitability through financial management, economies of scale and expanded services.
The Company has not completed any bank acquisitions since 2013.
Employees
The Company employed 4,570 persons on a full-time basis and 299 persons on a part-time basis at December 31, 2018. The
Company provides a comprehensive array of flexible benefit programs to its employees with a focus on financial and physical
wellness. The Company's financial benefits package includes a company-matching 401(k) savings plan, a 529 college savings
plan, and educational and adoption assistance programs. The Company's physical wellness package includes health, dental, vision,
life and various other insurances, as well as a wellness program that incentivizes employees to live a healthy and balanced lifestyle.
The Company has developed several training and development programs designed to challenge and develop the management and
leadership skills of employees, promote collaboration amongst various internal departments and geographic locations, and share
best-practices to meet the needs of customers and communities. The Company has also developed numerous training courses
targeted to develop interpersonal and technical skills, as well as, to provide training on new banking regulations. None of the
Company's employees are represented by collective bargaining agreements.
3
Competition
The Company operates in the highly competitive environment of financial services. The Company regularly faces competition
from banks, savings and loan associations, credit unions, brokerage companies, mortgage companies, insurance companies, trust
companies, credit card companies, private equity firms, leasing companies, securities brokers and dealers, financial technology
companies, e-commerce companies, mutual fund companies, and other companies providing financial services. Some of these
competitors are not subject to the same regulatory restrictions as domestic banks and bank holding companies. Some other
competitors are significantly larger than the Company, and therefore have greater economies of scale, greater financial resources,
higher lending limits, and may offer products and services that the Company does not provide. The Company competes by providing
a broad offering of products and services to support the needs of customers, matched with a strong commitment to customer
service. The Company also competes based on quality, innovation, convenience of locations, reputation, industry knowledge, and
price. In its two largest markets, the Company has approximately 13% of the deposit market share in Kansas City and approximately
9% of the deposit market share in St. Louis.
Operating Segments
The Company is managed in three operating segments: Commercial, Consumer, and Wealth. The Commercial segment provides
a full array of corporate lending, merchant and commercial bank card products, leasing, and international services, as well as
business and government deposit, investment, and cash management services. The Consumer segment includes the retail branch
network, consumer installment lending, personal mortgage banking, and consumer debit and credit bank card activities. The Wealth
segment provides traditional trust and estate planning services, brokerage services, and advisory and discretionary investment
portfolio management services to both personal and institutional corporate customers. In 2018, the Commercial, Consumer and
Wealth segments contributed 57%, 21% and 22% of total segment pre-tax income, respectively. Additional information relating
to operating segments can be found on pages 48 and 95.
Government Policies
The Company's operations are affected by federal and state legislative changes, by the United States government, and by
policies of various regulatory authorities, including those of the numerous states in which they operate. These include, for example,
the statutory minimum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System,
United States fiscal policy, international currency regulations and monetary policies, the U.S. Patriot Act, and capital adequacy
and liquidity constraints imposed by federal and state bank regulatory agencies.
Supervision and Regulation
The following information summarizes existing laws and regulations that materially affect the Company's operations. It does
not discuss all provisions of these laws and regulations, and it does not include all laws and regulations that affect the Company
presently or may affect the Company in the future.
General
The Company, as a bank holding company, is primarily regulated by the Board of Governors of the Federal Reserve System
under the Bank Holding Company Act of 1956, as amended (BHC Act). Under the BHC Act, the Federal Reserve Board’s prior
approval is required in any case in which the Company proposes to acquire all or substantially all the assets of any bank, acquire
direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other
bank holding company. With certain exceptions, the BHC Act also prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of any class of voting shares of any non-banking company. Under the BHC Act, the Company
may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries,
and may not acquire voting control of non-banking companies unless the Federal Reserve Board determines such businesses and
services to be closely related to banking. When reviewing bank acquisition applications for approval, the Federal Reserve Board
considers, among other things, the Bank’s record in meeting the credit needs of the communities it serves in accordance with the
Community Reinvestment Act of 1977, as amended (CRA). Under the terms of the CRA, banks have a continuing obligation,
consistent with safe and sound operation, to help meet the credit needs of their communities, including providing credit to individuals
residing in low- and moderate-income areas. The Bank has a current CRA rating of “outstanding.”
The Company is required to file various reports and additional information with the Federal Reserve Board. The Federal
Reserve Board regularly performs examinations of the Company. The Bank is a state-chartered Federal Reserve member bank
and is subject to regulation, supervision and examination by the Federal Reserve Bank of Kansas City and the Missouri Division
of Finance. The Bank is also subject to regulation by the Federal Deposit Insurance Corporation (FDIC). In addition, there are
numerous other federal and state laws and regulations which control the activities of the Company, including requirements and
limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates,
loan limits, mergers and acquisitions, issuance of securities, dividend payments, and extensions of credit. The Bank is subject to
4
federal and state consumer protection laws, including laws designed to protect customers and promote fair lending. These laws
include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure
Act, the Real Estate Settlement Procedures Act, and their respective state law counterparts. If the Company fails to comply with
these or other applicable laws and regulations, it may be subject to civil monetary penalties, imposition of cease and desist orders
or other written directives, removal of management and, in certain circumstances, criminal penalties. This regulatory framework
is intended primarily for the protection of depositors and the preservation of the federal deposit insurance funds. Statutory and
regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to employ
assets and maximize income.
In addition to its regulatory powers, the Federal Reserve Bank affects the conditions under which the Company operates by
its influence over the national supply of bank credit. The Federal Reserve Board employs open market operations in U.S. government
securities and oversees changes in the discount rate on bank borrowings, changes in the federal funds rate on overnight inter-bank
borrowings, and changes in reserve requirements on bank deposits in implementing its monetary policy objectives. These methods
are used in varying combinations to influence the overall level of the interest rates charged on loans and paid for deposits, the
price of the dollar in foreign exchange markets, and the level of inflation. The monetary policies of the Federal Reserve have a
significant effect on the operating results of financial institutions, most notably on the interest rate environment. In view of changing
conditions in the national economy and in the money markets, as well as the effect of credit policies of monetary and fiscal
authorities, the Company makes no prediction as to possible future changes in interest rates, deposit levels or loan demand, or
their effect on the financial statements of the Company.
The financial industry operates under laws and regulations that are under regular review by various agencies and legislatures
and are subject to change. The Company currently operates as a bank holding company, as defined by the Gramm-Leach-Bliley
Financial Modernization Act of 1999 (GLB Act), and the Bank qualifies as a financial subsidiary under the GLB Act, which allows
it to engage in investment banking, insurance agency, brokerage, and underwriting activities that were not available to banks prior
to the GLB Act. The GLB Act also included privacy provisions that limit banks’ abilities to disclose non-public information about
customers to non-affiliated entities.
The Company must also comply with the requirements of the Bank Secrecy Act (BSA). The BSA is designed to help fight
drug trafficking, money laundering, and other crimes. Compliance is monitored by the Federal Reserve. The BSA was enacted
to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of
money derived from, criminal activity. Since its passage, the BSA has been amended several times. These amendments include
the Money Laundering Control Act of 1986 which made money laundering a criminal act, as well as the Money Laundering
Suppression Act of 1994 which required regulators to develop enhanced examination procedures and increased examiner training
to improve the identification of money laundering schemes in financial institutions.
The USA PATRIOT Act, established in 2001, substantially broadened the scope of U.S. anti-money laundering laws and
regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding
the extra-territorial jurisdiction of the U.S. The regulations impose obligations on financial institutions to maintain appropriate
policies, procedures and controls to detect, prevent, and report money laundering and terrorist financing. The regulations include
significant penalties for non-compliance.
The Company is subject to regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2011 (Dodd-
Frank Act). Among its many provisions, the Dodd-Frank Act required stress-testing for certain financial services companies and
established a new council of “systemic risk” regulators. The Dodd Frank Act also established the Consumer Financial Protection
Bureau (CFPB) which is authorized to supervise certain financial services companies and has responsibility to implement, examine
for compliance with, and enforce “Federal consumer financial law.” The Company is subject to examinations by the CFPB. The
Dodd-Frank Act, through Title VI, commonly known as the Volcker Rule, placed trading restrictions on financial institutions and
separated investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their
consumer lending arms. The Volcker Rule also restricts financial institutions from investing in and sponsoring certain types of
investments.
In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law which provides a
number of limited amendments to the Dodd-Frank Act. Notable provisions of the legislation include: an increase in the asset
threshold from $50 billion to $250 billion, above which the Federal Reserve is required to apply enhanced prudential standards;
an exemption from the Volker Rule for insured depository institutions with less than $10 billion in consolidated assets; modifications
to the Liquidity Coverage and Supplementary Leverage ratios; and the elimination of Dodd-Frank company-run stress tests for
banks and bank holding companies with less than $250 billion in assets. While most of these provisions affect institutions larger
than the Company, the Company is no longer required to prepare stress testing as specified by the Dodd-Frank Act.
5
Subsidiary Bank
Under Federal Reserve policy, the bank holding company, Commerce Bancshares, Inc. (the "Parent"), is expected to act as a
source of financial strength to its bank subsidiary and to commit resources to support it in circumstances when it might not otherwise
do so. In addition, loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits
and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment
by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by
the bankruptcy trustee and entitled to a priority of payment.
Deposit Insurance
Substantially all of the deposits held by the Bank are insured up to applicable limits (generally $250,000 per depositor for each
account ownership category) by the Deposit Insurance Fund (DIF) of the FDIC and are subject to deposit insurance assessments
to maintain the DIF. In 2011, the FDIC released a final rule to implement provisions of the Dodd-Frank Act that affect deposit
insurance assessments. Among other things, the Dodd-Frank Act raised the minimum designated reserve ratio from 1.15% to
1.35% of estimated insured deposits, removed the upper limit of the designated reserve ratio, required that the designated reserve
ratio reach 1.35% by September 30, 2020, and required that the FDIC offset the effect of increasing the minimum designated
reserve ratio on depository institutions with total assets of less than $10 billion. The Dodd-Frank Act provided the FDIC flexibility
in the implementation of the increase in the designated reserve ratio, but it will ultimately result in increased deposit insurance
costs to the Company. The Dodd-Frank Act also required that the FDIC redefine the assessment base to average consolidated
assets minus average tangible equity.
On June 30, 2016, the DIF rose above the 1.15%, resulting in a reduction of the initial assessment rate for all banks and
implementing a 4.5 basis point surcharge on insured depository institutions with total consolidated assets of $10 billion or more.
Effective October 1, 2018, this surcharge was eliminated as the DIF reached its required level of 1.35% of estimated insured
deposits. This had the effect of reducing the Company’s insurance costs by $1.5 million in the fourth quarter of 2018.
Payment of Dividends
The Federal Reserve Board may prohibit the payment of cash dividends to shareholders by bank holding companies if their
actions constitute unsafe or unsound practices. The principal source of the Parent's cash revenues is cash dividends paid by the
Bank. The amount of dividends paid by the Bank in any calendar year is limited to the net profit of the current year combined
with the retained net profits of the preceding two years, and permission must be obtained from the Federal Reserve Board for
dividends exceeding these amounts. The payment of dividends by the Bank may also be affected by factors such as the maintenance
of adequate capital.
Capital Adequacy
The Company is required to comply with the capital adequacy standards established by the Federal Reserve, which are based
on the risk levels of assets and off-balance sheet financial instruments. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to judgments by regulators regarding qualitative
components, risk weightings, and other factors.
A new comprehensive capital framework was established by the Basel Committee on Banking Supervision, which was effective
for large and internationally active U.S. banks and bank holding companies on January 1, 2015. A key goal of the new framework,
known as "Basel III," was to strengthen the capital resources of banking organizations during normal and challenging business
environments. Basel III increased minimum requirements for both the quantity and quality of capital held by banking organizations.
The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity
Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer, which is being phased in during
2016-2019, is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints
on dividends, equity repurchases and executive compensation. The rule also adjusted the methodology for calculating risk-weighted
assets to enhance risk sensitivity. At December 31, 2018, the Company met all capital adequacy requirements under Basel III on
a fully phased-in basis as if such requirements had been in effect.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one
or more prescribed minimum capital ratios. Pursuant to FDICIA, the FDIC promulgated regulations defining the following five
categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the prompt
corrective action provisions of FDICIA, an insured depository institution generally will be classified as well-capitalized (under
6
the Basel III rules mentioned above) if it has a Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least
6.5%, a total capital ratio of at least 10%, and a Tier 1 leverage ratio of at least 5%. An institution that, based upon its capital
levels, is classified as “well-capitalized,” “adequately capitalized,” or “undercapitalized,” may be treated as though it were in the
next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition, or an unsafe or unsound practice warrants such treatment. At each successive lower capital category,
an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on
interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered
deposits. Furthermore, if a bank is classified in one of the undercapitalized categories, it is required to submit a capital restoration
plan to the federal bank regulator, and the holding company must guarantee the performance of that plan. The Bank has consistently
maintained regulatory capital ratios at or above the “well-capitalized” standards.
Stress Testing
As required by the Dodd-Frank Act, the Company performed stress tests as specified by the Federal Reserve requirement and
published results beginning in 2014 through 2017. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer
Protection Act was enacted, which eliminated the required stress testing under the Dodd-Frank Act for banks with consolidated
assets of less than $100 billion. The Company continues to perform periodic stress-testing based on its own internal criteria.
Executive and Incentive Compensation
Guidelines adopted by federal banking agencies prohibit excessive compensation as an unsafe and unsound practice, and
describe compensation as "excessive" when the amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal shareholder. The Federal Reserve Board has issued comprehensive guidance
on incentive compensation intended to ensure that the incentive compensation policies do not undermine safety and soundness
by encouraging excessive risk taking. This guidance covers all employees that have the ability to materially affect the risk profile
of an organization, either individually or as part of a group, based on key principles that (i) incentives do not encourage risk-taking
beyond the organization's ability to identify and manage risk, (ii) compensation arrangements are compatible with effective internal
controls and risk management, and (iii) compensation arrangements are supported by strong corporate governance, including
active and effective board oversight. Deficiencies in compensation practices may affect supervisory ratings and enforcement
actions may be taken if incentive compensation arrangements pose a risk to safety and soundness.
Transactions with Affiliates
The Federal Reserve Board regulates transactions between the Bank and its subsidiaries. Generally, the Federal Reserve Act
and Regulation W, as amended by the Dodd-Frank Act, limit the Company’s banking subsidiary and its subsidiaries to lending
and other “covered transactions” with affiliates. The aggregate amount of covered transactions a banking subsidiary or its
subsidiaries may enter into with an affiliate may not exceed 10% of the capital stock and surplus of the banking subsidiary. The
aggregate amount of covered transactions with all affiliates may not exceed 20% of the capital stock and surplus of the banking
subsidiary.
Covered transactions with affiliates are also subject to collateralization requirements and must be conducted on arm’s length
terms. Covered transactions include (a) a loan or extension of credit by the banking subsidiary, including derivative contracts, (b)
a purchase of securities issued to a banking subsidiary, (c) a purchase of assets by the banking subsidiary unless otherwise exempted
by the Federal Reserve, (d) acceptance of securities issued by an affiliate to the banking subsidiary as collateral for a loan, and
(e) the issuance of a guarantee, acceptance or letter of credit by the banking subsidiary on behalf of an affiliate.
Certain transactions with the Company's directors, officers or controlling persons are also subject to conflicts of interest
regulations. Among other things, these regulations require that loans to such persons and their related interests be made on terms
substantially the same as for loans to unaffiliated individuals, and must not create an abnormal risk of repayment or other unfavorable
features for the financial institution. See Note 2 to the consolidated financial statements for additional information on loans to
related parties.
Available Information
The Company’s principal offices are located at 1000 Walnut Street, Kansas City, Missouri (telephone number 816-234-2000).
The Company makes available free of charge, through its website at www.commercebank.com, reports filed with the Securities
and Exchange Commission as soon as reasonably practicable after the electronic filing. These filings include the annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports.
7
Statistical Disclosure
The information required by Securities Act Guide 3 — “Statistical Disclosure by Bank Holding Companies” is located on the
pages noted below.
II.
III.
I. Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest
Differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Portfolio
Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities and Sensitivities of Loans to Changes in Interest Rates . . . . . . . . . . . . . . . . . . . . . . .
Risk Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IV.
Summary of Loan Loss Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
V. Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on Equity and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VI.
Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VII.
Page
22, 54-57
39-40, 80-84
28
28-29
34-38
31-34
54, 86
17
86
Item 1a. RISK FACTORS
Making or continuing an investment in securities issued by Commerce Bancshares, Inc., including its common and preferred
stock, involves certain risks that you should carefully consider. If any of the following risks actually occur, its business, financial
condition or results of operations could be negatively affected, the market price for your securities could decline, and you could
lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form
10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important
factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements
made by or on behalf of Commerce Bancshares, Inc.
Difficult market conditions may affect the Company’s industry.
The concentration of the Company’s banking business in the United States particularly exposes it to downturns in the U.S.
economy. While current economic conditions are favorable, there remain risks in that environment.
In particular, the Company may face the following risks in connection with market conditions:
•
•
•
•
In the current national environment, positive trends in job growth, unemployment levels, consumer confidence, and credit
conditions are expected to continue, but the current recovery is historically long, there has been recent stock market
volatility, and consumer debt has been increasing. Further, the U.S. economy is affected by global economic events and
conditions, including recent U.S. trade disputes with various countries. Although the Company does not hold foreign
debt or have significant activities with foreign customers, the global economy, the strength of the U.S. dollar, and oil
prices may ultimately affect interest rates, business import/export activity, capital expenditures by businesses, and investor
confidence. Unfavorable changes in these factors may result in declines in consumer credit usage, adverse changes in
payment patterns, reduced loan demand, and higher loan delinquencies and default rates. These could impact the
Company’s future loan losses and provision for loan losses, as a significant part of the Company’s business includes
consumer and credit card lending.
In addition to the results above, a slowdown in economic activity may cause declines in financial services activity,
including declines in bank card, corporate cash management and other fee businesses, as well as the fees earned by the
Company on such transactions.
The process used to estimate losses inherent in the Company’s loan portfolio requires difficult, subjective, and complex
judgments, including consideration of economic conditions and how these economic predictions might impair the ability
of its borrowers to repay their loans. If an instance occurs that renders these predictions no longer capable of accurate
estimation, this may in turn impact the reliability of the process.
Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in
connection with current market conditions, thereby reducing market prices for various products and services which could
in turn reduce the Company’s revenues.
8
The performance of the Company is dependent on the economic conditions of the markets in which the Company operates.
The Company’s success is heavily influenced by the general economic conditions of the specific markets in which it operates.
Unlike larger national or other regional banks that are more geographically diversified, the Company provides financial services
primarily throughout the states of Missouri, Kansas, central Illinois, Oklahoma, and Colorado. It also has a growing presence in
additional states through its commercial banking offices in: Texas, Iowa, Indiana, Michigan, Ohio, and Tennessee. As the Company
does not have a significant banking presence in other parts of the country, a prolonged economic downturn in these markets could
have a material adverse effect on the Company’s financial condition and results of operations.
The Company operates in a highly competitive industry and market area.
The Company operates in the financial services industry and has numerous competitors including other banks and insurance
companies, securities dealers, brokers, trust and investment companies, mortgage bankers, and financial technology companies.
Consolidation among financial service providers and new changes in technology, product offerings and regulation continue to
challenge the Company's marketplace position. As consolidation occurs, larger regional and national banks may enter the
Company's markets and add to existing competition. Large, national financial institutions have substantial capital, technology and
marketing resources. These new competitors may lower fees to grow market share, which could result in a loss of customers and
lower fee revenue for the Company. They may have greater access to capital at a lower cost than the Company, and may have
higher loan limits, both of which may adversely affect the Company’s ability to compete effectively. The Company must continue
to make investments in its products and delivery systems to stay competitive with the industry, or its financial performance may
suffer.
The soundness of other financial institutions could adversely affect the Company.
The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institution counterparties. Financial services institutions are interrelated because of trading, clearing,
counterparty or other relationships. The Company has exposure to many different industries and counterparties and routinely
executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment
banks, mutual funds, and other institutional clients. Transactions with these institutions include overnight and term borrowings,
interest rate swap agreements, securities purchased and sold, short-term investments, and other such transactions. Because of this
exposure, defaults by, or rumors or questions about, one or more financial services institutions or the financial services industry
in general, could lead to market-wide liquidity problems and defaults by other institutions. Many of these transactions expose the
Company to credit risk in the event of default of its counterparty or client, while other transactions expose the Company to liquidity
risks should funding sources quickly disappear. In addition, the Company’s credit risk may be exacerbated when the collateral
held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the exposure due to the Company.
Any such losses could materially and adversely affect results of operations.
The Company is subject to increasingly extensive government regulation and supervision.
As part of the financial services industry, the Company has been subject to increasingly extensive federal and state regulation
and supervision over the past several years. Banking regulations are primarily intended to protect depositors’ funds, federal deposit
insurance funds, and the banking system, not shareholders. These regulations affect the Company’s lending practices, capital
structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory
policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Company in
substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial
services and products it may offer, and/or increase the ability of non-banks to offer competing financial services and products,
among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil
money penalties, and/or reputation damage, which could have a material adverse effect on the Company’s business, financial
condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur.
Significant changes in federal monetary policy could materially affect the Company’s business.
The Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part
the cost of funds for lending and interest rates earned on loans and paid on borrowings and interest-bearing deposits. Credit
conditions are influenced by its open market operations in U.S. government securities, changes in the member bank discount rate,
and bank reserve requirements. Changes in Federal Reserve Board policies are beyond the Company’s control and difficult to
predict, and such changes may result in lower interest margins and a lack of demand for credit products.
9
The Company is subject to both interest rate and liquidity risk.
With oversight from its Asset-Liability Management Committee, the Company devotes substantial resources to monitoring its
liquidity and interest rate risk on a monthly basis. The Company's net interest income is the largest source of overall revenue to
the Company, representing 62% of total revenue for the year ended December 31, 2018. The interest rate environment in which
the Company operates fluctuates in response to general economic conditions and policies of various governmental and regulatory
agencies, particularly the Federal Reserve Board, which regulates the supply of money and credit in the U.S. Changes in monetary
policy, including changes in interest rates, will influence loan originations, deposit generation, demand for investments and
revenues, and costs for earning assets and liabilities, and could significantly impact the Company’s net interest income.
The Federal Reserve Board raised the benchmark interest rate four times during 2018 for a total of 100 basis points. Future
economic conditions or other factors could shift monetary policy resulting in no additional rate increases in 2019 or decreases in
the benchmark rate. Furthermore, changes in interest rates could result in unanticipated changes to customer deposit balances and
funding costs, and affect the Company’s source of funds for future loan growth.
The Company has a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes
that are either directly or indirectly dependent on LIBOR. In 2017, the U.K. Financial Conduct Authority announced that LIBOR
is to be transitioned to alternative rates during the next four years. U.S. regulatory authorities have voiced similar support for
phasing out LIBOR. The impact of alternatives to LIBOR on the valuations, pricing and operation of the Company's financial
instruments is not yet known.
The Company’s asset valuation may include methodologies, models, estimations and assumptions which are subject to
differing interpretations and could result in changes to asset valuations that may materially adversely affect its results of
operations or financial condition.
The Company uses estimates, assumptions, and judgments when certain financial assets and liabilities are measured and reported
at fair value. Assets and liabilities carried at fair value inherently result in greater financial statement volatility. Fair values and
the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or
other observable inputs provided by independent third-party sources, when available. When such third-party information is not
available, fair value is estimated primarily by using cash flow and other financial modeling techniques utilizing assumptions such
as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying factors, assumptions, or estimates in any
of these areas could materially impact the Company’s future financial condition and results of operations. Furthermore, if models
used to calculate fair value of financial instruments are inadequate or inaccurate due to flaws in their design or execution, upon
sale, the Company may not realize the cash flows of a financial instrument as modeled and could incur material, unexpected losses.
During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit
spreads or illiquidity, it may be difficult to value certain assets if trading becomes less frequent and/or market data becomes less
observable. There may be certain asset classes in active markets with significant observable data that become illiquid due to the
current financial environment. In such cases, certain asset valuations may require more subjectivity and management judgment.
As such, valuations may include inputs and assumptions that are less observable or require greater estimation. Further, rapidly
changing and unprecedented credit and equity market conditions could materially impact the valuation of assets as reported within
the Company’s consolidated financial statements, and the period-to-period changes in value could vary significantly. Decreases
in value may have a material adverse effect on results of operations or financial condition.
The Company’s investment portfolio values may be adversely impacted by deterioration in the credit quality of underlying
collateral within the various categories of investment securities it owns.
The Company generally invests in securities issued by municipal entities, government-backed agencies or privately issued
securities, with collateral that are highly rated and evaluated at the time of purchase, however, these securities are subject to changes
in market value due to changing interest rates and implied credit spreads. While the Company maintains rigorous risk management
practices over bonds issued by municipalities, credit deterioration in these bonds could occur and result in losses. Certain mortgage
and asset-backed securities (which are collateralized by residential mortgages, credit cards, automobiles, mobile homes or other
assets) may decline in value due to actual or expected deterioration in the underlying collateral. Under accounting rules, when the
impairment is due to declining expected cash flows, some portion of the impairment, depending on the Company’s intent to sell
and the likelihood of being required to sell before recovery, must be recognized in current earnings. This could result in significant
losses.
10
Future loan losses could increase.
The Company maintains an allowance for loan losses that represents management’s best estimate of probable losses that have
been incurred at the balance sheet date within the existing portfolio of loans. The level of the allowance reflects management’s
continuing evaluation of industry concentrations, specific credit risks, loan loss experience, including emergence periods, current
loan portfolio quality, present economic, political, and regulatory conditions, and unidentified losses inherent in the current loan
portfolio. Although the loan losses have been stable during the past several years, an unforeseen deterioration of financial market
conditions could result in larger loan losses, which may negatively affect the Company's results of operations and could further
increase levels of its allowance for loan losses. In addition, the Company’s allowance level is subject to review by regulatory
agencies, and that review could result in adjustments to the allowance for loan losses. See the section captioned “Allowance for
Loan Losses” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report
for further discussion related to the Company’s process for determining the appropriate level of the allowance for probable loan
losses.
In 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard "Measurement of Credit Losses
on Financial Instruments" (ASU 2016-13), which is effective January 1, 2020. This new standard significantly alters the way the
reserve for credit losses is determined. The new standard utilizes a life of loan loss concept and will require significant operational
changes, especially in data collection and analysis. While an implementation plan has been established and much progress has
been made to date, the impact to the Company’s current reserve for credit losses from this new standard is not yet determined.
Due to the significant changes required by this new standard, it is possible that higher reserves could be required resulting in
reduced capital and earnings.
New lines of business or new products and services may subject the Company to additional risk.
From time to time, the Company may implement new lines of business or offer new products and services within existing lines
of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets
are not fully developed. In developing and marketing new lines of business and new products or services, the Company may invest
significant time and resources. Initial timetables for the introduction and development of new lines of business and new products
or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance
with regulations, competitive alternatives and shifting market preferences may also impact the successful implementation of a
new line of business or a new product or service. Furthermore, any new line of business, or new product or service, could have a
significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks
in the development and implementation of new lines of business and new products or services could have a material adverse effect
on the Company’s financial condition and results of operations.
A successful cyber attack or other computer system breach could significantly harm the Company, its reputation and its
customers.
The Company relies heavily on communications and information systems to conduct its business, and as part of its business,
the Company maintains significant amounts of data about its customers and the products they use. Information security risks
continue to increase due to new technologies, the increasing use of the Internet and telecommunication technologies (including
mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized
crime, perpetrators of fraud, hackers, and others. The Company makes significant investments in various technology to identify
and prevent intrusions into its information system. The Company also has policies and procedures designed to prevent or limit
the effect of failure, interruption or security breach of its information systems and performs regular audits using both internal and
outside resources. However, there can be no assurances that any such failures, interruptions or security breaches will not occur,
or if they do occur, that they will be adequately addressed. In addition to unauthorized access, denial-of-service attacks, or other
operational disruptions could overwhelm Company websites and prevent the Company from adequately serving customers. Should
any of the Company's systems become compromised or customer information be obtained by unauthorized parties, the reputation
of the Company could be damaged, relationships with existing customers may be impaired, and the Company could be subject to
lawsuits, all of which could result in lost business and have a material adverse effect on the Company’s business, financial condition
and results of operations.
11
The Company’s operations rely on certain external vendors.
The Company relies on third-party vendors to provide products and services necessary to maintain day-to-day operations. For
example, the Company outsources a portion of its information systems, communication, data management, and transaction
processing to third parties. Accordingly, the Company is exposed to the risk that these vendors might not perform in accordance
with the contracted arrangements or service level agreements because of changes in the vendor’s organizational structure, financial
condition, support for existing products and services, or strategic focus. Such failure to perform could be disruptive to the Company’s
operations, which could have a materially adverse impact on its business, results of operations and financial condition. These third
parties are also sources of risk associated with operational errors, system interruptions or breaches and unauthorized disclosure
of confidential information. If the vendors encounter any of these issues, the Company could be exposed to disruption of service,
damage to reputation and litigation. Because the Company is an issuer of both debit and credit cards, it is periodically exposed to
losses related to security breaches which occur at retailers that are unaffiliated with the Company (e.g., customer card data being
compromised at retail stores). These losses include, but are not limited to, costs and expenses for card reissuance as well as losses
resulting from fraudulent card transactions.
The Company continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services, including the entrance of financial technology companies offering new financial service
products. The Company regularly upgrades or replaces core technological systems and is currently in the process of replacing its
core deposit system, which is a significant project. The effective use of technology increases efficiency and enables financial
institutions to better serve customers and reduce costs. The Company’s future success depends, in part, upon its ability to address
the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to
create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources
to invest in technological improvements. The Company may encounter significant problems or may not be able to effectively
implement new technology-driven products, including the core deposit system, and services, or be successful in marketing the
new products and services to its customers. These problems might include significant time delays, cost overruns, loss of key
people, and technological system failures. Failure to successfully keep pace with technological change affecting the financial
services industry or failure to successfully complete the replacement of the core deposit system, or another core technological
system, could have a material adverse effect on the Company’s business, financial condition and results of operations.
Commerce Bancshares, Inc. relies on dividends from its subsidiary bank for most of its revenue.
Commerce Bancshares, Inc. is a separate and distinct legal entity from its banking and other subsidiaries. It receives substantially
all of its revenue from dividends from its subsidiary bank. These dividends, which are limited by various federal and state regulations,
are the principal source of funds to pay dividends on its preferred and common stock and to meet its other cash needs. In the event
the subsidiary bank is unable to pay dividends, the Company may not be able to pay dividends or other obligations, which would
have a material adverse effect on the Company's financial condition and results of operations.
The Company must attract and retain skilled employees.
The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people
can be intense, and the Company spends considerable time and resources attracting, hiring, and retaining qualified people for its
various business lines and support units. The unexpected loss of the services of one or more of the Company’s key personnel could
have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, and years
of industry experience, as well as the difficulty of promptly finding qualified replacement personnel.
Item 1b. UNRESOLVED STAFF COMMENTS
None
12
Item 2. PROPERTIES
The main offices of the Bank are located in the larger metropolitan areas of its markets in various multi-story office buildings.
The Bank owns its main offices and leases unoccupied premises to the public. The larger office buildings include:
Building
922 Walnut
Kansas City, MO
1000 Walnut
Kansas City, MO
811 Main
Kansas City, MO
8000 Forsyth
Clayton, MO
1551 N. Waterfront Pkwy
Wichita, KS
Net rentable
square footage
% occupied in
total
% occupied by
Bank
256,000
391,000
237,000
178,000
124,000
95%
93%
86
100
100
96
46
100
100
34
The Company has an additional 164 branch locations in Missouri, Illinois, Kansas, Oklahoma and Colorado which are owned
or leased, and 151 off-site ATM locations.
Item 3. LEGAL PROCEEDINGS
The information required by this item is set forth in Item 8 under Note 20, Commitments, Contingencies and Guarantees
on page 120.
Item 4. MINE SAFETY DISCLOSURES
Not applicable
13
Executive Officers of the Registrant
The following are the executive officers of the Company as of February 21, 2019, each of whom is designated annually. There
are no arrangements or understandings between any of the persons so named and any other person pursuant to which such person
was designated an executive officer.
Name and Age
Jeffery D. Aberdeen, 64
Kevin G. Barth, 58
Jeffrey M. Burik, 60
Daniel D. Callahan, 62
Sara E. Foster, 58
John K. Handy, 55
Robert S. Holmes, 55
Positions with Registrant
Controller of the Company since December 1995. He is also Controller of the Company's
subsidiary bank, Commerce Bank.
Executive Vice President of the Company since April 2005, and Community President and
Chief Executive Officer of Commerce Bank since October 1998. Senior Vice President of the
Company and Officer of Commerce Bank prior thereto.
Senior Vice President of the Company since February 2013. Executive Vice President of
Commerce Bank since November 2007.
Executive Vice President and Chief Credit Officer of the Company since December 2010 and
Senior Vice President of the Company prior thereto. Executive Vice President of Commerce
Bank since May 2003.
Executive Vice President of the Company since February 2012 and Senior Vice President of
the Company prior thereto. Executive Vice President of Commerce Bank since January 2016
and Senior Vice President of Commerce Bank prior thereto.
Executive Vice President of the Company since January 2018 and Senior Vice President of
the Company prior thereto. Community President and Chief Executive Officer of Commerce
Bank since January 2018 and Senior Vice President of Commerce Bank prior thereto.
Executive Vice President of the Company since April 2015, and Community President and
Chief Executive Officer of Commerce Bank since January 2016. Prior to his employment
with Commerce Bank in March 2015, he was employed at a Midwest regional bank where he
served as managing director and head of Regional Banking.
Patricia R. Kellerhals, 61
Senior Vice President of the Company since February 2016 and Vice President of the Company
prior thereto. Executive Vice President of Commerce Bank since 2005.
David W. Kemper, 68
John W. Kemper, 41
Charles G. Kim, 58
Douglas D. Neff, 50
Paula S. Petersen, 52
David L. Roller, 48
Executive Chairman of the Company and of the Board of Directors of the Company since
August 2018. Prior thereto, he was Chief Executive Officer of the Company and Chairman
of the Board of Directors of the Company. He was President of the Company from April 1982
until February 2013. He is the brother of Jonathan M. Kemper (a former Vice Chairman of the
Company), and father of John W. Kemper, President and Chief Executive Officer of the
Company.
Chief Executive Officer of the Company and Chairman and Chief Executive Officer of
Commerce Bank since August 2018. Prior thereto, he was Chief Operating Officer of the
Company. President of the Company since February 2013 and President of Commerce Bank
since March 2013. Member of Board of Directors since September 2015. He is the son of
David W. Kemper, Executive Chairman of the Company and nephew of Jonathan M. Kemper
(a former Vice Chairman of the Company).
Chief Financial Officer of the Company since July 2009. Executive Vice President of the
Company since April 1995 and Executive Vice President of Commerce Bank since January
2004. Prior thereto, he was Senior Vice President of Commerce Bank.
Senior Vice President of the Company since January 2019 and Chairman and Chief Executive
Officer of Commerce Bank Southwest Region since 2013.
Senior Vice President of the Company since July 2016 and Executive Vice President of
Commerce Bank since March 2012.
Senior Vice President of the Company since July 2016 and Senior Vice President of Commerce
Bank since September 2010.
14
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Commerce Bancshares, Inc.
Common Stock Data
Commerce Bancshares, Inc. common shares are listed on the Nasdaq Global Select Market (NASDAQ) under the symbol
CBSH. The Company had 3,664 common shareholders of record as of December 31, 2018. Certain of the Company's shares are
held in "nominee" or "street" name and the number of beneficial owners of such shares is approximately 58,500.
Performance Graph
The following graph presents a comparison of Company (CBSH) performance to the indices named below. It assumes $100
invested on December 31, 2013 with dividends invested on a cumulative total shareholder return basis.
Commerce (CBSH)
100.00
103.68
108.62
157.84
162.62
174.88
NASDAQ OMX Global-Bank
100.00
111.83
114.30
144.63
171.24
143.15
S&P 500
100.00
113.68
115.24
128.98
157.12
150.22
2013
2014
2015
2016
2017
2018
15
The following table sets forth information about the Company’s purchases of its $5 par value common stock, its only class of
common stock registered pursuant to Section 12 of the Exchange Act, during the fourth quarter of 2018.
Period
October 1—31, 2018
November 1—30, 2018
December 1—31, 2018
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
Program
Maximum
Number that May
Yet Be Purchased
Under the
Program
140,934
167,286
270,337
578,557
$62.14
$65.37
$59.05
$61.63
140,934
167,286
270,337
578,557
2,687,186
2,519,900
2,249,563
2,249,563
The Company’s stock purchases shown above were made under authorizations by the Board of Directors. Under the most
recent authorization in October 2015 of 5,000,000 shares, 2,249,563 shares remained available for purchase at December 31, 2018.
Item 6. SELECTED FINANCIAL DATA
The required information is set forth below in Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This report may contain “forward-looking statements” that are subject to risks and uncertainties and include information about
possible or assumed future results of operations. Many possible events or factors could affect the future financial results and
performance of Commerce Bancshares, Inc. and its subsidiaries (the "Company"). This could cause results or performance to
differ materially from those expressed in the forward-looking statements. Words such as “expects”, “anticipates”, “believes”,
“estimates”, variations of such words and other similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied
by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all
uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The
Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the
forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include
the risk factors identified in Item 1a Risk Factors and the following: changes in economic conditions in the Company’s market
area; changes in policies by regulatory agencies, governmental legislation and regulation; fluctuations in interest rates; changes
in liquidity requirements; demand for loans in the Company’s market area; changes in accounting and tax principles; estimates
made on income taxes; failure of litigation settlement agreements to become final in accordance with their terms; and competition
with other entities that offer financial services.
Overview
The Company operates as a super-community bank and offers a broad range of financial products to consumer and commercial
customers, delivered with a focus on high-quality, personalized service. It is the largest bank holding company headquartered in
Missouri, with its principal offices in Kansas City and St. Louis, Missouri. Customers are served from 320 locations in Missouri,
Kansas, Illinois, Oklahoma and Colorado and commercial offices throughout the nation's midsection. A variety of delivery
platforms are utilized, including an extensive network of branches and ATM machines, full-featured online banking, and a central
contact center.
The core of the Company’s competitive advantage is its focus on the local markets in which it operates, its offering of competitive,
sophisticated financial products, and its concentration on relationship banking and high-touch service. In order to enhance
shareholder value, the Company targets core revenue growth. To achieve this growth, the Company focuses on strategies that will
expand new and existing customer relationships, offer opportunities for controlled expansion in additional markets, utilize improved
technology, and enhance customer satisfaction.
16
Various indicators are used by management in evaluating the Company’s financial condition and operating performance. Among
these indicators are the following:
•
•
•
•
•
Net income and earnings per share — Net income attributable to Commerce Bancshares, Inc. was $433.5 million, an
increase of 35.7% compared to the previous year. The return on average assets was 1.76% in 2018, and the return on
average common equity was 16.16%. Diluted earnings per share increased 37.0% in 2018 compared to 2017.
Total revenue — Total revenue is comprised of net interest income and non-interest income. Total revenue in 2018
increased $130.2 million, or 10.9% over 2017, driven by growth in net interest income and non-interest income of $90.1
million and $40.1 million, respectively. The growth in net interest income in 2018 was mainly due to higher rates on
interest earning assets, which grew 44 basis points over 2017 rates, partially offset by higher rates on interest-bearing
liabilities, which grew 15 basis points in 2018 over the prior year. Growth in non-interest income resulted principally
from increases in bank card fees, trust fees, and deposit fees.
Non-interest expense — Total non-interest expense decreased .9% this year compared to 2017, mainly due to $32.0
million of donations made to a related foundation during 2017, which did not recur in 2018. Excluding these donations,
non-interest expense grew 3.6% in the current year, primarily driven by higher expense for salaries and benefits.
Asset quality — Net loan charge-offs totaled $42.3 million in 2018, an increase of $650 thousand over those recorded
in 2017, and averaged .30% of loans compared to .31% in the previous year. Total non-performing assets, which include
non-accrual loans and foreclosed real estate, amounted to $13.9 million at December 31, 2018, compared to $12.7 million
at December 31, 2017, and represented .10% of loans outstanding at December 31, 2018.
Shareholder return — During 2018, the Company paid cash dividends of $.895 per share on its common stock, representing
an increase of 9.7% over the previous year, and paid dividends of 6% on its preferred stock. In 2018, the Company issued
its 25th consecutive annual 5% common stock dividend, and in January 2019, the Company's Board of Directors authorized
an increase of 16% in the common cash dividend. In 2018, the Company purchased 1,193,960 shares of treasury stock.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related
notes. The historical trends reflected in the financial information presented below are not necessarily reflective of anticipated
future results.
Key Ratios
(Based on average balances)
Return on total assets
Return on common equity
Equity to total assets
Loans to deposits (1)
Non-interest bearing deposits to total deposits
Net yield on interest earning assets (tax equivalent basis)
(Based on end of period data)
Non-interest income to revenue (2)
Efficiency ratio (3)
Tier I common risk-based capital ratio (4)
Tier I risk-based capital ratio (4)
Total risk-based capital ratio (4)
Tier I leverage ratio (4)
Tangible common equity to tangible assets ratio (5)
Common cash dividend payout ratio
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
2018
2017
2016
2015
2014
1.76%
16.16
11.24
69.27
33.43
3.53
37.83
55.58
14.22
14.98
15.82
11.52
10.45
23.61
1.28%
12.46
10.53
66.18
34.85
3.20
39.88
62.18
12.65
13.41
14.35
10.39
9.84
29.52
1.12%
11.33
10.16
63.71
34.67
3.04
41.09
61.04
11.62
12.38
13.32
9.55
8.66
32.69
1.11%
11.43
10.00
61.44
35.12
2.94
41.40
61.42
11.52
12.33
13.28
9.23
8.48
33.35
1.15%
11.65
10.10
59.91
33.73
3.00
41.31
61.00
NA
13.74%
14.86
9.36
8.55
32.69
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) Risk-based capital information at December 31, 2018, 2017, 2016 and 2015 was prepared under Basel III requirements, which were effective January 1,
2015. Risk-based capital information for prior years was prepared under Basel I requirements.
(5) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization.
It provides a meaningful basis for period to period and company to company comparisons, and also assist regulators, investors and analysts in analyzing the
financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or
superior to, data prepared in accordance with GAAP.
17
The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures
of total tangible common equity and total tangible assets.
(Dollars in thousands)
Total equity
Less non-controlling interest
Less preferred stock
Less goodwill
Less core deposit premium
Total tangible common equity (a)
Total assets
Less goodwill
Less core deposit premium
Total tangible assets (b)
Tangible common equity to tangible assets ratio (a)/(b)
2018
$ 2,937,149
5,851
144,784
138,921
2,316
$ 2,645,277
$ 25,463,842
138,921
2,316
$ 25,322,605
2017
$ 2,718,184
1,624
144,784
138,921
2,965
$ 2,429,890
$ 24,833,415
138,921
2,965
$ 24,691,529
2016
$ 2,501,132
5,349
144,784
138,921
3,841
$ 2,208,237
$ 25,641,424
138,921
3,841
$ 25,498,662
2015
$ 2,367,418
5,428
144,784
138,921
5,031
$ 2,073,254
$ 24,604,962
138,921
5,031
$ 24,461,010
2014
$ 2,334,246
4,053
144,784
138,921
6,572
$ 2,039,916
$ 23,994,280
138,921
6,572
$ 23,848,787
10.45%
9.84%
8.66%
8.48%
8.55%
Selected Financial Data
(In thousands, except per share data)
Net interest income
Provision for loan losses
Non-interest income
Investment securities gains (losses), net
Non-interest expense
2018
2017
2016
2015
2014
$
823,825 $
42,694
501,341
(488)
737,821
733,679 $
45,244
461,263
25,051
744,343
680,049 $
36,318
446,556
(53)
689,229
634,320 $
28,727
422,444
6,320
650,792
Net income attributable to Commerce Bancshares, Inc.
Net income available to common shareholders
Net income per common share-basic*
Net income per common share-diluted*
Cash dividends on common stock
Cash dividends per common share*
Market price per common share*
Book value per common share*
Common shares outstanding*
Total assets
Loans, including held for sale
Investment securities
Deposits
Long-term debt
Equity
Non-performing assets
433,542
424,542
3.79
3.78
100,238
.895
56.37
25.13
111,331
25,463,842
14,160,992
8,698,666
20,323,659
8,702
2,937,149
13,949
319,383
310,383
2.77
2.76
91,619
.816
53.18
22.99
111,946
24,833,415
14,005,072
8,893,307
20,425,446
1,758
2,718,184
12,664
275,391
266,391
2.38
2.37
87,070
.777
52.44
21.07
111,861
25,641,424
13,427,192
9,770,986
21,101,095
102,049
2,501,132
14,649
263,730
254,730
2.21
2.21
84,961
.740
36.75
19.75
112,551
24,604,962
12,444,299
9,901,680
19,978,853
103,818
2,367,418
29,394
* Restated for the 5% stock dividend distributed in December 2018.
18
620,204
29,531
410,393
14,124
630,757
261,754
257,704
2.16
2.15
84,241
.705
35.78
18.70
117,087
23,994,280
11,469,238
9,645,792
19,475,778
104,058
2,334,246
46,251
Results of Operations
(Dollars in thousands)
Net interest income
Provision for loan losses
Non-interest income
Investment securities gains (losses), net
Non-interest expense
Income taxes
Non-controlling interest expense
Net income attributable to Commerce
Bancshares, Inc.
Preferred stock dividends
Net income available to common
shareholders
N.M. - Not meaningful.
$ Change
% Change
'18-'17
'17-'16
'18-'17
'17-'16
$
2018
823,825 $
(42,694)
501,341
(488)
(737,821)
(105,949)
2017
733,679 $
(45,244)
461,263
25,051
(744,343)
(110,506)
2016
680,049 $
(36,318)
446,556
(53)
(689,229)
(124,151)
90,146 $
(2,550)
40,078
(25,539)
(6,522)
(4,557)
(4,672)
(517)
(1,463)
4,155
433,542
(9,000)
319,383
(9,000)
275,391
(9,000)
114,159
—
53,630
8,926
14,707
25,104
55,114
(13,645)
(946)
43,992
—
12.3%
(5.6)
8.7
N.M.
(.9)
(4.1)
N.M.
35.7
N.M.
7.9%
24.6
3.3
N.M.
8.0
(11.0)
(64.7)
16.0
N.M.
$
424,542 $
310,383 $
266,391 $
114,159 $
43,992
36.8%
16.5%
Net income attributable to Commerce Bancshares, Inc. (net income) for 2018 was $433.5 million, an increase of $114.2 million,
or 35.7%, compared to $319.4 million in 2017. Diluted income per common share increased 37.0% to $3.78 in 2018, compared
to $2.76 in 2017. The growth in net income resulted from increases of $90.1 million in net interest income and $40.1 million in
non-interest income, as well as decreases of $6.5 million in non-interest expense, $4.6 million in income tax expense and $2.6
million in the provision for loan losses. These increases in net income were partly offset by a $25.5 million decrease in investment
securities gains. The return on average assets was 1.76% in 2018 compared to 1.28% in 2017, and the return on average common
equity was 16.16% in 2018 compared to 12.46% in 2017. At December 31, 2018, the ratio of tangible common equity to assets
increased to 10.45%, compared to 9.84% at year end 2017.
During 2018, the increase in net interest income mainly resulted from increased rates on the Company’s loan and investment
portfolios, partially offset by higher rates paid on interest-bearing deposits and borrowings. Total rates earned on average earning
assets grew 44 basis points this year, while funding costs for deposits and borrowings increased by 15 basis points. Non-interest
income grew 8.7% in 2018, primarily from growth in bank card, trust and deposit fee income. Investment securities net losses in
2018 were mainly comprised of net losses on sales of available for sale debt securities of $9.7 million and a $8.9 million adjustment
to recognize dividend income on a liquidated equity security. These losses were offset by realized and unrealized net gains on the
Company’s portfolio of private equity securities of $13.8 million, as well as gains of $4.3 million on sales and fair value adjustments
on equity securities. Additionally, net securities gains in 2017 included a gain of $32.0 million on the appreciation of securities
donated to a related foundation, which did not recur in 2018.
Non-interest expense declined $6.5 million in 2018 compared to 2017, with the decrease resulting from a $32.0 million donation
of appreciated securities to a charitable organization in 2017 that did not recur in 2018. This decrease in non-interest expense was
partly offset by increases in salaries and benefits, data processing and software, and marketing expense, which increased $19.9
million, $5.0 million, and $4.2 million, respectively. The provision for loan losses totaled $42.7 million, a decrease of $2.6 million
from the previous year.
Net income attributable to Commerce Bancshares, Inc. for 2017 was $319.4 million, an increase of $44.0 million, or 16.0%,
compared to $275.4 million in 2016. Diluted income per common share increased 16.5% to $2.76 in 2017, compared to $2.37 in
2016. The increase in net income resulted from increases of $53.6 million in net interest income, $14.7 million in non-interest
income, and $25.1 million in investment securities gains, as well as a decrease of $13.6 million in income tax expense. These
increases in net income were partly offset by increases of $55.1 million in non-interest expense and $8.9 million in the provision
for loan losses. The return on average assets was 1.28% in 2017 compared to 1.12% in 2016, and the return on average common
equity was 12.46% in 2017 compared to 11.33% in 2016. At December 31, 2017, the ratio of tangible common equity to assets
increased to 9.84%, compared to 8.66% at year end 2016.
During 2017, net interest income increased $53.6 million compared to 2016. This increase reflected growth of $53.9 million
in interest on loans, resulting from higher average balances and loan yields. In addition, interest on investment securities grew
by $7.5 million due to higher rates earned, which included $2.0 million in additional inflation income earned on the Company's
portfolio of U.S. Treasury inflation-protected securities (TIPS). Interest expense on deposits and borrowings rose by $10.7 million
largely due to higher average rates paid. The provision for loan losses increased $8.9 million over the previous year, totaling $45.2
million in 2017, and was $3.6 million higher than net loan charge-offs. Net charge-offs increased by $9.7 million in 2017 compared
19
to 2016, mainly due to higher net charge-offs on consumer credit card loans and lower net recoveries on construction and business
real estate loans.
Non-interest income in 2017 was $461.3 million, an increase of $14.7 million, or 3.3%, compared to $446.6 million in 2016.
This increase resulted mainly from growth in trust fees, deposit account fees, and loan fees and sales, which increased $13.4
million, $3.7 million, and $2.5 million, respectively. Non-interest expense in 2017 was $744.3 million, an increase of $55.1 million
over $689.2 million in 2016. The increase in non-interest expense included a $21.0 million, or 4.9%, increase in salaries and
benefits expense due to higher full-time salaries, incentive compensation, and payroll taxes. As mentioned above, expense in
2017 also included $32.0 million of contribution expense resulting from the donation of appreciated securities to a charitable
foundation. Investment securities net gains in 2017 totaled $25.1 million, largely resulting from these donations.
The Company distributed a 5% stock dividend for the 25th consecutive year on December 17, 2018. All per share and average
share data in this report has been restated for the 2018 stock dividend.
Critical Accounting Policies
The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most
significant of which are described in Note 1 to the consolidated financial statements. Certain of these policies require numerous
estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly
affect the Company's reported results and financial position for the current period or future periods. The use of estimates,
assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect,
fair value. Current economic conditions may require the use of additional estimates, and some estimates may be subject to a
greater degree of uncertainty due to the current instability of the economy. The Company has identified several policies as being
critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that
are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions
or using different assumptions. These policies relate to the allowance for loan losses, fair value measurement, and accounting for
income taxes.
Allowance for Loan Losses
The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level
of the allowance for loan losses reflects the Company's estimate of the losses inherent in the loan portfolio at any point in time.
While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ
significantly from estimated results, especially when determining allowances for business, construction and business real estate
loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal banking loans,
including personal real estate, credit card and consumer loans, are individually smaller and perform in a more homogenous manner,
making loss estimates more predictable. Further discussion of the methodology used in establishing the allowance is provided in
the Allowance for Loan Losses section of Item 7 and in Note 1 to the consolidated financial statements.
Fair Value Measurement
Investment securities, including available-for-sale, trading, equity and other securities, residential mortgage loans held for sale,
derivatives and deferred compensation plan assets and associated liabilities are recorded at fair value on a recurring basis.
Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired
loans that have been reduced based on the fair value of the underlying collateral, other real estate (primarily foreclosed property),
non-marketable equity securities and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve
write-downs of individual assets or application of lower of cost or fair value accounting.
Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement
date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and
disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The fair value
hierarchy, the extent to which fair value is used to measure assets and liabilities and the valuation methodologies and key inputs
used are discussed in Note 16 on Fair Value Measurements.
At December 31, 2018, assets and liabilities measured using observable inputs that are classified as either Level 1 or Level 2
represented 98.9% and 99.6% of total assets and liabilities recorded at fair value, respectively. Valuations generated from model-
based techniques that use at least one significant assumption not observable in the market are considered Level 3, and the Company's
Level 3 assets totaled $100.4 million, or 1.2% of total assets recorded at fair value on a recurring basis. Unobservable assumptions
reflect estimates of assumptions market participants would use in pricing the asset or liability. Fair value measurements for assets
20
and liabilities where limited or no observable market data exists often involves significant judgments about assumptions, such as
determining an appropriate discount rate that factors in both liquidity and risk premiums, and in many cases may not reflect
amounts exchanged in a current sale of the financial instrument. In addition, changes in market conditions may reduce the availability
of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities
could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Corporation
would use valuation techniques requiring more management judgment to estimate the appropriate fair value.
Accounting for Income Taxes
Accrued income taxes represent the net amount of current income taxes which are expected to be paid attributable to operations
as of the balance sheet date. Deferred income taxes represent the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns. Deferred tax assets and liabilities are measured using the enacted
tax rates that are expected to apply to taxable income when such assets and liabilities are anticipated to be settled or realized.
Current and deferred income taxes are reported as either a component of other assets or other liabilities in the consolidated balance
sheets, depending on whether the balances are assets or liabilities. Judgment is required in applying generally accepted accounting
principles in accounting for income taxes. The Company regularly monitors taxing authorities for changes in laws and regulations
and their interpretations by the judicial systems. The aforementioned changes, as well as any changes that may result from the
resolution of income tax examinations by federal and state taxing authorities, may impact the estimate of accrued income taxes
and could materially impact the Company’s financial position and results of operations.
21
Net Interest Income
Net interest income, the largest source of revenue, results from the Company’s lending, investing, borrowing, and deposit
gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest
earning assets and interest bearing liabilities. The following table summarizes the changes in net interest income on a fully taxable
equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes
and rates. Changes not solely due to volume or rate changes are allocated to rate.
(In thousands)
Interest income, fully taxable equivalent basis
Loans:
Business
Real estate- construction and land
Real estate - business
Real estate - personal
Consumer
Revolving home equity
Consumer credit card
Total interest on loans
Loans held for sale
Investment securities:
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
State and municipal obligations
Mortgage-backed securities
Asset-backed securities
Other securities
Total interest on investment securities
Federal funds sold and short-term securities purchased
under agreements to resell
Long-term securities purchased under agreements to
resell
Interest earning deposits with banks
Total interest income
Interest expense
Interest bearing deposits:
Savings
Interest checking and money market
Certificates of deposit of less than $100,000
Certificates of deposit of $100,000 and over
Federal funds purchased and securities sold under
agreements to repurchase
Other borrowings
Total interest expense
Net interest income, fully taxable equivalent basis
2018
Change due to
Average
Volume
Average
Rate
Total
2017
Change due to
Average
Volume
Average
Rate
Total
$
4,235 $
3,614
1,637
2,765
(1,018)
(735)
2,956
13,454
154
146
(2,331)
(11,184)
9,931
(11,051)
734
(13,755)
105
186
1,206
1,350
25,921 $
8,511
13,870
2,333
9,027
2,732
984
63,378
144
1,877
1,108
(8,022)
12,132
8,517
11,382
26,994
30,156 $
12,125
15,507
5,098
8,009
1,997
3,940
76,832
298
2,023
(1,223)
(19,206)
22,063
(2,534)
12,116
13,239
5,190 $
3,628
9,284
3,114
3,441
(669)
(654)
23,334
(368)
3,831
(3,108)
(1,191)
7,771
(4,884)
(1,151)
1,268
15,053 $
6,235
3,420
(264)
2,548
1,388
2,975
31,355
51
238
(2,744)
3
(1,036)
6,295
4,199
6,955
20,243
9,863
12,704
2,850
5,989
719
2,321
54,689
(317)
4,069
(5,852)
(1,188)
6,735
1,411
3,048
8,223
184
289
36
116
152
255
2,804
93,759
441
4,010
95,109
(1,765)
97
22,602
3,661
1,153
43,291
1,896
1,250
65,893
57
328
(264)
(2,393)
(65)
10,174
834
6,192
(8)
10,502
570
3,799
53
235
(272)
(439)
5
2,650
108
2,753
48
(3,041)
(5,265)
6,615 $
9,778
—
26,913
66,846 $
9,826
(3,041)
21,648
73,461 $
463
(1,955)
(1,915)
24,517 $
6,051
1,073
12,640
30,651 $
$
58
2,885
(164)
2,314
6,514
(882)
10,725
55,168
Net interest income totaled $823.8 million in 2018, increasing $90.1 million, or 12.3%, compared to $733.7 million in 2017.
On a tax equivalent (T/E) basis, net interest income totaled $840.1 million, and increased $73.5 million over 2017. This increase
included growth of $76.8 million in loan interest income (T/E), resulting from higher average balances and higher rates earned.
In addition, interest earned on investment securities increased $13.2 million, mainly due to higher rates earned and the receipt of
$8.9 million in dividend income during the second quarter of 2018, which was related to a liquidated equity security that was
carried at fair value. Interest expense on deposits and borrowings combined was $65.4 million and increased $21.6 million, mostly
due to higher rates paid. The net yield on earning assets (T/E) was 3.53% in 2018 compared with 3.19% in 2017.
22
During 2018, loan interest income (T/E) grew $76.8 million over 2017 mainly due to higher rates earned coupled with increased
average balances for most loan categories. The average tax equivalent rate earned on the loan portfolio increased 46 basis points
to 4.53% in 2018 compared to 4.07% in 2017. The higher rates earned on the loan portfolio were partly related to continued
actions taken by the Federal Reserve to raise short-term interest rates, which enabled much of the Company's loan portfolio to re-
price higher. In addition, average loan balances increased 2.3%, or $314.4 million, this year. Increased interest on business loans
was the main driver of overall higher loan interest income, mostly due to higher rates, as many of these loans contain variable
interest rate terms. Average business loan balances also grew $131.0 million this year. Increases in average balances and rates
on construction and business real estate loans drove interest income growth a combined $27.6 million this year. Interest on personal
real estate loans increased $5.1 million as average balances were higher by $74.1 million or 3.7%, and the average rate grew 11
basis points. Interest on consumer loans grew $8.0 million over the prior year as the average rate earned increased 45 basis points,
but was partly offset by a decline in average balances of $25.6 million. Consumer credit card loan interest was higher by $3.9
million due to growth of $24.9 million in average balances, coupled with a 13 basis point increase in the average rate earned.
Tax equivalent interest income on total investment securities increased $13.2 million during 2018, as the average rate earned
increased 33 basis points, while average balances declined $661.6 million. The average rate on the total investment portfolio was
2.84% in 2018 compared to 2.51% in 2017, while the average balance of the total investment securities portfolio (excluding
unrealized fair value adjustments on available for sale debt securities) was $8.8 billion in 2018 compared to an average balance
of $9.5 billion in 2017. The increase in interest income was mainly due to higher interest earned on mortgage-backed securities,
coupled with increased interest and dividend income on equity and other securities. These increases were partly offset lower
interest earned on state and municipal securities. Interest income on mortgage-backed securities increased $22.1 million, due to
an increase in average balances of $419.0 million and an increase of 29 basis points in the average rate earned. Interest income
on equity securities increased due to $8.9 million in dividend income during the second quarter of 2018 (mentioned previously),
while interest on other securities increased $1.9 million due to an increase in receipts of non-recurring equity investment dividends
during 2018. Interest earned on U.S. government securities grew $2.0 million, which included growth of $2.1 million in inflation
income on the Company's treasury inflation-protected securities (TIPS). Partly offsetting these increases in interest income were
declines of $19.2 million, $2.5 million and $1.2 million in interest earned on state and municipal, asset-backed and government-
sponsored enterprise (GSE) securities, respectively. The decline in state and municipal interest resulted from a decline of $310.0
million in average balances coupled with a lower tax equivalent rate due to tax law changes in 2018. Asset-backed securities
interest decreased mainly due to a decline of $627.9 million in average balances, partly offset by higher average rates. Interest
earned on GSE's declined mainly due to lower average balances, partly offset by growth in the average rate. Interest earned on
deposits with banks increased $4.0 million mainly due to an 88 basis point increase in average rates earned and an increase of
$112.7 million in average balances.
During 2018, interest expense on deposits increased $14.9 million over 2017 and resulted mainly from an 11 basis point increase
in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts increased $10.5
million due to higher rates paid, which rose nine basis points. The growth in interest expense on certificates of deposit was largely
due to higher rates paid on certificates of deposit over $100,000, which increased 54 basis points, partly offset by lower total
average certificate of deposit balances, which fell $363.3 million, or 17.5%. The overall rate paid on total deposits increased
from .23% in 2017 to .34% in the current year. Interest expense on borrowings increased due to higher rates paid on customer
repurchase agreements, partly offset by the elimination of all Federal Home Loan Bank (FHLB) borrowings in 2018. The overall
average rate incurred on all interest bearing liabilities was .44% in 2018, compared to .29% in 2017.
During 2017, net interest income totaled $733.7 million, increasing $53.6 million, or 7.9%, compared to $680.0 million in
2016. On a tax equivalent (T/E) basis, net interest income totaled $766.6 million and increased $55.2 million over 2016. This
increase included growth of $54.7 million in loan interest, resulting from higher average loan balances and higher rates earned.
In addition, interest earned on investment securities increased $8.2 million, mainly due to higher rates earned. Interest expense
on deposits and borrowings combined was $43.7 million and increased $10.7 million compared to 2016 largely due to higher rates
paid. The net yield on earning assets (T/E) was 3.19% in 2017 compared to 3.04% in 2016.
During 2017, loan interest income (T/E) grew $54.7 million over 2016 due to average loan growth of $683.9 million, or 5.3%.
The average tax equivalent rate earned on the loan portfolio was 4.07% in 2017 compared to 3.86% in 2016. Similar to 2018, the
higher rates earned on the loan portfolio were partly related to increases in interest rate levels taken by the Federal Reserve during
2017. The largest increase in loan interest occurred in business loans, which was higher by $20.2 million as a result of growth in
the average rate earned of 31 basis points. Also contributing to the increase were higher average business loan balances of $179.5
million, or 3.9%, as growth trends continued in commercial and industrial, tax-free, and lease loans. Construction and land loan
interest grew $9.9 million due to a 71 basis point increase in average rates and a $103.1 million, or 13.2%, increase in average
balances. Business real estate interest was higher by $12.7 million as a result of an increase in average balances of $253.7 million,
or 10.4%, along with an increase in average rates of 13 basis points. Interest earned on consumer loans increased $6.0 million
over the prior year as the average rate increased 12 basis points and average balances increased $89.2 million. Personal real estate
23
loan interest was higher by $2.9 million and resulted from growth in average balances of $83.3 million. Interest on consumer
credit card loans rose $2.3 million due to a 40 basis point increase in the average rate earned.
Tax equivalent interest income on total investment securities increased $8.2 million during 2017, as the average rate earned
increased nine basis points, while total average balances declined slightly. The average rate earned on the total investment portfolio
was 2.51% in 2017 compared to 2.42% in 2016, while the average balance of the total investment securities portfolio (excluding
unrealized fair value adjustments on available for sale debt securities) was approximately $9.5 billion during both years. The
increase in interest income was mainly due to higher interest earned on U.S. government obligations, mortgage-backed securities,
and other securities. Interest earned on U.S. government securities grew $4.1 million, which included growth of $2.0 million in
inflation-adjusted interest on TIPS. In addition, average balances rose $179.9 million, or 24.5%. Interest income on mortgage-
backed securities increased $6.7 million, due to an increase in average balances of $323.8 million, partly offset by a decline of
three basis points in the average rate earned. Interest earned on asset-backed securities increased $1.4 million, mainly due to an
increase of 30 basis points in the average rate earned, partly offset by a decline in average balances of $334.5 million. Interest
income on other securities increased $2.9 million, largely due to one-time interest payments received on a private equity investment
in 2017. Partly offsetting these increases in interest income were declines of $5.9 million and $1.2 million in interest on GSE and
state and municipal securities, respectively. The decline in GSE interest resulted from a $139.4 million decline in average balances,
coupled with a rate decrease of 61 basis points, while state and municipal interest was lower due to a decrease of $33.0 million
in average balances. Interest earned on deposits with banks increased $1.3 million mainly due to a 55 basis point increase in
average rates earned. Interest on long-term securities purchased under resell agreements increased $1.9 million in 2017 compared
to 2016 due to an increase in the average rate of 53 basis points, partly offset by a $103.2 million decrease in the average balances
of these instruments.
During 2017, interest expense on deposits increased $5.1 million over 2016. This growth was comprised of higher interest
expense on money market and interest checking accounts of $2.9 million and higher interest expense on certificates of deposit of
$2.2 million. The increase in money market and interest checking interest expense resulted mainly from higher average rates paid,
which rose three basis points. The growth in certificate of deposit interest expense was largely due to higher rates paid on certificates
of deposit over $100,000, which increased 19 basis points, partly offset by lower total average certificate of deposit balances,
which fell $139.6 million, or 6.3%. The overall rate paid on total deposits increased from .19% in 2016 to .23% in the current
year. Interest expense on borrowings increased $5.6 million, due to higher average rates paid on repurchase agreements during
2017, partly offset by lower FHLB borrowings. The overall average rate incurred on all interest bearing liabilities was .29% in
2017, compared to .22% in 2016.
Provision for Loan Losses
The provision for loan losses is recorded to bring the allowance for loan losses to a level deemed adequate by management
based on the factors mentioned in the “Allowance for Loan Losses” section of this discussion. The provision for loan losses totaled
$42.7 million in 2018, a decrease of $2.6 million from the 2017 provision of $45.2 million. In 2017, the provision exceeded net
loan charge-offs by $3.6 million, increasing the allowance for loan losses by the same amount, whereas the 2018 provision was
$400 thousand greater than net loan charge-offs for the year.
Net loan charge-offs for the year totaled $42.3 million and increased $650 thousand compared to $41.6 million in 2017. The
increase in net loan charge-offs over the previous year was mainly the result of higher net charge-offs on business loans, which
increased $724 thousand and was largely the result of a charge-off recorded on one larger loan. In addition, consumer credit card
net charge-offs increased $325 thousand, while construction loan net recoveries declined $556 thousand. Partly offsetting these
increases in net charge-offs were lower net charge-offs on consumer loans, which decreased $693 thousand from the prior year.
The allowance for loan losses totaled $159.9 million at December 31, 2018, an increase of $400 thousand compared to the prior
year, and represented 1.13% of outstanding loans at year end 2018, compared to 1.14% at year end 2017.
24
Non-Interest Income
(Dollars in thousands)
Bank card transaction fees
Trust fees
Deposit account charges and other fees
Capital market fees
Consumer brokerage services
Loan fees and sales
Other
Total non-interest income
Non-interest income as a % of total revenue*
Total revenue per full-time equivalent employee
$
$
$
2018
171,576
147,964
94,517
7,721
15,807
12,723
51,033
501,341
37.8%
276.4
$
$
$
2017
155,100
135,159
90,060
7,996
14,630
13,948
44,370
461,263
38.6%
248.9
$
$
$
2016
154,043
121,795
86,394
10,655
13,784
11,412
48,473
446,556
39.6%
235.5
* Total revenue is calculated as net interest income plus non-interest income.
% Change
'18-'17
'17-'16
10.6%
9.5
4.9
(3.4)
8.0
(8.8)
15.0
8.7%
0.7%
11.0
4.2
(25.0)
6.1
22.2
(8.5)
3.3%
Non-interest income totaled $501.3 million, an increase of $40.1 million, or 8.7%, compared to $461.3 million in 2017. Bank
card fees increased $16.5 million, or 10.6%, over the prior year, as a result of growth in net debit card fees of $4.1 million and net
corporate card fees of $14.8 million. These increases were partly offset by declines in net credit card fees of $1.6 million and net
merchant fees of $836 thousand. The table below is a summary of bank card transaction fees for the last three years.
(Dollars in thousands)
Net debit card fees
Net credit card fees
Net merchant fees
Net corporate card fees
2018
2017
2016
'18-'17
'17-'16
% Change
$
39,738 $
35,636 $
12,965
19,233
99,640
14,576
20,069
84,819
33,441
14,834
23,043
82,725
11.5%
(11.1)
(4.2)
17.5
6.6%
(1.7)
(12.9)
2.5
0.7%
Total bank card transaction fees
$
171,576 $
155,100 $
154,043
10.6%
Trust fee income increased $12.8 million, or 9.5%, as a result of continued growth in both personal (up 11.1%) and institutional
(up 6.4%) trust fees. The market value of total customer trust assets totaled $50.0 billion at year end 2018, which was an increase
of 2.7% over year end 2017 balances. Deposit account fees increased $4.5 million, or 4.9%, mainly due to growth of $2.4 million
in corporate cash management fees, $1.1 million in deposit account service charges and $892 thousand in overdraft and return
item fees. In 2018, corporate cash management fees comprised 40.7% of total deposit fees, while overdraft fees comprised 33.3%
of total deposit fees. Capital market fees declined $275 thousand, or 3.4%, due to continued lower sales volumes, while consumer
brokerage services revenue increased $1.2 million, or 8.0%, mainly due to growth in advisory and fixed annuity fees. Loan fees
and sales decreased $1.2 million, or 8.8%, from the prior year mainly due to declines mortgage banking revenue as a result of
lower originations of fixed-rate loans in 2018. Total mortgage banking revenue totaled $8.2 million in 2018 compared to $9.2
million in 2017. Other non-interest income increased $6.7 million, or 15.0%, over the prior year, mainly due to gains of $6.6
million recorded on the sale of branch properties in 2018. In addition, cash sweep commissions, interest rate swap fees, and fees
from sales of tax credits increased $1.6 million, $2.1 million, and $1.6 million, respectively, over 2017. These increases were
partly offset by lower gains of $1.1 million on sales of leased assets to customers upon lease termination.
During 2017, non-interest income increased $14.7 million, or 3.3%, to $461.3 million compared to $446.6 million in 2016.
Bank card fees increased $1.1 million, or .7%, over 2016. This growth included increases of $2.2 million, or 6.6%, in net debit
card fees and $2.1 million, or 2.5%, in net corporate card fees, partly offset by a decline of $3.0 million, or 12.9%, in net merchant
fees. Trust fee income increased $13.4 million, or 11.0%, as a result of growth in both personal (up 10.3%) and institutional (up
11.9%) trust fees. The market value of total customer trust assets totaled $48.7 billion at year end 2017, which was an increase
of 13.1% over year end 2016 balances. Deposit account fees increased $3.7 million, or 4.2%, mainly due to growth in service
charges on deposits of $2.5 million, or 12.1%. In addition, overdraft fees increased $1.2 million, or 4.2%, while corporate cash
management fees were flat. Capital market fees declined $2.7 million, or 25.0%, due to lower sales volumes, while consumer
brokerage services revenue increased $846 thousand, or 6.1%, due to growth in advisory fees. Loan fees and sales increased $2.5
million in 2017 compared to 2016, mainly due to higher mortgage banking revenue. Other non-interest income decreased $4.1
million, or 8.5%, from 2016. This decrease was due in part to a decline in interest rate swap fees of $3.9 million due to lower
origination volume. In addition, a large gain on a branch sale and a trust settlement were recorded in 2016, which did not recur
in 2017. These declines were partly offset by higher gains of $1.2 million on sales of leased assets to customers upon lease
termination.
25
Investment Securities Gains (Losses), Net
(In thousands)
2018
2017
2016
Net gains (losses) on sales of available for sale debt securities
$
(9,653)
$
(9,695)
$
Net gains on sales of equity securities
Fair value adjustments on equity securities
Adjustment for dividend income on a liquidated equity investment
Donations of equity securities
Net gains (losses) on sales and fair value adjustments of private equity investments
Other
1,759
2,542
(8,917)
—
13,849
(68)
10,643
—
—
31,074
(6,332)
(639)
Total investment securities gains (losses), net
$
(488)
$
25,051
$
109
1,904
—
—
—
(1,796)
(270)
(53)
Net gains and losses on investment securities during 2018, 2017 and 2016 are shown in the table above. Included in these
amounts are gains and losses arising from sales of securities from the Company’s available for sale debt portfolio, including credit-
related losses on debt securities identified as other-than-temporarily impaired. Also shown are gains and losses relating to private
equity investments, which are primarily held by the Parent’s majority-owned private equity subsidiaries. These include fair value
adjustments, in addition to gains and losses realized upon disposition. The portions of private equity investment gains and losses
that are attributable to minority interests are reported as non-controlling interest in the consolidated statements of income, and
resulted in expense of $2.8 million in 2018, compared to income of $575 thousand in 2017 and expense of $573 thousand in 2016.
Net securities losses of $488 thousand were recorded in 2018, which included $9.7 million in net losses realized on bond sales
resulting from the Company's sale of approximately $680 million (book value) of bonds, mainly mortgage and asset-backed
securities, as part of a strategy to extend the duration of the securities portfolio and improve net interest margins. Net securities
losses also included $8.9 million in losses related to an adjustment for dividend income on a liquidated investment. These losses
were offset by net gains totaling $13.8 million of fair value adjustments on private equity investments, in addition to fair value
adjustments and net gains realized on sales of equity investments.
Net securities gains of $25.1 million were recorded in 2017, which included $31.1 million in gains realized upon donation of
appreciated stock and $10.6 million in net gains realized on sales of equity securities. These gains were offset by net losses of
$9.7 million realized on sales of available for sale debt securities, resulting from the Company's sale of approximately $790 million
of bonds, mainly mortgage and asset-backed securities. Additionally, net securities losses included $499 thousand in net losses
realized on the sale of private equity investments and $5.8 million in losses related to fair value adjustments on private equity
investments.
Net securities losses of $53 thousand were recorded in 2016. The 2016 net loss included $1.9 million in gains realized upon
dispositions of private equity investments, offset by net losses in fair value totaling $3.7 million on the Company's private equity
investment portfolio. Additionally, the Company realized gains on sales of equity securities, including a $1.8 million gain resulting
from the Parent's withdrawal from a private equity fund as required under the Volcker Rule investment prohibitions.
26
Non-Interest Expense
(Dollars in thousands)
Salaries
Employee benefits
Net occupancy
Equipment
Supplies and communication
Data processing and software
Marketing
Deposit insurance
Community service
Other
2018
2017
2016
'18-'17
'17-'16
$
396,897
$
380,945
$
360,840
4.2 %
5.6%
% Change
71,297
46,044
18,125
20,637
85,978
20,548
11,546
2,445
64,304
67,376
45,612
18,568
22,790
80,998
16,325
13,986
34,377
63,366
66,470
46,290
19,141
24,135
79,589
16,032
13,327
3,906
59,499
5.8
.9
(2.4)
(9.4)
6.1
25.9
(17.4)
(92.9)
1.5
1.4
(1.5)
(3.0)
(5.6)
1.8
1.8
4.9
N.M.
6.5
8.0%
Total non-interest expense
$
737,821
$
744,343
$
689,229
(.9)%
Efficiency ratio
Salaries and benefits as a % of total non-interest
expense
Number of full-time equivalent employees
55.6%
63.5%
4,795
62.2%
60.2%
4,800
61.0%
62.0%
4,784
Non-interest expense was $737.8 million in 2018, a decrease of $6.5 million, or .9%, from the previous year. Salaries and
benefits expense increased $19.9 million, or 4.4%, mainly due to higher full-time salaries and medical expense. Growth in salaries
expense was driven by increases in full-time salaries in information technology, consumer, wealth, commercial and other support
units, while incentive compensation expense declined slightly from 2017. Full-time equivalent employees totaled 4,795 at
December 31, 2018, reflecting a small decrease from 2017. Occupancy expense increased $432 thousand, or .9%, mainly due to
higher rent, utilities and building services expense, while equipment expense decreased $443 thousand, or 2.4%, due to lower
equipment depreciation expense. Supplies and communication expense decreased $2.2 million, or 9.4%, mainly due to lower
voice and data network costs. Data processing and software expense increased $5.0 million, or 6.1%, primarily due to higher third
party processing costs. Marketing expense increased $4.2 million, or 25.9%, due to new bank card initiatives and consumer
marketing initiatives in 2018. Deposit insurance expense declined $2.4 million, or 17.4%, from the prior year mainly due to
decreases in average assets, a lower assessment rate, and the elimination of the special FDIC surcharge in the fourth quarter of
2018. Community service costs decreased $31.9 million due to the contribution of appreciated securities to a related foundation
in 2017, which did not recur in 2018. Other non-interest expense increased $938 thousand, or 1.5%, over the prior year mainly
due to higher costs for professional fees (up $2.4 million) and directors fees (up $936 thousand). These increases were partly
offset by lower bank card fraud losses (down $961 thousand).
In 2017, non-interest expense was $744.3 million, an increase of $55.1 million, or 8.0%, over 2016. Salaries and benefits
expense increased $21.0 million, or 4.9%, mainly due to higher full-time salaries, incentive compensation, and payroll taxes.
Incentive compensation included the accrual of a discretionary bonus of $3.3 million in December 2017 that was paid to
approximately 75% of all employees. Growth in salaries expense resulted partly from staffing additions in commercial and
consumer, information technology, and other support units. Full-time equivalent employees totaled 4,800 at December 31, 2017,
an increase of .3% over 2016. Occupancy expense decreased $678 thousand, mainly due to higher net rental income and lower
demolition costs on a branch replacement project. Supplies and communication expense decreased by $1.3 million, or 5.6%,
mainly due to reissuance costs for new chip cards distributed to customers in 2016 and lower office supplies expense. Data
processing and software expense increased $1.4 million, or 1.8%, mainly due to higher online subscription services and outsourced
data provider fees, partly offset by lower bank card processing costs. Equipment expense decreased by $573 thousand, or 3.0%,
while deposit insurance expense was higher by $659 thousand, or 4.9%, due to higher insurance rates. Costs for marketing increased
slightly compared to 2016. Community service costs increased $30.5 million due to the contribution of $32.0 million of appreciated
securities to a related foundation during 2017. Other non-interest expense increased $3.9 million, or 6.5%, over 2016 mainly due
to higher costs for legal and professional fees (up $1.2 million), impairment losses on surplus branch sites (up $1.2 million), and
lower deferred origination costs (down $1.5 million).
Income Taxes
Income tax expense was $105.9 million in 2018, compared to $110.5 million in 2017 and $124.2 million in 2016. The effective
tax rate, including the effect of non-controlling interest, was 19.6% in 2018 compared to 25.7% in 2017 and 31.1% in 2016.
27
Due to the enactment of new federal tax reform legislation in December 2017, federal tax rates were lowered from 35% to
21%, which lowered the Company's effective tax rate in 2018. Additionally, the Company adopted ASU 2016-09, "Improvements
to Employee Share-Based Payment Accounting," on January 1, 2017, which requires all excess tax benefits (net of tax deficiencies)
to be recognized as income tax expense or benefit in the income statement. The amount of excess tax benefits (net of tax deficiencies)
recognized as a reduction to income tax expense totaled $4.7 million and $7.3 million in 2018 and 2017, respectively. In 2017,
the Company also recorded income tax benefits of $11.8 million resulting from the contribution of appreciated securities to a
charitable foundation.
Financial Condition
Loan Portfolio Analysis
Classifications of consolidated loans by major category at December 31 for each of the past five years are shown in the table
below. This portfolio consists of loans which were acquired or originated with the intent of holding to their maturity. Loans held
for sale are separately discussed in a following section. A schedule of average balances invested in each loan category below
appears on page 54.
(In thousands)
Commercial:
Business
Real estate — construction and land
Real estate — business
Personal banking:
Real estate — personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans
2018
2017
2016
2015
2014
Balance at December 31
$
5,106,427 $
4,958,554 $
4,776,365 $
4,397,893 $ 3,969,952
869,659
2,875,788
968,820
2,697,452
791,236
2,643,374
624,070
403,507
2,355,544
2,288,215
2,127,083
1,955,572
376,399
814,134
15,236
2,062,787
2,104,487
400,587
783,864
7,123
2,010,397
1,990,801
413,634
776,465
10,464
1,915,953
1,883,092
1,924,365
1,705,134
432,981
779,744
6,142
430,873
782,370
6,095
$
14,140,298 $
13,983,674 $
13,412,736 $
12,436,692 $ 11,469,238
The contractual maturities of business and real estate loan categories at December 31, 2018, and a breakdown of those loans
between fixed rate and floating rate loans are as follows.
(In thousands)
Business
Real estate — construction and land
Real estate — business
Real estate — personal
Principal Payments Due
In
One Year
or Less
After One
Year Through
Five Years
After
Five
Years
Total
$
2,503,345
$
2,153,729
$
449,353
$
5,106,427
524,674
516,579
165,134
322,426
1,750,781
510,971
22,559
608,428
1,450,978
869,659
2,875,788
2,127,083
Total business and real estate loans
$
3,709,732
$
4,737,907
$
2,531,318
$
10,978,957
Business and real estate loans:
Loans with fixed rates
Loans with floating rates
Total business and real estate loans
23.8%
76.2%
100.0%
48.4%
51.6%
100.0%
55.2%
44.8%
100.0%
41.7%
58.3%
100.0%
28
The following table shows loan balances at December 31, 2018, segregated between those with fixed interest rates and those
with variable rates that fluctuate with an index.
(In thousands)
Business
Real estate — construction and land
Real estate — business
Real estate — personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans
Fixed Rate
Loans
Variable Rate
Loans
Total
% Variable Rate
Loans
$
1,856,806 $
3,249,621 $
5,106,427
63.6%
46,693
1,224,106
1,445,600
1,373,478
7,171
61,878
15,236
822,966
1,651,682
681,483
582,094
369,228
752,256
—
869,659
2,875,788
2,127,083
1,955,572
376,399
814,134
15,236
94.6
57.4
32.0
29.8
98.1
92.4
—
$
6,030,968 $
8,109,330 $
14,140,298
57.3%
Total loans at December 31, 2018 were $14.1 billion, an increase of $156.6 million, or 1.1%, over balances at December 31,
2017. The growth in loans during 2018 occurred in the business, business real estate, personal real estate, credit card and overdraft
loan categories, while construction, consumer and revolving home equity loans declined from the prior year. Business loans
increased $147.9 million, or 3.0%, reflecting growth in commercial and industrial loans, while commercial card and tax-advantaged
lending declined. Business real estate loans increased $178.3 million, or 6.6%, due to the improved loan demand and the transfer
of certain outstanding construction loans into this category. Construction loans decreased $99.2 million, or 10.2% mainly due to
pay downs on certain completed projects and transfers to the business real estate loan category. Personal real estate loans increased
$64.3 million, or 3.1%, on origination growth and demand for adjustable rate mortgages, which are retained on the balance sheet.
The Company sells certain long-term fixed rate mortgage loans to the secondary market, and loan sales in 2018 totaled $193.5
million, compared to $199.8 million in 2017. Consumer loans decreased $148.9 million, or 7.1%, due to declines in automobile,
fixed rate home equity and other consumer loans, along with continued run off of marine and recreational vehicle loan balances.
Consumer credit card loans increased $30.3 million, or 3.9%, as a result of new account activity, while revolving home equity
loan balances declined $24.2 million compared to balances at year end 2017.
The Company currently holds approximately 30% of its loan portfolio in the Kansas City market, 29% in the St. Louis market,
and 41% in other regional markets. The portfolio is diversified from a business and retail standpoint, with 63% in loans to businesses
and 37% in loans to consumers. The Company believes a diversified approach to loan portfolio management, strong underwriting
criteria and an aversion toward credit concentrations, from an industry, geographic and product perspective, have contributed to
low levels of problem loans and loan losses experienced over the last several years.
The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national
credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions.
The Company typically participates in these loans when business operations are maintained in the local communities or regional
markets and opportunities to provide other banking services are present. At December 31, 2018, the balance of SNC loans totaled
approximately $830.2 million, with an additional $1.3 billion in unfunded commitments.
Commercial Loans
Business
Total business loans amounted to $5.1 billion at December 31, 2018 and include loans used mainly to fund customer accounts
receivable, inventories, and capital expenditures. The business loan portfolio includes tax-advantaged loans and leases which carry
tax free interest rates. These loans totaled $902.5 million at December 31, 2018, a decline of $32.6 million, or 3.5%, from December
31, 2017 balances. The business loan portfolio also includes direct financing and sales type leases totaling $557.3 million, which
are used by commercial customers to finance capital purchases ranging from computer equipment to office and transportation
equipment. These leases increased $25.8 million, or 4.9%, over 2017. The Company has outstanding energy-related loans totaling
$143.8 million at December 31, 2018, which are further discussed on page 38. Also included in the business portfolio are corporate
card loans, which totaled $297.0 million at December 31, 2018 and are made in conjunction with the Company’s corporate card
business for corporate trade purchases. Corporate card loans are made to corporate, non-profit and government customers
nationwide, but have very short-term maturities, which limit risk.
Business loans, excluding corporate card loans, are made primarily to customers in the regional trade area of the Company,
generally the central Midwest, encompassing the states of Missouri, Kansas, Illinois, and nearby Midwestern markets, including
29
Iowa, Oklahoma, Colorado, Texas and Ohio. This portfolio is diversified from an industry standpoint and includes businesses
engaged in manufacturing, wholesaling, retailing, agribusiness, insurance, financial services, public utilities, health care, and other
service businesses. Emphasis is upon middle-market and community businesses with known local management and financial
stability. Consistent with management’s strategy and emphasis upon relationship banking, most borrowing customers also maintain
deposit accounts and utilize other banking services. Net loan charge-offs in this category totaled $2.1 million in 2018 (mainly
representing a charge-off on one larger loan placed on non-accrual late in the year), compared to net loan charge-offs of $1.4
million recorded in 2017. Non-accrual business loans were $9.0 million (.2% of business loans) at December 31, 2018 compared
to $5.9 million at December 31, 2017.
Real Estate-Construction and Land
The portfolio of loans in this category amounted to $869.7 million at December 31, 2018, which was a decrease of $99.2
million, or 10.2%, from the prior year and comprised 6.2% of the Company’s total loan portfolio. Commercial construction and
land development loans totaled $664.6 million, or 76.4% of total construction loans at December 31, 2018. These loans decreased
$101.3 million from 2017 year end balances; driving the decline in the total construction portfolio. Commercial construction loans
are made during the construction phase for small and medium-sized office and medical buildings, manufacturing and warehouse
facilities, apartment complexes, shopping centers, hotels and motels, and other commercial properties. Commercial land
development loans relate to land owned or developed for use in conjunction with business properties. Residential construction
and land development loans at December 31, 2018 totaled $205.1 million, or 23.6% of total construction loans. A stable construction
market has contributed to improved loss trends, with net loan recoveries of $635 thousand and $1.2 million recorded in 2018 and
2017, respectively.
Real Estate-Business
Total business real estate loans were $2.9 billion at December 31, 2018 and comprised 20.3% of the Company’s total loan
portfolio. This category includes mortgage loans for small and medium-sized office and medical buildings, manufacturing and
warehouse facilities, shopping centers, hotels and motels, churches, and other commercial properties. The business real estate
borrowers and/or properties are generally located in local and regional markets where Commerce does business, and emphasis is
placed on owner-occupied lending (36.1% of this portfolio), which presents lower risk levels. Additional information about
business real estate loans by borrower is presented on page 36. At December 31, 2018, non-accrual balances amounted to $1.7
million, or .1% of business real estate loans, down from $2.7 million at year end 2017. The Company experienced net loan
recoveries of $378 thousand in 2018, compared to net loan recoveries of $203 thousand in 2017.
Personal Banking Loans
Real Estate-Personal
At December 31, 2018, there were $2.1 billion in outstanding personal real estate loans, which comprised 15.0% of the
Company’s total loan portfolio. The mortgage loans in this category are mainly for owner-occupied residential properties. The
Company originates both adjustable and fixed rate mortgage loans, and at December 31, 2018, 32% of the portfolio was comprised
of adjustable rate loans, while 68% was comprised of fixed rate loans. The Company does not purchase any loans from outside
parties or brokers, and has never maintained or promoted subprime or reduced-document products. Levels of mortgage loan
origination activity increased slightly in 2018, with originations of $563.0 million in 2018 compared with $560.8 million in 2017.
Net loans retained by the Company increased $64.3 million, driven by increased demand for adjustable rate mortgage loans, which
the Company retains, while loans sold to the secondary market decreased $6.3 million. The loan sales were made under a 2015
initiative to originate and sell certain long term fixed rate loans, resulting in sales of $199.8 million in 2017 and $193.5 million
in 2018. The Company has experienced lower loan losses in this category than many others in the industry and believes this is
partly because of its conservative underwriting culture, stable markets, and the fact that it does not offer subprime lending products
or purchase loans from brokers. Net loan recoveries for 2018 amounted to $335 thousand, compared to net loan recoveries of
$305 thousand in the previous year. The non-accrual balances of loans in this category decreased to $1.8 million at December 31,
2018, compared to $2.5 million at year end 2017.
Consumer
Consumer loans consist of private banking, automobile, motorcycle, marine, tractor/trailer, recreational vehicle (RV), fixed
rate home equity, patient health care financing and other types of consumer loans. These loans totaled $2.0 billion at year end
2018. Approximately 47% of the consumer portfolio consists of automobile loans, 20% in private banking loans, 5% in motorcycle
loans, 14% in fixed rate home equity loans, 9% in heathcare financing loans and 3% in marine and RV loans. Total consumer
loans decreased $148.9 million at year end in 2018 compared to year end 2017. Declines of $99.4 million in automobile loan
originations, $28.5 million in fixed rate home equity loans, $20.9 million in marine and RV loans and $42.2 million in motorcycle
loans were partly offset by growth of $25.3 million in patient health care financing and $12.4 million in private banking loans.
30
Also, auto loans totaling $25.9 million were sold to another institution this year. Net charge-offs on total consumer loans were
$9.3 million in 2018, compared to $10.0 million in 2017, averaging .5% of consumer loans in both years. Consumer loan net
charge-offs included marine and RV loan net charge-offs of $710 thousand, which were 1.2% of average marine and RV loans in
2018, compared to 1.4% in 2017.
Revolving Home Equity
Revolving home equity loans, of which 98% are adjustable rate loans, totaled $376.4 million at year end 2018. An additional
$709.4 million was available in unused lines of credit, which can be drawn at the discretion of the borrower. Home equity loans
are secured mainly by second mortgages (and less frequently, first mortgages) on residential property of the borrower. The
underwriting terms for the home equity line product permit borrowing availability, in the aggregate, generally up to 80% or 90%
of the appraised value of the collateral property at the time of origination. Net charge-offs totaled $55 thousand in 2018, compared
to $185 thousand in 2017.
Consumer Credit Card
Total consumer credit card loans amounted to $814.1 million at December 31, 2018 and comprised 5.8% of the Company’s
total loan portfolio. The credit card portfolio is concentrated within regional markets served by the Company. The Company offers
a variety of credit card products, including affinity cards, rewards cards, and standard and premium credit cards, and emphasizes
its credit card relationship product, Special Connections. Approximately 41% of the households that own a Commerce credit card
product also maintain a deposit relationship with the subsidiary bank. At December 31, 2018, approximately 92% of the outstanding
credit card loan balances had a floating interest rate, compared to 91% in the prior year. Net charge-offs amounted to $30.6 million
in 2018, an increase of $325 thousand over $30.3 million in 2017.
Loans Held for Sale
At December 31, 2018, loans held for sale were comprised of certain long-term fixed rate personal real estate loans and loans
extended to students while attending colleges and universities. The personal real estate loans are carried at fair value and totaled
$13.5 million at December 31, 2018. The student loans, carried at the lower of cost or fair value, totaled $7.2 million at December
31, 2018. Both of these portfolios are further discussed in Note 2 to the consolidated financial statements.
Allowance for Loan Losses
The Company has an established process to determine the amount of the allowance for loan losses which assesses the risks
and losses inherent in its portfolio. This process provides an allowance consisting of a specific allowance component based on
certain individually evaluated loans and a general component based on estimates of reserves needed for pools of loans.
Loans subject to individual evaluation generally consist of business, construction, business real estate and personal real estate
loans on non-accrual status, and include troubled debt restructurings that are on non-accrual status. These non-accrual loans are
evaluated individually for impairment based on factors such as payment history, borrower financial condition and collateral. For
collateral dependent loans, appraisals of collateral (including exit costs) are normally obtained annually but discounted based on
date last received and market conditions. From these evaluations of expected cash flows and collateral values, specific allowances
are determined.
Loans which are not individually evaluated are segregated by loan type and sub-type and are collectively evaluated. These
loans include commercial loans (business, construction and business real estate) which have been graded pass, special mention,
or substandard, and also includes all personal banking loans except personal real estate loans on non-accrual status. Collectively-
evaluated loans include certain troubled debt restructurings with similar risk characteristics. Allowances for both personal banking
and commercial loans use methods which consider historical and current loss trends, loss emergence periods, delinquencies,
industry concentrations and unique risks. Economic conditions throughout the Company's market place, as monitored by Company
credit officers, are also considered in the allowance determination process.
The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses rest upon various
judgments and assumptions made by management. In addition to past loan loss experience, various qualitative factors are
considered, such as current loan portfolio composition and characteristics, trends in delinquencies, portfolio risk ratings, levels
of non-performing assets, credit concentrations, collateral values, and prevailing regional and national economic conditions. The
Company has internal credit administration and loan review staff that continuously review loan quality and report the results of
their reviews and examinations to the Company’s senior management and Board of Directors. Such reviews also assist management
in establishing the level of the allowance. In using this process and the information available, management must consider various
assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these
subjective factors, actual outcomes of inherent losses can differ from original estimates. The Company’s subsidiary bank continues
31
to be subject to examination by several regulatory agencies, and examinations are conducted throughout the year, targeting various
segments of the loan portfolio for review. Refer to Note 1 to the consolidated financial statements for additional discussion on the
allowance and charge-off policies.
At December 31, 2018, the allowance for loan losses was $159.9 million, compared to $159.5 million at December 31, 2017.
The percentage of allowance to loans decreased slightly to 1.13% at December 31, 2018 compared to 1.14% at year end 2017.
Total loans delinquent 90 days or more and still accruing were $16.7 million at December 31, 2018, a decrease of $1.5 million
compared to year end 2017, mainly driven by a $2.2 million decrease in personal real estate loans delinquent 90 days or more,
partly offset by an increase of $1.5 million in consumer credit card loan delinquencies. Non-accrual loans at December 31, 2018
were $12.5 million, an increase of $553 thousand over the prior year, mainly due to an increase in business non-accrual loans of
$3.0 million. This increase was partially offset by decreases in business real estate and consumer non-accrual loans of $1.0 million
and $834 thousand, respectively. The 2018 year end balance of non-accrual loans was comprised of $9.0 million of business loans,
$1.7 million of business real estate loans and $1.8 million of personal real estate loans.
Net loan charge-offs totaled $42.3 million in 2018, representing a $650 thousand increase compared to net charge-offs of $41.6
million in 2017. The increase was largely due to higher business loan net charge-offs of $724 thousand and was mainly the result
of a charge-off recorded on one larger loan, which was subsequently placed on non-accrual. In addition, consumer credit card loan
net charge-offs increased $325 thousand, while net recoveries on construction loans declined $556 thousand. Partly offsetting
these increases in net charge-offs were lower net loan charge-offs of $693 thousand on consumer loans. Consumer credit card net
charge-offs were 3.98% of average consumer credit card loans in 2018 compared to 4.07% in 2017. Consumer credit card loan
net charge-offs as a percentage of total net charge-offs decreased to 72.3% in 2018 compared to 72.6% in 2017. Consumer loan
net charge-offs were .46% of average consumer loans in 2018, compared to .49% in 2017, and represented 22.0% of total net loan
charge-offs in 2018.
The ratio of net charge-offs to total average loans outstanding in 2018 was .30%, compared to .31% in 2017 and .25% in 2016.
The provision for loan losses in 2018 was $42.7 million, compared to provisions of $45.2 million in 2017 and $36.3 million in
2016.
The Company considers the allowance for loan losses of $159.9 million adequate to cover losses inherent in the loan portfolio
at December 31, 2018.
32
The schedules which follow summarize the relationship between loan balances and activity in the allowance for loan losses:
(Dollars in thousands)
Loans outstanding at end of year(A)
Average loans outstanding(A)
Allowance for loan losses:
Balance at beginning of year
Additions to allowance through charges to expense
Loans charged off:
Business
Real estate — construction and land
Real estate — business
Real estate — personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans charged off
Recoveries of loans previously charged off:
Business
Real estate — construction and land
Real estate — business
Real estate — personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total recoveries
Net loans charged off
Balance at end of year
$
$
$
2018
14,140,298
13,926,079
159,532
42,694
$
$
$
Years Ended December 31
2017
2016
2015
2014
13,983,674
13,611,699
$
$
13,412,736
12,927,778
$
$
12,436,692
11,869,276
$
$
11,469,238
11,260,233
155,932
$
151,532
$
156,532
$
45,244
36,318
28,727
161,532
29,531
3,144
20
176
12,897
357
36,931
2,296
55,821
1,042
635
398
511
3,611
302
6,353
675
13,527
42,294
2,410
1
127
417
13,415
488
36,114
2,207
55,179
1,032
1,192
330
722
3,436
303
5,861
659
13,535
41,644
2,549
515
194
556
12,711
860
31,616
1,977
50,978
1,933
4,227
1,475
562
3,664
375
6,186
638
19,060
31,918
2,295
499
1,263
1,037
11,708
722
31,326
2,200
51,050
2,683
1,761
1,396
596
3,430
320
6,287
850
17,323
33,727
2,646
794
1,108
844
12,214
783
32,424
1,960
52,773
2,181
2,323
681
317
3,409
743
7,702
886
18,242
34,531
$
159,932
$
159,532
$
155,932
$
151,532
$
156,532
Ratio of allowance to loans at end of year
Ratio of provision to average loans outstanding
1.13%
.31%
1.14%
.33%
1.16%
.28%
1.22%
.24%
1.36%
.26%
(A) Net of unearned income, before deducting allowance for loan losses, excluding loans held for sale.
Ratio of net charge-offs (recoveries) to average loans outstanding, by loan
category:
Business
Real estate — construction and land
Real estate — business
Real estate — personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Years Ended December 31
2018
2017
2016
2015
2014
.04%
.03%
.01%
(.01)%
(.07)
(.01)
(.02)
.46
.01
3.98
33.93
(.14)
(.01)
(.02)
.49
.05
4.07
33.71
(.48)
(.05)
—
.46
.12
3.39
28.42
(.26)
(.01)
.02
.45
.09
3.35
24.93
.01%
(.37)
.02
.03
.54
.01
3.28
21.97
Ratio of total net charge-offs to total average loans outstanding
.30%
.31%
.25%
.28 %
.31%
33
The following schedule provides a breakdown of the allowance for loan losses by loan category and the percentage of each
loan category to total loans outstanding at year end.
(Dollars in thousands)
2018
2017
2016
2015
2014
Loan Loss
Allowance
Allocation
% of Loans
to Total
Loans
Loan Loss
Allowance
Allocation
% of Loans
to Total
Loans
Loan Loss
Allowance
Allocation
% of Loans
to Total
Loans
Loan Loss
Allowance
Allocation
% of Loans
to Total
Loans
Loan Loss
Allowance
Allocation
% of Loans
to Total
Loans
Business
$
42,890
36.1% $
44,462
35.4% $
43,910
35.6% $
43,617
35.4% $
40,881
34.6%
RE — construction and
land
RE — business
RE — personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total
22,515
27,717
3,250
18,007
825
43,755
973
$ 159,932
6.2
20.3
15.0
13.8
2.7
5.8
24,432
24,810
4,201
19,509
1,189
40,052
.1
877
100.0% $ 159,532
6.9
19.3
14.8
15.0
2.9
5.6
.1
21,841
25,610
4,110
18,935
1,164
39,530
832
5.9
19.7
15.0
14.8
3.1
5.8
.1
16,312
22,157
6,680
21,717
1,393
38,764
892
5.0
18.9
15.4
15.5
3.5
6.3
—
13,584
35,157
7,343
16,822
2,472
39,541
732
3.5
20.0
16.4
14.9
3.7
6.8
.1
100.0% $ 155,932
100.0% $ 151,532
100.0% $ 156,532
100.0%
Risk Elements of Loan Portfolio
Management reviews the loan portfolio continuously for evidence of problem loans. During the ordinary course of business,
management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements. Such
loans are placed under close supervision with consideration given to placing the loan on non-accrual status, the need for an
additional allowance for loan loss, and (if appropriate) partial or full loan charge-off. Loans are placed on non-accrual status when
management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. After a loan is
placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. Interest is
included in income only as received and only after all previous loan charge-offs have been recovered, so long as management is
satisfied there is no impairment of collateral values. The loan is returned to accrual status only when the borrower has brought
all past due principal and interest payments current, and, in the opinion of management, the borrower has demonstrated the ability
to make future payments of principal and interest as scheduled. Loans that are 90 days past due as to principal and/or interest
payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are
comprised of those personal banking loans that are exempt under regulatory rules from being classified as non-accrual. Consumer
installment loans and related accrued interest are normally charged down to the fair value of related collateral (or are charged off
in full if no collateral) once the loans are more than 120 days delinquent. Credit card loans and the related accrued interest are
charged off when the receivable is more than 180 days past due.
The following schedule shows non-performing assets and loans past due 90 days and still accruing interest.
(Dollars in thousands)
Total non-accrual loans
Real estate acquired in foreclosure
Total non-performing assets
Non-performing assets as a percentage of total loans
Non-performing assets as a percentage of total assets
Loans past due 90 days and still accruing interest
December 31
2018
$ 12,536
1,413
$ 13,949
2017
11,983
681
12,664
$
$
2016
14,283
366
14,649
2015
26,575
2,819
29,394
2014
40,775
5,476
46,251
$
$
$
$
$
$
.10%
.05%
.09%
.05%
.11%
.06%
.24%
.12%
.40%
.19%
$ 16,658
$
18,127
$
16,396
$
16,467
$
13,658
The table below shows the effect on interest income in 2018 of loans on non-accrual status at year end.
(In thousands)
Gross amount of interest that would have been recorded at original rate
Interest that was reflected in income
Interest income not recognized
$
$
1,339
392
947
Non-accrual loans, which are also classified as impaired, totaled $12.5 million at year end 2018, an increase of $553 thousand
from the balance at year end 2017. The increase from December 31, 2017 occurred mainly in business loans, which increased
$3.0 million but was partially offset by decreases in business real estate, consumer, and personal real estate non-accrual loans. At
December 31, 2018, non-accrual loans were comprised primarily of business (71.7%), personal real estate (14.6%), and business
real estate (13.7%) loans. Foreclosed real estate totaled $1.4 million at December 31, 2018, an increase of $732 thousand when
compared to December 31, 2017. Total non-performing assets remain low compared to the overall banking industry in 2018, with
34
the non-performing loans to total loans ratio at .10% at December 31, 2018. Total loans past due 90 days or more and still accruing
interest were $16.7 million as of December 31, 2018, a decrease of $1.5 million when compared to December 31, 2017. Balances
by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual
loans" section of Note 2 to the consolidated financial statements.
In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which
management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard
under the Company’s internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing
the potential for loss should they become non-performing. Although these loans are generally identified as potential problem
loans, they may never become non-performing. Such loans totaled $145.7 million at December 31, 2018, compared with $213.4
million at December 31, 2017, resulting in a decrease of $67.7 million. The decrease in potential problem loans was seen in all
loan classes but was largely driven by a $55.4 million decline in business loans, mainly due to loans paying off and the upgrade
of certain large commercial and industrial and lease loans.
(In thousands)
Potential problem loans:
Business
Real estate – construction and land
Real estate – business
Real estate – personal
Total potential problem loans
December 31
2018
2017
$
$
$
98,009
1,211
44,854
1,586
145,660 $
153,417
2,702
51,134
6,121
213,374
At December 31, 2018, the Company had $75.8 million of loans whose terms have been modified or restructured under a
troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have
been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings"
section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $50.9 million
which are classified as substandard and included in the table above because of this classification.
Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan
portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are
considered at high risk of loss due to their terms, location, or special conditions. Construction and land loans and business real
estate loans are subject to higher risk because of the impact that volatile interest rates and a changing economy can have on real
estate value, and because of the potential volatility of the real estate industry. Certain personal real estate products (residential
first mortgages and home equity loans) have contractual features that could increase credit exposure in a market of declining real
estate prices, when interest rates are steadily increasing, or when a geographic area experiences an economic downturn. For these
personal real estate loans, higher risks could exist when 1) loan terms require a minimum monthly payment that covers only
interest, or 2) loan-to-collateral value (LTV) ratios at origination are above 80%, with no private mortgage insurance. Information
presented below for personal real estate and home equity loans is based on LTV ratios which were calculated with valuations at
loan origination date. The Company does not attempt to obtain updated appraisals or valuations unless the loans become
significantly delinquent or are in the process of being foreclosed upon. For credit monitoring purposes, the Company analyzes
delinquency information and current FICO scores. For home equity loans, the line utilization is also analyzed. This has remained
an effective means of evaluating credit trends and identifying problem loans, partly because the Company offers standard,
conservative lending products.
35
Real Estate - Construction and Land Loans
The Company’s portfolio of construction loans, as shown in the table below, amounted to 6.2% of total loans outstanding at
December 31, 2018. The largest component of construction and land loans was commercial construction, which decreased $98.0
million during the year ended December 31, 2018. At December 31, 2018, multi-family residential construction loans totaled
approximately $146.6 million, or 23.5%, of the commercial construction loan portfolio.
December 31,
2018
% of Total
% of Total Loans
December 31,
2017
% of Total
% of Total Loans
$
81,740
123,369
45,180
619,370
9.4%
14.2
5.2
71.2
.6% $
.9
.3
4.4
81,859
121,138
48,474
717,349
8.5%
12.5
5.0
74.0
$
869,659
100.0%
6.2% $
968,820
100.0%
.6%
.9
.3
5.1
6.9%
(Dollars in thousands)
Residential land
and land development
Residential construction
Commercial land
and land development
Commercial construction
Total real estate –
construction and land loans
Real Estate – Business Loans
Total business real estate loans were $2.9 billion at December 31, 2018 and comprised 20.3% of the Company’s total loan
portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings,
churches, hotels and motels, shopping centers, and other commercial properties. Approximately 36.1% of these loans were for
owner-occupied real estate properties, which present lower risk profiles.
(Dollars in thousands)
Owner-occupied
Multi-family
Office
Retail
Hotels
Farm
Industrial
Other
Total real estate - business
loans
Real Estate - Personal Loans
December 31,
2018
% of Total
% of Total Loans
December 31,
2017
% of Total
% of Total Loans
$
1,038,589
36.1%
7.3% $
1,010,786
37.5%
7.2%
408,151
356,733
307,915
209,693
160,935
109,391
284,381
14.2
12.4
10.7
7.3
5.6
3.8
9.9
2.9
2.5
2.2
1.5
1.1
.8
2.0
298,605
373,301
338,937
181,704
161,972
73,078
259,069
11.1
13.8
12.6
6.7
6.0
2.7
9.6
2.1
2.7
2.4
1.3
1.2
.5
1.9
$
2,875,788
100.0%
20.3% $
2,697,452
100.0%
19.3%
The Company’s $2.1 billion personal real estate loan portfolio is composed mainly of residential first mortgage real estate
loans. The majority of this portfolio is comprised of approximately $1.9 billion of loans made to the retail customer base and
includes both adjustable rate and fixed rate mortgage loans. As shown in Note 2 to the consolidated financial statements, 2.9%
of this portfolio has FICO scores of less than 660, and delinquency levels have been low. Loans of approximately $31.6 million
in this personal real estate portfolio were structured with interest only payments. Interest only loans are typically made to high
net-worth borrowers and generally have low LTV ratios at origination or have additional collateral pledged to secure the loan.
Therefore, they are not perceived to represent above normal credit risk. Loans originated with interest only payments were not
made to "qualify" the borrower for a lower payment amount. A small portion of the total portfolio is comprised of personal real
estate loans made to individuals employed by commercial customers which totaled $201.7 million at December 31, 2018.
36
The following table presents information about the retail-based personal real estate loan portfolio for 2018 and 2017.
(Dollars in thousands)
Loans with interest only payments
Loans with no insurance and LTV:
Between 80% and 90%
Between 90% and 95%
Over 95%
Over 80% LTV with no insurance
Total loan portfolio from which above loans were identified
Revolving Home Equity Loans
2018
2017
Principal
Outstanding at
December 31
$
31,613
% of Loan
Portfolio
Principal
Outstanding at
December 31
% of Loan
Portfolio
1.6% $
29,919
1.6%
111,164
30,595
46,624
188,383
1,947,202
5.7
1.6
2.4
9.7
110,272
28,774
44,529
183,575
1,855,779
5.9
1.6
2.4
9.9
The Company also has revolving home equity loans that are generally collateralized by residential real estate. Most of these
loans (91.7%) are written with terms requiring interest only monthly payments. These loans are offered in three main product
lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As shown in the following tables, the percentage of loans with LTV ratios
greater than 80% has remained a small segment of this portfolio, and delinquencies have been low and stable. The weighted
average FICO score for the total current portfolio balance is 793. At maturity, the accounts are re-underwritten and if they qualify
under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or to
convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay
off the loan. Over the next three years, approximately 9% of the Company's current outstanding balances are expected to mature.
Of these balances, 89% have a FICO score above 700. The Company does not expect a significant increase in losses as these
loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.
(Dollars in thousands)
Loans with interest only payments
Loans with LTV:
Between 80% and 90%
Over 90%
Over 80% LTV
Total loan portfolio from which above
loans were identified
Principal
Outstanding at
December 31,
2018
345,302
$
New Lines
Originated
*
During 2018
91.7% $198,875
*
52.8%
Unused Portion
of Available
Lines at
December 31,
2018
$692,293
Balances
Over 30
Days Past
Due
$1,274
*
183.9%
40,327
4,785
45,112
10.7
1.3
12.0
19,608
675
20,283
5.2
.2
5.4
38,960
4,176
43,136
10.4
1.1
11.5
375
56
431
376,399
209,569
725,733
* Percentage of total principal outstanding of $376.4 million at December 31, 2018.
(Dollars in thousands)
Loans with interest only payments
Loans with LTV:
Between 80% and 90%
Over 90%
Over 80% LTV
Total loan portfolio from which above
loans were identified
Principal
Outstanding at
December 31,
2017
369,846
$
New Lines
Originated
*
During 2017
92.3% $160,111
*
40.0%
Unused Portion
of Available
Lines at
December 31,
2017
$680,826
Balances
Over 30
Days Past
Due
$2,977
*
170.0%
43,493
7,849
51,342
10.9
1.9
12.8
19,537
—
19,537
4.9
—
4.9
40,750
5,452
46,202
10.2
1.3
11.5
514
85
599
400,587
172,511
713,934
* Percentage of total principal outstanding of $400.6 million at December 31, 2017.
*
.3%
.1
—
.1
*
.7%
.1
—
.1
37
Other Consumer Loans
Within the consumer loan portfolio are several direct and indirect product lines comprised mainly of loans secured by
automobiles, motorcycles, marine, and RVs. Outstanding balances for auto loans were $910.5 million and $1.0 billion at December
31, 2018 and 2017, respectively. The balances over 30 days past due amounted to $17.8 million at December 31, 2018, compared
to $18.4 million at the end of 2017, and comprised 2.0% of the outstanding balances of these loans at December 31, 2018 compared
to 1.8% at December 31, 2017. For the year ended December 31, 2018, $365.0 million of new auto loans were originated, compared
to $464.3 million during 2017. At December 31, 2018, the automobile loan portfolio had a weighted average FICO score of 757.
Outstanding balances for motorcycle loans were $89.4 million at December 31, 2018, compared to $129.5 million at December
31, 2017. The balances over 30 days past due amounted to $2.1 million and $2.5 million at December 31, 2018 and 2017,
respectively, and comprised 2.4% of the outstanding balances of these loans at December 31, 2018, compared to 1.9% at December
31, 2017. For the year ended December 31, 2018, $15.0 million of new motorcycle loans were originated, compared to $55.3
million during 2017.
Marine and RV loan production has been significantly curtailed since 2008 with few new originations. While loss rates have
remained low over the last five years, the loss ratios experienced for marine and RV loans in 2017 increased over the prior year
and have been higher than for other consumer loan products, at 1.2% and 1.4% in 2018 and 2017, respectively. Balances over 30
days past due for marine and RV loans increased $1.6 million at year end 2018 compared to 2017.
The table below provides the total outstanding principal and other data for this group of direct and indirect lending products
at December 31, 2018 and 2017.
(In thousands)
Automobiles
Motorcycles
Marine
RV
Total
Principal
Outstanding at
December 31
2018
New Loans
Originated
Balances
Over 30 Days
Past Due
Principal
Outstanding at
December 31
2017
New Loans
Originated
Balances
Over 30 Days
Past Due
$
910,478 $
364,955 $
17,790
$
1,009,880 $
464,253 $
18,396
89,443
13,003
37,914
14,992
1,603
1,276
2,109
647
1,887
129,530
17,776
54,070
55,253
997
29
2,496
846
109
$
1,050,838 $
382,826 $
22,433
$
1,211,256 $
520,532 $
21,847
Additionally, the Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at
December 31, 2018 of $814.1 million in consumer credit card loans outstanding, approximately $188.7 million, or 23.2%, carried
a low promotional rate. Within the next six months, $74.3 million of these loans are scheduled to convert to the ongoing higher
contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and
detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in
the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.
Energy Lending
The Company's energy lending portfolio was comprised of lending to the petroleum and natural gas sectors and totaled $143.8
million at December 31, 2018, an increase of $9.3 million from year end 2017, as shown in the table below.
(In thousands)
Extraction
Downstream distribution and refining
Mid-stream shipping and storage
Support activities
Total energy lending portfolio
$
December 31,
2018
114,152 $
17,300
3,483
8,892
143,827 $
$
December 31,
2017
86,040
25,329
9,310
13,811
134,490
Unfunded
commitments at
December 31, 2018
70,155
$
19,358
57,047
14,898
161,458
$
38
Investment Securities Analysis
Investment securities are comprised of securities which are classified as available for sale, equity, trading or other. The largest
component, available for sale debt securities, decreased 1.3% during 2018 to $8.6 billion (excluding unrealized gains/losses in
fair value) at year end 2018. During 2018, debt securities of $2.1 billion were purchased, which included $526.1 million in U.S.
government securities, $707.5 million in agency mortgage-backed securities, $320.9 million in non-agency mortgage-based
securities, and $418.2 million in asset-backed securities. Total sales, maturities and pay downs were $2.2 billion during 2018.
During 2019, maturities and pay downs of approximately $1.0 billion are expected to occur. The average tax equivalent yield
earned on total investment securities was 2.84% in 2018 and 2.51% in 2017.
At December 31, 2018, the fair value of available for sale securities was $8.5 billion, which included a net unrealized loss in
fair value of $64.6 million, compared to a net unrealized gain of $10.0 million at December 31, 2017. The overall unrealized loss
in fair value at December 31, 2018 included net gains of $5.3 million in state and municipal securities, offset by net losses of $51.9
million in mortgage and asset-backed securities. The portfolio also included unrealized net losses of $6.8 million, $3.7 million,
and $7.3 million on U.S. government and federal agency obligations, government-sponsored enterprise obligations, and other debt
securities, respectively.
Available for sale investment securities at year end for the past two years are shown below:
(In thousands)
Amortized Cost
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
State and municipal obligations
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Other debt securities
Total available for sale debt securities
Fair Value
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
State and municipal obligations
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Other debt securities
Total available for sale debt securities
December 31
2018
2017
$
914,486 $
199,470
1,322,785
3,253,433
1,053,854
1,518,976
339,595
917,494
408,266
1,592,707
3,046,701
903,920
1,495,380
350,988
$
$
8,602,599 $
8,715,456
907,652 $
195,778
1,328,039
3,214,985
1,047,716
1,511,614
332,257
917,147
406,363
1,611,366
3,040,913
905,793
1,492,800
351,060
$
8,538,041 $
8,725,442
At December 31, 2018, the available for sale portfolio included $3.2 billion of agency mortgage-backed securities, which are
collateralized bonds issued by agencies including FNMA, GNMA, FHLMC, FHLB, Federal Farm Credit Banks and FDIC. Non-
agency mortgage-backed securities totaled $1.0 billion and included $714.4 million collateralized by commercial mortgages and
$333.3 million collateralized by residential mortgages at December 31, 2018. Certain non-agency mortgage-backed securities are
other-than-temporarily impaired, and the processes for determining impairment and the related losses are discussed in Note 3 to
the consolidated financial statements.
At December 31, 2018, U.S. government obligations included TIPS of $434.4 million, at fair value. Other debt securities
include corporate bonds, notes and commercial paper.
39
The types of securities held in the available for sale security portfolio at year end 2018 are presented in the table below.
Additional detail by maturity category is provided in Note 3 to the consolidated financial statements.
Available for sale debt securities:
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
State and municipal obligations
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Other debt securities
*Based on call provisions and estimated prepayment speeds.
December 31, 2018
Percent of
Total Debt
Securities
Weighted
Average
Yield
Estimated
Average
Maturity*
10.6%
1.63%
5.0 years
2.3
15.5
37.7
12.3
17.7
3.9
2.32
2.50
2.85
2.85
2.62
2.65
4.9
5.2
4.6
3.1
2.8
3.8
Equity securities include common and preferred stock with readily determinable fair values that totaled $2.6 million at December
31, 2018, compared to $48.8 million at December 31, 2017. The decrease is due to a third party merger transaction in June 2018,
in which the majority of these securities were redeemed for cash of $39.9 million.
Other securities totaled $129.2 million at December 31, 2018 and $99.0 million at December 31, 2017. These include Federal
Reserve Bank stock and Federal Home Loan Bank (Des Moines) stock held by the bank subsidiary in accordance with debt and
regulatory requirements. These are restricted securities and are carried at cost. Also included are private equity investments which
are held by a subsidiary qualified as a Small Business Investment Company. These investments are carried at estimated fair value,
but are not readily marketable. While the nature of these investments carries a higher degree of risk than the normal lending
portfolio, this risk is mitigated by the overall size of the investments and oversight provided by management, and management
believes the potential for long-term gains in these investments outweighs the potential risks.
Other securities at year end for the past two years are shown below:
(In thousands)
Federal Reserve Bank stock
Federal Home Loan Bank stock
Private equity investments in debt securities
Private equity investments in equity securities
Total other securities
December 31
2018
2017
$
$
33,498 $
10,000
39,831
45,828
129,157 $
33,253
10,000
31,734
24,018
99,005
In addition to its holdings in the investment securities portfolio, the Company invests in long-term securities purchased under
agreements to resell, which totaled $700.0 million at both December 31, 2018 and December 31, 2017. These investments mature
in 2020 through 2022 and have fixed rates or variable rates that fluctuate with published indices. The counterparties to these
agreements are other financial institutions from whom the Company has accepted collateral of $712.3 million in marketable
investment securities at December 31, 2018. The average rate earned on these agreements during 2018 was 1.83%.
The Company also holds offsetting repurchase and resale agreements totaling $450.0 million at December 31, 2018 and $650.0
million at December 31, 2017, which are further discussed in Note 19 to the consolidated financial statements. These agreements
involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution
counterparty. These repurchase and resale agreements have been offset against each other in the balance sheet, as permitted under
current accounting guidance. The agreements mature in 2019 and earned an average of 53 basis points during 2018.
Deposits and Borrowings
Deposits are the primary funding source for the Bank and are acquired from a broad base of local markets, including both
individual and corporate customers. Total period-end deposits were $20.3 billion at December 31, 2018, compared to $20.4 billion
last year, reflecting a decrease of $101.8 million, or 0.5%.
40
Average deposits declined $463.5 million, or 2.3%, in 2018 compared to 2017, resulting from declines in average demand
deposits, which decreased $447.3 million, driven by lower balances in business, personal, and government demand deposits.
Additionally, average certificates of deposit balances decreased $363.3 million in 2018. These decreases were partially offset by
growth in average interest checking and money market deposit accounts, which increased $299.4 million in 2018 over 2017 average
balances.
The following table shows year end deposit balances by type, as a percentage of total deposits.
Non-interest bearing
Savings, interest checking and money market
Certificates of deposit of less than $100,000
Certificates of deposit of $100,000 and over
Total deposits
December 31
2018
2017
34.3%
57.5
2.9
5.3
100.0%
35.1%
56.3
3.1
5.5
100.0%
Core deposits, which include non-interest bearing, interest checking, savings, and money market deposits, supported 77% of
average earning assets in both 2018 and 2017. Average balances by major deposit category for the last six years appear on page
54. A maturity schedule of certificates of deposits outstanding at December 31, 2018 is included in Note 6 on Deposits in the
consolidated financial statements.
The Company’s primary sources of overnight borrowings are federal funds purchased and securities sold under agreements to
repurchase (repurchase agreements). Balances in these accounts can fluctuate significantly on a day-to-day basis and generally
have one day maturities. Total balances of federal funds purchased and repurchase agreements outstanding at December 31, 2018
were $2.0 billion, a $449.3 million decrease from the $1.5 billion balance outstanding at year end 2017. On an average basis,
these borrowings increased $51.8 million, or 3.5%, during 2018, mainly due to an increase of $133.7 million in repurchase
agreements, partly offset by a decrease of $82.0 million in federal funds purchased. The average rate paid on total federal funds
purchased and repurchase agreements was 1.30% during 2018 and .67% during 2017.
The majority of the Company’s long-term debt has been comprised of fixed rate advances from the FHLB. The Company
repaid the advances in November 2017 and no new advances were taken in 2018. The average rate paid on the FHLB advances
during 2017 was 3.55%.
Liquidity and Capital Resources
Liquidity Management
Liquidity is managed within the Company in order to satisfy cash flow requirements of deposit and borrowing customers while
at the same time meeting its own cash flow needs. The Company has taken numerous steps to address liquidity risk and has
developed a variety of liquidity sources which it believes will provide the necessary funds for future growth. The Company
manages its liquidity position through a variety of sources including:
• A portfolio of liquid assets including marketable investment securities and overnight investments,
• A large customer deposit base and limited exposure to large, volatile certificates of deposit,
• Lower long-term borrowings that might place demands on Company cash flow,
• Relatively low loan to deposit ratio promoting strong liquidity,
• Excellent debt ratings from both Standard & Poor’s and Moody’s national rating services, and
• Available borrowing capacity from outside sources.
41
The Company’s most liquid assets include available for sale debt securities, federal funds sold, balances at the Federal Reserve
Bank, and securities purchased under agreements to resell. At December 31, 2018 and 2017, such assets were as follows:
(In thousands)
Available for sale debt securities
Federal funds sold
Long-term securities purchased under agreements to resell
Balances at the Federal Reserve Bank
Total
2018
2017
$
8,538,041 $
8,725,442
3,320
700,000
689,876
9,931,237 $
$
42,775
700,000
30,631
9,498,848
Federal funds sold are funds lent to the Company’s correspondent bank customers with overnight maturities, and totaled $3.3
million at December 31, 2018. At December 31, 2018, the Company had lent funds totaling $700.0 million under long-term resale
agreements to other large financial institutions. The agreements mature in years 2020 through 2022. Under these agreements,
the Company holds marketable securities, safekept by a third-party custodian, as collateral. This collateral totaled $712.3 million
in fair value at December 31, 2018. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and
are used for general liquidity purposes, totaled $689.9 million at December 31, 2018. The Company’s available for sale investment
portfolio includes scheduled maturities and expected pay downs of approximately $1.0 billion during 2019, and these funds offer
substantial resources to meet either new loan demand or help offset reductions in the Company’s deposit funding base. The
Company pledges portions of its investment securities portfolio to secure public fund deposits, repurchase agreements, trust funds,
letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. At December 31, 2018 and 2017, total
investment securities pledged for these purposes were as follows:
(In thousands)
2018
2017
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings
FHLB borrowings and letters of credit
Repurchase agreements *
Other deposits
Total pledged securities
Unpledged and available for pledging
Ineligible for pledging
$
67,675 $
9,974
2,469,432
1,784,020
4,331,101
2,872,562
1,334,378
84,946
13,332
2,001,401
1,679,024
3,778,703
3,346,826
1,599,913
Total available for sale debt securities, at fair value
$
8,538,041 $
8,725,442
* Includes securities pledged for collateral swaps, as discussed in Note 19 to the consolidated financial statements
Liquidity is also available from the Company’s large base of core customer deposits, defined as non-interest bearing, interest
checking, savings, and money market deposit accounts. At December 31, 2018, such deposits totaled $18.7 billion and represented
91.8% of the Company’s total deposits. These core deposits are normally less volatile, often with customer relationships tied to
other products offered by the Company promoting long lasting relationships and stable funding sources. Total core deposits
increased $7.0 million at year end 2018 compared to year end 2017, with growth of $105.5 million in corporate core deposits,
offset by declines of $94.5 million in consumer deposits and $83.3 million in private banking deposits. While the Company
considers core consumer and private banking deposits less volatile, corporate deposits could decline if interest rates increase
significantly or if corporate customers increase investing activities and reduce deposit balances. If these corporate deposits decline,
the Company's funding needs can be met by liquidity supplied by investment security maturities and pay downs expected to total
$1.0 billion over the next year, as noted above. In addition, as shown on page 43, the Company has borrowing capacity of $3.6
billion through advances from the FHLB and the Federal Reserve.
(In thousands)
Core deposit base:
Non-interest bearing
Interest checking
Savings and money market
Total
2018
2017
$
6,980,298 $
7,158,962
2,090,936
9,594,303
1,533,904
9,965,716
$
18,665,537 $
18,658,582
42
Certificates of deposit of $100,000 or greater totaled $1.1 billion at December 31, 2018. These deposits are normally considered
more volatile and higher costing, and comprised 5.3% of total deposits at December 31, 2018.
Other important components of liquidity are the level of borrowings from third party sources and the availability of future
credit. The Company’s outside borrowings are mainly comprised of federal funds purchased, and repurchase agreements, as
follows:
(In thousands)
Borrowings:
Federal funds purchased
Securities sold under agreements to repurchase
Other debt
Total
2018
2017
$
$
13,170 $
1,943,219
8,702
202,370
1,304,768
1,758
1,965,091 $
1,508,896
Federal funds purchased, which totaled $13.2 million at December 31, 2018, are unsecured overnight borrowings obtained
mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Retail repurchase
agreements are offered to customers wishing to earn interest in highly liquid balances and are used by the Company as a funding
source considered to be stable, but short-term in nature. Repurchase agreements are collateralized by securities in the Company’s
investment portfolio. Total repurchase agreements at December 31, 2018 were comprised of non-insured customer funds totaling
$2.0 billion, and securities pledged for these retail agreements totaled $1.9 billion.
The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the
FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged,
the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Additionally, this
collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal
Reserve Bank also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following
table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future
funding capacity available to the Company at December 31, 2018.
(In thousands)
Total collateral value pledged
Advances outstanding
Letters of credit issued
Available for future advances
December 31, 2018
FHLB
Federal Reserve
Total
2,461,457 $
1,318,138 $
3,779,595
—
(217,406)
—
—
—
(217,406)
2,244,051 $
1,318,138 $
3,562,189
$
$
The Company’s average loans to deposits ratio was 69.3% at December 31, 2018, which is considered in the banking industry
to be a measure of strong liquidity. Also, the Company receives outside ratings from both Standard & Poor’s and Moody’s on both
the consolidated company and its subsidiary bank, Commerce Bank. These ratings are as follows:
Commerce Bancshares, Inc.
Issuer rating
Preferred stock
Rating outlook
Commerce Bank
Issuer rating
Baseline credit assessment
Short-term rating
Rating outlook
43
Standard &
Poor’s
Moody’s
A-
BBB-
Stable
A
A-1
Stable
Baa1
Stable
A2
a1
P-1
Stable
The Company considers these ratings to be indications of a sound capital base and strong liquidity and believes that these
ratings would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been
outstanding during the past ten years. The Company has no subordinated or hybrid debt instruments which would affect future
borrowing capacity. Because of its lack of significant long-term debt, the Company believes that, through its Capital Markets
Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit,
privately-placed corporate notes or other forms of debt.
The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash
equivalents and restricted cash of $684.9 million in 2018, as reported in the consolidated statements of cash flows on page 63 of
this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $552.7
million and has historically been a stable source of funds. Investing activities used total cash of $91.0 million, mainly from an
increase in the loan portfolio, offset by sales and maturities (net of purchases) of investment securities. Growth in the loan portfolio
used cash of $200.7 million and net purchases of land, buildings and equipment used $19.9 million, while activity in the investment
securities portfolio provided cash of $129.5 million. Investing activities are somewhat unique to financial institutions in that,
while large sums of cash flow are normally used to fund growth in investment securities, loans, or other bank assets, they are
normally dependent on the financing activities described below.
During 2018, financing activities provided total cash of $223.3 million, primarily resulting from a $449.3 million increase in
federal funds purchases and short-term securities sold under agreements to repurchase, offset by a $48.5 million decrease in
deposits. Cash dividend payments of $109.2 million were paid on common and preferred stock, while treasury stock purchases
totaled $75.2 million. Future short-term liquidity needs for daily operations are not expected to vary significantly, and the Company
believes it maintains adequate liquidity to meet these cash flows. The Company’s sound equity base, along with its low debt level,
common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future
acquisitions may utilize partial funding through one or more of these options.
Cash outflows resulting from the Company’s transactions in its common and preferred stock were as follows:
(In millions)
Purchases of treasury stock
Common cash dividends paid
Preferred cash dividends paid
Cash used
2018
2017
2016
$
$
75.2 $
17.8 $
100.2
9.0
91.6
9.0
184.4 $
118.4 $
39.4
87.1
9.0
135.5
The Parent faces unique liquidity constraints due to legal limitations on its ability to borrow funds from its bank subsidiary.
The Parent obtains funding to meet its obligations from two main sources: dividends received from bank and non-bank subsidiaries
(within regulatory limitations) and management fees charged to subsidiaries as reimbursement for services provided by the Parent,
as presented below:
(In millions)
Dividends received from subsidiaries
Management fees
Total
2018
2017
2016
$
$
200.0 $
37.7
237.7 $
160.0 $
30.4
190.4 $
160.0
31.0
191.0
These sources of funds are used mainly to pay cash dividends on outstanding stock, pay general operating expenses, and
purchase treasury stock. At December 31, 2018, the Parent’s investment securities totaled $5.8 million at fair value, consisting
mainly of preferred stock and non-agency mortgage-backed securities. To support its various funding commitments, the Parent
maintains a $20.0 million line of credit with its subsidiary bank. There were no borrowings outstanding under the line during
2018 or 2017.
Company senior management is responsible for measuring and monitoring the liquidity profile of the organization with oversight
by the Company’s Asset/Liability Committee. This is done through a series of controls, including a written Contingency Funding
Policy and risk monitoring procedures, which include daily, weekly and monthly reporting. In addition, the Company prepares
forecasts to project changes in the balance sheet affecting liquidity and to allow the Company to better plan for forecasted changes.
44
Capital Management
Under Basel III capital guidelines, at December 31, 2018 and 2017, the Company met all capital adequacy requirements and
had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table.
(Dollars in thousands)
Risk-adjusted assets
Tier I common risk-based capital
Tier I risk-based capital
Total risk-based capital
2018
2017
$ 19,103,966
$
19,149,949
2,716,232
2,861,016
3,022,023
2,422,480
2,567,264
2,747,863
Minimum Ratios
under Capital
Adequacy
Guidelines*
Minimum Ratios
for Well-
Capitalized
Banks**
Tier I common risk-based capital ratio
14.22%
12.65%
7.00%
6.50%
Tier I risk-based capital ratio
Total risk-based capital ratio
Tier I leverage ratio
Tangible common equity to tangible assets
Dividend payout ratio
14.98
15.82
11.52
10.45
23.61
13.41
14.35
10.39
9.84
29.52
8.50
10.50
4.00
8.00
10.00
5.00
* as of the fully phased-in date of Jan. 1, 2019, including capital conservation buffer
**under Prompt Corrective Action requirements
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors and periodically
purchases stock in the open market. During 2017 and 2018, respectively, the Company purchased 315 thousand and 1.2 million
shares through market purchases. At December 31, 2018, 2.2 million shares remained available for purchase under the current
Board authorization.
The Company’s common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate
capital levels and alternative investment options. Per share cash dividends paid by the Company increased 9.7% in 2018 compared
with 2017, and the Company increased its first quarter 2019 cash dividend 16%, making 2019 the Company's 51st consecutive
year of regular cash dividend increases. The Company also distributed its 25th consecutive annual 5% stock dividend in December
2018.
Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements
In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded
on the balance sheet. The most significant of these are loan commitments totaling $11.2 billion (including approximately $5.3
billion in unused approved credit card lines) and the contractual amount of standby letters of credit totaling $353.9 million at
December 31, 2018. As many commitments expire unused or only partially used, these totals do not necessarily reflect future
cash requirements. Management does not anticipate any material losses arising from commitments or contingent liabilities and
believes there are no material commitments to extend credit that represent risks of an unusual nature.
A table summarizing contractual cash obligations of the Company at December 31, 2018 and the expected timing of these
payments follows:
(In thousands)
Long-term debt obligations*
Operating lease obligations
Purchase obligations
Certificates of Deposit*
Total
* Includes principal payments only.
Payments Due by Period
In One Year or
Less
After One Year
Through Three
Years
After Three Years
Through Five
Years
After Five Years
Total
$
$
218 $
5,763
255,861
1,286,425
1,548,267 $
458 $
8,872
270,790
336,656
616,776 $
275 $
6,871
51,209
34,234
92,589 $
— $
15,161
2,370
807
18,338
$
951
36,667
580,230
1,658,122
2,275,970
The Company funds a defined benefit pension plan for a portion of its employees. Under the funding policy for the plan,
contributions are made as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable
period. No contributions to the defined benefit plan were made in 2018, and the Company is not required nor does it expect to
make a contribution in 2019.
45
The Company has investments in several low-income housing partnerships within the areas it serves. These partnerships
supply funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the
population with lower family income. If these developments successfully attract a specified percentage of residents falling in that
lower income range, federal (and sometimes state) income tax credits are made available to the partners. The tax credits are
normally recognized over ten years, and they play an important part in the anticipated yield from these investments. In order to
continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained.
Under the terms of the partnership agreements, the Company has a commitment to fund a specified amount that will be due in
installments over the life of the agreements, which ranges from 10 to 15 years. At December 31, 2018, the investments totaled
$36.8 million and are recorded as other assets in the Company’s consolidated balance sheet. Unfunded commitments, which are
recorded as liabilities, amounted to $24.7 million at December 31, 2018.
The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are
either resold to third parties or retained for use by the Company. During 2018, purchases and sales of tax credits amounted to
$80.9 million and $71.6 million, respectively. Fees from the sales of tax credits were $4.9 million, $3.3 million and $3.1 million
in 2018, 2017 and 2016, respectively. At December 31, 2018, the Company had outstanding purchase commitments totaling
$180.5 million that it expects to fund in 2019. These commitments, along with the commitments for the next five years, are
included in the table above.
Interest Rate Sensitivity
The Company’s Asset/Liability Management Committee (ALCO) measures and manages the Company’s interest rate risk on
a monthly basis to identify trends and establish strategies to maintain stability in net interest income throughout various rate
environments. Analytical modeling techniques provide management insight into the Company’s exposure to changing rates. These
techniques include net interest income simulations and market value analysis. Management has set guidelines specifying acceptable
limits within which net interest income and market value may change under various rate change scenarios. These measurement
tools indicate that the Company is currently within acceptable risk guidelines as set by management.
The Company’s main interest rate measurement tool, income simulations, projects net interest income under various rate change
scenarios in order to quantify the magnitude and timing of potential rate-related changes. Income simulations are able to capture
option risks within the balance sheet where expected cash flows may be altered under various rate environments. Modeled rate
movements include “shocks, ramps and twists.” Shocks are intended to capture interest rate risk under extreme conditions by
immediately shifting rates up and down, while ramps measure the impact of gradual changes and twists measure yield curve risk.
The size of the balance sheet is assumed to remain constant so that results are not influenced by growth predictions.
The Company also employs a sophisticated simulation technique known as a stochastic income simulation. This technique
allows management to see a range of results from hundreds of income simulations. The stochastic simulation creates a vector of
potential rate paths around the market’s best guess (forward rates) concerning the future path of interest rates and allows rates to
randomly follow paths throughout the vector. This allows for the modeling of non-biased rate forecasts around the market consensus.
Results give management insight into a likely range of rate-related risk as well as worst and best-case rate scenarios.
Additionally, the Company uses market value analyses to help identify longer-term risks that may reside on the balance sheet.
This is considered a secondary risk measurement tool by management. The Company measures the market value of equity as the
net present value of all asset and liability cash flows discounted along the current swap curve plus appropriate market risk spreads.
It is the change in the market value of equity under different rate environments, or effective duration, that gives insight into the
magnitude of risk to future earnings due to rate changes. Market value analyses also help management understand the price
sensitivity of non-marketable bank products under different rate environments.
The tables below compute the effects of gradual shifts in interest rates over a twelve month period on the Company’s net
interest income, assuming a static balance sheet with the exception of deposit attrition. The difference between the two simulations
is the amount of deposit attrition incorporated, which is shown in the tables below. In the simulations below, three rising rate
scenarios and one falling rate scenario were selected and net interest income was calculated and compared to a base scenario in
which assets, liabilities and rates remained constant over a twelve month period. For each of the simulations, interest rates
applicable to each interest earning asset or interest bearing liability were ratably increased or decreased during the year (by either
100, 200 or 300 basis points). The balances contained in the balance sheet were assumed not to change over the twelve month
period, except that as presented in the tables below, it was assumed certain non-maturity type deposit attrition would occur, as a
result of higher interest rates, and would be replaced with borrowed funds.
The simulations shown below reflect different assumptions related to deposit attrition. The Company utilizes these simulations
both for monitoring interest rate risk and for liquidity planning purposes. While the future effects of rising rates on deposit balances
46
cannot be known, the Company maintains a practice of running multiple rate scenarios to better understand interest rate risk and
its effect on the Company’s performance. The Company believes that its approach to interest rate risk has appropriately considered
its susceptibility to both rising rates and falling rates and has adopted strategies which minimize impacts to overall interest rate
risk.
Simulation A
December 31, 2018
September 30, 2018
(Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed
Deposit
Attrition
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed
Deposit
Attrition
300 basis points rising
$
200 basis points rising
100 basis points rising
5.0
5.2
3.8
.62
.45
.59% $
(348.3)
$
.85% $
(360.6)
(237.9)
(120.3)
142.8
7.0
7.3
5.7
.88
.69
(248.6)
(128.9)
139.3
100 basis points falling
(17.2)
(2.03)
(13.0)
1.56
Simulation B
December 31, 2018
September 30, 2018
(Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed
Deposit
Attrition
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed
Deposit
Attrition
300 basis points rising
$
(18.1)
(2.13)% $
(936.4)
$
(15.4)
(1.85)% $
(947.2)
200 basis points rising
(15.3)
(1.81)
100 basis points rising
(14.2)
(1.68)
(829.2)
(715.4)
(12.7)
(1.53)
(11.8)
(1.42)
(838.8)
(723.3)
The difference in Simulation A and B is the degree to which deposits are modeled to decline or increase as noted in the tables
above. Both simulations assume that a decline in deposits would be offset by an increase in borrowed funds, which are more rate
sensitive and can result in higher interest costs in a rising rate environment.
Under Simulation A, in the three rising rate scenarios, interest income grows faster than funding costs as loan and investment
balances remain constant but rates increase. The increase in interest income from higher rates is assisted by lower deposit balances,
reducing interest expense but offset by higher short-term borrowed funds with higher market sensitive rates. In Simulation B, the
assumed higher levels of deposit attrition were modeled to be replaced by wholesale borrowed funds with higher costs than in
Simulation A and resulted in a reduction in net interest income under all rising rate scenarios. In the 100 basis point falling scenario
shown in Simulation A, it is assumed that deposits would increase $142.8 million along with an increase in earning assets, but
rates on loans would fall faster than deposit rates. In this scenario, additional borrowed funds would not be necessary. Additionally,
this scenario results in lower net interest income than in the base calculation. The 100 basis point falling scenario is presented
only in Simulation A as the results would be the same under Simulation B.
In both Simulations A and B, the change in net interest income from the base calculation at December 31, 2018 was lower than
what was modeled at September 30, 2018 largely due to higher rates and balances of federal funds purchased and repurchase
agreements, as well as higher deposit rates at year end. The deposit attrition assumption used in both Simulations A and B was
not materially different than what was modeled in the prior quarter.
Projecting deposit activity in a historically low interest rate environment is difficult, and the Company cannot predict how
deposits will react to shifting rates. The comparison provided above provides insight into potential effects of changes in rates and
deposit levels on net interest income.
Derivative Financial Instruments
The Company maintains an overall interest rate risk management strategy that permits the use of derivative instruments to
modify exposure to interest rate risk. Such instruments include interest rate swaps, interest rate floors, interest rate caps, credit
risk participation agreements, foreign exchange contracts, mortgage loan commitments, forward sale contracts, and forward to be
announced (TBA) contracts. The Company’s interest rate risk management strategy includes the ability to modify the re-pricing
characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and
47
cash flows. Interest rate floors with a total notional amount of $1.0 billion were entered into during the year ended December 31,
2018 as part of this strategy to manage interest rate risk. All of these derivative instruments utilized by the Company are further
discussed in Note 18 on Derivative Instruments.
In all of these contracts, the Company is exposed to credit risk in the event of nonperformance by counterparties, who may be
bank customers or other financial institutions. The Company controls the credit risk of its financial contracts through credit
approvals, limits and monitoring procedures. Because the Company generally enters into transactions only with high quality
counterparties, there have been no losses associated with counterparty nonperformance on derivative financial instruments.
The following table summarizes the notional amounts and estimated fair values of the Company’s derivative instruments at
December 31, 2018 and 2017. Notional amount, along with the other terms of the derivative, is used to determine the amounts to
be exchanged between the counterparties. Because the notional amount does not represent amounts exchanged by the parties, it
is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk.
2018
2017
Notional
Amount
Positive Fair
Value
Negative Fair
Value
Notional
Amount
Positive Fair
Value
Negative Fair
Value
$
(13,110)
$ 1,741,412
$
7,674
$
(7,857)
$ 2,006,280
$
1,000,000
62,163
143,460
6,206
14,544
5,768
11,537
29,031
24
47
20
536
15
—
(24)
(93)
(8)
—
(8)
—
31,776
133,488
11,826
17,110
2,566
16,500
$ 3,254,921
$
—
41,210
$
(178)
(13,421)
25,000
$ 1,963,178
$
—
16
46
21
580
8
4
8,349
$
—
(16)
(123)
(40)
—
(7)
(31)
(8,074)
(In thousands)
Interest rate swaps
Interest rate floors
Interest rate caps
Credit risk participation
agreements
Foreign exchange contracts
Mortgage loan commitments
Mortgage loan forward sale
contracts
Forward TBA contracts
Total at December 31
Operating Segments
The Company segregates financial information for use in assessing its performance and allocating resources among three
operating segments. The results are determined based on the Company’s management accounting process, which assigns balance
sheet and income statement items to each responsible segment. These segments are defined by customer base and product type.
The management process measures the performance of the operating segments based on the management structure of the Company
and is not necessarily comparable with similar information for any other financial institution. Each segment is managed by
executives who, in conjunction with the Chief Executive Officer, make strategic business decisions regarding that segment. The
three reportable operating segments are Consumer, Commercial, and Wealth. Additional information is presented in Note 12 on
Segments in the consolidated financial statements.
The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, cash, etc.) and funds provided
(deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to each
new source or use of funds with a maturity, based on current swap rates, thus determining an interest spread at the time of the
transaction. Non-maturity assets and liabilities are valued using weighted average pools. The funds transfer pricing process
attempts to remove interest rate risk from valuation, allowing management to compare profitability under various rate environments.
The Company also assigns loan charge-offs and recoveries (labeled in the table below as “provision for loan losses”) directly to
each operating segment instead of allocating an estimated loan loss provision. The operating segments also include a number of
allocations of income and expense from various support and overhead centers within the Company.
48
The table below is a summary of segment pre-tax income results for the past three years.
(Dollars in thousands)
Consumer
Commercial
Wealth
Segment Totals
Other/
Elimination
Consolidated
Totals
Year ended December 31, 2018:
Net interest income
Provision for loan losses
Non-interest income
Investment securities losses, net
Non-interest expense
Income before income taxes
Year ended December 31, 2017:
Net interest income
Provision for loan losses
Non-interest income
Investment securities gains, net
$
296,228
$
345,221
$
46,946
$
688,395
$
135,430 $
823,825
(41,280)
126,253
—
(1,134)
202,527
—
32
173,026
—
(42,382)
501,806
—
(312)
(465)
(488)
(42,694)
501,341
(488)
(287,473)
(297,847)
(123,576)
(708,896)
(28,925)
(737,821)
$
$
93,728
279,031
(41,829)
121,362
—
$
$
$
$
248,767
329,087
205
$
$
96,428
47,264
(41)
184,577
158,175
—
—
$
$
438,923
655,382
(41,665)
464,114
—
105,240 $
544,163
78,297 $
733,679
(3,579)
(2,851)
25,051
(45,244)
461,263
25,051
Non-interest expense
(275,734)
(281,845)
(120,461)
(678,040)
(66,303)
(744,343)
Income before income taxes
$
82,830
$
232,024
$
84,937
$
399,791
$
30,615 $
430,406
2018 vs 2017
Increase in income before income
taxes:
Amount
$
10,898
$
16,743
$
11,491
$
39,132
$
74,625 $
113,757
Percent
13.2%
7.2%
13.5%
9.8%
N.M.
26.4%
Year ended December 31, 2016:
Net interest income
Provision for loan losses
Non-interest income
Investment securities losses, net
$
268,654
$
311,704
$
44,113
$
624,471
$
55,578 $
680,049
(36,042)
116,185
—
4,378
187,350
—
(122)
144,661
—
(31,786)
448,196
—
(4,532)
(1,640)
(53)
(36,318)
446,556
(53)
Non-interest expense
(266,258)
(272,398)
(113,888)
(652,544)
(36,685)
(689,229)
Income before income taxes
$
82,539
$
231,034
$
74,764
$
388,337
$
12,668 $
401,005
2017 vs 2016
Increase in income before income
taxes:
Amount
Percent
Consumer
$
291
$
990
$
10,173
$
11,454
$
17,947 $
29,401
.4 %
.4 %
13.6 %
2.9 %
N.M.
7.3 %
The Consumer segment includes consumer deposits, consumer finance, and consumer debit and credit cards. During 2018,
income before income taxes for the Consumer segment increased $10.9 million, or 13.2%, compared to 2017. This increase was
mainly due to growth of $17.2 million, or 6.2%, in net interest income and an increase in non-interest income of $4.9 million, or
4.0%. Net interest income increased due to a $15.2 million increase in net allocated funding credits assigned to the Consumer
segment's loan and deposit portfolios and growth of $3.5 million in loan interest income, partly offset by an increase of $1.6 million
in deposit interest expense. Non-interest income increased mainly due to growth in net debit card fees, (mainly lower network
expense and higher interchange fees), deposit fees (mainly deposit account service fees and overdraft and return item fees) and
mortgage banking revenue, partly offset by higher credit card rewards expense. These increases to income were partly offset by
growth of $11.7 million, or 4.3%, in non-interest expense. Non-interest expense increased over the prior year due to an increase
in full-time salaries expense and higher allocated servicing and support costs, mainly marketing, information technology and
management fees. The provision for loan losses totaled $41.3 million, a $549 thousand decrease from the prior year, which was
mainly due to lower net charge-offs on marine & RV loans, partly offset by higher consumer credit card loan net charge-offs. Total
average loans in this segment decreased $69.9 million, or 2.8%, in 2018 compared to the prior year mainly due to a decline in
auto loans and the continued run off of marine and RV loans. Average deposits increased $19.9 million over the prior year, resulting
from growth in interest checking and money market deposit accounts, partly offset by declines in demand and certificate of deposit
balances.
49
During 2017, income before income taxes for the Consumer segment increased $291 thousand, or .4%, compared to 2016.
This increase was mainly due to growth of $10.4 million, or 3.9%, in net interest income and an increase in non-interest income
of $5.2 million, or 4.5%. Net interest income increased due to a $9.7 million increase in net allocated funding credits assigned to
the Consumer segment's loan and deposit portfolios and a $670 thousand increase in loan interest income. Non-interest income
increased mainly due to growth in deposit fees (mainly deposit account service fees and overdraft and return item fees) and bank
card fees. These increases to income were partly offset by growth of $9.5 million, or 3.6%, in non-interest expense and $5.8
million in the provision for loan losses. Non-interest expense increased over the prior year due to an increase in full-time salaries
expense and higher allocated support costs, mainly administrative, online banking and information technology, while supplies
expense decreased due to higher chip card reissue costs in 2016. The provision for loan losses totaled $41.8 million, a $5.8 million
increase over the prior year, which was mainly due to higher net charge-offs on consumer credit card loans. Total average loans
in this segment decreased $62.0 million, or 2.4%, in 2017 compared to the prior year mainly due to a decline in marine and RV
loans. Average deposits increased $234.3 million, or 2.4%, over the prior year, resulting from growth in money market deposit
accounts, partly offset by a decline in certificate of deposit balances.
Commercial
The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch
network), leasing, international services, and business, government deposit, and related commercial cash management services,
as well as merchant and commercial bank card products. The segment includes the Capital Markets Group, which sells fixed-
income securities to individuals, corporations, correspondent banks, public institutions, and municipalities, and also provides
investment safekeeping and bond accounting services. Pre-tax income for 2018 increased $16.7 million, or 7.2%, compared to
2017, mainly due to increases in net interest income and non-interest income, partly offset by higher non-interest expense and an
increase in the provision for loan losses. Net interest income increased $16.1 million, or 4.9%, due to growth of $70.6 million in
loan interest income, partly offset by a decrease of $32.1 million in net allocated funding credits and higher interest expense of
$22.5 million on deposits and customer repurchase agreements. The provision for loan losses increased $1.3 million over last
year, due to lower business and construction loan net recoveries, partly offset by lower commercial card loan net charge-offs.
Non-interest income increased $18.0 million, or 9.7%, over the previous year due to higher net corporate card fees (driven by
higher fees), swap fees, tax credit sales fees and deposit account fees (mainly corporate cash management). These increases were
partly offset by lower gains on sales of leased assets to customers upon lease termination. Non-interest expense increased $16.0
million, or 5.7%, during 2018, mainly due to increases in salaries expense and allocated support and service costs (mainly
information technology and commercial sales and product support fees). Average segment loans increased $304.7 million, or
3.5%, compared to 2017, with growth occurring in commercial and industrial, construction, and healthcare loans. Average deposits
decreased $271.8 million, or 3.3%, due to declines in business demand deposits and certificates of deposit, partly offset by growth
in interest checking deposits.
Pre-tax income for 2017 increased $990 thousand, or .4%, compared to 2016, mainly due to an increase in net interest income,
partly offset by lower non-interest income, higher non-interest expense and an increase in the provision for loan losses. Net interest
income increased $17.4 million, or 5.6%, due to growth of $45.9 million in loan interest income, partly offset by a decrease of
$17.7 million in net allocated funding credits. In addition, customer repurchase agreement interest expense increased $5.5 million
and deposit interest expense increased $5.2 million. The provision for loan losses increased $4.2 million over last year, as
construction loan and business real estate loan net recoveries were lower by $2.5 million and $1.1 million, respectively. Non-
interest income decreased $2.8 million, or 1.5%, from the previous year due to lower interest rate swap fees and capital market
fees. Non-interest expense increased $9.4 million, or 3.5%, during 2017, mainly due to increases in full-time salaries expense
and allocated support costs, partly offset by lower bank card processing costs and business line allocations. Average segment
loans increased $562.5 million, or 7.0%, compared to 2016, with growth occurring in commercial and industrial, construction,
and business real estate loans. Average deposits increased $57.6 million, or .7%, due to growth in governmental demand deposit
accounts, partly offset by declines in certificates of deposit, money market deposit accounts, and business demand deposits.
Wealth
The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management services,
brokerage services, and includes Private Banking accounts. At December 31, 2018, the Trust group managed investments with a
market value of $30.3 billion and administered an additional $19.7 billion in non-managed assets. It also provides investment
management services to The Commerce Funds, a series of mutual funds with $2.5 billion in total assets at December 31, 2018.
In 2018, pre-tax income for the Wealth segment was $96.4 million, compared to $84.9 million in 2017, an increase of $11.5 million,
or 13.5%. Net interest income decreased $318 thousand, or .7%, due to a $5.3 million decrease in net allocated funding credits,
partly offset by a $5.5 million increase in loan interest income. Non-interest income increased $14.9 million, or 9.4%, over the
prior year largely due to higher personal and institutional trust fees, brokerage fees and cash sweep commissions. These increases
were partly offset by write downs on software costs. Non-interest expense increased $3.1 million, or 2.6%, resulting from higher
salary and benefit costs, data processing expense and allocated support and corporate management fee costs, partly offset by lower
50
trust losses. The provision for loan losses decreased $73 thousand, mainly due to personal real estate loan net recoveries. Average
assets increased $25.2 million, or 2.1%, during 2018 mainly due to higher personal real estate and consumer loans. Average
deposits decreased $219.0 million, or 10.5%, due to declines in money market deposit accounts and long-term certificates of
deposit over $100,000.
In 2017, pre-tax income for the Wealth segment was $84.9 million, compared to $74.8 million in 2016, an increase of $10.2
million, or 13.6%. Net interest income increased $3.2 million, or 7.1%, due to a $5.1 million increase in loan interest income,
partly offset by a $2.1 million decline in net allocated funding credits. Non-interest income increased $13.5 million, or 9.3%,
over the prior year largely due to higher personal and institutional trust fees, brokerage revenue and cash sweep fees, partly offset
by a trust related settlement recorded in 2016. Non-interest expense increased $6.6 million, or 5.8%, resulting from higher incentive
compensation and allocated support costs. The provision for loan losses decreased $81 thousand, mainly due to lower charge-
offs on revolving home equity loans. Average assets increased $101.6 million, or 9.1%, during 2017 mainly due to higher personal
real estate and consumer loans. Average deposits increased $5.6 million, or .3%, due to growth in money market deposit accounts
and business demand deposits, partly offset by a decline in long-term certificates of deposit over $100,000.
The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column
include activity not related to the segments, such as certain administrative functions, the investment securities portfolio, and the
effect of certain expense allocations to the segments. Also included in this category is the difference between the Company’s
provision for loan losses and net loan charge-offs, which are generally assigned directly to the segments. In 2018, the pre-tax
income in this category was $105.2 million, compared to $30.6 million in 2017. This increase was due to higher unallocated net
interest income of $57.1 million and lower unallocated non-interest expense of $37.4 million. Non-interest expense for 2017
included contributions of $32.0 million to a related charitable foundation, which were not allocated to the segments. Unallocated
securities losses were $488 thousand in 2018, compared to securities gains of $25.1 million in 2017. Also, the unallocated loan
loss provision decreased $3.3 million, as the provision was $3.6 million in excess of charge-offs in 2017 compared to $312 thousand
less than charge offs in 2018.
Impact of Recently Issued Accounting Standards
Derivatives The FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities", in August 2017.
The ASU improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk
management activities in its financial statements. These improvements allow the hedging of risk components, ease restrictions
on the measurement of the change in fair value of the hedged item, aligns the recognition and presentation of the effects of the
hedging instrument and the hedged item, and otherwise simplify hedge accounting guidance. The amendments are effective January
1, 2019 but may be adopted early in any interim period. The Company adopted the ASU on January 1, 2018, but as the Company
did not utilize hedge accounting on that date, the Company's consolidated financial statements were not affected by the adoption.
The hedging improvements in the new guidance will be considered in the development of risk management strategies in the future.
Revenue from Contracts with Customers The FASB issued ASU 2014-09, "Revenue from Contracts with Customers", in
May 2014, which has been followed by additional clarifying guidance on specified implementation issues. The ASU supersedes
revenue recognition requirements in Topic 605, Revenue Recognition, including most industry specific revenue recognition
guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The guidance was adopted on January 1, 2018 under the
full retrospective method with a restatement of prior periods. The impact of the adoption and required disclosures are discussed
in Note 15 to the consolidated financial statements.
Liabilities The FASB issued ASU 2016-04, "Recognition of Breakage for Certain Prepaid Stored-Value Products", in March
2016, in order to address current and potential future diversity in practice related to the derecognition of a prepaid stored-value
product liability. Such products include prepaid gift cards issued on a specific payment network and redeemable at network-
accepting merchant locations, prepaid telecommunication cards, and traveler's checks. The amendments require that the portion
of the dollar value of prepaid stored-value products that is ultimately unredeemed (that is, the breakage) be accounted for consistent
with the breakage guidance for stored-value product transactions provided in ASC Topic 606 - Revenue from Contracts with
Customers. These amendments are effective for interim and annual periods beginning January 1, 2018 and did not have a significant
effect on the Company's consolidated financial statements.
Income Taxes The FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory", in October 2016.
Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has
been sold to an outside party. The amendments require the recognition of income tax consequences of an intra-entity transfer of
51
an asset (other than inventory) when the transfer occurs. This change removes the current exception to the principal of
comprehensive recognition of current and deferred income taxes in GAAP (except for inventory). These amendments were
effective for reporting periods beginning January 1, 2018 and did not have a significant effect on the Company's consolidated
financial statements.
Financial Instruments The FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial
Liabilities", in January 2016. The amendments require all equity investments to be measured at fair value with changes in the fair
value recognized through net income, other than those accounted for under the equity method of accounting or those that result
in the consolidation of the investee. The amendments also require use of the exit price notion when measuring the fair value of
financial instruments for disclosure purposes. These amendments were adopted on January 1, 2018 and are further discussed in
Notes 3 and 17 to the consolidated financial statements.
Statement of Cash Flows The FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments", in
August 2016. The ASU addresses the presentation and classification in the Statement of Cash Flows of several specific cash flow
issues. These include cash payments for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments,
distributions received from equity method investees, and separately identifiable cash flows and application of the predominance
principle. The amendments were effective January 1, 2018 and did not have a significant effect on the Company's consolidated
financial statements.
Restricted Cash The FASB issued ASU 2016-18, "Restricted Cash", in November 2016. The ASU requires that amounts
described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the
beginning and end of period amounts shown on the statement of cash flows. Disclosures are to be provided on the amounts reported
as restricted and the nature of the restrictions on cash and cash equivalents. The amendments, which were applied on a retrospective
basis, were effective January 1, 2018 and did not have a significant effect on the Company's consolidated financial statements.
Retirement Benefits The FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost", in March 2017. Under previous guidance, the different components comprising net benefit
cost are aggregated for reporting in the financial statements. Because these components are heterogeneous, the current presentation
reduces the transparency and usefulness of the financial statements. The ASU requires that an employer report the service cost
component of net benefit cost in the same line item as other compensation costs arising from services rendered during the period.
The other components of net benefit cost are required to be presented separately from the servicing cost component. Only service
cost is eligible for capitalization when applicable. The amendments were effective January 1, 2018 and as noted in Note 9 to the
consolidated financial statements, did not have a significant effect on the Company's consolidated financial statements.
Leases In February 2016, the FASB issued ASU 2016-02, "Leases", in order to increase transparency and comparability by
recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The
ASU primarily affects lessee accounting, which requires the lessee to recognize a right-of-use (ROU) asset and a liability to make
lease payments for those leases classified as operating leases under previous GAAP. The ASU provides guidance as to the definition
of a lease, identification of lease components, and sale and leaseback transactions. The FASB has issued elections and expedients
within the original ASU and additional amendments, clarifying the lease guidance for certain implementation issues. The Company
has adopted the package of expedients, the lease component expedient as well as the disclosure expedient. Additionally, for leases
with a term of 12 months or less, an election was made not to recognize lease assets and lease liabilities. The ASU and the related
amendments are effective for interim and annual periods beginning January 1, 2019. The Company is the lessee in less than 200
lease agreements, which will be recognized on the balance sheet. As of January 1, 2019, the Company adopted the new accounting
standard, and a lease liability of $28.1 million and a ROU asset of $27.5 million were recognized, but should not materially impact
the Company's consolidated financial statements or various balance sheet related ratios.
Premium Amortization The FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities", in
March 2017. Under current guidance, many entities amortize the premium on purchased callable debt securities over the contractual
life of the instrument. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized
premium is recorded as a loss in earnings. The amendments in this ASU shorten the amortization period for certain callable debt
securities held at a premium to the earliest call date, and more closely align the amortization period to expectations incorporated
in market pricing of the instrument. The amendments are effective January 1, 2019 and are not expected to have a significant
effect on the Company's consolidated financial statements.
Financial Instruments ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", was issued in June 2016.
Its implementation will result in a new loan loss accounting framework, also known as the current expected credit loss (CECL)
model. CECL requires credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities to
be recorded at the time of origination. Under the current incurred loss model, losses are recorded when it is probable that a loss
52
event has occurred. The new standard will require significant operational changes, especially in data collection and analysis. The
ASU is effective for interim and annual periods beginning January 1, 2020, and is expected to increase the allowance upon adoption.
The Company established an internal CECL implementation team in 2017 and partnered with an outside vendor to implement
the new standard. Software development and data collection has continued since that time and it's expected the preliminary CECL
model will be ready for detailed testing during the second quarter of 2019. The Company continues to evaluate the impact the
adoption of ASU 2016-13 will have on the Company's consolidated financial statements.
Intangible Assets The FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", in January 2017. Under
current guidance, a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with
the carrying amount of that goodwill by following procedures that would be required in determining the fair value of assets acquired
and liabilities assumed in a business combination. Under the new amendments, the goodwill impairment test compares the fair
value of a reporting unit with its carrying amount and an impairment charge is measured as the amount by which the carrying
amount exceeds the reporting unit's fair value. The amendments are effective for impairment tests beginning January 1, 2020 and
are not expected to have a significant effect on the Company's consolidated financial statements.
Comprehensive Income The FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income", in February 2018. The guidance allows a reclassification from accumulated other comprehensive income
to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments are effective for all entities
effective January 1, 2019, but early adoption is permitted in certain circumstances. The Company adopted the ASU effective
January 1, 2018 and recorded a reclassification which increased accumulated other comprehensive income and reduced retained
earnings by $2.9 million. As these are both categories within equity, total equity was unchanged. The adoption did not have a
significant effect on the Company's consolidated financial statements.
Financial Instruments The FASB issued ASU 2018-13, "Changes to the Disclosure Requirements of Fair Value Measurement",
in August 2018. The amendments in the ASU eliminate or modify certain disclosure requirements for fair value measurements
in Topic 820, Fair Value Measurement. In addition, the amendments in the ASU also require the addition of new disclosure
requirements on fair value measurement, including the disclosure of changes in unrealized gains and losses for the period included
in accumulated other comprehensive income (AOCI) for recurring Level 3 fair value measurements and the range and weighted
average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments are effective January
1, 2020 and are not expected to have a significant effect on the Company's consolidated financial statements.
Retirement Benefits The FASB issued ASU 2018-14, "Compensation - Retirement Benefits-Defined Benefit Plans-General
(Subtopic 715-20)", in August 2018. The amendments in the ASU eliminate disclosures that are no longer considered cost beneficial
and clarify specific requirements of disclosures. In addition, the amendments in the ASU also add new disclosures, including the
explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments
are effective January 1, 2021 and are not expected to have a significant effect on the Company's consolidated financial statements.
Intangible Assets The FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract", in August 2018. This new standard modifies existing guidance and clarifies
the accounting for implementation costs of a hosting arrangement. Under the new amendments, the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract are aligned with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software or hosting arrangements that include an internal-use
software license. The amendments are effective January 1, 2020, but early adoption is permitted. The Company is still assessing
the impact on the Company's consolidated financial statements.
Corporate Governance
The Company has adopted a number of corporate governance measures. These include corporate governance guidelines, a code
of ethics that applies to its senior financial officers and the charters for its audit committee, its committee on compensation and
human resources, and its committee on governance/directors. This information is available on the Company’s Web site
www.commercebank.com under Investor Relations.
53
AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Average
Balance
2018
Interest
Income/
Expense
Average Rates
Earned/Paid
Average
Balance
2017
Interest
Income/
Expense
Average Rates
Earned/Paid
Average
Balance
2016
Interest
Income/
Expense
Average Rates
Earned/Paid
Years Ended December 31
(Dollars in thousands)
ASSETS
Loans:(A)
Business(B)
Real estate – construction and land
Real estate – business
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans
Loans held for sale
Investment securities:
U.S. government & federal agency
obligations
Government-sponsored enterprise
obligations
State & municipal obligations(B)
Mortgage-backed securities
Asset-backed securities
Other debt securities
Trading debt securities(B)
Equity securities(B)
Other securities(B)
Total investment securities
Federal funds sold and short-term
securities purchased under agreements
to resell
Long-term securities purchased under
agreements to resell
Interest earning deposits with banks
Total interest earning assets
Allowance for loan losses
Unrealized gain (loss) on debt securities
Cash and due from banks
Land, buildings and equipment - net
Other assets
Total assets
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings
Interest checking and money market
Certificates of deposit of less than
$100,000
Certificates of deposit of $100,000
and over
Total interest bearing deposits
Borrowings:
Federal funds purchased and
securities sold under agreements to
repurchase
Other borrowings
Total borrowings
Total interest bearing liabilities
Non-interest bearing deposits
Other liabilities
Equity
Total liabilities and equity
Net interest margin (T/E)
Net yield on interest earning assets
Percentage increase (decrease) in net
interest margin (T/E) compared to
the prior year
$
4,963,029 $
967,320
2,737,820
2,093,802
2,010,826
379,715
768,789
4,778
13,926,079
19,493
184,837
49,440
117,516
80,365
89,074
17,513
92,269
—
631,014
1,298
921,759
21,720
6,098
42,867
111,686
34,223
8,912
759
11,816
12,412
250,493
519
15,881
6,233
905,438
973
26,830
3,215
14,658
45,676
19,655
45
19,700
65,376
308,520
1,410,700
4,203,625
1,455,690
340,458
24,731
26,459
114,438
8,806,380
27,026
696,438
319,948
23,795,364
(158,791)
(113,068)
360,732
343,636
438,362
$ 24,666,235
$
867,150
10,817,169
603,137
1,114,825
13,402,281
1,514,144
1,747
1,515,891
14,918,172
6,728,971
247,520
2,771,572
$ 24,666,235
3.72% $
5.11
4.29
3.84
4.43
4.61
12.00
—
4.53
6.66
4,832,045 $
881,879
2,694,620
2,019,674
2,036,393
398,611
743,885
4,592
13,611,699
17,452
154,681
37,315
102,009
75,267
81,065
15,516
88,329
—
554,182
1,000
3.20% $
4.23
3.79
3.73
3.98
3.89
11.87
—
4.07
5.73
4,652,526 $
778,822
2,440,955
1,936,420
1,947,240
417,514
749,589
4,712
12,927,778
25,710
134,438
27,452
89,305
72,417
75,076
14,797
86,008
—
499,493
1,317
2.89 %
3.52
3.66
3.74
3.86
3.54
11.47
—
3.86
5.12
914,961
19,697
735,081
15,628
2.36
1.98
3.04
2.66
2.35
2.62
3.07
44.66
10.85
2.84
1.92
2.28
1.95
3.81
452,422
1,720,723
3,784,602
2,083,611
330,365
21,929
60,772
98,564
9,467,949
18,518
688,147
207,269
24,011,034
(156,572)
45,760
361,414
345,639
424,333
$ 25,031,608
.11
.25
.53
1.31
.34
$
819,558
10,517,741
676,272
1,404,960
13,418,531
1.30
2.58
1.30
.44%
1,462,387
87,696
1,550,083
14,968,614
7,176,255
250,510
2,636,229
$ 25,031,608
7,321
62,073
89,623
36,757
8,410
583
2,283
10,507
237,254
230
15,440
2,223
810,329
981
16,328
2,645
10,859
30,813
9,829
3,086
12,915
43,728
2.15
1.62
3.61
2.37
1.76
2.55
2.66
3.76
10.66
2.51
1.24
2.24
1.07
3.37
591,785
1,753,727
3,460,821
2,418,118
331,289
19,722
47,763
112,888
9,471,194
12,660
791,392
188,581
23,417,315
(152,628)
143,842
381,822
350,443
415,677
$ 24,556,471
.12
.16
.39
.77
.23
$
775,121
10,285,288
749,261
1,471,610
13,281,280
.67
3.52
.83
.29%
1,266,093
171,255
1,437,348
14,718,628
7,049,633
292,145
2,496,065
$ 24,556,471
13,173
63,261
82,888
35,346
8,382
489
2,208
7,656
229,031
78
13,544
973
744,436
923
13,443
2,809
8,545
25,720
3,315
3,968
7,283
33,003
2.13
2.23
3.61
2.40
1.46
2.53
2.48
4.62
6.78
2.42
.62
1.71
.52
3.18
.12
.13
.37
.58
.19
.26
2.32
.51
.22 %
3.04 %
7.14 %
$
840,062
$
766,601
$
711,433
3.53%
9.58%
3.19%
7.75%
(A) Loans on non-accrual status are included in the computation of average balances. Included in interest income above are loan fees and late charges, net of amortization of deferred loan
origination fees and costs, which are immaterial. Credit card income from merchant discounts and net interchange fees are not included in loan income.
AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
54
Average
Balance
2015
Interest
Income/
Expense
Average Rates
Earned/Paid
Average
Balance
2014
Interest
Income/
Expense
Average Rates
Earned/Paid
Average
Balance
2013
Interest
Income/
Expense
Average Rates
Earned/Paid
Average Balance Five
Year Compound
Growth Rate
Years Ended December 31
$
4,186,101 $
477,320
2,293,839
1,899,234
1,829,830
431,033
746,503
5,416
11,869,276
4,115
116,455
17,075
85,751
71,666
72,625
15,262
86,162
—
464,996
191
466,135
5,180
938,589
1,786,235
3,164,447
2,773,069
255,558
20,517
45,200
108,061
9,557,811
17,319
63,054
80,936
29,558
6,191
562
1,805
8,582
213,187
16,184
60
13,172
528
692,134
876
12,498
3,236
6,051
22,661
1,861
3,574
5,435
28,096
1,002,053
206,115
22,655,554
(152,690)
112,352
378,803
359,773
383,810
$ 23,737,602
$
729,311
9,752,794
832,343
1,224,402
12,538,850
1,654,860
103,884
1,758,744
14,297,594
6,786,741
280,231
2,373,036
$ 23,737,602
2.78%
3.58
3.74
3.77
3.97
3.54
11.54
—
3.92
4.64
$
3,919,421 $
418,702
2,300,855
1,818,125
1,617,039
426,720
754,482
4,889
11,260,233
—
110,791
15,826
88,206
69,054
68,434
16,188
86,298
—
454,797
—
2.83%
3.78
3.83
3.80
4.23
3.79
11.44
—
4.04
—
$
3,366,564 $
378,896
2,251,113
1,694,955
1,437,270
424,358
752,478
6,020
10,311,654
102,847
15,036
92,555
66,353
67,299
16,822
84,843
—
445,755
3.05 %
3.97
4.11
3.91
4.68
3.96
11.28
—
4.32
4,488
176
3.92
1.11
1.85
3.53
2.56
1.07
2.42
2.74
3.99
7.94
2.23
.37
1.31
.26
3.06
.12
.13
.39
.49
.18
.11
3.44
.31
.20%
497,271
13,750
13,211
61,593
80,229
24,976
3,287
411
1,448
9,885
208,790
101
12,473
555
676,716
855
12,667
4,137
5,926
23,585
1,019
3,484
4,503
28,088
794,752
1,715,493
2,981,225
2,834,013
141,266
18,423
48,847
100,399
9,131,689
31,817
985,205
220,876
21,629,820
(160,828)
90,392
382,207
354,899
376,433
$ 22,672,923
$
670,650
9,477,947
935,387
1,372,509
12,456,493
1,257,660
104,896
1,362,556
13,819,049
6,339,183
225,554
2,289,137
$ 22,672,923
2.77
1.66
3.59
2.69
.88
2.33
2.23
2.96
9.85
2.29
.32
1.27
.25
3.13
.13
.13
.44
.43
.19
.08
3.32
.33
.20%
401,162
499,947
1,617,814
3,187,648
3,061,415
166,113
20,986
54,754
111,205
9,121,044
8,775
8,658
58,522
87,523
27,475
4,990
472
1,316
11,545
209,276
24,669
106
21,119
387
676,819
766
13,589
6,002
6,383
26,740
809
3,364
4,173
30,913
1,174,589
155,885
20,792,329
(166,846)
124,718
382,500
357,544
383,739
$ 21,873,984
$
625,517
9,059,524
1,034,991
1,380,003
12,100,035
1,294,691
103,901
1,398,592
13,498,627
5,961,116
237,130
2,177,111
$ 21,873,984
2.19
1.73
3.62
2.75
.90
3.00
2.25
2.40
10.38
2.29
.43
1.80
.25
3.26
.12
.15
.58
.46
.22
.06
3.24
.30
.23 %
3.11 %
(2.90)%
8.07%
20.62
3.99
4.32
6.95
(2.20)
.43
(4.52)
6.19
34.14
18.10
(9.20)
(2.70)
5.69
(13.82)
15.43
3.34
(13.54)
.57
(.70)
1.84
(9.93)
15.47
2.73
(0.98)
(198.06)
(1.17)
(.79)
2.70
2.43
6.75
3.61
(10.24)
(4.18)
2.07
3.18
(55.83)
1.62
2.02
2.45
.86
4.95
2.43%
$
664,038
$
648,628
$
645,906
2.93%
2.38%
3.00%
.42%
(B)
Interest income and yields are presented on a fully-taxable equivalent basis using a federal income tax rate of 21% in 2018 and 35% in prior periods. Loan interest income includes tax
free loan income (categorized as business loan income) which includes tax equivalent adjustments of $5,931,000 in 2018, $10,357,000 in 2017, $9,537,000 in 2016, $8,332,000 in 2015,
$7,640,000 in 2014 and $6,673,000 in 2013. Investment securities interest income includes tax equivalent adjustments of $10,306,000 in 2018, $22,565,000 in 2017, $21,847,000 in
2016, $21,386,000 in 2015, $20,784,000 in 2014 and $19,861,000 in 2013. These adjustments relate to state and municipal obligations, trading securities, equity securities, and other
securities.
55
QUARTERLY AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
(Dollars in millions)
ASSETS
Loans:
Business(A)
Real estate – construction and land
$
Real estate – business
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans
Loans held for sale
Investment securities:
U.S. government & federal agency
obligations
Government-sponsored enterprise
obligations
State & municipal obligations(A)
Mortgage-backed securities
Asset-backed securities
Other debt securities
Trading debt securities(A)
Equity securities(A)
Other securities(A)
Total investment securities
Federal funds sold and short-term
securities purchased under agreements
to resell
Long-term securities purchased under
agreements to resell
Interest earning deposits with banks
Total interest earning assets
Allowance for loan losses
Unrealized gain (loss) on debt securities
Cash and due from banks
Land, buildings and equipment – net
Other assets
Total assets
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings
Interest checking and money market
Certificates of deposit under $100,000
Certificates of deposit $100,000 & over
Total interest bearing deposits
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase
Other borrowings
Total borrowings
Total interest bearing liabilities
Non-interest bearing deposits
Other liabilities
Equity
Total liabilities and equity
Net interest margin (T/E)
Net yield on interest earning assets
(A)
Includes tax equivalent calculations.
$
$
$
$
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Average
Balance
Average Rates
Earned/Paid
Average
Balance
Average Rates
Earned/Paid
Average
Balance
Average Rates
Earned/Paid
Average
Balance
Average Rates
Earned/Paid
Year ended December 31, 2018
5,030
953
2,758
2,122
1,962
374
788
5
13,992
18
923
215
1,361
4,380
1,519
340
26
4
128
8,896
14
700
353
23,973
(159)
(166)
365
343
452
24,808
871
10,839
585
1,091
13,386
1,656
1
1,657
15,043
6,667
265
2,833
24,808
216
3.93% $
5.47
4.53
3.87
4.62
4.98
11.91
—
4.72
6.59
1.90
2.24
3.06
2.75
2.55
2.60
3.21
39.92
15.51
2.86
2.56
2.31
2.28
3.92
.11
.30
.70
1.61
.41
1.60
2.67
1.60
.54%
$
$
$
$
4,925
992
2,733
2,111
1,985
374
775
5
13,900
18
925
262
1,376
4,434
1,427
340
24
4
120
8,912
13
686
299
23,828
(159)
(119)
357
344
445
24,696
877
10,840
594
1,100
13,411
1,500
2
1,502
14,913
6,678
296
2,809
24,696
211
3.80% $
5.21
4.35
3.83
4.46
4.72
11.99
—
4.59
6.87
2.23
2.10
2.98
2.65
2.42
2.59
3.13
32.69
13.00
2.76
2.10
2.26
1.96
3.80
.11
.26
.56
1.41
.35
1.33
2.60
1.33
.45%
$
$
$
$
4,962
972
2,727
2,079
2,026
378
754
4
13,902
22
924
354
1,395
4,067
1,407
340
26
47
109
8,669
37
700
354
23,684
(159)
(122)
357
343
419
24,522
881
10,850
609
1,135
13,475
1,339
3
1,342
14,817
6,749
228
2,728
24,522
216
3.69% $
5.06
4.22
3.84
4.39
4.51
12.05
—
4.49
6.72
3.18
1.88
3.06
2.60
2.32
2.63
3.15
89.68
6.68
3.19
1.93
2.17
1.80
3.90
.11
.23
.46
1.23
.32
1.18
2.52
1.19
.40%
$
$
$
$
4,934
952
2,734
2,062
2,072
393
758
5
13,910
19
916
406
1,513
3,926
1,469
342
22
51
101
8,746
44
700
274
23,693
(159)
(43)
364
345
437
24,637
839
10,738
625
1,134
13,336
1,560
2
1,562
14,898
6,825
199
2,715
24,637
197
3.48%
4.69
4.06
3.80
4.25
4.25
12.06
—
4.33
6.45
2.12
1.84
3.06
2.62
2.11
2.65
2.73
3.64
6.73
2.58
1.65
2.38
1.69
3.59
.12
.20
.43
1.02
.28
1.04
2.54
1.04
.36%
3.58%
3.52%
3.65%
3.37%
56
QUARTERLY AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
(Dollars in millions)
ASSETS
Loans:
Business(A)
Real estate – construction and land
$
Real estate – business
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans
Loans held for sale
Investment securities:
U.S. government & federal agency
obligations
Government-sponsored enterprise
obligations
State & municipal obligations(A)
Mortgage-backed securities
Asset-backed securities
Other debt securities
Trading debt securities(A)
Equity securities(A)
Other securities(A)
Total investment securities
Federal funds sold and short-term
securities purchased under agreements
to resell
Long-term securities purchased under
agreements to resell
Interest earning deposits with banks
Total interest earning assets
Allowance for loan losses
Unrealized gain on debt securities
Cash and due from banks
Land, buildings and equipment – net
Other assets
Total assets
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings
Interest checking and money market
Certificates of deposit under $100,000
Certificates of deposit $100,000 & over
Total interest bearing deposits
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase
Other borrowings
Total borrowings
Total interest bearing liabilities
Non-interest bearing deposits
Other liabilities
Equity
Total liabilities and equity
Net interest margin (T/E)
Net yield on interest earning assets
(A)
Includes tax equivalent calculations.
$
$
$
$
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Average
Balance
Average Rates
Earned/Paid
Average
Balance
Average Rates
Earned/Paid
Average
Balance
Average Rates
Earned/Paid
Average
Balance
Average Rates
Earned/Paid
Year ended December 31, 2017
4,818
948
2,720
2,045
2,101
394
757
5
13,788
18
918
452
1,631
3,950
1,623
351
20
82
96
9,123
27
700
270
23,926
(157)
37
372
347
438
24,963
822
10,416
645
1,119
13,002
1,626
42
1,668
14,670
7,257
312
2,724
24,963
198
3.32% $
4.41
3.90
3.72
4.07
4.06
11.90
—
4.18
5.55
2.60
1.69
3.60
2.38
1.94
2.56
2.63
3.30
6.67
2.58
1.35
2.36
1.18
3.48
.12
.17
.40
.88
.24
.83
3.59
.90
.31%
$
$
$
$
4,778
888
2,710
2,017
2,070
395
740
4
13,602
21
918
457
1,699
3,719
2,025
322
21
51
102
9,314
24
662
211
23,834
(157)
73
349
345
429
24,873
829
10,387
668
1,326
13,210
1,501
102
1,603
14,813
7,136
252
2,672
24,873
190
3.25% $
4.31
3.85
3.72
4.02
4.03
12.03
—
4.13
5.36
1.40
1.61
3.57
2.36
1.82
2.51
2.51
4.02
5.39
2.37
1.30
2.28
1.24
3.36
.12
.16
.40
.83
.24
.75
3.53
.93
.31%
$
$
$
$
4,828
862
2,701
2,004
1,998
400
731
5
13,529
18
911
450
1,772
3,708
2,335
321
21
53
100
9,671
13
666
139
24,036
(157)
58
349
344
413
25,043
831
10,667
688
1,510
13,696
1,363
106
1,469
15,165
7,066
203
2,609
25,043
191
3.21% $
4.30
3.74
3.72
3.94
3.84
11.90
—
4.06
5.75
2.52
1.59
3.61
2.35
1.72
2.54
2.70
3.97
10.50
2.50
1.13
2.22
1.04
3.36
.12
.15
.39
.75
.23
.60
3.47
.81
.29%
$
$
$
$
4,907
828
2,646
2,012
1,975
405
748
4
13,525
12
913
450
1,783
3,760
2,360
327
25
56
99
9,773
10
725
208
24,253
(155)
15
376
346
417
25,252
796
10,604
705
1,671
13,776
1,356
102
1,458
15,234
7,247
234
2,537
25,252
187
3.02%
3.85
3.63
3.74
3.89
3.64
11.66
—
3.92
6.64
2.09
1.58
3.65
2.38
1.63
2.56
2.77
3.99
20.30
2.57
.94
2.12
.77
3.29
.13
.14
.37
.67
.21
.46
3.53
.67
.26%
3.29%
3.17%
3.18%
3.13%
57
SUMMARY OF QUARTERLY STATEMENTS OF INCOME
Year ended December 31, 2018
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Non-interest income
Investment securities gains (losses), net
Salaries and employee benefits
Other expense
Provision for loan losses
Income before income taxes
Income taxes
Non-controlling interest
Net income attributable to Commerce Bancshares, Inc.
Net income per common share — basic*
Net income per common share — diluted*
Weighted average shares — basic*
Weighted average shares — diluted*
Year ended December 31, 2017
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Non-interest income
Investment securities gains (losses), net
Salaries and employee benefits
Other expense
Provision for loan losses
Income before income taxes
Income taxes
Non-controlling interest
Net income attributable to Commerce Bancshares, Inc.
Net income per common share — basic*
Net income per common share — diluted*
Weighted average shares — basic*
Weighted average shares — diluted*
12/31/2018
9/30/2018
6/30/2018
3/31/2018
For the Quarter Ended
$
232,832 $
(20,612)
212,220
133,087
(7,129)
(120,517)
(68,108)
(12,256)
137,297
(26,537)
(1,108)
224,751 $
(16,997)
207,754
123,714
4,306
(116,194)
(68,865)
(9,999)
140,716
(26,647)
(1,493)
225,623 $
(14,664)
210,959
124,850
(3,075)
(115,589)
(66,271)
(10,043)
140,831
(29,507)
(994)
109,652 $
112,576 $
110,330 $
.96 $
.96 $
110,477
110,770
.99 $
.98 $
110,889
111,260
.96 $
.96 $
110,970
111,331
12/31/2017
9/30/2017
6/30/2017
3/31/2017
For the Quarter Ended
201,572 $
(11,564)
190,008
119,383
27,209
(115,741)
(93,118)
(12,654)
115,087
(20,104)
(628)
194,244 $
(11,653)
182,591
116,887
(3,037)
(111,382)
(67,835)
(10,704)
106,520
(32,294)
338
193,594 $
(10,787)
182,807
115,380
1,651
187,997
(9,724)
178,273
109,613
(772)
(108,829)
(112,369)
(68,061)
(10,758)
112,190
(33,201)
(29)
94,355 $
74,564 $
78,960 $
.82 $
.82 $
110,900
111,275
.65 $
.64 $
110,909
111,280
.68 $
.68 $
110,862
111,241
205,995
(13,103)
192,892
119,690
5,410
(115,894)
(66,383)
(10,396)
125,319
(23,258)
(1,077)
100,984
.88
.88
110,916
111,264
(67,008)
(11,128)
96,609
(24,907)
(198)
71,504
.62
.62
110,658
111,096
$
$
$
$
$
$
$
Year ended December 31, 2016
(In thousands, except per share data)
12/31/2016
9/30/2016
6/30/2016
3/31/2016
For the Quarter Ended
Interest income
Interest expense
Net interest income
Non-interest income
Investment securities gains (losses), net
Salaries and employee benefits
Other expense
Provision for loan losses
Income before income taxes
Income taxes
Non-controlling interest
Net income attributable to Commerce Bancshares, Inc.
Net income per common share — basic*
Net income per common share — diluted*
Weighted average shares — basic*
Weighted average shares — diluted*
* Restated for the 5% stock dividend distributed in 2018.
$
181,498 $
179,361 $
180,065 $
(8,296)
173,202
112,817
3,651
(108,639)
(65,960)
(10,400)
104,671
(32,297)
(795)
(8,118)
171,243
112,112
(1,965)
(107,004)
(67,031)
(7,263)
100,092
(30,942)
(605)
(8,236)
171,829
109,113
(744)
(104,808)
(64,824)
(9,216)
101,350
(31,542)
85
71,579 $
68,545 $
69,893 $
.62 $
.62 $
110,507
110,866
.59 $
.59 $
110,468
110,749
.61 $
.60 $
110,416
110,704
$
$
$
58
172,128
(8,353)
163,775
112,514
(995)
(106,859)
(64,104)
(9,439)
94,892
(29,370)
(148)
65,374
.56
.56
110,629
110,880
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth on pages 46 through 47 of Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Commerce Bancshares, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Commerce Bancshares, Inc. and subsidiaries (the Company)
as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and
changes in equity for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively,
the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 21, 2019 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
We have served as the Company’s auditor since 1971.
Kansas City, Missouri
February 21, 2019
59
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
Loans
Allowance for loan losses
Net loans
Loans held for sale (including $13,529,000 and $15,327,000 of residential mortgage loans carried at
fair value at December 31, 2018 and 2017, respectively)
Investment securities:
Available for sale debt ($463,325,000 and $662,515,000 pledged at December 31, 2018 and
2017, respectively, to secure swap and repurchase agreements)
Trading debt
Equity
Other
Total investment securities
Federal funds sold and short-term securities purchased under agreements to resell
Long-term securities purchased under agreements to resell
Interest earning deposits with banks
Cash and due from banks
Land, buildings and equipment – net
Goodwill
Other intangible assets – net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Savings, interest checking and money market
Certificates of deposit of less than $100,000
Certificates of deposit of $100,000 and over
Total deposits
Federal funds purchased and securities sold under agreements to repurchase
Other borrowings
Other liabilities
Total liabilities
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized 2,000,000 shares; issued 6,000 shares at December 31, 2018 and 2017
Common stock, $5 par value
Authorized 120,000,000 shares; issued 111,886,450 shares at December 31, 2018 and 107,081,397
shares at December 31, 2017
Capital surplus
Retained earnings
Treasury stock of 555,100 shares at December 31, 2018
and 276,968 shares at December 31, 2017, at cost
Accumulated other comprehensive income (loss)
Total Commerce Bancshares, Inc. stockholders’ equity
Non-controlling interest
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
December 31
2018
2017
(In thousands)
$
14,140,298 $
(159,932)
13,980,366
13,983,674
(159,532)
13,824,142
20,694
21,398
8,538,041
27,059
4,409
129,157
8,698,666
3,320
700,000
689,876
507,892
333,119
138,921
8,794
382,194
25,463,842 $
6,980,298 $
11,685,239
586,091
1,072,031
20,323,659
1,956,389
8,702
237,943
22,526,693
8,725,442
18,269
50,591
99,005
8,893,307
42,775
700,000
30,631
438,439
335,110
138,921
7,618
401,074
24,833,415
7,158,962
11,499,620
634,646
1,132,218
20,425,446
1,507,138
1,758
180,889
22,115,231
144,784
144,784
559,432
2,084,824
241,163
(34,236)
(64,669)
2,931,298
5,851
2,937,149
25,463,842 $
535,407
1,815,360
221,374
(14,473)
14,108
2,716,560
1,624
2,718,184
24,833,415
$
$
$
60
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans
Interest on loans held for sale
Interest on investment securities
Interest on federal funds sold and short-term securities purchased under agreements
to resell
Interest on long-term securities purchased under agreements to resell
Interest on deposits with banks
Total interest income
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market
Certificates of deposit of less than $100,000
Certificates of deposit of $100,000 and over
Interest on federal funds purchased and securities sold under agreements to
repurchase
Interest on other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NON-INTEREST INCOME
Bank card transaction fees
Trust fees
Deposit account charges and other fees
Capital market fees
Consumer brokerage services
Loan fees and sales
Other
Total non-interest income
INVESTMENT SECURITIES GAINS (LOSSES), NET
NON-INTEREST EXPENSE
Salaries and employee benefits
Net occupancy
Equipment
Supplies and communication
Data processing and software
Marketing
Deposit insurance
Community service
Other
Total non-interest expense
Income before income taxes
Less income taxes
Net income
Less non-controlling interest expense
Net income attributable to Commerce Bancshares, Inc.
Less preferred stock dividends
Net income available to common shareholders
Net income per common share - basic
Net income per common share - diluted
See accompanying notes to consolidated financial statements.
$
$
$
61
For the Years Ended December 31
2017
2016
2018
$
625,083 $
1,298
240,187
543,825 $
1,000
214,689
519
15,881
6,233
889,201
27,803
3,215
14,658
19,655
45
65,376
823,825
42,694
781,131
171,576
147,964
94,517
7,721
15,807
12,723
51,033
501,341
(488)
468,194
46,044
18,125
20,637
85,978
20,548
11,546
2,445
64,304
737,821
544,163
105,949
438,214
4,672
433,542
9,000
424,542 $
3.79 $
3.78 $
230
15,440
2,223
777,407
17,309
2,645
10,859
9,829
3,086
43,728
733,679
45,244
688,435
155,100
135,159
90,060
7,996
14,630
13,948
44,370
461,263
25,051
448,321
45,612
18,568
22,790
80,998
16,325
13,986
34,377
63,366
744,343
430,406
110,506
319,900
517
319,383
9,000
310,383 $
2.77 $
2.76 $
489,956
1,317
207,184
78
13,544
973
713,052
14,366
2,809
8,545
3,315
3,968
33,003
680,049
36,318
643,731
154,043
121,795
86,394
10,655
13,784
11,412
48,473
446,556
(53)
427,310
46,290
19,141
24,135
79,589
16,032
13,327
3,906
59,499
689,229
401,005
124,151
276,854
1,463
275,391
9,000
266,391
2.38
2.37
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income (loss):
Net unrealized gains (losses) on securities for which a portion of an
other-than-temporary impairment has been recorded in earnings
Net unrealized gains (losses) on other securities
Change in pension loss
Unrealized gains on cash flow hedge derivatives
Other comprehensive income (loss)
Comprehensive income
Less non-controlling interest expense
For the Years Ended December 31
2018
2017
2016
$
438,214 $
319,900 $
276,854
(277)
(55,631)
664
6,855
(48,389)
389,825
4,672
412
3,022
(301)
—
3,133
323,033
517
(341)
(22,422)
1,268
—
(21,495)
255,359
1,463
253,896
Comprehensive income attributable to Commerce Bancshares, Inc.
$
385,153 $
322,516 $
See accompanying notes to consolidated financial statements.
62
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Provision for depreciation and amortization
Amortization of investment security premiums, net
Deferred income tax (benefit) expense
Investment securities (gains) losses, net (A)
Net gains on sales of loans held for sale
Proceeds from sales of loans held for sale
Originations of loans held for sale
Net (increase) decrease in trading securities, excluding unsettled transactions
Stock-based compensation
Increase in interest receivable
Increase in interest payable
Increase (decrease) in income taxes payable
Donation of securities
Other changes, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Proceeds from sales of investment securities (A)
Proceeds from maturities/pay downs of investment securities (A)
Purchases of investment securities (A)
Net increase in loans
Long-term securities purchased under agreements to resell
Repayments of long-term securities purchased under agreements to resell
Purchases of land, buildings and equipment
Sales of land, buildings and equipment
Net cash provided by (used in) investing activities
FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
Net increase (decrease) in certificates of deposit
Net increase (decrease) in federal funds purchased and short-term securities sold under agreements to
repurchase
Net increase (decrease) in other borrowings
Purchases of treasury stock
Issuance of stock under equity compensation plans
Cash dividends paid on common stock
Cash dividends paid on preferred stock
Net cash provided by (used in) financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Income tax payments, net
Interest paid on deposits and borrowings
Loans transferred to foreclosed real estate
Loans transferred from held for investment to held for sale, net
(A) Available for sale debt securities, equity securities, and other securities.
See accompanying notes to consolidated financial statements.
63
For the Years Ended December 31
2018
2017
2016
$
438,214 $
319,900 $
276,854
42,694
38,679
26,224
5,336
488
(6,370)
208,431
(203,775)
(14,277)
12,841
(4,258)
2,137
12,288
—
(5,992)
552,660
45,244
39,732
35,423
13,617
(25,051)
(8,008)
215,373
(216,064)
7,585
12,105
(4,459)
38
(27,685)
32,036
(13,259)
426,527
36,318
40,929
31,493
(2,059)
53
(5,850)
160,875
(163,469)
73,780
11,525
(3,642)
1,107
4,509
—
(7,460)
454,963
708,864
1,510,985
792,380
1,899,640
24,380
2,032,397
(2,090,333)
(1,853,817)
(1,988,101)
(200,673)
(100,000)
100,000
(33,294)
13,427
(91,024)
60,278
(108,742)
449,251
6,944
(75,231)
(10)
(100,238)
(9,000)
223,252
684,888
$
$
524,352
1,209,240 $
84,172 $
63,239
1,551
—
(614,849)
(1,009,523)
(75,000)
100,000
(30,824)
3,190
220,720
(15,036)
(474,044)
(216,767)
(100,291)
(17,771)
(8)
(91,619)
(9,000)
(924,536)
(277,289)
801,641
524,352 $
120,744 $
43,690
2,063
—
(250,000)
400,000
(24,478)
10,112
(805,213)
782,846
243,199
(239,647)
(1,769)
(39,381)
(6)
(87,070)
(9,000)
649,172
298,922
502,719
801,641
119,596
31,896
1,122
42,688
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except per share data)
Balance, December 31, 2015
Net income
Other comprehensive loss
Distributions to non-controlling interest
Purchases of treasury stock
Cash dividends paid on common stock
($.777 per share)
Cash dividends paid on preferred stock
($1.500 per depositary share)
Excess tax benefit related to equity
compensation plans
Stock-based compensation
Issuance under stock purchase and equity
compensation plans
5% stock dividend, net
Balance, December 31, 2016
Adoption of ASU 2016-09
Net income
Other comprehensive income
Distributions to non-controlling interest
Sale of non-controlling interest of subsidiary
Purchases of treasury stock
Cash dividends paid on common stock
($.816 per share)
Cash dividends paid on preferred stock
($1.500 per depositary share)
Stock-based compensation
Issuance under stock purchase and equity
compensation plans
5% stock dividend, net
Balance, December 31, 2017
Adoption of ASU 2018-02
Adoption of ASU 2016-01
Net income
Other comprehensive loss
Distributions to non-controlling interest
Purchases of treasury stock
Cash dividends paid on common stock
($.895 per share)
Cash dividends paid on preferred stock
($1.500 per depositary share)
Stock-based compensation
Issuance under stock purchase and equity
compensation plans
5% stock dividend, net
Balance, December 31, 2018
Commerce Bancshares, Inc. Shareholders
Preferred
Stock
Common
Stock
Capital
Surplus
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Non-
Controlling
Interest
Total
$ 144,784 $ 489,862 $ 1,337,677 $ 383,313 $ (26,116) $
32,470 $
5,428 $ 2,367,418
275,391
1,463
276,854
(87,070)
(9,000)
3,390
11,525
(15,810)
20,153
215,672
(269,785)
144,784
510,015
1,552,454
3,441
292,849
(2,144)
319,383
2,950
12,105
(17,734)
(91,619)
(9,000)
25,392
262,144
(288,095)
144,784
535,407
1,815,360
221,374
(2,932)
33,320
433,542
(100,238)
(9,000)
12,841
(21,632)
24,025
278,255
(334,903)
(21,495)
(1,542)
(21,495)
(1,542)
(39,381)
(87,070)
(9,000)
3,390
11,525
911
(478)
10,975
5,349
2,501,132
1,297
517
319,900
3,133
(1,293)
(2,949)
3,133
(1,293)
1
(17,771)
(91,619)
(9,000)
12,105
858
(559)
14,108
2,932
(33,320)
(48,389)
1,624
2,718,184
—
—
4,672
438,214
(445)
(48,389)
(445)
(75,231)
(100,238)
(9,000)
12,841
1,792
(579)
(39,381)
16,721
33,482
(15,294)
(17,771)
18,592
(14,473)
(75,231)
23,424
32,044
$ 144,784 $ 559,432 $ 2,084,824 $ 241,163 $ (34,236) $
(64,669) $
5,851 $ 2,937,149
See accompanying notes to consolidated financial statements.
64
Commerce Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
Commerce Bancshares, Inc. and its subsidiaries (the Company) conducts its principal activities from approximately 320 branch
and ATM locations throughout Missouri, Illinois, Kansas, Oklahoma and Colorado. Principal activities include retail and
commercial banking, investment management, securities brokerage, mortgage banking, credit related insurance and private equity
investment activities. The Company also maintains commercial banking offices in Dallas, Houston, Cincinnati, Nashville, Des
Moines, Indianapolis, and Grand Rapids.
Basis of Presentation
The Company follows accounting principles generally accepted in the United States of America (GAAP) and reporting practices
applicable to the banking industry. The preparation of financial statements under GAAP requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and notes. These estimates are based on information
available to management at the time the estimates are made. While the consolidated financial statements reflect management’s
best estimates and judgments, actual results could differ from those estimates. The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries (after elimination of all material intercompany balances and
transactions). Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications
had no effect on net income or total assets. Management has evaluated subsequent events for potential recognition or disclosure
through the date these consolidated financial statements were issued.
The Company, in the normal course of business, engages in a variety of activities that involve variable interest entities (VIEs).
A VIE is a legal entity that lacks equity investors or whose equity investors do not have a controlling financial interest in the entity
through their equity investments. However, an enterprise is deemed to have a controlling financial interest and is the primary
beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. An
enterprise that is the primary beneficiary must consolidate the VIE. The Company’s interests in VIEs are evaluated to determine
if the Company is the primary beneficiary both at inception and when there is a change in circumstances that requires a
reconsideration.
The Company is considered to be the primary beneficiary in a rabbi trust related to a deferred compensation plan offered to
certain employees. The assets and liabilities of this trust, which are included in the accompanying consolidated balance sheets,
are not significant. The Company also has variable interests in certain entities in which it is not the primary beneficiary. These
entities are not consolidated. These interests include affordable housing limited partnership interests, holdings in its investment
portfolio of various asset and mortgage-backed bonds that are issued by securitization trusts, and managed discretionary trust
assets that are not included in the accompanying consolidated balance sheets.
Cash, Cash Equivalents and Restricted Cash
In the accompanying consolidated statements of cash flows, cash and cash equivalents include “Cash and due from banks”,
“Federal funds sold and short-term securities purchased under agreements to resell”, and “Interest earning deposits with banks”
as segregated in the accompanying consolidated balance sheets. Restricted cash is comprised of cash collateral on deposit with
another financial institution to secure interest rate swap transactions. Restricted cash is included in other assets in the consolidated
balance sheets and totaled $8.2 million and $12.5 million at December 31, 2018 and 2017, respectively.
Regulations of the Federal Reserve System require cash balances to be maintained at the Federal Reserve Bank, based on
certain deposit levels. The minimum reserve requirement for the Bank at December 31, 2018 totaled $228.3 million. Other interest
earning cash balances held at the Federal Reserve Bank totaled $689.9 million.
Loans and Related Earnings
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balances, net of undisbursed loan proceeds, the allowance for loan losses, and any deferred fees and
costs on originated loans. Origination fee income received on loans and amounts representing the estimated direct costs of
origination are deferred and amortized to interest income over the life of the loan using the interest method.
65
Interest on loans is accrued based upon the principal amount outstanding. Interest income is recognized primarily on the level
yield method. Loan and commitment fees, net of costs, are deferred and recognized in income over the term of the loan or
commitment as an adjustment of yield. Annual fees charged on credit card loans are capitalized to principal and amortized over
12 months to loan fees and sales. Other credit card fees, such as cash advance fees and late payment fees, are recognized in income
as an adjustment of yield when charged to the cardholder’s account.
Non-Accrual Loans
Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and
agreed upon terms of repayment. Business, construction real estate, business real estate, and personal real estate loans that are
contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both
well-secured and in the process of collection. Consumer, revolving home equity and credit card loans are exempt under regulatory
rules from being classified as non-accrual. When a loan is placed on non-accrual status, any interest previously accrued but not
collected is reversed against current income, and the loan is charged off to the extent uncollectible. Principal and interest payments
received on non-accrual loans are generally applied to principal. Interest is included in income only after all previous loan charge-
offs have been recovered and is recorded only as received. The loan is returned to accrual status only when the borrower has
brought all past due principal and interest payments current, and, in the opinion of management, the borrower has demonstrated
the ability to make future payments of principal and interest as scheduled. A six month history of sustained payment performance
is generally required before reinstatement of accrual status.
Troubled Debt Restructurings
A loan is accounted for as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrowers’
financial difficulties, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically
involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, or accrued interest, (2) a loan
renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed
in bankruptcy. Business, business real estate, construction real estate and personal real estate troubled debt restructurings with
impairment charges are placed on non-accrual status. The Company measures the impairment loss of a troubled debt restructuring
in the same manner as described below. Troubled debt restructurings which are performing under their contractual terms continue
to accrue interest which is recognized in current earnings.
Impaired Loans
Loans are evaluated regularly by management for impairment. Included in impaired loans are all non-accrual loans, as well
as loans that have been classified as troubled debt restructurings. Once a loan has been identified as impaired, impairment is
measured based on either the present value of the expected future cash flows at the loan’s initial effective interest rate or the fair
value of the collateral if collateral dependent. Factors considered in determining impairment include delinquency status, cash
flow analysis, credit analysis, and collateral value and availability.
Loans Held For Sale
Loans held for sale include student loans and certain fixed rate residential mortgage loans. These loans are typically classified
as held for sale upon origination based upon management's intent to sell the production of these loans. The student loans are
carried at the lower of aggregate cost or fair value, and their fair value is determined based on sale contract prices. The mortgage
loans are carried at fair value under the elected fair value option. Their fair value is based on secondary market prices for loans
with similar characteristics, including an adjustment for embedded servicing value. Changes in fair value and gains and losses
on sales are included in loan fees and sales. Deferred fees and costs related to these loans are not amortized but are recognized
as part of the cost basis of the loan at the time it is sold. Interest income related to loans held for sale is accrued based on the
principal amount outstanding and the loan's contractual interest rate.
Occasionally, other types of loans may be classified as held for sale in order to manage credit concentration. These loans are
carried at the lower of cost or fair value with gains and losses on sales recognized in loan fees and sales.
Allowance/Provision for Loan Losses
The allowance for loan losses is maintained at a level believed to be appropriate by management to provide for probable loan
losses inherent in the portfolio as of the balance sheet date, including losses on known or anticipated problem loans as well as for
loans which are not currently known to require specific allowances. Management has established a process to determine the
amount of the allowance for loan losses which assesses the risks and losses inherent in its portfolio. Business, construction real
estate and business real estate loans are normally larger and more complex, and their collection rates are harder to predict. These
loans are more likely to be collateral dependent and are allocated a larger reserve, due to their potential volatility. Personal real
66
estate, credit card, consumer and revolving home equity loans are individually smaller and perform in a more homogenous manner,
making loss estimates more predictable. Management’s process provides an allowance consisting of a specific allowance component
based on certain individually evaluated loans and a general component based on estimates of reserves needed for pools of loans.
Loans subject to individual evaluation generally consist of business, construction real estate, business real estate and personal
real estate loans on non-accrual status. These impaired loans are evaluated individually for the impairment of repayment potential
and collateral adequacy. Other impaired loans identified as performing troubled debt restructurings are collectively evaluated
because they have similar risk characteristics. Loans which have not been identified as impaired are segregated by loan type and
sub-type and are collectively evaluated. Reserves calculated for these loan pools are estimated using a consistent methodology
that considers historical loan loss experience by loan type, loss emergence periods, delinquencies, current economic factors, loan
risk ratings and industry concentrations.
The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses is based on various
judgments and assumptions made by management. The amount of the allowance for loan losses is influenced by several qualitative
factors which include collateral valuation, evaluation of performance and status, current loan portfolio composition and
characteristics, trends in delinquencies, portfolio risk ratings, levels of non-performing assets, and prevailing regional and national
economic and business conditions.
The estimates, appraisals, evaluations, and cash flows utilized by management may be subject to frequent adjustments due to
changing economic prospects of borrowers or properties. These estimates are reviewed periodically and adjustments, if necessary,
are recorded in the provision for loan losses in the periods in which they become known.
Loans, or portions of loans, are charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for loan
losses, and recoveries of loans previously charged off are added back to the allowance. Business, business real estate, construction
real estate and personal real estate loans are generally charged down to estimated collectible balances when they are placed on
non-accrual status. Consumer loans and related accrued interest are normally charged down to the fair value of related collateral
(or are charged off in full if no collateral) once the loans are more than 120 days delinquent. Credit card loans are charged off
against the allowance for loan losses when the receivable is more than 180 days past due. The interest and fee income previously
capitalized but not collected on credit card charge-offs is reversed against interest income.
Operating, Direct Financing and Sales Type Leases
The net investment in direct financing and sales type leases is included in loans on the Company’s consolidated balance sheets
and consists of the present values of the sum of the future minimum lease payments and estimated residual value of the leased
asset. Revenue consists of interest earned on the net investment and is recognized over the lease term as a constant percentage
return thereon. The net investment in operating leases is included in other assets on the Company’s consolidated balance sheets.
It is carried at cost, less the amount depreciated to date. Depreciation is recognized on a straight-line basis over the lease term to
the estimated residual value. Operating lease revenue consists of the contractual lease payments and is recognized over the lease
term in other non-interest income. Estimated residual values are established at lease inception utilizing contract terms, past customer
experience, and general market data and are reviewed and adjusted, if necessary, on an annual basis.
Investments in Debt and Equity Securities
The majority of the Company's investment portfolio is comprised of debt securities which are classified as available for sale.
From time to time, the Company sells securities and utilizes the proceeds to reduce borrowings, fund loan growth, or modify its
interest rate profile. Securities classified as available for sale are carried at fair value. Changes in fair value, excluding certain
losses associated with other-than-temporary impairment (OTTI), are reported in other comprehensive income (loss), a component
of stockholders’ equity. Securities are periodically evaluated for OTTI in accordance with guidance provided in ASC 320-10-35.
For securities with OTTI, the entire loss in fair value is required to be recognized in current earnings if the Company intends to
sell the securities or believes it likely that it will be required to sell the security before the anticipated recovery. If neither condition
is met, but the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has
occurred, and the loss is then recognized in current earnings. The noncredit-related portion of the overall loss is reported in other
comprehensive income (loss). Gains and losses realized upon sales of securities are calculated using the specific identification
method and are included in investment securities gains (losses), net, in the consolidated statements of income. Purchase premiums
and discounts are amortized to interest income using a level yield method over the estimated lives of the securities. For mortgage
and asset-backed securities, prepayment experience is evaluated quarterly to determine the appropriate estimate of the future rate
of prepayment. When a change in a bond's estimated remaining life is necessary, a corresponding adjustment is made in the related
amortization of premium or discount accretion.
67
Equity securities include common and preferred stock with readily determinable fair values. These are also carried at fair
value. Prior to January 1, 2018, changes in fair value were recorded in other comprehensive income. The Company's adoption
of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", effective January 1, 2018, required
that all subsequent changes in fair value be recorded in current earnings. The adoption also required a reclassification of the
unrealized gain in fair value on equity securities (recorded in accumulated other comprehensive income at December 31, 2017)
to retained earnings. The amount of this reclassification was $33.3 million, net of tax.
Certain equity securities do not have readily determinable fair values. The Company has elected under ASU 2016-01 to measure
these at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar
investment of the same issuer. The Company has not recorded any impairment or other adjustments to the carrying amount of
these investments.
Other securities include Federal Reserve Bank stock and Federal Home Loan Bank stock, which are held for debt and regulatory
purposes. They are carried at cost and periodically evaluated for other-than-temporary impairment. Also included are investments
in portfolio concerns held by the Company’s private equity subsidiaries, which consist of both debt and equity instruments. Private
equity investments are carried at fair value in accordance with ASC 946-10-15, with changes in fair value reported in current
earnings. In the absence of readily ascertainable market values, fair value is estimated using internally developed methods. Changes
in fair value which are recognized in current earnings and gains and losses from sales are included in investment securities gains
(losses), net in the consolidated statements of income.
Trading account securities, which are debt securities bought and held principally for the purpose of resale in the near term, are
carried at fair value. Gains and losses, both realized and unrealized, are recorded in non-interest income.
Purchases and sales of securities are recognized on a trade date basis. A receivable or payable is recognized for pending
transaction settlements.
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized
financing transactions, not as purchases and sales of the underlying securities. The agreements are recorded at the amount of cash
advanced or received.
The Company periodically enters into securities purchased under agreements to resell with large financial institutions.
Securities pledged by the counterparties to secure these agreements are delivered to a third party custodian.
Securities sold under agreements to repurchase are a source of funding to the Company and are offered to cash management
customers as an automated, collateralized investment account. From time to time, securities sold may also be used by the Bank
to obtain additional borrowed funds at favorable rates. These borrowings are secured by a portion of the Company's investment
security portfolio and delivered either to the dealer custody account at the FRB or to the applicable counterparty.
The fair value of collateral either received from or provided to a counterparty is monitored daily, and additional collateral is
obtained, returned, or provided by the Company in order to maintain full collateralization for these transactions.
As permitted by current accounting guidance, the Company offsets certain securities purchased under agreements to resell
against securities sold under agreements to repurchase in its balance sheet presentation. These agreements are further discussed
in Note 19, Resale and Repurchase Agreements.
Land, Buildings and Equipment
Land is stated at cost, and buildings and equipment are stated at cost, including capitalized interest when appropriate, less
accumulated depreciation. Depreciation is computed using a straight-line method, utilizing estimated useful lives; generally 30
years for buildings, 10 years for building improvements, and 3 to 10 years for equipment. Leasehold improvements are amortized
over the shorter of 10 years or the remaining lease term. Maintenance and repairs are charged to non-interest expense as incurred.
68
Foreclosed Assets
Foreclosed assets consist of property that has been repossessed and is comprised of commercial and residential real estate and
other non-real estate property, including auto and recreational and marine vehicles. The assets are initially recorded at fair value
less estimated selling costs, establishing a new cost basis. Initial valuation adjustments are charged to the allowance for loan
losses. Fair values are estimated primarily based on appraisals, third-party price opinions, or internally developed pricing models.
After initial recognition, fair value estimates are updated periodically. Declines in fair value below cost are recognized through
valuation allowances which may be reversed when supported by future increases in fair value. These valuation adjustments, in
addition to gains and losses realized on sales and net operating expenses, are recorded in other non-interest expense.
Goodwill and Intangible Assets
Goodwill is not amortized but is assessed for impairment on an annual basis or more frequently in certain circumstances. When
testing for goodwill impairment, the Company may initially perform a qualitative assessment. Based on the results of this qualitative
assessment, if the Company concludes it is more likely than not that a reporting unit's fair value is less than its carrying amount,
a quantitative analysis is performed. Quantitative valuation methodologies include a combination of formulas using current market
multiples, based on recent sales of financial institutions within the Company's geographic marketplace. If the fair value of a
reporting unit is less than the carrying amount, additional analysis is required to measure the amount of impairment. The Company
has not recorded impairment resulting from goodwill impairment tests. However, adverse changes in the economic environment,
operations of the reporting unit, or other factors could result in a decline in fair value.
Intangible assets that have finite useful lives, such as core deposit intangibles and mortgage servicing rights, are amortized
over their estimated useful lives. Core deposit intangibles are amortized over periods of 8 to 14 years, representing their estimated
lives, using accelerated methods. Mortgage servicing rights are amortized in proportion to and over the period of estimated net
servicing income, considering appropriate prepayment assumptions. Core deposit intangibles are reviewed for impairment
whenever events or changes in circumstances indicate their carrying amount may not be recoverable. Impairment is indicated if
the sum of the undiscounted estimated future net cash flows is less than the carrying value of the intangible asset. Mortgage
servicing rights, while initially recorded at fair value, are subsequently amortized and carried at the lower of the initial capitalized
amount (net of accumulated amortization), or estimated fair value. The Company evaluates its mortgage servicing rights for
impairment on a quarterly basis, using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications
based on the risk characteristics of the underlying loans. A valuation allowance has been established, through a charge to earnings,
to the extent the amortized cost exceeds the estimated fair value. However, the Company has not recorded other-than-temporary
impairment losses on either of these types of intangible assets.
Income Taxes
Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily
represent amounts currently payable under tax laws. Deferred income taxes are provided for temporary differences between the
financial reporting bases and income tax bases of the Company’s assets and liabilities, net operating losses, and tax credit
carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable
income when such assets and liabilities are anticipated to be settled or realized. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized as tax expense or benefit in the period that includes the enactment date of the change. In
determining the amount of deferred tax assets to recognize in the financial statements, the Company evaluates the likelihood of
realizing such benefits in future periods. A valuation allowance is established if it is more likely than not that all or some portion
of the deferred tax asset will not be realized. The Company recognizes interest and penalties related to income taxes within income
tax expense in the consolidated statements of income.
The Company and its eligible subsidiaries file a consolidated federal income tax return. State and local income tax returns are
filed on a combined, consolidated or separate return basis based upon each jurisdiction’s laws and regulations.
In December 2017, tax reform legislation was enacted which changed the maximum corporate tax rate for years 2018 and
beyond. As such, deferred tax assets and liabilities were revalued in 2017 to account for the change in future tax rates. Additional
information about current and deferred income taxes is provided in Note 8, Income Taxes.
Non-Interest Income
Non-interest income is mainly comprised of revenue from contracts with customers. For that revenue (excluding certain
revenue associated with financial instruments, derivative and hedging instruments, guarantees, lease contracts, transferring and
servicing of financial assets, and other specific revenue transactions), the Company applies the following five-step approach when
recognizing revenue: (i) identify the contract with the customer, (ii) identify the performance obligations, (iii) determine the
69
transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the
performance obligation is satisfied. The Company’s contracts with customers are generally short term in nature, with a duration
of one year or less, and most contracts are cancellable by either the Company or its customer without penalty. Performance
obligations for customer contracts are generally satisfied at a single point in time, typically when the transaction is complete and
the customer has received the goods or service, or over time. For performance obligations satisfied over time, the Company
recognizes the value of the goods or services transferred to the customer when the performance obligations have been transferred
and received by the customer. Payments for satisfied performance obligations are typically due when or as the goods or services
are completed, or shortly thereafter, which usually occurs within a single financial reporting period.
In situations where payment is made before the performance obligation is satisfied, the fees are deferred until the performance
obligations pertaining to those goods or services are completed. In cases where payment has not been received despite satisfaction
of its performance obligations, the Company accrues an estimate of the amount due in the period that the performance obligations
have been satisfied. For contracts with variable components, the Company only recognizes revenue to the extent that it is probable
that the cumulative amount recognized will not be subject to a significant reversal in future periods. Generally, the Company’s
contracts do not include terms that require significant judgment to determine whether a variable component is included within the
transaction price. The Company generally acts in a principal capacity, on its own behalf, in most of its contracts with customers.
For these transactions, revenue and the related costs to provide the goods or services are presented on a gross basis in the financial
statements. In some cases, the Company acts in an agent capacity, deriving revenue through assisting third parties in transactions
with the Company’s customers. In such transactions, revenue and the related costs to provide services is presented on a net basis
in the financial statements. These transactions primarily relate to fees earned from bank card and related network and rewards
costs and the sales of annuities and certain limited insurance products.
Derivatives
Most of the Company's derivative contracts are accounted for as free-standing instruments. These instruments are carried at
fair value, and changes in fair value are recognized in current earnings. They include interest rate swaps and caps, which are
offered to customers to assist in managing their risks of adverse changes in interest rates. Each contract between the Company
and a customer is offset by a contract between the Company and an institutional counterparty, thus minimizing the Company's
exposure to rate changes. The Company also enters into certain contracts, known as credit risk participation agreements, to buy
or sell credit protection on specific interest rate swaps. It also purchases and sells forward foreign exchange contracts, either in
connection with customer transactions, or for its own trading purposes. In 2015, the Company began an origination and sales
program of certain personal real estate mortgages. Derivative instruments under this program include mortgage loan commitments,
forward loan sale contracts, and forward contracts to sell certain to-be-announced (TBA) securities.
The Company's interest rate risk management policy permits the use of hedge accounting for derivatives, and in 2018 the
Company entered into interest rate floor contracts as protection from the potential for declining interest rates in the commercial
loan portfolio. These floors were designated and qualified as cash flow hedges. In a cash flow hedge, the changes in fair value
are recorded in accumulated other comprehensive income and recognized in the income statement when the hedged cash flows
affect earnings. Both at hedge inception and on an ongoing basis, the Company assesses whether the interest rate floors used in
the hedging relationships are highly effective in offsetting changes in the cash flows of the hedged items.
The Company has master netting arrangements with various counterparties but does not offset derivative assets and liabilities
under these arrangements in its consolidated balance sheets. However, interest rate swaps that are executed under central clearing
requirements are presented net of variation margin as mandated by the statutory terms of the Company's contract with its clearing
counterparty.
Additional information about derivatives held by the Company and valuation methods employed is provided in Note 16, Fair
Value Measurements and Note 18, Derivative Instruments.
Pension Plan
The Company’s pension plan is described in Note 9, Employee Benefit Plans. Historically, the Company has reported all
components of net periodic pension cost in salaries and employee benefits in its consolidated statements of income. Upon the
adoption of ASU 2017-07 "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost", in 2018, only the service cost component of net periodic pension cost is reported in salaries and employee benefits in the
accompanying consolidated statements of income, while the other components are reported in other non-interest expense. The
funded status of the plan is recognized as an asset or liability in the consolidated balance sheets, and changes in that funded status
are recognized in the year in which the changes occur through other comprehensive income. Plan assets and benefit obligations
are measured as of the fiscal year end of the plan. The measurement of the projected benefit obligation and pension expense involve
actuarial valuation methods and the use of various actuarial and economic assumptions. The Company monitors the assumptions
70
and updates them periodically. Due to the long-term nature of the pension plan obligation, actual results may differ significantly
from estimations. Such differences are adjusted over time as the assumptions are replaced by facts and values are recalculated.
Stock-Based Compensation
The Company’s stock-based employee compensation plan is described in Note 10, Stock-Based Compensation and Directors
Stock Purchase Plan. In accordance with the requirements of ASC 718-10-30-3 and 35-2, the Company measures the cost of
stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period,
which is generally the vesting period. The fair value of an option award is estimated using the Black-Scholes option-pricing model
while the fair value of a nonvested stock award is the common stock (CBSH) market price. The expense recognized for stock-
based compensation is included in salaries and benefits in the accompanying consolidated statements of income. In periods prior
to 2017, expense was reduced for estimated forfeitures over the vesting period and adjusted for actual forfeitures as they occurred.
Effective January 1, 2017, the Company elected to recognize forfeitures as a reduction to expense only when they have occurred,
as allowed under the provisions of ASU 2016-09. The effect of this change, which was recognized as a cumulative-effect adjustment
on January 1, 2017, increased equity and increased deferred tax assets by approximately $1.3 million.
Treasury Stock
Purchases of the Company’s common stock are recorded at cost. Upon re-issuance for acquisitions, exercises of stock-based
awards or other corporate purposes, treasury stock is reduced based upon the average cost basis of shares held.
Income per Share
Basic income per share is computed using the weighted average number of common shares outstanding during each year.
Diluted income per share includes the effect of all dilutive potential common shares (primarily stock appreciation rights) outstanding
during each year. The Company applies the two-class method of computing income per share. The two-class method is an earnings
allocation formula that determines income per share for common stock and for participating securities, according to dividends
declared and participation rights in undistributed earnings. The Company’s nonvested stock awards are considered to be a class
of participating security. All per share data has been restated to reflect the 5% stock dividend distributed in December 2018.
71
2. Loans and Allowance for Loan Losses
Major classifications within the Company’s held for investment loan portfolio at December 31, 2018 and 2017 are as follows:
(In thousands)
Commercial:
Business
Real estate — construction and land
Real estate — business
Personal Banking:
Real estate — personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans
2018
2017
$
5,106,427 $
4,958,554
869,659
968,820
2,875,788
2,697,452
2,127,083
1,955,572
376,399
814,134
15,236
2,062,787
2,104,487
400,587
783,864
7,123
$
14,140,298 $
13,983,674
Loans to directors and executive officers of the Parent and the Bank, and to their affiliates, are summarized as follows:
(In thousands)
Balance at January 1, 2018
Additions
Amounts collected
Amounts written off
Balance, December 31, 2018
$
$
47,225
127,253
(128,540)
—
45,938
Management believes all loans to directors and executive officers have been made in the ordinary course of business with
normal credit terms, including interest rate and collateral considerations, and do not represent more than a normal risk of collection.
The activity in the table above includes draws and repayments on several lines of credit with business entities. There were no
outstanding loans at December 31, 2018 to principal holders (over 10% ownership) of the Company’s common stock.
The Company’s lending activity is generally centered in Missouri, Illinois, Kansas and other nearby states including Oklahoma,
Colorado, Iowa, Ohio, Texas, and others. The Company maintains a diversified portfolio with limited industry concentrations of
credit risk. Loans and loan commitments are extended under the Company’s normal credit standards, controls, and monitoring
features. Most loan commitments are short or intermediate term in nature. Commercial loan maturities generally range from one
to seven years. Collateral is commonly required and would include such assets as marketable securities and cash equivalent assets,
accounts receivable and inventory, equipment, other forms of personal property, and real estate. At December 31, 2018, unfunded
loan commitments totaled $11.2 billion (which included $5.3 billion in unused approved lines of credit related to credit card loan
agreements) which could be drawn by customers subject to certain review and terms of agreement. At December 31, 2018, loans
totaling $3.7 billion were pledged at the FHLB as collateral for borrowings and letters of credit obtained to secure public deposits.
Additional loans of $1.6 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.
The Company has a net investment in direct financing and sales type leases to commercial and industrial and tax-exempt
entities of $752.2 million and $737.7 million at December 31, 2018 and 2017, respectively, which is included in business loans
on the Company’s consolidated balance sheets. This investment includes deferred income of $62.6 million and $52.1 million at
December 31, 2018 and 2017, respectively. The net investment in operating leases amounted to $16.1 million and $17.4 million
at December 31, 2018 and 2017, respectively, and is included in other assets on the Company’s consolidated balance sheets.
72
Allowance for loan losses
A summary of the activity in the allowance for losses during the previous three years follows:
(In thousands)
Balance at December 31, 2015
Provision for loan losses
Deductions:
Loans charged off
Less recoveries
Net loans charged off (recoveries)
Balance at December 31, 2016
Provision for loan losses
Deductions:
Loans charged off
Less recoveries
Net loans charged off (recoveries)
Balance at December 31, 2017
Provision for loan losses
Deductions:
Loans charged off
Less recoveries
Net loans charged off (recoveries)
Balance at December 31, 2018
Commercial
Personal
Banking
Total
$
82,086 $
69,446 $
151,532
4,898
31,420
36,318
3,258
7,635
(4,377)
91,361
2,327
2,538
2,554
(16)
93,704
254
3,164
2,075
1,089
47,720
11,425
36,295
64,571
42,917
52,641
10,981
41,660
65,828
42,440
52,657
11,452
41,205
50,978
19,060
31,918
155,932
45,244
55,179
13,535
41,644
159,532
42,694
55,821
13,527
42,294
$
92,869 $
67,063 $
159,932
The following table shows the balance in the allowance for loan losses and the related loan balance at December 31, 2018 and
2017, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on
non-accrual status which are individually evaluated for impairment and other impaired loans deemed to have similar risk
characteristics, which are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
(In thousands)
December 31, 2018
Commercial
Personal Banking
Total
December 31, 2017
Commercial
Personal Banking
Total
Impaired Loans
All Other Loans
Allowance for
Loan Losses
Loans
Outstanding
Allowance for
Loan Losses
Loans
Outstanding
1,780 $
916
2,696 $
3,067 $
1,176
61,496
17,120
78,616
92,613
22,182
4,243 $
114,795
$
$
$
$
91,089 $
8,790,378
66,147
5,271,304
157,236 $ 14,061,682
90,637 $
8,532,213
64,652
5,336,666
155,289 $ 13,868,879
$
$
$
$
73
Impaired loans
The table below shows the Company’s investment in impaired loans at December 31, 2018 and 2017. These loans consist of
all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt
restructurings under current accounting guidance. These restructured loans are performing in accordance with their modified
terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be
collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt
restructurings" section on page 78.
(In thousands)
Non-accrual loans
Restructured loans (accruing)
Total impaired loans
2018
2017
12,536 $
66,080
78,616 $
11,983
102,812
114,795
$
$
The following table provides additional information about impaired loans held by the Company at December 31, 2018 and
2017, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance
has been provided.
(In thousands)
December 31, 2018
With no related allowance recorded:
Business
With an allowance recorded:
Business
Real estate – construction and land
Real estate – business
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Total
December 31, 2017
With no related allowance recorded:
Business
Real estate – business
Consumer
With an allowance recorded:
Business
Real estate – construction and land
Real estate – business
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Total
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
$
$
$
$
$
$
$
$
$
$
8,725 $
8,725 $
14,477 $
14,477 $
—
—
40,286 $
40,582 $
1,223
416
12,069
4,461
5,510
40
7,109
421
12,699
6,236
5,510
40
7,109
69,891 $
78,616 $
72,597 $
87,074 $
5,356 $
9,000 $
1,299
779
1,303
817
7,434 $
11,120 $
11
546
266
38
1
611
2,696
2,696
—
—
—
—
72,589 $
73,168 $
2,455
837
12,532
9,126
5,388
204
6,685
841
13,071
11,914
5,426
204
6,685
107,361 $
111,309 $
114,795 $
122,429 $
27
585
532
67
11
566
4,243
4,243
74
Total average impaired loans during 2018 and 2017 are shown in the table below.
(In thousands)
Commercial
2018
Personal
Banking
Total
Commercial
2017
Personal
Banking
Total
Average impaired loans:
Non-accrual loans
Restructured loans (accruing)
Total
$
$
7,619 $
2,122 $
73,261
16,526
80,880 $
18,648 $
9,741
89,787
99,528
$
$
9,658 $
3,989 $
49,070
17,539
58,728 $
21,528 $
13,647
66,609
80,256
The table below shows interest income recognized during the years ended December 31, 2018, 2017 and 2016 for impaired
loans held at the end of each respective period. This interest relates to accruing restructured loans, as discussed previously.
(In thousands)
Interest income recognized on impaired loans:
Business
Real estate – construction and land
Real estate – business
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Total
Years Ended December 31
2018
2017
2016
$
2,219 $
3,135 $
1,064
25
558
139
305
3
746
41
514
402
307
10
673
2
171
152
339
31
722
$
3,995 $
5,082 $
2,481
75
Delinquent and non-accrual loans
The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of
loans on non-accrual status, at December 31, 2018 and 2017.
(In thousands)
December 31, 2018
Commercial:
Business
Real estate – construction and land
Real estate – business
Personal Banking:
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total
December 31, 2017
Commercial:
Business
Real estate – construction and land
Real estate – business
Personal Banking:
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total
Credit quality
Current or Less
Than 30 Days
Past Due
30 – 89 Days
Past Due
90 Days Past
Due and Still
Accruing
Non-accrual
Total
$
5,086,912
$
10,057 $
473 $
8,985 $
5,106,427
867,692
2,867,347
2,118,045
1,916,320
374,830
792,334
14,937
1,963
6,704
6,041
35,608
875
11,140
299
—
22
1,165
3,644
694
10,660
—
4
869,659
1,715
2,875,788
1,832
—
—
—
—
2,127,083
1,955,572
376,399
814,134
15,236
$
14,038,417
$
72,687 $
16,658 $
12,536 $
14,140,298
$
4,949,148 $
3,085 $
374 $
5,947 $
4,958,554
967,321
2,694,234
2,050,787
2,067,025
397,349
764,568
6,840
1,473
482
6,218
32,674
1,962
10,115
283
21
—
3,321
3,954
1,276
9,181
—
5
968,820
2,736
2,697,452
2,461
834
—
—
—
2,062,787
2,104,487
400,587
783,864
7,123
$
13,897,272 $
56,292 $
18,127 $
11,983 $
13,983,674
The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s
internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment,
based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect
increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored
for early identification of credit deterioration. The “special mention” rating is attached to loans where the borrower exhibits
material negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to
meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial
situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied
to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that
the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments
consistent with acceptable and agreed upon terms of repayment, as discussed in Note 1.
76
(In thousands)
December 31, 2018
Pass
Special mention
Substandard
Non-accrual
Total
December 31, 2017
Pass
Special mention
Substandard
Non-accrual
Total
Commercial Loans
Business
Real Estate -
Construction
Real Estate -
Business
Total
$
4,915,042 $
866,527 $
2,777,374 $
8,558,943
$
$
84,391
98,009
8,985
1,917
1,211
4
5,106,427 $
869,659 $
51,845
44,854
1,715
2,875,788 $
138,153
144,074
10,704
8,851,874
4,740,013 $
955,499 $
2,593,005 $
8,288,517
59,177
153,417
5,947
10,614
2,702
5
50,577
51,134
2,736
120,368
207,253
8,688
$
4,958,554 $
968,820 $
2,697,452 $
8,624,826
The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information
is provided in the table in the above section on "Delinquent and non-accrual loans". In addition, FICO scores are obtained and
updated on a quarterly basis for most of the loans in the Personal Banking portfolio. The bank normally obtains a FICO score at
the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain
personal real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer
activities and are often underwritten with other collateral considerations. These loans totaled $201.7 million at December 31,
2018 and $219.2 million at December 31, 2017. The table also excludes consumer loans related to the Company's patient healthcare
loan program, which totaled $170.3 million at December 31, 2018 and $145.0 million at December 31, 2017. As the healthcare
loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and
consumer loans excluded below totaled less than 8% of the Personal Banking portfolio. For the remainder of loans in the Personal
Banking portfolio, the table below shows the percentage of balances outstanding at December 31, 2018 and 2017 by FICO score.
December 31, 2018
FICO score:
Under 600
600 – 659
660 – 719
720 – 779
780 and over
Total
December 31, 2017
FICO score:
Under 600
600 – 659
660 – 719
720 – 779
780 and over
Total
Personal Banking Loans
% of Loan Category
Real Estate -
Personal
Consumer
Revolving Home
Equity
Consumer Credit
Card
1.1%
3.1%
0.8%
4.4%
1.8
9.4
24.7
63.0
4.8
16.1
25.7
50.3
1.7
9.1
24.0
64.4
14.0
34.8
26.4
20.4
100.0%
100.0%
100.0%
100.0%
1.3 %
3.3 %
1.1 %
4.7 %
2.1
10.5
25.6
60.5
5.5
17.3
26.8
47.1
1.7
9.5
21.4
66.3
14.4
34.4
26.0
20.5
100.0 %
100.0 %
100.0 %
100.0 %
77
Troubled debt restructurings
As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings,
as shown in the table below. Restructured loans are those extended to borrowers who are experiencing financial difficulty and
who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it
probable that amounts due under the contractual terms will be collected. Commercial performing restructured loans are primarily
comprised of certain business, construction and business real estate loans classified as substandard, but renewed at rates judged
to be non market. These loans are performing in accordance with their modified terms, and because the Company believes it
probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being
recognized on an accrual basis. Troubled debt restructurings also include certain credit card and other small consumer loans under
various debt management and assistance programs. Modifications to these loans generally involve removing the available line
of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company also classified as consumer
bankruptcy certain personal real estate, revolving home equity, and consumer loans as troubled debt restructurings because they
were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis,
as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of
various other workout arrangements with consumer customers.
(In thousands)
Accruing loans:
Commercial
Assistance programs
Consumer bankruptcy
Other consumer
Non-accrual loans
Total troubled debt restructurings
December 31
2018
2017
$
$
50,904 $
88,588
7,410
4,103
3,663
9,759
6,941
3,916
3,367
7,796
75,839 $
110,608
The table below shows the balance of troubled debt restructurings by loan classification at December 31, 2018, in addition to
the period end balances of these restructured loans which the Company considers to have been in default at any time during the
past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to
interest or principal.
(In thousands)
Commercial:
Business
Real estate – construction and land
Real estate – business
Personal Banking:
Real estate – personal
Consumer
Revolving home equity
Consumer credit card
Balance 90 days past
due at any time
during previous 12
months
December 31, 2018
$
48,777 $
412
10,355
3,636
5,510
40
7,109
25
—
—
158
50
—
670
903
Total troubled debt restructurings
$
75,839
$
For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect
on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified
as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial
impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where
the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. However, the effects of modifications
to loans under various debt management and assistance programs were estimated to decrease interest income by approximately
$1.0 million on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly
involve extensions and other small modifications that did not include the forgiveness of principal or interest.
78
The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation,
including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt
restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects
to collect under contractual terms. Performing commercial loans having no concessions granted other than being renewed at non-
market interest rates are judged to have similar risk characteristics as non-troubled debt commercial loans and are collectively
evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing
personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during
bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies
or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans
and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.
If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be
based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing, troubled debt
restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses
is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin.
The Company had commitments of $1.8 million at December 31, 2018 to lend additional funds to borrowers with restructured
loans, compared to $7.6 million at December 31, 2017.
Loans held for sale
The Company designates certain long-term fixed rate personal real estate loan originations as held for sale, and the Company
has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with
the related economic hedges discussed in Note 18. The loans are primarily sold to FNMA, FHLMC, and GNMA. At December 31,
2018, the fair value of these loans was $13.5 million, and the unpaid principal balance was $13.0 million.
The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who
are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains
contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at
lower of cost or fair value, which at December 31, 2018 totaled $7.2 million.
At December 31, 2018, none of the loans held for sale were past due or on non-accrual status.
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $1.4 million and $681 thousand at December 31, 2018 and 2017,
respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.0 million
and $2.7 million at December 31, 2018 and 2017, respectively. Upon acquisition, these assets are recorded at fair value less
estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this
cost basis or fair value less estimated selling costs.
79
3. Investment Securities
Investment securities as shown in this report reflect revised categories as required by the Company's adoption of ASU 2016-01
"Recognition and Measurement of Financial Assets and Financial Liabilities", on January 1, 2018. That new guidance refined the
definition of equity securities and required their segregation from available for sale debt securities. For comparability purposes,
prior period disclosures in this report have been revised to show the new categorization. Investment securities, at fair value,
consisted of the following at December 31, 2018 and 2017:
(In thousands)
Available for sale debt securities
Trading debt securities
Equity securities:
Readily determinable fair value
No readily determinable fair value
Other:
Federal Reserve Bank stock
Federal Home Loan Bank stock
Private equity investments
Total investment securities
2018
2017
$ 8,538,041 $ 8,725,442
18,269
27,059
2,585
1,824
48,838
1,753
33,498
10,000
85,659
33,253
10,000
55,752
$ 8,698,666 $ 8,893,307
While changes in the fair value of available for sale debt securities continue to be recorded in the equity category of accumulated
other comprehensive income, the new guidance requires changes in the fair value of equity securities to be recorded in current
earnings. Also, the unrealized gain of $33.3 million (net of tax) on fair value on equity securities, which was previously recorded
in accumulated other comprehensive income at December 31, 2017, was reclassified to retained earnings on January 1, 2018.
Equity securities include common and preferred stock with readily determinable fair values that totaled $2.5 million at cost
and $2.6 million at fair value at December 31, 2018. The decline in these balances from prior periods was due to a third party
merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9 million. During the
year ended 2018, unrealized net losses of $332 thousand were recognized in current earnings on equity securities still held at
December 31, 2018.
Equity securities also include securities with a carrying value of $1.8 million that do not have readily determinable fair values.
The Company has elected, under the ASU, to measure these at cost minus impairment, if any, plus or minus changes resulting
from observable price changes for the identical or similar investment of the same issuer. The Company did not record any
impairment or other adjustments to the carrying amount of these investments during the period.
Other investment securities whose accounting is not addressed in the ASU include Federal Reserve Bank (FRB) stock, Federal
Home Loan Bank (FHLB) stock, and investments in portfolio concerns held by the Company's private equity subsidiaries. FRB
stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the
investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at
cost. The private equity investments, in the absence of readily ascertainable market values, are carried at estimated fair value.
The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair
value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for
sale debt securities by maturity groupings as of December 31, 2018 is shown in the following table. The weighted average yield
for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of
each security at December 31, 2018. Yields on tax exempt securities have not been adjusted for tax exempt status. The investment
portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, GNMA and
FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by residential and
commercial mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards,
automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they
may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company
does not have exposure to subprime-originated mortgage-backed or collateralized debt obligation instruments, and does not hold
any trust preferred securities.
80
(.04)*%
1.90*
1.61*
.64*
1.63*
1.53
2.03
2.71
3.10
2.32
2.45
2.37
2.58
3.22
2.50
2.85
2.85
2.62
2.79
(Dollars in thousands)
U.S. government and federal agency obligations:
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total U.S. government and federal agency obligations
Government-sponsored enterprise obligations:
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Amortized Cost
Fair Value
Weighted Average
Yield
$
23,577 $
434,973
386,708
69,228
914,486
24,991
96,601
34,985
42,893
23,518
435,690
381,419
67,025
907,652
24,743
95,619
34,460
40,956
Total government-sponsored enterprise obligations
199,470
195,778
State and municipal obligations:
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total state and municipal obligations
Mortgage and asset-backed securities:
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Total mortgage and asset-backed securities
Other debt securities:
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
Total other debt securities
98,429
656,762
493,994
73,600
98,675
659,525
496,997
72,842
1,322,785
1,328,039
3,253,433
1,053,854
1,518,976
5,826,263
16,500
249,870
73,225
339,595
3,214,985
1,047,716
1,511,614
5,774,315
16,418
245,319
70,520
332,257
Total available for sale debt securities
$
8,602,599 $
8,538,041
* Rate does not reflect inflation adjustment on inflation-protected securities
Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which
totaled $434.4 million, at fair value, at December 31, 2018. Interest paid on these securities increases with inflation and decreases
with deflation, as measured by the Consumer Price Index. At maturity, the principal paid is the greater of an inflation-adjusted
principal or the original principal. Included in state and municipal obligations are $14.2 million, at fair value, of auction rate
securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum
failed auction rates.
81
For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in
accumulated other comprehensive income, by security type.
(In thousands)
December 31, 2018
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
U.S. government and federal agency obligations
$
914,486 $
4,545 $
(11,379) $
Government-sponsored enterprise obligations
State and municipal obligations
Mortgage and asset-backed securities:
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Total mortgage and asset-backed securities
Other debt securities
Total
December 31, 2017
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
State and municipal obligations
Mortgage and asset-backed securities:
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Total mortgage and asset-backed securities
Other debt securities
Total
907,652
195,778
1,328,039
3,214,985
1,047,716
1,511,614
5,774,315
332,257
917,147
406,363
1,611,366
199,470
1,322,785
3,253,433
1,053,854
1,518,976
5,826,263
339,595
55
10,284
9,820
6,641
3,849
20,310
72
(3,747)
(5,030)
(48,268)
(12,779)
(11,211)
(72,258)
(7,410)
$
$
8,602,599 $
35,266 $
(99,824) $
8,538,041
917,494 $
4,096 $
(4,443) $
408,266
1,592,707
3,046,701
903,920
1,495,380
5,446,001
350,988
26
21,413
17,956
6,710
2,657
27,323
1,250
(1,929)
(2,754)
(23,744)
3,040,913
(4,837)
(5,237)
(33,818)
(1,178)
905,793
1,492,800
5,439,506
351,060
$
8,715,456 $
54,108 $
(44,122) $
8,725,442
The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special
emphasis and analysis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's),
whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based
on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are
prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual
payments required, and various other information related to the underlying collateral (including current delinquencies), collateral
loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment
speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge
probable ranges of credit loss. At December 31, 2018, the fair value of securities on this watch list was $57.7 million compared
to $68.0 million at December 31, 2017.
As of December 31, 2018, the Company had recorded OTTI of $14.1 million on certain non-agency mortgage-backed securities
with a current par value of $23.4 million. These securities, which are part of the watch list mentioned above, had an aggregate
fair value of $18.4 million at December 31, 2018. The Company does not intend to sell these securities and believes it is not likely
that it will be required to sell the securities before the recovery of their amortized cost.
The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated
life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant
inputs to the cash flow models used to calculate the credit losses on these securities at December 31, 2018 included the following:
Significant Inputs
Prepayment CPR
Projected cumulative default
Credit support
Loss severity
Range
0% - 25%
8% - 52%
0% - 20%
13% - 63%
82
The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for
sale debt securities.
(In thousands)
Cumulative OTTI credit losses at January 1
Credit losses on debt securities for which impairment was not previously recognized
Credit losses on debt securities for which impairment was previously recognized
Increase in expected cash flows that are recognized over remaining life of security
Cumulative OTTI credit losses at December 31
2018
2017
2016
14,199 $
14,080 $
14,129
58
10
(175)
111
274
(266)
—
270
(319)
14,092 $
14,199 $
14,080
$
$
Debt securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below,
along with the length of the impairment period.
(In thousands)
December 31, 2018
Less than 12 months
12 months or longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. government and federal agency obligations
$
317,699
$
6,515
$
116,728 $
4,864
$
434,427
$
11,379
Government-sponsored enterprise obligations
State and municipal obligations
Mortgage and asset-backed securities:
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Total mortgage and asset-backed securities
Other debt securities
Total
December 31, 2017
—
157,838
330,933
207,506
147,997
686,436
51,836
$ 1,213,809
U.S. government and federal agency obligations
$ 618,617
Government-sponsored enterprise obligations
State and municipal obligations
Mortgage and asset-backed securities:
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
286,393
282,843
1,320,689
577,017
786,048
$
$
—
704
1,502
1,085
728
3,315
564
188,846
257,051
3,747
4,326
188,846
414,889
1,927,268
657,685
813,427
3,398,380
260,682
46,766
11,694
10,483
68,943
6,846
2,258,201
865,191
961,424
4,084,816
312,518
11,098
$ 4,221,687 $
88,726
$ 5,435,496
$
— $
— $ 618,617
217
1,002
336,159
332,182
4,443
1,712
1,752
9,433
2,966
3,168
49,766
49,339
619,300
153,813
264,295
14,311
1,939,989
23,744
1,871
2,069
730,830
1,050,343
3,747
5,030
48,268
12,779
11,211
72,258
7,410
99,824
4,443
1,929
2,754
$
$
4,837
5,237
33,818
1,178
Total mortgage and asset-backed securities
2,683,754
15,567
1,037,408
18,251
3,721,162
Other debt securities
Total
144,090
727
20,202
451
164,292
$ 4,015,697 $
24,201
$ 1,156,715 $
19,921
$ 5,172,412 $
44,122
The available for sale debt portfolio included $5.4 billion of securities that were in a loss position at December 31, 2018,
compared to $5.2 billion at December 31, 2017. The total amount of unrealized loss on these securities was $99.8 million at
December 31, 2018, an increase of $55.7 million compared to the loss at December 31, 2017. This increase in losses was mainly
due to a rising rate environment.
83
The following table presents proceeds from sales of securities and the components of investment securities gains and losses
which have been recognized in earnings.
(In thousands)
Proceeds from sales of securities:
Available for sale debt securities
Equity securities
Other
Total proceeds
Investment securities gains (losses), net:
Available for sale debt securities:
Losses realized on called bonds
Gains realized on sales
Losses realized on sales
Other-than-temporary impairment recognized on debt securities
Equity securities:
Gains realized on donations of securities
Gains realized on sales
Losses realized on sales
Fair value adjustments, net
Other:
Gains realized on sales
Losses realized on sales
Fair value adjustments, net
Total investment securities gains (losses), net
For the Year Ended December 31
2018
2017
2016
$667,227 $ 779,793 $
2,047
3,026
19,307
$708,864 $ 792,380 $ 24,380
41,637
—
10,953
1,634
$
— $
(254) $
448
592
(10,101)
(68)
(10,287)
(385)
— 31,074
10,653
(10)
—
1,759
(8,917)
2,542
—
—
13,849
381
(880)
(5,833)
$
(488) $ 25,051 $
—
109
—
(270)
—
1,911
(7)
—
2,442
(499)
(3,739)
(53)
Investment securities with a fair value of $4.3 billion and $3.8 billion were pledged at December 31, 2018 and 2017, respectively,
to secure public deposits, securities sold under repurchase agreements, trust funds, and borrowings at the Federal Reserve Bank.
Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated
$463.3 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell
or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC,
no investment in a single issuer exceeds 10% of stockholders’ equity.
4. Land, Buildings and Equipment
Land, buildings and equipment consist of the following at December 31, 2018 and 2017:
(In thousands)
Land
Buildings and improvements
Equipment
Total
Less accumulated depreciation
Net land, buildings and equipment
2018
2017
$
91,603 $
545,510
226,666
863,779
530,660
$
333,119 $
94,992
540,204
216,876
852,072
516,962
335,110
Depreciation expense of $28.6 million in 2018, $29.1 million in 2017 and $30.1 million in 2016, was included in occupancy
expense and equipment expense in the consolidated statements of income. Repairs and maintenance expense of $16.9 million,
$16.4 million and $16.2 million for 2018, 2017 and 2016, respectively, was included in occupancy expense and equipment expense.
There has been no interest expense capitalized on construction projects in the past three years.
84
5. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
(In thousands)
Amortizable intangible
assets:
Core deposit premium
Mortgage servicing rights
Total
December 31, 2018
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net
Amount
$ 31,270
10,339
$ 41,609
$
$
(28,954)
(3,861)
(32,815)
$
$
— $ 2,316
—
6,478
— $ 8,794
$ 31,270
7,906
$ 39,176
$
$
(28,305)
(3,244)
(31,549)
$
$
— $ 2,965
4,653
(9)
$ 7,618
(9)
The carrying amount of goodwill and its allocation among segments at December 31, 2018 and 2017 is shown in the table
below. As a result of ongoing assessments, no impairment of goodwill was recorded in 2018, 2017 or 2016. Further, the annual
assessment of qualitative factors on January 1, 2019 revealed no likelihood of impairment as of that date.
(In thousands)
Consumer segment
Commercial segment
Wealth segment
Total goodwill
December 31,
2018
December 31,
2017
$
$
70,721 $
67,454
746
138,921 $
70,721
67,454
746
138,921
Changes in the net carrying amount of goodwill and other net intangible assets for the years ended December 31, 2018 and
2017 are shown in the following table.
(In thousands)
Balance at December 31, 2016
Originations
Amortization
Impairment reversal
Balance at December 31, 2017
Originations
Amortization
Impairment reversal
Goodwill
Core Deposit
Premium
Mortgage
Servicing Rights
$
138,921 $
3,841 $
—
—
—
138,921
—
—
—
—
(876)
—
2,965
—
(649)
—
2,868
2,234
(462)
13
4,653
2,433
(617)
9
6,478
Balance at December 31, 2018
$
138,921 $
2,316 $
Mortgage servicing rights (MSRs) are initially recorded at fair value and subsequently amortized over the period of estimated
servicing income. They are periodically reviewed for impairment and if impairment is indicated, recorded at fair value. Temporary
impairment, including impairment recovery, is effected through a change in a valuation allowance. At December 31, 2018, no
temporary impairment had been recognized. The fair value of the MSRs is based on the present value of expected future cash
flows, as further discussed in Note 16 on Fair Value Measurements.
Aggregate amortization expense on intangible assets for the years ended December 31, 2018, 2017 and 2016 was $1.3 million,
$1.3 million and $1.5 million, respectively. The following table shows the estimated future amortization expense based on existing
asset balances and the interest rate environment as of December 31, 2018. The Company’s actual amortization expense in any
given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage
interest rates, prepayment rates and other market conditions.
(In thousands)
2019
2020
2021
2022
2023
$
1,273
1,097
957
842
732
85
6. Deposits
At December 31, 2018, the scheduled maturities of certificates of deposit were as follows:
(In thousands)
Due in 2019
Due in 2020
Due in 2021
Due in 2022
Due in 2023
Thereafter
Total
$
1,286,425
281,717
54,939
18,301
15,933
807
$
1,658,122
The following table shows a detailed breakdown of the maturities of certificates of deposit, by size category, at December 31,
2018.
(In thousands)
Due in 3 months or less
Due in over 3 through 6 months
Due in over 6 through 12 months
Due in over 12 months
Total
Certificates of
Deposit under
$100,000
Certificates of
Deposit over
$100,000
116,068 $
446,300 $
117,046
176,591
176,386
245,994
184,426
195,311
Total
562,368
363,040
361,017
371,697
586,091 $
1,072,031 $
1,658,122
$
$
The aggregate amount of certificates of deposit that exceeded the $250,000 FDIC insurance limit totaled $824.0 million at
December 31, 2018.
7. Borrowings
At December 31, 2018, the Company's borrowings primarily consisted of federal funds purchased, securities sold under
agreements to repurchase (repurchase agreements), and securities sold short. The following table sets forth selected
information for federal funds purchased and repurchase agreements.
(Dollars in thousands)
Federal funds purchased and repurchase agreements:
2018
2017
2016
Year End
Weighted
Rate
Average
Weighted
Rate
Average Balance
Outstanding
Maximum
Outstanding at
any Month End
Balance at
December 31
.9%
1.3% $
1,514,144 $
1,981,761 $
1,956,389
.8
.4
.7
.3
1,462,387
1,266,093
1,984,071
1,723,905
1,507,138
1,723,905
Federal funds purchased and repurchase agreements comprised the majority of the Company's short-term borrowings
(borrowings with an original maturity of less than one year) at December 31, 2018, and $1.9 billion of these borrowings were
repurchase agreements, which generally have one day maturities and are mainly comprised of non-insured customer funds secured
by a portion of the Company's investment portfolio. Additional information about the securities pledged for repurchase agreements
is provided in Note 19 on Resale and Repurchase Agreements.
In addition to federal funds purchased and repurchase agreements, the Company's short-term borrowings at December 31,
2018 included $7.8 million of securities sold short.
The Bank is a member of the Des Moines FHLB and has access to term financing from the FHLB. These borrowings are
secured under a blanket collateral agreement including primarily residential mortgages as well as all unencumbered assets and
stock of the borrowing bank. At December 31, 2018, the Bank had no outstanding advances from the FHLB. The FHLB also
issues letters of credit to secure the Bank's obligations to certain depositors of public funds, which totaled $217.4 million at
December 31, 2018.
86
8. Income Taxes
The components of income tax expense from operations for the years ended December 31, 2018, 2017 and 2016 were as
follows:
(In thousands)
Year ended December 31, 2018:
U.S. federal
State and local
Total
Year ended December 31, 2017:
U.S. federal
State and local
Total
Year ended December 31, 2016:
U.S. federal
State and local
Total
Current
Deferred
Total
$
$
$
$
$
$
90,390 $
10,223
100,613 $
89,154 $
7,735
96,889 $
116,753 $
9,457
126,210 $
3,220 $
2,116
5,336 $
12,190 $
1,427
13,617 $
(2,036) $
(23)
(2,059) $
93,610
12,339
105,949
101,344
9,162
110,506
114,717
9,434
124,151
The components of income tax (benefit) expense recorded directly to stockholders’ equity for the years ended December 31,
2018, 2017 and 2016 were as follows:
(In thousands)
Unrealized gain (loss) on available for sale debt securities
Change in fair value on cash flow hedges
Accumulated pension (benefit) loss
Compensation expense for tax purposes in excess of amounts recognized for
financial reporting purposes
Income tax (benefit) expense allocated to stockholders’ equity
2018
2017
2016
$
$
(18,634) $
2,286
222
—
(16,126) $
2,104 $
—
(184)
—
1,920 $
(13,952)
—
778
(3,390)
(16,564)
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2018 and 2017 were as follows:
(In thousands)
Deferred tax assets:
Loans, principally due to allowance for loan losses
Unrealized loss on available for sale debt securities
Equity-based compensation
Deferred compensation
Unearned fee income
Accrued expenses
Private equity investments
Other
Total deferred tax assets
Deferred tax liabilities:
Equipment lease financing
Unrealized gain on available for sale debt securities
Land, buildings and equipment
Undistributed earnings of subsidiaries
Intangibles
Other
Total deferred tax liabilities
Net deferred tax liabilities
2018
2017
39,169 $
16,140
7,609
5,911
4,125
2,152
2,008
528
77,642
55,738
—
14,207
—
5,973
5,309
81,227
(3,585) $
40,341
—
8,201
5,647
3,701
5,245
5,473
4,430
73,038
45,825
13,603
8,592
7,094
5,732
6,569
87,415
(14,377)
$
$
Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to
realize the total deferred tax assets.
87
As a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, the Company revalued its deferred tax assets and
liabilities using the highest maximum corporate tax rate of 21%. This change was reported as a reduction of deferred tax expense.
The Company also adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," on January 1, 2017.
This adoption required all excess tax benefits and tax deficiencies arising from share-based award payments to be recognized as
income tax expense or benefit in the statements of income, while in previous periods these benefits and deficiencies were recognized
in equity. In 2018 and 2017, net excess tax benefits resulted from share-based award payments. The effects on federal tax expense
of both of these items are shown in the reconciliation below.
A reconciliation between the expected federal income tax expense using the federal statutory tax rate and the Company's actual
income tax expense is provided below. The federal statutory tax rate was 21% in 2018 and 35% in 2017 and 2016. The effective
tax rate is calculated by dividing income taxes by income before income taxes less the non-controlling interest expense.
(In thousands)
Computed “expected” tax expense
Increase (decrease) in income taxes resulting from:
Tax-exempt interest, net of cost to carry
Contribution of appreciated securities
State and local income taxes, net of federal tax benefit
Tax reform enactment
Share-based award payments
Other
Total income tax expense
2018
2017
2016
$
113,293 $
150,461 $
139,840
(11,502)
—
9,748
—
(3,928)
(1,662)
(20,295)
(10,864)
5,955
(6,753)
(6,613)
(1,385)
(20,033)
—
6,132
—
—
(1,788)
$
105,949 $
110,506 $
124,151
The gross amount of unrecognized tax benefits was $1.3 million and $1.2 million at December 31, 2018 and 2017, respectively,
and the total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $993 thousand and
$785 thousand, respectively. The activity in the accrued liability for unrecognized tax benefits for the years ended December 31,
2018 and 2017 was as follows:
(In thousands)
Unrecognized tax benefits at beginning of year
Gross increases – tax positions in prior period
Gross increases – current-period tax positions
Lapse of statute of limitations
Unrecognized tax benefits at end of year
2018
2017
$
$
1,208 $
31
322
(304)
1,257 $
1,228
5
268
(293)
1,208
The Company and its subsidiaries are subject to income tax by federal, state and local government taxing authorities. Tax
years 2015 through 2018 remain open to examination for U.S. federal income tax, and tax years 2014 through 2018 remain open
to examination in major state taxing jurisdictions.
9. Employee Benefit Plans
Employee benefits charged to operating expenses are summarized in the table below. Substantially all of the Company’s
employees are covered by a defined contribution (401(k)) plan, under which the Company makes matching contributions.
(In thousands)
Payroll taxes
Medical plans
401(k) plan
Pension plans
Other
Total employee benefits
2018
2017
2016
25,712 $
27,030
14,986
651
2,918
71,297 $
24,402 $
25,143
14,244
704
2,883
67,376 $
23,210
25,497
13,562
987
3,214
66,470
$
$
The Company adopted ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost”, on January 1, 2018, which required that the service cost component of net periodic pension cost be reported in the
same income statement line item as other compensation costs, while other components of net periodic pension cost be reported
separately from the service cost component. Historically, the Company has reported all components of pension cost in salaries
88
and employee benefits. Beginning in 2018, only the service cost component has been included in this category, and the other
components have been recorded in other non-interest expense. Prior period financial statements have not been revised because
the amount of the reclassification was not significant.
A portion of the Company’s employees are covered by a noncontributory defined benefit pension plan, however, participation
in the pension plan is not available to employees hired after June 30, 2003. All participants are fully vested in their benefit payable
upon normal retirement date, which is based on years of participation and compensation. Certain key executives also participate
in a supplemental executive retirement plan (the CERP) that the Company funds only as retirement benefits are disbursed. The
CERP carries no segregated assets. Since January 2011, all benefits accrued under the pension plan have been frozen. However,
the accounts continue to accrue interest at a stated annual rate. The CERP continues to provide credits based on hypothetical
contributions in excess of those permitted under the 401(k) plan. In the tables presented below, the pension plan and the CERP
are presented on a combined basis.
Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to
satisfy the statutory minimum required contribution as defined by the Pension Protection Act, which is intended to provide for
current service accruals and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these
requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. No contributions to
the defined benefit plan were made in 2018. The Company made a discretionary contribution of $5.5 million to its defined benefit
pension plan in 2017 in order to reduce pension guarantee premiums. The minimum required contribution for 2019 is expected
to be zero. The Company does not expect to make any further contributions in 2019 other than the necessary funding contributions
to the CERP. Contributions to the CERP were $24 thousand, $439 thousand and $21 thousand during 2018, 2017 and 2016,
respectively.
The following items are components of the net pension cost for the years ended December 31, 2018, 2017 and 2016.
(In thousands)
Service cost-benefits earned during the year
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of prior service cost
Amortization of unrecognized net loss
Net periodic pension cost
2018
2017
2016
$
$
651 $
621 $
3,756
(5,255)
(271)
2,267
3,826
(5,785)
(271)
2,313
1,148 $
704 $
500
3,944
(5,751)
(271)
2,565
987
The following table sets forth the pension plans’ funded status, using valuation dates of December 31, 2018 and 2017.
(In thousands)
Change in projected benefit obligation
Projected benefit obligation at prior valuation date
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Projected benefit obligation at valuation date
Change in plan assets
Fair value of plan assets at prior valuation date
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at valuation date
2018
2017
$
120,667 $
116,695
651
3,756
(6,622)
(6,389)
621
3,826
(6,780)
6,305
112,063
120,667
108,260
(2,244)
24
(6,622)
99,418
99,537
9,564
5,939
(6,780)
108,260
(12,407)
Funded status and net amount recognized at valuation date
$
(12,645) $
The accumulated benefit obligation, which represents the liability of a plan using only benefits as of the measurement date,
was $112.1 million and $120.7 million for the combined plans on December 31, 2018 and 2017, respectively.
89
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at
December 31, 2018 and 2017 are shown below, including amounts recognized in other comprehensive income during the periods.
All amounts are shown on a pre-tax basis.
(In thousands)
Prior service cost
Accumulated loss
Accumulated other comprehensive loss
Cumulative employer contributions in excess of net periodic benefit cost
Net amount recognized as an accrued benefit liability on the December 31 balance sheet
Net loss arising during period
Amortization of net loss
Amortization of prior service cost
Total recognized in other comprehensive income
Total expense recognized in net periodic pension cost and other comprehensive income
2018
2017
$
$
$
$
1,535 $
(32,342)
(30,807)
18,162
(12,645) $
(1,110)
2,267
(271)
886 $
(262) $
1,806
(33,499)
(31,693)
19,286
(12,407)
(2,527)
2,313
(271)
(485)
(1,189)
The estimated net loss and prior service cost to be amortized from accumulated other comprehensive income into net periodic
pension cost in 2019 is $2.1 million.
The following assumptions, on a weighted average basis, were used in accounting for the plans.
Determination of benefit obligation at year end:
Effective discount rate for benefit obligations
Assumed credit on cash balance accounts
Determination of net periodic benefit cost for year ended:
Effective discount rate for benefit obligations
Effective rate for interest on benefit obligations
Long-term rate of return on assets
Assumed credit on cash balance accounts
2018
2017
2016
4.14%
5.00%
3.57%
3.28%
5.00%
5.00%
3.57%
5.00%
3.95%
3.28%
6.00%
5.00%
4.05%
5.00%
4.16%
3.38%
6.00%
5.00%
90
The following table shows the fair values of the Company’s pension plan assets by asset category at December 31, 2018 and
2017. Information about the valuation techniques and inputs used to measure fair value are provided in Note 16 on Fair Value
Measurements.
(In thousands)
December 31, 2018
Assets:
U.S. government obligations
Government-sponsored enterprise obligations (a)
State and municipal obligations
Agency mortgage-backed securities (b)
Non-agency mortgage-backed securities
Asset-backed securities
Corporate bonds (c)
Equity securities and mutual funds: (d)
Mutual funds
Common stocks
International developed markets funds
Emerging markets funds
Total
December 31, 2017
Assets:
U.S. government obligations
Government-sponsored enterprise obligations (a)
State and municipal obligations
Agency mortgage-backed securities (b)
Non-agency mortgage-backed securities
Asset-backed securities
Corporate bonds (c)
Equity securities and mutual funds: (d)
Mutual funds
Common stocks
International developed markets funds
Emerging markets funds
Total
Fair Value Measurements
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Total Fair Value
$
2,994 $
2,994 $
— $
1,200
8,299
8,209
4,398
3,520
37,207
8,645
18,173
5,046
1,727
99,418 $
—
—
—
—
—
—
8,645
18,173
5,046
1,727
36,585 $
1,200
8,299
8,209
4,398
3,520
37,207
—
—
—
—
62,833 $
3,719 $
3,719 $
— $
$
$
1,282
8,527
7,896
4,891
3,833
37,457
6,979
23,744
7,870
2,062
108,260 $
$
—
—
—
—
—
—
6,979
23,744
7,870
2,062
44,374 $
1,282
8,527
7,896
4,891
3,833
37,457
—
—
—
—
63,886 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(a) This category represents bonds (excluding mortgage-backed securities) issued by agencies such as the Federal Home Loan Bank, the
Federal Home Loan Mortgage Corp and the Federal National Mortgage Association.
(b) This category represents mortgage-backed securities issued by the agencies mentioned in (a).
(c) This category represents investment grade bonds issued in the U.S., primarily by domestic issuers, representing diverse industries.
(d) This category represents investments in individual common stocks and equity funds. These holdings are diversified, largely across the
financial services, technology services, healthcare, electronic technology, and consumer goods industries.
The investment policy of the pension plan is designed for growth in principal, within limits designed to safeguard against
significant losses within the portfolio. The policy sets guidelines, which may change from time to time, regarding the types and
percentages of investments held. Currently, the policy includes guidelines such as holding bonds rated investment grade or better
and prohibiting investment in Company stock. The plan does not utilize derivatives. Management believes there are no significant
concentrations of risk within the plan asset portfolio at December 31, 2018. Under the current policy, the long-term investment
target mix for the plan is 35% equity securities and 65% fixed income securities. The Company regularly reviews its policies on
investment mix and may make changes depending on economic conditions and perceived investment risk.
91
Effective January 1, 2016, the Company changed the method used to estimate the interest cost component of net periodic
pension cost for its defined benefit pension plan. Prior to the change, the interest cost component was estimated by utilizing a
single weighted average discount rate derived from the yield curve used to measure the projected benefit obligation. Under the
new method, the interest cost component is estimated by applying the specific annual spot rates along the yield curve used in the
determination of the projected benefit obligation to the relevant projected cash flows. This change provides a more precise
measurement of the interest cost by improving the correlation between projected benefit cash flows and the corresponding spot
yield curve rates. The Company accounted for this change prospectively as a change in accounting estimate. The change resulted
in a decrease of approximately $900 thousand in the interest cost component of the estimated annual net periodic pension cost for
2016.
The assumed overall expected long-term rate of return on pension plan assets used in calculating 2018 pension plan expense
was 5.0%. Determination of the plan’s expected rate of return is based upon historical and anticipated returns of the asset classes
invested in by the pension plan and the allocation strategy currently in place among those classes. The rate used in plan calculations
may be adjusted by management for current trends in the economic environment. The 10-year annualized return for the Company’s
pension plan was 7.2%. During 2018, the plan’s assets lost 1.7% of their value, compared to a 9.6% rate of return in 2017. Returns
for any plan year may be affected by changes in the stock market and interest rates. The Company expects to incur pension expense
of $2.2 million in 2019, compared to $1.1 million in 2018.
The Company utilizes mortality tables published by the Society of Actuaries to incorporate mortality assumptions into the
measurement of the pension benefit obligation. At December 31, 2018, the Company utilized an updated mortality projection
scale, which decreased the pension benefit obligation on that date by approximately $300 thousand.
The following future benefit payments are expected to be paid:
(In thousands)
2019
2020
2021
2022
2023
2024 - 2028
$
7,163
7,353
7,510
7,473
7,509
36,468
10. Stock-Based Compensation and Directors Stock Purchase Plan*
The Company’s stock-based compensation is provided under a stockholder-approved plan which allows for issuance of various
types of awards, including stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards
and stock-based awards. During the past three years, stock-based compensation has been issued in the form of nonvested stock
awards and stock appreciation rights. At December 31, 2018, 2,515,678 shares remained available for issuance under the plan.
The stock-based compensation expense that was charged against income was $12.8 million, $12.1 million and $11.5 million for
the years ended December 31, 2018, 2017 and 2016, respectively. The total income tax benefit recognized in the income statement
for share-based compensation arrangements was $3.2 million, $4.5 million and $4.3 million for the years ended December 31,
2018, 2017 and 2016, respectively.
92
Nonvested Restricted Stock Awards
Nonvested stock is awarded to key employees by action of the Company's Compensation and Human Resources Committee
and Board of Directors. These awards generally vest after 4 to 7 years of continued employment, but vesting terms may vary
according to the specifics of the individual grant agreement. There are restrictions as to transferability, sale, pledging, or assigning,
among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant of restricted stock awards.
A summary of the status of the Company’s nonvested share awards as of December 31, 2018 and changes during the year then
ended is presented below.
Nonvested at January 1, 2018
Granted
Vested
Forfeited
Canceled
Shares
1,317,092
268,658
(376,489)
(28,321)
—
Weighted
Average Grant
Date Fair Value
36.82
$
57.28
30.73
44.12
—
Nonvested at December 31, 2018
1,180,940
$
43.24
The total fair value (at vest date) of shares vested during 2018, 2017 and 2016 was $21.5 million, $23.8 million and $10.9
million, respectively.
Stock Appreciation Rights
Stock appreciation rights (SARs) are granted with exercise prices equal to the market price of the Company’s stock at the date
of grant. SARs vest ratably over four years of continuous service and have 10-year contractual terms. All SARs must be settled
in stock under provisions of the plan. A summary of SAR activity during 2018 is presented below.
(Dollars in thousands, except per share data)
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at January 1, 2018
Granted
Forfeited
Expired
Exercised
Outstanding at December 31, 2018
Exercisable at December 31, 2018
1,237,804 $
177,001
(17,529)
(607)
(330,231)
1,066,438 $
561,527 $
35.36
55.63
45.82
43.14
29.96
40.22
34.57
6.7 years $
17,218
5.6 years $
12,239
In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date
of grant. The Black-Scholes model is a closed-end model that uses various assumptions as shown in the following table. Expected
volatility is based on historical volatility of the Company’s stock. The Company uses historical exercise behavior and other factors
to estimate the expected term of the SARs, which represents the period of time that the SARs granted are expected to be outstanding.
The risk-free rate for the expected term is based on the U.S. Treasury zero coupon spot rates in effect at the time of grant. The
per share average fair value and the model assumptions for SARs granted during the past three years are shown in the table below.
Weighted per share average fair value at grant date
Assumptions:
Dividend yield
Volatility
Risk-free interest rate
Expected term
2018
$11.84
2017
$11.37
2016
$6.47
1.6%
20.6%
2.7%
1.6%
21.1%
2.4%
2.2%
21.2%
1.8%
6.6 years
7.0 years
7.2 years
93
Additional information about stock options and SARs exercised is presented below.
(In thousands)
Intrinsic value of options and SARs exercised
Tax benefit realized from options and SARs exercised
2018
2017
2016
$
$
9,632 $
1,928 $
9,310
2,698
$
$
8,854
1,781
As of December 31, 2018, there was $27.3 million of unrecognized compensation cost related to unvested SARs and stock
awards. This cost is expected to be recognized over a weighted average period of approximately 3.2 years.
Directors Stock Purchase Plan
The Company has a directors stock purchase plan whereby outside directors of the Company and its subsidiaries may elect to
use their directors’ fees to purchase Company stock at market value each month end. Remaining shares available for issuance
under this plan were 53,160 at December 31, 2018. In 2018, 31,235 shares were purchased at an average price of $57.69, and in
2017, 16,666 shares were purchased at an average price of $51.95.
* All share and per share amounts in this note have been restated for the 5% common stock dividend distributed in 2018.
11. Accumulated Other Comprehensive Income (Loss)
The table below shows the activity and accumulated balances for components of other comprehensive income (loss). The
largest component is the unrealized holding gains and losses on available for sale debt securities. Unrealized gains and losses on
debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately
below. Another component is amortization from other comprehensive income of losses associated with pension benefits, which
occurs as the amortization is included in current net periodic benefit cost. The remaining component is gains and losses in fair
value on certain interest rate floors that have been designated as cash flow hedging instruments.
(In thousands)
Balance January 1, 2018
Unrealized Gains (Losses)
on Securities (1)
OTTI
Other
Pension
Loss
Unrealized
Gains (Losses)
on Cash Flow
Hedge
Derivatives (2)
Total
Accumulated
Other
Comprehensive
Income (Loss)
$
3,411
$
30,326
$ (19,629) $
— $
14,108
ASU 2018-02 Reclassification of tax rate change
715
6,359
(4,142)
ASU 2016-01 Reclassification of unrealized gain on equity
securities
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income
Current period other comprehensive income (loss), before tax
Income tax (expense) benefit
Current period other comprehensive income (loss), net of tax
Transfer of unrealized gain on securities for which impairment was
not previously recognized
Balance December 31, 2018
Balance January 1, 2017
$
$
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income
Current period other comprehensive income (loss), before tax
Income tax (expense) benefit
Current period other comprehensive income (loss), net of tax
Transfer of unrealized gain on securities for which impairment was
not previously recognized
—
—
—
(438)
(33,320)
(73,725)
—
(1,110)
8,381
68
(447)
1,996
(370)
(74,172)
93
18,541
(277)
(55,631)
886
(222)
664
760
9,141
(2,286)
6,855
2,932
(33,320)
(66,892)
2,377
(64,515)
16,126
(48,389)
12
(12)
—
—
—
3,861
$ (52,278) $ (23,107) $
6,855
$
(64,669)
2,975
$
27,328
$ (19,328) $
— $
279
385
664
(252)
412
36,307
(2,527)
(31,433)
2,042
4,874
(1,852)
3,022
(485)
184
(301)
24
(24)
—
—
—
—
—
—
—
10,975
34,059
(29,006)
5,053
(1,920)
3,133
—
Balance December 31, 2017
$
3,411
$
30,326
$ (19,629) $
— $
14,108
(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the
consolidated statements of income.
(2) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "interest and fees on loans" in the consolidated
statements of income.
94
The requirement to revalue deferred tax assets and liabilities in the period of enactment stranded the effects of the tax rate
change, mandated by the Tax Cuts and Jobs Act, in accumulated other comprehensive income. In response, the FASB issued ASU
2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", which the Company adopted
on January 1, 2018. This ASU allowed the reclassification of the stranded tax effects from accumulated other comprehensive
income (loss) (as shown in the table above) to retained earnings.
As mentioned in Note 1, new accounting guidance for investment securities, which was effective January 1, 2018, required
the reclassification of unrealized gains on equity securities from accumulated other comprehensive income (loss) to retained
earnings (also shown above).
12. Segments
The Company segregates financial information for use in assessing its performance and allocating resources among three
operating segments: Consumer, Commercial, and Wealth. The Consumer segment includes the consumer portion of the retail
branch network (loans, deposits and other personal banking services), indirect and other consumer financing, and consumer debit
and credit card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this
consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment. The Commercial
segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing,
international services, and business, government deposit, and related commercial cash management services, as well as merchant
and commercial bank card products. The Commercial segment also includes the Capital Markets Group, which sells fixed income
securities and provides investment safekeeping and bond accounting services. The Wealth segment provides traditional trust and
estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various
loan and deposit related services to its private banking customers.
The Company’s business line reporting system derives segment information from the internal profitability reporting system
used by management to monitor and manage the financial performance of the Company. This information is based on internal
management accounting procedures and methods, which have been developed to reflect the underlying economics of the businesses.
These methodologies are applied in connection with funds transfer pricing and assignment of overhead costs among segments.
Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used
for (provided by) assets and liabilities based on their maturity, prepayment and/or repricing characteristics. Income and expense
that directly relate to segment operations are recorded in the segment when incurred. Expenses that indirectly support the segments
are allocated based on the most appropriate method available.
The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, and cash) and funds provided
(e.g., deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to
each new source or use of funds with a maturity, based on current swap rates, thus determining an interest spread at the time of
the transaction. Non-maturity assets and liabilities are valued using weighted average pools. The funds transfer pricing process
attempts to remove interest rate risk from valuation, allowing management to compare profitability under various rate environments.
95
The following tables present selected financial information by segment and reconciliations of combined segment totals to
consolidated totals. There were no material intersegment revenues between the three segments. Management periodically makes
changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these
changes are reflected in prior year information presented below.
Segment Income Statement Data
(In thousands)
Year ended December 31, 2018:
Net interest income
Provision for loan losses
Non-interest income
Investment securities losses, net
Non-interest expense
Income before income taxes
Year ended December 31, 2017:
Net interest income
Provision for loan losses
Non-interest income
Investment securities gains, net
Non-interest expense
Income before income taxes
Year ended December 31, 2016:
Net interest income
Provision for loan losses
Non-interest income
Investment securities losses, net
Non-interest expense
Income before income taxes
Consumer
Commercial
Wealth
Segment Totals
Other/
Elimination
Consolidated
Totals
$
$
$
$
$
296,228 $
(41,280)
126,253
—
(287,473)
93,728 $
279,031 $
(41,829)
121,362
—
(275,734)
82,830 $
268,654 $
(36,042)
116,185
—
(266,258)
$
82,539 $
345,221 $
(1,134)
202,527
—
(297,847)
248,767 $
329,087 $
205
184,577
—
(281,845)
232,024 $
311,704 $
4,378
187,350
—
(272,398)
231,034 $
46,946 $
32
173,026
—
(123,576)
96,428 $
47,264 $
(41)
158,175
—
(120,461)
84,937 $
44,113 $
(122)
144,661
—
(113,888)
74,764 $
688,395 $
(42,382)
501,806
—
(708,896)
438,923 $
655,382 $
(41,665)
464,114
—
(678,040)
399,791 $
624,471 $
(31,786)
448,196
—
(652,544)
388,337 $
135,430 $
(312)
(465)
(488)
(28,925)
105,240 $
78,297 $
(3,579)
(2,851)
25,051
(66,303)
30,615 $
55,578 $
(4,532)
(1,640)
(53)
(36,685)
12,668 $
823,825
(42,694)
501,341
(488)
(737,821)
544,163
733,679
(45,244)
461,263
25,051
(744,343)
430,406
680,049
(36,318)
446,556
(53)
(689,229)
401,005
The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column
include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio,
and the effect of certain expense allocations to the segments. The provision for loan losses in this category contains the difference
between net loan charge-offs assigned directly to the segments and the recorded provision for loan loss expense. Included in this
category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment.
Segment Balance Sheet Data
(In thousands)
Average balances for 2018:
Assets
Loans, including held for sale
Goodwill and other intangible assets
Deposits
Average balances for 2017:
Assets
Loans, including held for sale
Goodwill and other intangible assets
Deposits
$
$
Consumer
Commercial
Wealth
Segment Totals
Other/
Elimination
Consolidated
Totals
2,541,627 $
2,401,657
78,062
10,210,506
9,115,738 $
8,939,696
68,300
8,029,248
1,243,806 $
1,233,780
746
1,871,596
12,901,171 $
12,575,133
147,108
20,111,350
11,765,064 $
1,370,439
—
19,902
24,666,235
13,945,572
147,108
20,131,252
2,610,045 $
2,471,578
76,734
10,190,613
8,830,584 $
8,635,035
68,538
8,301,004
1,218,598 $
1,209,792
746
2,090,582
12,659,227 $
12,316,405
146,018
20,582,199
12,372,381 $
1,312,746
—
12,587
25,031,608
13,629,151
146,018
20,594,786
The above segment balances include only those items directly associated with the segment. The “Other/Elimination” column
includes unallocated bank balances not associated with a segment (such as investment securities and federal funds sold), balances
relating to certain other administrative and corporate functions, and eliminations between segment and non-segment balances.
This column also includes the resulting effect of allocating such items as float, deposit reserve and capital for the purpose of
computing the cost or credit for funds used/provided.
96
The Company’s reportable segments are strategic lines of business that offer different products and services. They are managed
separately because each line services a specific customer need, requiring different performance measurement analyses and
marketing strategies. The performance measurement of the segments is based on the management structure of the Company and
is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily
indicative of the segments’ financial condition and results of operations if they were independent entities.
13. Common and Preferred Stock*
On December 17, 2018, the Company distributed a 5% stock dividend on its $5 par common stock for the 25th consecutive
year. All per common share data in this report has been restated to reflect the stock dividend.
The Company applies the two-class method of computing income per share, as nonvested share-based awards that pay
nonforfeitable common stock dividends are considered securities which participate in undistributed earnings with common stock.
The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and
for common stock. Income per share attributable to common stock is shown in the following table. Nonvested share-based awards
are further discussed in Note 10 on Stock-Based Compensation.
Basic income per share is based on the weighted average number of common shares outstanding during the year. Diluted
income per share gives effect to all dilutive potential common shares that were outstanding during the year. Presented below is
a summary of the components used to calculate basic and diluted income per common share, which have been restated for all
stock dividends.
(In thousands, except per share data)
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.
Less preferred stock dividends
Net income available to common shareholders
Less income allocated to nonvested restricted stock
Net income allocated to common stock
Weighted average common shares outstanding
Basic income per common share
Diluted income per common share:
Net income available to common shareholders
Less income allocated to nonvested restricted stock
Net income allocated to common stock
Weighted average common shares outstanding
Net effect of the assumed exercise of stock-based awards -- based on the treasury
stock method using the average market price for the respective periods
Weighted average diluted common shares outstanding
Diluted income per common share
2018
2017
2016
$
$
$
$
$
$
433,542 $
9,000
424,542
4,558
419,984 $
110,812
3.79 $
424,542 $
4,547
419,995 $
110,812
319,383 $
9,000
310,383
3,848
306,535 $
110,833
2.77 $
310,383 $
3,838
306,545 $
110,833
343
111,155
391
111,224
3.78 $
2.76 $
275,391
9,000
266,391
3,698
262,693
110,505
2.38
266,391
3,692
262,699
110,505
295
110,800
2.37
Unexercised stock appreciation rights of 223 thousand, 159 thousand and 88 thousand were excluded from the computation
of diluted income per share for the years ended December 31, 2018, 2017 and 2016, respectively, because their inclusion would
have been anti-dilutive.
The Company has 6,000,000 depositary shares outstanding, representing 6,000 shares of 6.00% Series B Non-Cumulative
Perpetual Preferred Stock, par value $1.00 per share, having an aggregate liquidation preference of $150.0 million (“Series B
Preferred Stock”). Each depositary share has a liquidation preference of $25 per share. Dividends on the Series B Preferred Stock,
if declared, accrue and are payable quarterly, in arrears, at a rate of 6.00%. The Series B Preferred Stock qualifies as Tier 1 capital
for the purposes of the regulatory capital calculations. In the event that the Company does not declare and pay dividends on the
Series B Preferred Stock for the most recent dividend period, the ability of the Company to declare or pay dividends on, purchase,
redeem or otherwise acquire shares of its common stock or any securities of the Company that rank junior to the Series B Preferred
Stock is subject to certain restrictions under the terms of the Series B Preferred Stock.
The Company maintains a treasury stock buyback program authorized by its Board of Directors. The most recent authorization
in October 2015 approved future purchases of 5,000,000 shares of the Company's common stock. At December 31, 2018, 2,249,563
shares of common stock remained available for purchase under the current authorization.
97
The table below shows activity in the outstanding shares of the Company’s common stock during the past three years. Shares
in the table below are presented on an historical basis and have not been restated for the annual 5% stock dividends.
(In thousands)
Shares outstanding at January 1
Issuance of stock:
Awards and sales under employee and director plans
5% stock dividend
Other purchases of treasury stock
Other
Shares outstanding at December 31
Years Ended December 31
2018
2017
2016
106,615
101,461
97,226
416
5,305
(1,194)
(13)
111,129
403
5,078
(315)
(12)
106,615
397
4,831
(959)
(34)
101,461
* Except as noted in the above table, all share and per share amounts in this note have been restated for the 5% common stock dividend distributed in 2018.
98
14. Regulatory Capital Requirements
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that could
have a direct material effect on the Company’s financial statements. The regulations require the Company to meet specific capital
adequacy guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company’s capital classification is also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
The following tables show the capital amounts and ratios for the Company (on a consolidated basis) and the Bank, together
with the minimum capital adequacy and well-capitalized capital requirements, at the last two year ends.
(Dollars in thousands)
December 31, 2018
Total Capital (to risk-weighted assets):
Actual
Minimum Capital
Adequacy Requirement
Well-Capitalized Capital
Requirement
Amount
Ratio
Amount
Ratio
Amount
Ratio
Commerce Bancshares, Inc. (consolidated)
$ 3,022,023
15.82% $ 1,528,317
8.00%
N.A.
N.A.
Commerce Bank
2,655,591
13.98
1,519,169
8.00
$ 1,898,962
10.00%
Tier I Capital (to risk-weighted assets):
Commerce Bancshares, Inc. (consolidated)
$ 2,861,016
14.98% $ 1,146,238
6.00%
N.A.
Commerce Bank
2,494,584
13.14
1,139,377
6.00
$ 1,519,169
Tier I Common Capital (to risk-weighted assets):
Commerce Bancshares, Inc. (consolidated)
$ 2,716,232
14.22% $ 859,678
4.50%
N.A.
Commerce Bank
2,494,584
13.14
854,533
4.50
$ 1,234,325
Tier I Capital (to adjusted quarterly average assets):
(Leverage Ratio)
Commerce Bancshares, Inc. (consolidated)
$ 2,861,016
11.52% $ 993,564
4.00%
N.A.
Commerce Bank
December 31, 2017
Total Capital (to risk-weighted assets):
2,494,584
10.07
991,185
4.00
$ 1,238,981
N.A.
8.00%
N.A.
6.50%
N.A.
5.00%
Commerce Bancshares, Inc. (consolidated)
$ 2,747,863
14.35% $ 1,531,996
8.00%
N.A.
N.A.
Commerce Bank
2,428,789
12.76
1,522,361
8.00
$ 1,902,951
10.00%
Tier I Capital (to risk-weighted assets):
Commerce Bancshares, Inc. (consolidated)
$ 2,567,264
13.41% $ 1,148,997
6.00%
N.A.
Commerce Bank
2,268,131
11.92
1,141,771
6.00
$ 1,522,361
Tier I Common Capital (to risk-weighted assets):
Commerce Bancshares, Inc. (consolidated)
$ 2,422,480
12.65% $ 861,748
4.50%
N.A.
Commerce Bank
2,268,131
11.92
856,328
4.50
$ 1,236,918
Tier I Capital (to adjusted quarterly average assets):
(Leverage Ratio)
Commerce Bancshares, Inc. (consolidated)
$ 2,567,264
10.39% $ 988,653
4.00%
N.A.
Commerce Bank
2,268,131
9.20
986,240
4.00
$ 1,232,800
N.A.
8.00%
N.A.
6.50%
N.A.
5.00%
The minimum required ratios for well-capitalized banks (under prompt corrective action provisions) are 6.5% for Tier I common
capital, 8.0% for Tier I capital, 10.0% for Total capital and 5.0% for the leverage ratio.
At December 31, 2018 and 2017, the Company met all capital requirements to which it is subject, and the Bank’s capital
position exceeded the regulatory definition of well-capitalized.
99
15. Revenue from Contracts with Customers
The Company adopted ASU 2014-09, "Revenue from Contracts with Customers," and its related amendments on January 1,
2018. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. For the year ended December 31, 2018, approximately 62% of the Company’s total revenue was comprised
of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to
this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.
The Company has concluded that the new guidance did not require any significant change to its revenue recognition processes.
However, application of the new guidance resulted in a reclassification of certain bank card related network and rewards costs,
previously classified as non-interest expense, to a reduction to non-interest income in the Company’s consolidated statements of
income. The reclassification had no effect on prior period net income or net income per share. The Company adopted ASU
2014-09 on a full retrospective basis, in which each prior reporting period has been presented in accordance with the new guidance.
The table below shows the effect of this reclassification on bank card fee income and non-interest expense for the years ended
December 31, 2017 and 2016.
(In thousands)
Non-interest income:
Bank card transaction fees
Total non-interest income
Non-interest expense:
Data processing and software
Other
Total non-interest expense
For the year ended December 31, 2017
Adoption of
ASU 2014-09 As Adjusted
As Previously
Reported
For the Year Ended December 31, 2016
As Previously
Reported
Adoption of
ASU 2014-09
As Adjusted
$
$
180,441 $
(25,341) $
155,100
$
181,879 $
(27,836) $
154,043
486,604
(25,341)
461,263
474,392
(27,836)
446,556
92,246 $
(11,248) $
77,459
769,684
(14,093)
(25,341)
80,998
63,366
744,343
$
92,722 $
(13,133) $
74,202
717,065
(14,703)
(27,836)
79,589
59,499
689,229
The following table disaggregates non-interest income subject to ASU 2014-09 by major product line.
(In thousands)
Bank card transaction fees
Trust fees
Deposit account charges and other fees
Consumer brokerage services
Other non-interest income
Total non-interest income from contracts with
customers
Other non-interest income (a)
Total non-interest income
For the Year Ended December 31
2018
2017
2016
$
171,576 $
155,100 $
147,964
94,517
15,807
37,440
467,304
34,037
135,159
90,060
14,630
30,128
425,077
36,186
$
501,341 $
461,263 $
154,043
121,795
86,394
13,784
31,326
407,342
39,214
446,556
(a) This revenue is not within the scope of ASU 2014-09, and includes fees relating to capital market activities, loan fees and sales,
derivative instruments, standby letters of credit and various other transactions.
The following table presents the opening and closing receivable balances for the years ended December 31, 2018 and 2017
for the Company’s significant revenue categories subject to ASU 2014-09.
(In thousands)
Bank card transaction fees
Trust fees
Deposit account charges and other fees
Consumer brokerage services
December 31,
2018
December 31,
2017
December 31,
2016
$
13,035 $
13,315 $
14,686
2,721
6,107
559
2,802
5,597
380
2,681
5,735
309
For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied
as of the end of a reporting period. A description of these revenue categories follows.
100
Bank Card Transaction Fees
The following table presents the components of bank card fee income.
(In thousands)
Debit card:
Fee income
Expense for network charges
Net debit card fees
Credit card:
Fee income
Expense for network charges and rewards
Net credit card fees
Corporate card:
Fee income
Expense for network charges and rewards
Net corporate card fees
Merchant:
Fee income
Fees to cardholder banks
Expense for network charges
Net merchant fees
For the Years Ended December 31
2018
2017
2016
$
41,522 $
40,134 $
(1,784)
39,738
26,799
(13,834)
12,965
199,651
(100,011)
99,640
30,241
(7,831)
(3,177)
19,233
(4,498)
35,636
25,275
(10,699)
14,576
179,642
(94,823)
84,819
31,863
(8,228)
(3,566)
20,069
39,430
(5,989)
33,441
24,650
(9,816)
14,834
166,576
(83,851)
82,725
37,407
(9,585)
(4,779)
23,043
154,043
Total bank card transaction fees
$
171,576 $
155,100 $
The majority of debit and credit card fees are reported in the Consumer segment, while corporate card and merchant fees are
reported in the Commercial segment.
Debit and Credit Card Fees
The Company issues debit and credit cards to its retail and commercial banking customers who use the cards to purchase goods
and services from merchants through an electronic payment system. As a card issuer, the Company earns fees, including interchange
income, for processing the cardholder’s purchase transaction with a merchant through a settlement network. Purchases are charged
directly to a customer’s checking account (in the case of a debit card), or are posted to a customer’s credit card account. The fees
earned are established by the settlement network and are dependent on the type of transaction processed but are typically based
on a per unit charge. Interchange income, the largest component of debit and credit card fees, is settled daily through the networks.
The services provided to the cardholders include issuing and maintaining cards, settling purchases with merchants, and maintaining
memberships in various card networks to facilitate processing. These services are considered one performance obligation, as one
of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for
each purchase transaction, and income is immediately recognized.
In order to participate in the settlement network process, the Company must pay various transaction-related costs, established
by the networks, including membership fees and a per unit charge for each transaction. These expenses are recorded net of the
card fees earned.
Consumer credit card products offer cardholders rewards that can be later redeemed for cash or goods or services to encourage
card usage. Reward programs must meet network requirements based on the type of card issued. The expense associated with
the rewards granted are recorded net of the credit card fees earned.
Commercial card products offer cash rewards to corporate cardholders to encourage card usage in facilitating corporate
payments. The Company pays cash rewards based on contractually agreed upon amounts, normally as a percent of each sales
transaction. The expense associated with the cash rewards program is recorded net of the corporate card fees earned.
101
Merchant Fees
The Company offers merchant processing services to its business customers to enable them to accept credit and debit card
payments. Merchant processing activities include gathering merchant sales information, authorizing sales transactions and
collecting the funds from card issuers using the networks. The merchant is charged a merchant discount fee for the services based
on agreed upon pricing between the merchant and the Company. Merchant fees are recorded net of outgoing interchange costs
paid to the card issuing banks and net of other network costs as show in the table above.
Merchant services provided are considered one performance obligation, as one of the services would not be performed without
the others. The performance obligation is satisfied as services are rendered for each settlement transaction and income is
immediately recognized. Income earned from merchant fees settles with the customer according to terms negotiated in individual
customer contracts. The majority of customers settle with the Company at least monthly.
Trust Fees
The following table shows the components of revenue within trust fees.
(In thousands)
Private client
Institutional
Other
Total trust fees
For the Years Ended December 31
2018
2017
2016
$
$
111,533 $
100,358 $
29,241
7,190
27,477
7,324
90,992
24,565
6,238
147,964 $
135,159 $
121,795
This revenue is reported in the Wealth segment.
The Company provides trust and asset management services to both private client and institutional trust customers including
asset custody, investment advice, and reporting and administrative services. Other specialized services such as tax preparation,
financial planning, representation and other related services are provided as needed. Trust fees are generally earned monthly and
billed based on a rate multiplied by the fair value of the customer trust assets. The majority of customer trust accounts are billed
monthly. However, some accounts are billed quarterly, and a small number of accounts are billed semi-annually or annually, in
accordance with agreements in place with the customer. The Company accrues trust fees monthly based on an estimate of fees
due and either directly charges the customer’s account the following month or invoices the customer for fees due according to the
billing schedule.
The Company maintains written product pricing information which is used to bill each trust customer based on the services
provided. Providing trust services is considered to be a single performance obligation that is satisfied on a monthly basis, involving
the monthly custody of customer assets, statement rendering, periodic investment advice where applicable, and other specialized
services as needed. As such, performance obligations are considered to be satisfied at the conclusion of each month while trust
fee income is also recorded monthly.
Deposit Account Charges and Other Fees
The following table shows the components of revenue within deposit account charges and other fees.
(In thousands)
Corporate cash management fees
Overdraft and return item fees
Other service charges on deposit
accounts
Total deposit account charges and
other fees
$
$
For the Years Ended December 31
2018
2017
2016
38,468 $
31,468
36,044 $
30,576
24,581
23,440
94,517 $
90,060 $
36,131
29,350
20,913
86,394
Approximately half of this revenue is reported in the Consumer segment, while the remainder is reported in the Commercial
segment.
The Company provides corporate cash management services to its business and non-profit customers to meet their various
transaction processing needs. Such services include deposit and check processing, lockbox, remote deposit, reconciliation, on-
line banking and other similar transaction processing services. The Company maintains unit prices for each type of service, and
102
the customer is billed based on transaction volumes processed monthly. The customer is usually billed either monthly or quarterly,
however, some customers may be billed semi-annually or annually. The customer may pay for the cash management services
provided either by paying in cash or using the value of deposit balances (formula provided to the customer) held at the Company.
The Company’s performance obligation for corporate cash management services is the processing of items over a monthly term,
and the obligations are satisfied at the conclusion of each month.
Overdraft fees are charged to customers when daily checks and other withdrawals to customers’ accounts exceed balances on
hand. Fees are based on a unit price multiplied by the number of items processed whose total amounts exceed the available account
balance. The daily overdraft charge is calculated and the fee is posted to the customer’s account each day. The Company’s
performance obligations for overdraft transactions is based on the daily transaction processed and the obligation is satisfied as
each day’s transaction processing is concluded.
Other deposit fees include numerous smaller fees such as monthly statement fees, foreign ATM processing fees, identification
restoration fees, and stop payment fees. Such fees are mostly billed to customers directly on their monthly deposit account
statements, or in the case of foreign ATM processing fees, the fee is charged to the customer on the day that transactions are
processed. Performance obligations for all of these various services are satisfied at the time that the service is rendered.
Consumer Brokerage Services
The following shows the components of revenue within consumer brokerage services.
(In thousands)
Commission income
Managed account services
Total consumer brokerage services
For the Years Ended December 31
2018
2017
2016
$
$
8,956 $
6,851
15,807 $
8,400 $
6,230
14,630 $
8,170
5,614
13,784
Nearly all of this revenue is reported in the Company's Wealth segment.
Consumer brokerage services revenue is comprised of commissions received upon the execution of purchases and sales of
mutual fund shares and equity securities, in addition to sales of annuities and certain limited insurance products in an agency
capacity. Also, fees are earned on professionally managed advisory programs through arrangements with sub-advisors. Payment
from the customer is due upon settlement date for purchases and sales of securities, at the purchase date for annuities and insurance
products, and upon inception of the service period for advisory programs.
Most of the contracts (except advisory contracts) encompass two types of performance obligations. The first is an obligation
to provide account maintenance, record keeping and custodial services throughout the contract term. The second is the obligation
to provide trade execution services for the customers' purchases and sales of products mentioned above. The first obligation is
satisfied over time as the service period elapses, while the second type of obligation is satisfied upon the execution of each purchase/
sale transaction. Contracts for advisory services contain a single performance obligation comprised of providing the management
services and related reporting/administrative services over the contract term.
The transaction price of the contracts (except advisory contracts) is a commission charged at the time of trade execution. The
commission varies across different security types, insurance products and mutual funds. It is generally determined by standardized
price lists published by the Company and its mutual fund and insurance vendors. Because the transaction price relates specifically
to the trade execution, it has been allocated to that performance obligation and is recorded at the time of execution. The fee for
advisory services is charged to the customer in advance of the quarterly service period, based on the account balance at the beginning
of the period. Revenue is recognized ratably over the service period.
Other Non-Interest Income from Contracts with Customers
Other non-interest income consists mainly of various customer deposit related fees such as ATM fees and gains on sales of tax
credits, foreclosed assets, and bank premises and equipment. Performance obligations for these services consist mainly of the
execution of transactions for sales of various properties or providing specific deposit related transactions. Fees from these revenue
sources are recognized when the performance obligation is completed, at which time cash is received by the Company.
103
16. Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and
liabilities and to determine fair value disclosures. Various financial instruments such as equity securities, available for sale debt
securities, trading securities, certain investments relating to private equity activities, and derivatives are recorded at fair value on
a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities
on a nonrecurring basis, such as loans held for sale, mortgage servicing rights and certain other investment securities. These
nonrecurring fair value adjustments typically involve lower of cost or fair value accounting, or write-downs of individual assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation
techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of
fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation
of an asset or liability as of the measurement date. The three levels are defined as follows:
• Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
• Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for
the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
• Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally
developed, using the Company’s best information and assumptions that a market participant would consider.
When determining the fair value measurements for assets and liabilities required or permitted to be recorded or disclosed at
fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions
that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable
markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company
looks to observable market data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded
in observable markets, and the Company must use alternative valuation techniques to derive an estimated fair value measurement.
104
Instruments Measured at Fair Value on a Recurring Basis
The table below presents the carrying values of assets and liabilities measured at fair value on a recurring basis at December
31, 2018 and 2017. There were no transfers among levels during these years.
(In thousands)
December 31, 2018
Assets:
Residential mortgage loans held for sale
Available for sale debt securities:
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
State and municipal obligations
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Other debt securities
Trading debt securities
Equity securities
Private equity investments
Derivatives *
Assets held in trust for deferred compensation plan
Total assets
Liabilities:
Derivatives *
Liabilities held in trust for deferred compensation plan
Total liabilities
December 31, 2017
Assets:
Residential mortgage loans held for sale
Available for sale debt securities:
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
State and municipal obligations
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Other debt securities
Trading debt securities
Equity securities
Private equity investments
Derivatives *
Assets held in trust for deferred compensation plan
Total assets
Liabilities:
Derivatives *
Liabilities held in trust for deferred compensation plan
Total liabilities
* The fair value of each class of derivative is shown in Note 18.
.
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair Value
$
13,529 $
— $
13,529 $
—
907,652
195,778
1,328,039
3,214,985
1,047,716
1,511,614
332,257
27,059
2,585
85,659
41,210
12,968
8,721,051
907,652
—
—
—
—
—
—
—
2,585
—
—
12,968
923,205
—
195,778
1,313,881
3,214,985
1,047,716
1,511,614
332,257
27,059
—
—
40,627
—
7,697,446
13,421
12,968
26,389 $
—
12,968
12,968 $
13,328
—
13,328 $
15,327 $
— $
15,327 $
917,147
406,363
1,611,366
3,040,913
905,793
1,492,800
351,060
18,269
48,838
55,752
8,349
12,843
8,884,820
917,147
—
—
—
—
—
—
—
19,864
—
—
12,843
949,854
—
406,363
1,594,350
3,040,913
905,793
1,492,800
351,060
18,269
28,974
—
7,723
—
7,861,572
8,074
12,843
20,917 $
—
12,843
12,843 $
7,951
—
7,951 $
—
—
14,158
—
—
—
—
—
—
85,659
583
—
100,400
93
—
93
—
—
—
17,016
—
—
—
—
—
—
55,752
626
—
73,394
123
—
123
$
$
$
105
Valuation methods for instruments measured at fair value on a recurring basis
Following is a description of the Company’s valuation methodologies used for instruments measured at fair value on a recurring
basis:
Residential mortgage loans held for sale
The Company originates fixed rate, first lien residential mortgage loans that are intended for sale in the secondary market. Fair
value is based on quoted secondary market prices for loans with similar characteristics, which are adjusted to include the embedded
servicing value in the loans. This adjustment represents an unobservable input to the valuation but is not considered significant
given the relative insensitivity of the valuation to changes in this input. Accordingly, these loan measurements are classified as
Level 2.
Available for sale debt securities
For available for sale securities, changes in fair value, including that portion of other-than-temporary impairment unrelated to
credit loss, are recorded in other comprehensive income. As mentioned in Note 3 on Investment Securities, the Company records
the credit-related portion of other-than-temporary impairment in current earnings. This portfolio comprises the majority of the
assets which the Company records at fair value. Most of the portfolio, which includes government-sponsored enterprise, mortgage-
backed and asset-backed securities, are priced utilizing industry-standard models that consider various assumptions, including
time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices
for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are
observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions
are executed in the marketplace. These measurements are classified as Level 2 in the fair value hierarchy. Where quoted prices
are available in an active market, the measurements are classified as Level 1. Most of the Level 1 measurements apply to U.S.
Treasury obligations.
The fair values of Level 1 and 2 securities in the available for sale portfolio are prices provided by a third-party pricing service.
The prices provided by the third-party pricing service are based on observable market inputs, as described in the sections below.
On a quarterly basis, the Company compares a sample of these prices to other independent sources for the same and similar
securities. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing service. Based
on this research, the pricing service may affirm or revise its quoted price. No significant adjustments have been made to the prices
provided by the pricing service. The pricing service also provides documentation on an ongoing basis that includes reference
data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy
is appropriate.
Valuation methods and inputs, by class of security:
• U.S. government and federal agency obligations
U.S. treasury bills, bonds and notes, including inflation-protected securities, are valued using live data from active market
makers and inter-dealer brokers. Valuations for stripped coupon and principal issues are derived from yield curves generated
from various dealer contacts and live data sources.
• Government-sponsored enterprise obligations
Government-sponsored enterprise obligations are evaluated using cash flow valuation models. Inputs used are live market
data, cash settlements, Treasury market yields, and floating rate indices such as LIBOR, CMT, and Prime.
•
State and municipal obligations, excluding auction rate securities
A yield curve is generated and applied to bond sectors, and individual bond valuations are extrapolated. Inputs used to
generate the yield curve are bellwether issue levels, established trading spreads between similar issuers or credits, historical
trading spreads over widely accepted market benchmarks, new issue scales, and verified bid information. Bid information
is verified by corroborating the data against external sources such as broker-dealers, trustees/paying agents, issuers, or
non-affiliated bondholders.
• Mortgage and asset-backed securities
Collateralized mortgage obligations and other asset-backed securities are valued at the tranche level. For each tranche
valuation, the process generates predicted cash flows for the tranche, applies a market based (or benchmark) yield/spread
for each tranche, and incorporates deal collateral performance and tranche level attributes to determine tranche-specific
spreads to adjust the benchmark yield. Tranche cash flows are generated from new deal files and prepayment/default
assumptions. Tranche spreads are based on tranche characteristics such as average life, type, volatility, ratings, underlying
106
collateral and performance, and prevailing market conditions. The appropriate tranche spread is applied to the corresponding
benchmark, and the resulting value is used to discount the cash flows to generate an evaluated price.
Valuation of agency pass-through securities, typically issued under GNMA, FNMA, FHLMC, and SBA programs, are
primarily derived from information from the To Be Announced (TBA) market. This market consists of generic mortgage
pools which have not been received for settlement. Snapshots of the TBA market, using live data feeds distributed by
multiple electronic platforms, are used in conjunction with other indices to compute a price based on discounted cash flow
models.
• Other debt securities
Other debt securities are valued using active markets and inter-dealer brokers as well as bullet spread scales and option
adjusted spreads. The spreads and models use yield curves, terms and conditions of the bonds, and any special features
(e.g., call or put options and redemption features).
The available for sale portfolio includes certain auction rate securities. Due to the illiquidity in the auction rate securities
market in recent years, the fair value of these securities cannot be based on observable market prices. The fair values of these
securities are estimated using a discounted cash flows analysis which is discussed more fully in the Level 3 Inputs section of this
note. Because many of the inputs significant to the measurement are not observable, these measurements are classified as Level
3 measurements.
Equity securities with readily determinable fair values
Equity securities are priced using the market prices for each security from the major stock exchanges or other electronic
quotation systems. These are generally classified as Level 1 measurements. Stocks which trade infrequently are classified as
Level 2.
Trading debt securities
The securities in the Company’s trading portfolio are priced by averaging several broker quotes for similar instruments and
are classified as Level 2 measurements.
Private equity investments
These securities are held by the Company’s private equity subsidiaries and are included in other investment securities in the
consolidated balance sheets. Due to the absence of quoted market prices, valuation of these nonpublic investments requires
significant management judgment. These fair value measurements, which are discussed in the Level 3 Inputs section of this note,
are classified as Level 3.
Derivatives
The Company’s derivative instruments include interest rate swaps and floors, foreign exchange forward contracts, and certain
credit risk guarantee agreements. When appropriate, the impact of credit standing as well as any potential credit enhancements,
such as collateral, has been considered in the fair value measurement.
• Valuations for interest rate swaps are derived from a proprietary model whose significant inputs are readily observable
market parameters, primarily yield curves used to calculate current exposure. Counterparty credit risk is incorporated into
the model and calculated by applying a net credit spread over LIBOR to the swap's total expected exposure over time.
The net credit spread is comprised of spreads for both the Company and its counterparty, derived from probability of
default and other loss estimate information obtained from a third party credit data provider or from the Company's Credit
Department when not otherwise available. The credit risk component is not significant compared to the overall fair value
of the swaps. The results of the model are constantly validated through comparison to active trading in the marketplace.
Parties to swaps requiring central clearing are required to post collateral (generally in the form of cash or marketable
securities) to an authorized clearing agency that holds and monitors the collateral. In January 2017, the Company's clearing
counterparty made rule changes to characterize a component of this collateral as a legal settlement of the derivative contract
exposure. As a result, this component, known as variation margin, is no longer accounted for separately from the derivative
as collateral, but is considered in determining the fair value of the derivative.
Valuations for interest rate floors are also derived from a proprietary model whose significant inputs are readily observable
market parameters, primarily yield curves and volatility surfaces. The model uses market standard methodology of
discounting the future expected cash receipts that would occur if variable interest rates fall below the strike rates of the
floors. The model also incorporates credit valuation adjustments of both the Company's and the counterparties' non-
107
performance risk. The credit valuation adjustment component is not significant compared to the overall fair value of the
floors.
The fair value measurements of interest rate swaps and floors are classified as Level 2 due to the observable nature of the
significant inputs utilized.
•
Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations
from global market makers and are classified as Level 2.
• The Company’s contracts related to credit risk guarantees are valued under a proprietary model which uses unobservable
inputs and assumptions about the creditworthiness of the counterparty (generally a Bank customer). Customer credit
spreads, which are based on probability of default and other loss estimates, are calculated internally by the Company's
Credit Department, as mentioned above, and are based on the Company's internal risk rating for each customer. Because
these inputs are significant to the measurements, they are classified as Level 3.
• Derivatives relating to residential mortgage loan sale activity include commitments to originate mortgage loans held for
sale, forward loan sale contracts, and forward commitments to sell TBA securities. The fair values of loan commitments
and sale contracts are estimated using quoted market prices for loans similar to the underlying loans in these instruments.
The valuations of loan commitments are further adjusted to include embedded servicing value and the probability of
funding. These assumptions are considered Level 3 inputs and are significant to the loan commitment valuation; accordingly,
the measurement of loan commitments is classified as Level 3. The fair value measurement of TBA contracts is based on
security prices published on trading platforms and is classified as Level 2.
Assets held in trust
Assets held in an outside trust for the Company’s deferred compensation plan consist of investments in mutual funds. The fair
value measurements are based on quoted prices in active markets and classified as Level 1. The Company has recorded an asset
representing the total investment amount. The Company has also recorded a corresponding liability, representing the Company’s
liability to the plan participants.
108
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
(In thousands)
Year ended December 31, 2018:
Balance at January 1, 2018
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Investment securities called
Discount accretion
Purchases of private equity securities
Sale / pay down of private equity securities
Capitalized interest/dividends
Purchase of risk participation agreement
Sale of risk participation agreement
Balance at December 31, 2018
Total gains or losses for the year included in earnings attributable
to the change in unrealized gains or losses relating to assets still
held at December 31, 2018
Year ended December 31, 2017:
Balance at January 1, 2017
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Investment securities called
Discount accretion
Purchases of private equity securities
Sale / pay down of private equity securities
Capitalized interest/dividends
Purchase of risk participation agreement
Sale of risk participation agreement
Balance at December 31, 2017
Total gains or losses for the year included in earnings attributable to
the change in unrealized gains or losses relating to assets still held
at December 31, 2017
$
$
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
State and
Municipal
Obligations
Private Equity
Investments
Derivatives
Total
$
17,016 $
55,752 $
503 $
73,271
—
(274)
(2,616)
32
—
—
—
—
—
13,849
105
—
—
—
16,395
(371)
34
—
—
—
—
—
—
—
—
61
(179)
13,954
(274)
(2,616)
32
16,395
(371)
34
61
(179)
$
$
$
14,158 $
85,659 $
490 $
100,307
— $
13,849 $
663 $
14,512
16,682 $
50,820 $
258 $
67,760
—
882
(600)
52
—
—
—
—
—
17,016 $
(5,833)
266
(5,567)
—
—
—
13,352
(2,621)
34
—
—
55,752 $
—
—
—
—
—
—
70
(91)
503 $
882
(600)
52
13,352
(2,621)
34
70
(91)
73,271
— $
(5,658) $
615 $
(5,043)
Gains and losses on the Level 3 assets and liabilities in the table above are reported in the following income categories:
(In thousands)
Year ended December 31, 2018:
Loan Fees and
Sales
Other Non-
Interest Income
Investment
Securities Gains
(Losses), Net
Total
Total gains or losses included in earnings
Change in unrealized gains or losses relating to assets still held at
December 31, 2018
Year ended December 31, 2017:
Total gains or losses included in earnings
Change in unrealized gains or losses relating to assets still held at
December 31, 2017
$
$
$
$
(45) $
535 $
231 $
580 $
150 $
13,849 $
13,954
128 $
13,849 $
14,512
35 $
35 $
(5,833) $
(5,567)
(5,658) $
(5,043)
109
Level 3 Inputs
As shown above, the Company's significant Level 3 measurements which employ unobservable inputs that are readily
quantifiable pertain to auction rate securities (ARS) held by the Bank, investments in portfolio concerns held by the Company's
private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal
securities and totaled $14.2 million at December 31, 2018, while private equity investments, included in other securities, totaled
$85.7 million.
Information about these inputs is presented in the table and discussions below.
Quantitative Information about Level 3 Fair Value Measurements
Weighted
Auction rate securities
Private equity investments
Mortgage loan commitments
Valuation Technique
Discounted cash flow
Unobservable Input
Estimated market recovery period
Estimated market rate
Market comparable companies EBITDA multiple
Discounted cash flow
Probability of funding
Embedded servicing value
Average
Range
4 - 5 years
4.8%
6.0
53.7% - 98.0% 78.6%
1.3%
2.3%
.7% -
4.3% -
-
4.0
The fair values of ARS are estimated using a discounted cash flows analysis in which estimated cash flows are based on
mandatory interest rates paid under failing auctions and projected over an estimated market recovery period. Under normal
conditions, ARS traded in weekly auctions and were considered liquid investments. The Company's estimate of when these
auctions might resume is highly judgmental and subject to variation depending on current and projected market conditions. Few
auctions of these securities have been successful in recent years, and most secondary transactions have been privately arranged.
Estimated cash flows during the period over which the Company expects to hold the securities are discounted at an estimated
market rate. These securities are comprised of bonds issued by various states and municipalities for healthcare and student lending
purposes, and market rates are derived for each type. Market rates are calculated at each valuation date using a LIBOR or Treasury
based rate plus spreads representing adjustments for liquidity premium and nonperformance risk. The spreads are developed
internally by employees in the Company's bond department. An increase in the holding period alone would result in a higher fair
value measurement, while an increase in the estimated market rate (the discount rate) alone would result in a lower fair value
measurement. The valuation of the ARS portfolio is reviewed on a quarterly basis by the Company's chief investment officers.
The fair values of the Company's private equity investments are based on a determination of fair value of the investee company
less preference payments assuming the sale of the investee company. Investee companies are normally non-public entities. The
fair value of the investee company is determined by reference to the investee's total earnings before interest, depreciation/
amortization, and income taxes (EBITDA) multiplied by an EBITDA factor. EBITDA is normally determined based on a trailing
prior period adjusted for specific factors including current economic outlook, investee management, and specific unique
circumstances such as sales order information, major customer status, regulatory changes, etc. The EBITDA multiple is based on
management's review of published trading multiples for recent private equity transactions and other judgments and is derived for
each individual investee. The fair value of the Company's investment (which is usually a partial interest in the investee company)
is then calculated based on its ownership percentage in the investee company. On a quarterly basis, these fair value analyses are
reviewed by a valuation committee consisting of investment managers and senior Company management.
The significant unobservable inputs used in the fair value measurement of the Company’s derivative commitments to originate
residential mortgage loans are the percentage of commitments that are actually funded and the mortgage servicing value that is
inherent in the underlying loan value. A significant increase in the rate of loans that fund would result in a larger derivative asset
or liability. A significant increase in the inherent mortgage servicing value would result in an increase in the derivative asset or a
reduction in the derivative liability. The probability of funding and the inherent mortgage servicing values are directly impacted
by changes in market rates and will generally move in the same direction as interest rates.
110
Instruments Measured at Fair Value on a Nonrecurring Basis
For assets measured at fair value on a nonrecurring basis during 2018 and 2017, and still held as of December 31, 2018 and
2017, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation
assumptions used to determine each adjustment, and the carrying value of the related individual assets or portfolios at December
31, 2018 and 2017.
(In thousands)
Fair Value
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Gains
(Losses)
Balance at December 31, 2018
Collateral dependent impaired loans
Mortgage servicing rights
Long-lived assets
Balance at December 31, 2017
Collateral dependent impaired loans
Mortgage servicing rights
Foreclosed assets
Long-lived assets
$
$
294 $
— $
— $
294 $
6,478
914
—
—
—
—
6,478
914
1,236 $
— $
— $
1,236 $
4,653
—
3,378
—
—
—
—
—
—
4,653
—
3,378
(269)
9
(552)
(617)
13
(9)
(724)
Valuation methods for instruments measured at fair value on a nonrecurring basis
Following is a description of the Company’s valuation methodologies used for other financial and nonfinancial instruments
measured at fair value on a nonrecurring basis.
Collateral dependent impaired loans
While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the
carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans.
Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance
for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining
the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size
and complexity of the real estate collateral. The Company maintains a staff of qualified appraisers who also review third party
appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including
external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral
are regularly reviewed by credit administration. Unobservable inputs to these measurements, which include estimates and
judgments often used in conjunction with appraisals, are not readily quantifiable. These measurements are classified as Level 3.
Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company at
December 31, 2018 and 2017 are shown in the table above.
Mortgage servicing rights
The Company initially measures its mortgage servicing rights at fair value and amortizes them over the period of estimated
net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage servicing
rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation
model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that
market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount
rates, cost to service, float earnings rates, and other ancillary income, including late fees. The fair value measurements are classified
as Level 3.
Foreclosed assets
Foreclosed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of
commercial and residential real estate and other non-real estate property, including auto, marine and recreational vehicles.
Foreclosed assets are initially recorded as held for sale at the lower of the loan balance or fair value of the collateral less estimated
selling costs. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting
111
a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed
pricing methods. These measurements are classified as Level 3.
Long-lived assets
When investments in branch facilities and various office buildings are determined to be impaired, their carrying values are
written down to estimated fair value, or estimated fair value less cost to sell if the property is held for sale. Fair value is estimated
in a process which considers current local commercial real estate market conditions and the judgment of the sales agent and often
involves obtaining third party appraisals from certified real estate appraisers. The carrying amounts of these real estate holdings
are regularly monitored by real estate professionals employed by the Company. These fair value measurements are classified as
Level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with
appraisals, are not readily quantifiable.
112
17. Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value
estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount
that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because
no market exists for many of the Company's financial instruments, fair value estimates are based on judgments regarding future
expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and
cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
As mentioned in Note 3, the Company prospectively adopted ASU 2016-01 on January 1, 2018. In accordance with its
requirements, the fair value of loans as of December 31, 2018 was measured using an exit price notion. The fair value of loans
as of December 31, 2017 was measured using an entry price notion.
The estimated fair values of the Company’s financial instruments and the classification of their fair value measurements within
the valuation hierarchy are as follows at December 31, 2018 and 2017:
Estimated Fair Value at December 31, 2018
Level 1
Level 2
Level 3
Total
$
— $
—
—
—
—
—
—
—
—
—
910,237
3,320
—
689,876
507,892
—
12,968
— $ 5,017,694 $ 5,017,694
868,274
868,274
—
2,846,095
2,846,095
—
2,084,370
2,084,370
—
1,916,627
1,916,627
—
365,069
365,069
—
756,651
756,651
—
11,223
11,223
—
13,866,003
— 13,866,003
20,694
—
8,698,666
145,139
3,320
—
693,228
693,228
689,876
—
507,892
—
41,210
583
12,968
—
$ 2,124,293 $ 7,704,611 $ 14,704,953 $ 24,533,857
20,694
7,643,290
—
—
—
—
40,627
—
$ 6,980,298 $
11,685,239
—
13,170
—
—
—
12,968
$ 18,691,675 $
— $
—
—
—
—
—
13,328
—
— $ 6,980,298
— 11,685,239
1,663,748
13,170
1,944,458
8,702
13,421
12,968
13,328 $ 3,617,001 $ 22,322,004
1,663,748
—
1,944,458
8,702
93
—
(In thousands)
Financial Assets
Loans:
Business
Real estate - construction and land
Real estate - business
Real estate - personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans
Loans held for sale
Investment securities
Federal funds sold
Securities purchased under agreements to resell
Interest earning deposits with banks
Cash and due from banks
Derivative instruments
Assets held in trust for deferred compensation plan
Total
Financial Liabilities
Non-interest bearing deposits
Savings, interest checking and money market deposits
Certificates of deposit
Federal funds purchased
Securities sold under agreements to repurchase
Other borrowings
Derivative instruments
Liabilities held in trust for deferred compensation plan
Total
Carrying
Amount
$ 5,106,427
869,659
2,875,788
2,127,083
1,955,572
376,399
814,134
15,236
14,140,298
20,694
8,698,666
3,320
700,000
689,876
507,892
41,210
12,968
$ 24,814,924
$ 6,980,298
11,685,239
1,658,122
13,170
1,943,219
8,702
13,421
12,968
$ 22,315,139
113
(In thousands)
Financial Assets
Loans:
Business
Real estate - construction and land
Real estate - business
Real estate - personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total loans
Loans held for sale
Investment securities
Federal funds sold
Securities purchased under agreements to resell
Interest earning deposits with banks
Cash and due from banks
Derivative instruments
Assets held in trust for deferred compensation plan
Total
Financial Liabilities
Non-interest bearing deposits
Savings, interest checking and money market deposits
Certificates of deposit
Federal funds purchased
Securities sold under agreements to repurchase
Other borrowings
Derivative instruments
Liabilities held in trust for deferred compensation plan
Total
Carrying
Amount
$ 4,958,554
968,820
2,697,452
2,062,787
2,104,487
400,587
783,864
7,123
13,983,674
21,398
8,893,307
42,775
700,000
30,631
438,439
8,349
12,843
$ 24,131,416
$ 7,158,962
11,499,620
1,766,864
202,370
1,304,768
1,758
8,074
12,843
$ 21,955,259
Estimated Fair Value at December 31, 2017
Level 1
Level 2
Level 3
Total
$
— $
—
—
—
—
—
—
—
—
—
937,011
42,775
—
30,631
438,439
—
12,843
— $ 4,971,401 $ 4,971,401
979,389
979,389
—
2,702,598
2,702,598
—
2,060,443
2,060,443
—
2,074,129
2,074,129
—
400,333
400,333
—
798,093
798,093
—
7,123
—
7,123
13,993,509
— 13,993,509
21,398
—
8,893,307
117,774
42,775
—
695,194
695,194
30,631
—
438,439
—
8,349
626
12,843
—
$ 1,461,699 $ 7,867,643 $ 14,807,103 $ 24,136,445
21,398
7,838,522
—
—
—
—
7,723
—
$ 7,158,962 $
11,499,620
—
202,370
—
—
—
12,843
$ 18,873,795 $
— $
—
—
—
—
—
7,951
—
— $ 7,158,962
— 11,499,620
1,768,780
202,370
1,305,375
1,758
8,074
12,843
7,951 $ 3,076,036 $ 21,957,782
1,768,780
—
1,305,375
1,758
123
—
18. Derivative Instruments
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts,
along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a
measure of loss exposure. At December 31, 2018, with the exception of the interest rate floors (discussed below), the Company's
derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.
(In thousands)
Interest rate swaps
Interest rate floors
Interest rate caps
Credit risk participation agreements
Foreign exchange contracts
Mortgage loan commitments
Mortgage loan forward sale contracts
Forward TBA contracts
Total notional amount
December 31
2018
2017
$
2,006,280
$
1,741,412
1,000,000
62,163
143,460
6,206
14,544
5,768
16,500
—
31,776
133,488
11,826
17,110
2,566
25,000
$
3,254,921
$ 1,963,178
The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify
their interest rate sensitivity. The customers are engaged in a variety of businesses, including real estate, manufacturing, retail
114
product distribution, education, and retirement communities. These customer swaps are offset by matching contracts purchased
by the Company from other financial dealer institutions. Contracts with dealers that require central clearing are novated to a
clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition
to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition
have a minimal effect on earnings.
Many of the Company’s interest rate swap arrangements with large financial institutions contain contingent features relating
to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if
the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate
and ongoing collateralization on interest rate swaps in net liability positions, or can require instant settlement of the contracts.
The Company maintains debt ratings and capital well above these minimum requirements.
During the year ended December 31, 2018, the Company entered into interest rate floors, with a combined notional value of
$1.0 billion, to hedge the potential risk of declining interest rates on certain floating rate commercial loans. The premiums paid
for these floors totaled $20.7 million. As of December 31, 2018, the maximum length of time over which the Company is hedging
its exposure to the variability in future cash flows is approximately 6 years, and the floors are forward starting, beginning in 2020.
The interest rate floors qualified and were designated as cash flow hedges and were assessed for effectiveness using regression
analysis. The change in the fair value of the interest rate floors are recorded in AOCI, net of the amortization of the premium paid,
which is recorded against interest and fees on loans in the consolidated statements of income. As of December 31, 2018, net
deferred gains on the interest rate floors totaled $9.1 million (pre-tax) and were recorded in AOCI in the consolidated balance
sheet. As of December 31, 2018, it is expected that $2.8 million (pre-tax) of interest rate floor premium amortization will be
reclassified from AOCI into earnings over the next twelve months.
The Company’s foreign exchange activity involves the purchase and sale of forward foreign exchange contracts, which are
commitments to purchase or deliver a specified amount of foreign currency at a specific future date. This activity enables customers
involved in international business to hedge their exposure to foreign currency exchange rate fluctuations. The Company minimizes
its related exposure arising from these customer transactions with offsetting contracts for the same currency and time frame with
approved, reputable counterparties. Risk arises from changes in the currency exchange rate and from the potential for counterparty
nonperformance. These risks are controlled by adherence to a foreign exchange trading policy which contains control limits on
currency amounts, open positions, maturities and losses, and procedures for approvals, record-keeping, monitoring and reporting.
Hedge accounting has not been applied to these foreign exchange activities.
Credit risk participation agreements arise when the Company contracts, as a guarantor or beneficiary, with other financial
institutions to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses
resulting from a third party default on the underlying swap. The Company’s risks and responsibilities as guarantor are further
discussed in Note 20 on Commitments, Contingencies and Guarantees.
Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated
residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments
and forward loan sale contracts. Changes in the fair values of the loan commitments and funded loans prior to sale that are due
to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the
to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the
security settlement date.
115
The fair values of the Company’s derivative instruments are shown in the table below. Information about the valuation methods
used to measure fair value is provided in Note 16 on Fair Value Measurements. Derivative instruments with a positive fair value
(asset derivatives) are reported in other assets in the consolidated balance sheets while derivative instruments with a negative fair
value (liability derivatives) are reported in other liabilities in the consolidated balance sheets. As mentioned in Note 16, effective
January 2017, certain collateral posted to and from the Company's clearing counterparty has been offset against the fair values of
cleared swaps, such that at December 31, 2018 in the table below, the positive fair values of cleared swaps were reduced by $8.1
million and the negative fair values of cleared swaps were reduced by $6.5 million. At December 31, 2017, the positive fair values
of cleared swaps were reduced by $4.5 million and the negative fair values of cleared swaps were reduced by $4.3 million.
(In thousands)
Derivatives designated as hedging instruments:
Interest rate floors
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments:
Interest rate swaps
Interest rate caps
Credit risk participation agreements
Foreign exchange contracts
Mortgage loan commitments
Mortgage loan forward sale contracts
Forward TBA contracts
Total derivatives not designated as hedging instruments
Total
Asset Derivatives
December 31
Liability Derivatives
December 31
2018
2017
2018
2017
Fair Value
Fair Value
$
$
$
$
$
$
$
$
29,031
29,031
11,537
24
47
20
536
15
—
12,179
41,210
$
$
— $
— $
— $
— $
7,674
16
46
21
580
8
4
8,349
8,349
$
$
$
(13,110)
(24)
$
(93)
(8)
—
(8)
(178)
(13,421)
(13,421)
$
$
—
—
(7,857)
(16)
(123)
(40)
—
(7)
(31)
(8,074)
(8,074)
116
The pre-tax effects of derivative instruments on the consolidated statements of income are shown in the tables below.
Amount of Gain or
(Loss) Recognized in
OCI
Location of Gain (Loss)
Reclassified from AOCI into
Income
Amount of Gain (Loss)
Reclassified from AOCI
into Income
For the Year Ended
December 31
2018
For the Year Ended
December 31
2018
$
$
8,381 Interest and fees on loans $
8,381
$
(760)
(760)
(In thousands)
Derivatives in cash flow hedging
relationships:
Interest rate floors* (a)
Total
* No hedging relationship existed during 2017 and 2016.
(a) Amounts shown herein were excluded from the assessment of effectiveness, as they represent the time value component of
derivative gains (losses).
(In thousands)
Derivative instruments:
Interest rate swaps
Interest rate caps
Credit risk participation agreements
Foreign exchange contracts:
Mortgage loan commitments
Mortgage loan forward sale contracts
Forward TBA contracts
Total
Location of Gain or (Loss) Recognized
in Income on Derivative
Amount of Gain or (Loss) Recognized in
Income on Derivative
For the Years
Ended December 31
2018
2017
2016
Other non-interest income
$
3,914
$
1,978
$
5,927
Other non-interest income
Other non-interest income
Other non-interest income
Loan fees and sales
Loan fees and sales
Loan fees and sales
11
150
31
(45)
5
414
—
35
(80)
231
64
(648)
—
(44)
55
87
(63)
79
$
4,480
$
1,580
$
6,041
The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the
consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master
netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset.
Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable
securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after netting
is applied); thus amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under
master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.
While the Company is party to master netting arrangements with most of its swap derivative counterparties, the Company does
not offset derivative assets and liabilities under these arrangements on its consolidated balance sheet. Collateral, usually in the
form of marketable securities, is exchanged between the Company and dealer bank counterparties and is generally subject to
thresholds and transfer minimums. By contract, it may be sold or re-pledged by the secured party until recalled at a subsequent
valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash to its clearing
agency. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as
appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally
secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.
117
(In thousands)
December 31, 2018
Assets:
Derivatives subject to master netting
agreements
Derivatives not subject to master
netting agreements
Total derivatives
Liabilities:
Derivatives subject to master netting
agreements
Derivatives not subject to master
netting agreements
Total derivatives
December 31, 2017
Assets:
Derivatives subject to master netting
agreements
Derivatives not subject to master
netting agreements
Total derivatives
Liabilities:
Derivatives subject to master netting
agreements
Derivatives not subject to master
netting agreements
Total derivatives
Gross Amount
Recognized
Gross Amounts
Offset in the
Balance Sheet
Net Amounts
Presented in the
Balance Sheet
Gross Amounts Not Offset in the
Balance Sheet
Financial
Instruments
Available for
Offset
Collateral
Received/
Pledged
Net Amount
$
40,613 $
— $
40,613 $
(2,992) $
(26,174) $
11,447
597
41,210
13,333
88
13,421
—
—
—
—
—
597
41,210
13,333
(2,992)
(261)
10,080
88
13,421
$
7,726 $
— $
7,726 $
(233) $
(824) $
6,669
623
8,349
7,935
139
8,074
—
—
—
—
—
623
8,349
7,935
139
8,074
(233)
(1,570)
6,132
118
19. Resale and Repurchase Agreements
The following table shows the extent to which assets and liabilities relating to securities purchased under agreements to resell
(resale agreements) and securities sold under agreements to repurchase (repurchase agreements) have been offset in the consolidated
balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged,
which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related
asset or liability (after netting is applied); thus amounts of excess collateral are not shown. The agreements in the following table
were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.
Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the
same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the
securities portfolio. The securities collateral accepted or pledged in resale and repurchase agreements with other financial
institutions also may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The
Company generally retains custody of securities pledged for repurchase agreements with customers.
The Company is party to several agreements commonly known as collateral swaps. These agreements involve the exchange
of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase
and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each
other in the balance sheet, having met the accounting requirements for this treatment. The collateral swaps totaled $450.0 million
at December 31, 2018 and $650.0 million at December 31, 2017. At December 31, 2018, the Company had posted collateral of
$463.3 million in marketable securities, consisting of agency mortgage-backed bonds and treasuries, and had accepted $453.7
million in agency mortgage-backed and corporate bonds.
(In thousands)
December 31, 2018
Total resale agreements, subject to
master netting arrangements
Total repurchase agreements, subject to
master netting arrangements
December 31, 2017
Total resale agreements, subject to
master netting arrangements
Total repurchase agreements, subject to
master netting arrangements
Gross Amount
Recognized
Gross Amounts
Offset in the
Balance Sheet
Net Amounts
Presented in the
Balance Sheet
Gross Amounts Not Offset in the
Balance Sheet
Financial
Instruments
Available for
Offset
Securities
Collateral
Received/
Pledged
Net Amount
$
1,150,000 $
(450,000) $
700,000 $
— $
(700,000) $
2,393,219
(450,000)
1,943,219
—
(1,943,219)
$
1,350,000 $
(650,000) $
700,000 $
— $
(700,000) $
1,954,768
(650,000)
1,304,768
—
(1,304,768)
—
—
—
—
119
The table below shows the remaining contractual maturities of repurchase agreements outstanding at December 31, 2018 and
2017, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these
borrowings.
(In thousands)
December 31, 2018
Repurchase agreements, secured by:
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
Agency mortgage-backed securities
Non-agency mortgage-backed securities
Asset-backed securities
Other debt securities
Total repurchase agreements, gross amount recognized
December 31, 2017
Repurchase agreements, secured by:
U.S. government and federal agency obligations
Government-sponsored enterprise obligations
Agency mortgage-backed securities
Asset-backed securities
Other debt securities
Total repurchase agreements, gross amount recognized
Remaining Contractual Maturity of the Agreements
Overnight and
continuous
Up to 90 days
Greater than 90
days
Total
$
$
$
$
387,541 $
18,466
882,744
187,740
322,680
98,522
1,897,693 $
271,820 $
149,111
737,975
89,601
14,780
1,263,287 $
150,000 $
100,000 $
—
31,774
—
—
—
—
213,752
—
—
—
181,774 $
313,752 $
1,731 $
—
9,750
30,000
—
41,481 $
450,000 $
—
200,000
—
—
650,000 $
637,541
18,466
1,128,270
187,740
322,680
98,522
2,393,219
723,551
149,111
947,725
119,601
14,780
1,954,768
20. Commitments, Contingencies and Guarantees
The Company leases certain premises and equipment, all of which were classified as operating leases. The rent expense under
such arrangements amounted to $7.7 million, $7.3 million and $7.1 million in 2018, 2017 and 2016, respectively. A summary of
minimum lease commitments follows:
(In thousands)
Year Ended December 31
2019
2020
2021
2022
2023
After
Total minimum lease payments
Type of Property
Real Property
Equipment
Total
$
5,659 $
104 $
4,766
4,027
3,598
3,273
15,161
51
28
—
—
—
$
5,763
4,817
4,055
3,598
3,273
15,161
36,667
All leases expire prior to 2054. It is expected that in the normal course of business, leases that expire will be renewed or replaced
by leases on other properties; thus, the future minimum lease commitments are not expected to be less than the amounts shown
for 2019.
The Company engages in various transactions and commitments with off-balance sheet risk in the normal course of business
to meet customer financing needs. The Company uses the same credit policies in making the commitments and conditional
obligations described below as it does for on-balance sheet instruments. The following table summarizes these commitments at
December 31:
(In thousands)
Commitments to extend credit:
Credit card
Other
Standby letters of credit, net of participations
Commercial letters of credit
120
2018
2017
$
5,328,502 $
5,102,556
5,840,967
5,737,181
353,905
13,774
387,811
4,498
Commitments to extend credit are legally binding agreements to lend to a borrower providing there are no violations of any
conditions established in the contract. As many of the commitments are expected to expire without being drawn upon, the total
commitment does not necessarily represent future cash requirements. Refer to Note 2 on Loans and Allowance for Loan Losses
for further discussion.
Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods to a buyer. The majority
of commercial letters of credit issued are used to settle payments in international trade. Typically, letters of credit require presentation
of documents which describe the commercial transaction, evidence shipment, and transfer title.
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance
standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the
payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a
significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer
for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same
credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit
are secured, and in the event of nonperformance by the customer, the Company has rights to the underlying collateral, which could
include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.
At December 31, 2018, the Company had recorded a liability in the amount of $2.7 million, representing the carrying value
of the guarantee obligations associated with the standby letters of credit. This amount will be accreted into income over the
remaining life of the respective commitments. Commitments outstanding under these letters of credit, which represent the maximum
potential future payments guaranteed by the Company, were $353.9 million at December 31, 2018.
The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are
either resold to third parties or retained for use by the Company. During 2018, purchases and sales of tax credits amounted to
$80.9 million and $71.6 million, respectively. At December 31, 2018, the Company had outstanding purchase commitments
totaling $180.5 million that it expects to fund in 2019.
The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in
order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in
the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the
financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment)
by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing
relationships with the Company. The Company monitors overall borrower collateral, and at December 31, 2018, believes sufficient
collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term, with all changes in
fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the
RPAs, which correspond to the terms of the underlying swaps, range from 2 to 11 years. At December 31, 2018, the fair value of
the Company's guarantee liability RPAs was $93 thousand, and the notional amount of the underlying swaps was $87.4 million.
The maximum potential future payment guaranteed by the Company cannot be readily estimated and is dependent upon the fair
value of the interest rate swaps at the time of default.
The Company has various legal proceedings pending at December 31, 2018, arising in the normal course of business. While
some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of
damages or are at very early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters
for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet
progressed to the point where a loss amount can be determined to be probable and estimable.
121
21. Related Parties
The Company’s Chief Executive Officer, its Executive Chairman, and its former Vice Chairman are directors of Tower Properties
Company (Tower) and, together with members of their immediate families, beneficially own approximately 67% of the outstanding
stock of Tower. At December 31, 2018, Tower owned 201,901 shares of Company stock. Tower is primarily engaged in the
business of owning, developing, leasing and managing real property.
Payments from the Company and its affiliates to Tower are summarized below. These payments, with the exception of dividend
payments, relate to property management services, including construction oversight, on three Company-owned office buildings
and related parking garages in downtown Kansas City.
(In thousands)
Leasing agent fees
Operation of parking garages
Building management fees
Property construction management fees
Dividends paid on Company stock held by Tower
Total
2018
2017
2016
$
$
133 $
95
1,935
136
181
32 $
82
1,954
146
232
2,480 $
2,446 $
101
184
1,832
147
221
2,485
Tower has a $13.5 million line of credit with the Bank which is subject to normal credit terms and has a variable interest rate.
The line of credit is collateralized by Company stock and based on collateral value had a maximum borrowing amount of
approximately $9.1 million at December 31, 2018. There were no borrowings under this line during 2018, and there was no
balance outstanding at December 31, 2018. The maximum borrowings during 2017 were $5.2 million, and there were no borrowings
during 2016. There was no balance outstanding at December 31, 2017 or 2016. Interest paid on these borrowings during the last
three years was not significant. Letters of credit may be collateralized under this line of credit; however, there were no letters of
credit outstanding during 2018, 2017 or 2016, and thus, no fees were received during these periods. From time to time, the Bank
extends additional credit to Tower for construction and development projects. No construction loans were outstanding during
2018, 2017 and 2016.
Tower leases office space in the Kansas City bank headquarters building owned by the Company. Rent paid to the Company
totaled $74 thousand in 2018, $74 thousand in 2017, and $72 thousand in 2016, at $16.69, $15.75 and $15.67 per square foot,
respectively.
Directors of the Company and their beneficial interests have deposit accounts with the Bank and may be provided with cash
management and other banking services, including loans, in the ordinary course of business. Such loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other
unrelated persons and did not involve more than the normal risk of collectability.
As discussed in Note 20 on Commitments, Contingencies and Guarantees, the Company regularly purchases various state tax
credits arising from third-party property redevelopment and resells the credits to third parties. During 2018, the Company sold
state tax credits to its Executive Chairman, its former Vice Chairman, and its Chief Executive Officer in the amount of $831
thousand, $759 thousand, and $119 thousand, respectively, for personal tax planning. During 2017, the Company sold state tax
credits to its Executive Chairman, its former Vice Chairman, and its Chief Executive Officer in the amount of $694 thousand,
$598 thousand, and $67 thousand, respectively. During 2016, the Company sold state tax credits to its Executive Chairman, his
father (a former Chief Executive Officer), its former Vice Chairman, and its Chief Executive Officer in the amount of $549
thousand, $191 thousand, $244 thousand, and $72 thousand, respectively. The terms of the sales and the amounts paid were the
same as the terms and amounts paid for similar tax credits by persons not related to the Company.
122
22. Parent Company Condensed Financial Statements
Following are the condensed financial statements of Commerce Bancshares, Inc. (Parent only) for the periods indicated:
Condensed Balance Sheets
(In thousands)
Assets
Investment in consolidated subsidiaries:
Bank
Non-banks
Cash
Investment securities:
Available for sale debt
Equity
Note receivable due from bank subsidiary
Advances to subsidiaries, net of borrowings
Income tax benefits
Other assets
Total assets
Liabilities and stockholders’ equity
Pension obligation
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Condensed Statements of Income
(In thousands)
Income
Dividends received from consolidated bank subsidiary
Earnings of consolidated subsidiaries, net of dividends
Interest and dividends on investment securities
Management fees charged to subsidiaries
Investment securities gains (losses)
Net interest income on advances and note to subsidiaries
Other
Total income
Expense
Salaries and employee benefits
Professional fees
Data processing fees paid to affiliates
Community service
Other
Total expense
Income tax benefit
Net income
December 31
2018
2017
$
2,587,489 $
2,409,098
67,538
207,462
52,479
151,607
2,576
3,191
50,000
19,867
8,590
23,734
4,595
49,345
50,000
14,571
8,279
19,951
2,970,447 $
2,759,925
$
$
12,645 $
26,504
39,149
2,931,298
$
2,970,447 $
12,407
30,958
43,365
2,716,560
2,759,925
For the Years Ended December 31
2018
2017
2016
$
200,000 $
160,002 $
233,785
147,678
10,698
37,688
(4,581)
1,299
2,390
2,099
30,431
41,717
514
3,346
160,002
118,704
2,364
30,965
1,880
21
2,720
481,279
385,787
316,656
33,588
2,383
3,341
152
10,729
50,193
(2,456)
33,714
2,036
3,512
32,093
10,671
82,026
(15,622)
29,116
1,951
3,226
1,620
9,849
45,762
(4,497)
$
433,542 $
319,383 $
275,391
123
Condensed Statements of Cash Flows
(In thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings of consolidated subsidiaries, net of dividends
Other adjustments, net
Net cash provided by operating activities
Investing Activities
(Increase) decrease in securities purchased under agreements to resell
Decrease in investment in subsidiaries, net
Proceeds from sales of investment securities
Proceeds from maturities/pay downs of investment securities
Purchases of investment securities
Note receivable due from bank subsidiary
(Increase) decrease in advances to subsidiaries, net
Net purchases of building improvements and equipment
Net cash provided by (used in) investing activities
Financing Activities
Purchases of treasury stock
Issuance of stock under equity compensation plans
Cash dividends paid on common stock
Cash dividends paid on preferred stock
Net cash used in financing activities
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Income tax receipts, net
For the Years Ended December 31
2018
2017
2016
$
433,542 $
319,383 $
275,391
(233,785)
(147,678)
(118,704)
2,505
202,262
(11,268)
160,437
9,541
166,228
—
—
41,638
1,988
(125)
—
(5,296)
(133)
38,072
155,775
(51,335)
11
11,006
2,295
—
(50,000)
(9,518)
(52)
109,517
4
2,949
4,105
—
—
13,507
(3)
(30,773)
(75,231)
(17,771)
(39,381)
(10)
(100,238)
(9,000)
(184,479)
55,855
151,607
(8)
(91,619)
(9,000)
(118,398)
151,556
51
207,462 $
151,607 $
(6)
(87,070)
(9,000)
(135,457)
(2)
53
51
(1,965) $
(8,991) $
(8,958)
$
$
Dividends paid by the Parent to its shareholders were substantially provided from Bank dividends. The Bank may distribute
common dividends without prior regulatory approval, provided that the dividends do not exceed the sum of net income for the
current year and retained net income for the preceding two years, subject to maintenance of minimum capital requirements. The
Parent charges fees to its subsidiaries for management services provided, which are allocated to the subsidiaries based primarily
on total average assets. The Parent makes cash advances to its private equity subsidiaries for general short-term cash flow purposes.
Advances may be made to the Parent by its subsidiary bank holding company for temporary investment of idle funds. Interest on
such advances is based on market rates.
In 2017, the Bank borrowed $50.0 million from the Parent as part of its strategy to manage FDIC insurance premiums. The
note has a rolling 13 month maturity, and the interest rate is a variable rate equal to the one year treasury rate.
For the past several years, the Parent has maintained a $20.0 million line of credit for general corporate purposes with the
Bank. The line of credit is secured by investment securities. The Parent has not borrowed under this line during the past three
years.
At December 31, 2018, the fair value of the investment securities held by the Parent consisted of investments of $2.5 million
in common and preferred stock with readily determinable fair values, $720 thousand in equity securities that do not have readily
determinable fair values, and $2.6 million in non-agency mortgage-backed securities. The decline in balances from the prior year
was due to a third party merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9
million.
124
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and financial disclosure.
Item 9a. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this
annual report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting
was effective as of December 31, 2018.
The Company’s internal control over financial reporting as of December 31, 2018 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which follows.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred that has materially affected, or is reasonably
likely to materially affect, such controls during the last quarter of the period covered by this report.
125
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Commerce Bancshares, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Commerce Bancshares, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated
statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period
ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated
February 21, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Kansas City, Missouri
February 21, 2019
126
Item 9b. OTHER INFORMATION
None
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Items 401, 405 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K regarding executive officers,
directors, and corporate governance is included at the end of Part I of this Form 10-K under the caption “Executive Officers of
the Registrant” and under the captions “Proposal One - Election of the 2022 Class of Directors”, “Section 16(a) Beneficial
Ownership Reporting Compliance”, “Audit and Risk Committee Report”, “Committees of the Board" and "Shareholder Proposals
and Nominations" in the definitive proxy statement, which is incorporated herein by reference.
The Company’s senior financial officer code of ethics for the chief executive officer and senior financial officers of the Company,
including the chief financial officer, principal accounting officer or controller, or persons performing similar functions, is available
at www.commercebank.com. Amendments to, and waivers of, the code of ethics are posted on this Web site.
Item 11. EXECUTIVE COMPENSATION
The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K regarding executive compensation is included
under the captions “Compensation Discussion and Analysis”, “Executive Compensation”, “Director Compensation”,
“Compensation and Human Resources Committee Report”, and “Compensation and Human Resources Committee Interlocks and
Insider Participation” in the definitive proxy statement, which is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Items 201(d) and 403 of Regulation S-K is included under the captions “Equity Compensation
Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the definitive proxy statement,
which is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Items 404 and 407(a) of Regulation S-K is covered under the captions “Proposal One - Election
of the 2022 Class of Directors” and “Corporate Governance” in the definitive proxy statement, which is incorporated herein by
reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 9(e) of Schedule 14A is included under the captions “Pre-approval of Services by the External
Auditor” and “Fees Paid to KPMG LLP” in the definitive proxy statement, which is incorporated herein by reference.
127
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) The following documents are filed as a part of this report:
(1)
(2)
Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of Quarterly Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statement Schedules:
All schedules are omitted as such information is inapplicable or is included in the financial
statements.
Page
60
61
62
63
64
65
58
(b) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed
below.
3 —Articles of Incorporation and By-Laws:
(1) Restated Articles of Incorporation, as amended, were filed in quarterly report on Form 10-Q (Commission
file number 0-2989) dated May 7, 2014, and the same are hereby incorporated by reference.
(2) Restated By-Laws, as amended, were filed in current report on Form 8-K (Commission file number 0-2989)
dated February 14, 2013, and the same are hereby incorporated by reference.
4 — Instruments defining the rights of security holders, including indentures:
(1) Pursuant to paragraph (b)(4)(iii) of Item 601 Regulation S-K, Registrant will furnish to the Commission upon
request copies of long-term debt instruments.
10 — Material Contracts (Each of the following is a management contract or compensatory plan arrangement):
(1) Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of January 1,
2019.
(2) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors amended and restated as of
April 17, 2013 was filed in current report on Form 8-K (Commission file number 0-2989) dated April 23, 2013,
and the same is hereby incorporated by reference.
(3) Commerce Executive Retirement Plan amended and restated as of January 28, 2011 was filed in annual report
on Form 10-K (Commission file number 0-2989) dated February 25, 2011, and the same is hereby incorporated
by reference.
(4) 2009 Form of Severance Agreement between Commerce Bancshares, Inc. and the persons listed at the end of
such agreement was filed in annual report on Form 10-K (Commission file number 0-2989) dated February 24,
2015, and the same is hereby incorporated by reference.
(5) 2015 Form of Severance Agreement between Commerce Bancshares, Inc. and the persons listed at the end of
such agreement was filed in annual report on Form 10-K (Commission file number 0-2989) dated February 24,
2015, and the same is hereby incorporated by reference.
(6) 2009 Form of Severance Agreement between Commerce Bancshares, Inc. and the persons listed at the end of
such agreement.
(7) Trust Agreement for the Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and
restated as of January 1, 2001 was filed in quarterly report on Form 10-Q (Commission file number 0-2989)
dated May 8, 2001, and the same is hereby incorporated by reference.
128
(8) Commerce Bancshares, Inc. 2019 Compensatory Arrangements with CEO and Named Executive Officers
were filed in amended current report on Form 8-K (Commission file number 0-2989) dated January 23, 2019,
and the same is hereby incorporated by reference.
(9) Commerce Bancshares, Inc. Amended and Restated 2005 Equity Incentive Plan, amended and restated as of
April 17, 2013 (incorporated by reference to Exhibit 10(j) to Commerce Bancshares, Inc.'s Form 8-K dated April
23, 2013).
(9)(1) Amendment No. 1 dated November 12, 2018 to Commerce Bancshares, Inc. Amended and Restated 2005
Equity Incentive Plan, amended and restated as of April 17, 2013.
(10) Commerce Bancshares, Inc. Stock Appreciation Rights Agreement and Commerce Bancshares, Inc.
Restricted Stock Award Agreement, pursuant to the 2005 Equity Incentive Plan, were filed in current report on
Form 8-K (Commission file number 0-2989) dated February 23, 2006, and the same are hereby incorporated by
reference.
(11) Commerce Bancshares, Inc. Stock Appreciation Rights Agreement, Commerce Bancshares, Inc. Restricted
Stock Award Agreements for Executive Officers, and Commerce Bancshares, Inc. Restricted Stock Award
Agreements for Employees other than Executive Officers, pursuant to the 2005 Equity Incentive Plan, were filed
in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 6, 2013, and the same are hereby
incorporated by reference.
(12) Form of Notice of Grant of Award and Award Agreement for Restricted Stock for Executive Officers,
pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in quarterly report on Form
10-Q (Commission file number 0-2989) dated May 7, 2014, and the same is hereby incorporated by reference.
(13) Form of Notice of Grant of Award and Award Agreement for Restricted Stock for Employees other than
Executive Officers, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in
quarterly report on Form 10-Q (Commission file number 0-2989) dated May 7, 2014, and the same is hereby
incorporated by reference.
(14) Form of Notice of Grant of Award and Award Agreement for Stock Appreciation Rights, pursuant to the
Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in quarterly report on Form 10-Q
(Commission file number 0-2989) dated May 7, 2014, and the same is hereby incorporated by reference.
(15) Form of Notice of Grant of Award and Award Agreement for Restricted Stock, pursuant to the Commerce
Bancshares, Inc. 2005 Equity Incentive Plan.
21 — Subsidiaries of the Registrant
23 — Consent of Independent Registered Public Accounting Firm
24 — Power of Attorney
31.1 — Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 — Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 — Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101 — Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated
Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial
Statements, tagged as blocks of text and in detail
Item 16. FORM 10-K SUMMARY
None.
129
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized this 21st day of February 2019.
SIGNATURES
COMMERCE BANCSHARES, INC.
By:
/s/ THOMAS J. NOACK
Thomas J. Noack
Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on the 21st day of February 2019.
By:
By:
By:
/s/ JOHN W. KEMPER
John W. Kemper
Chief Executive Officer
/s/ CHARLES G. KIM
Charles G. Kim
Chief Financial Officer
/s/ JEFFERY D. ABERDEEN
Jeffery D. Aberdeen
Controller
(Chief Accounting Officer)
All the Directors on the Board of Directors*
David W. Kemper
Terry D. Bassham
John R. Capps
Earl H. Devanny, III
W. Thomas Grant, II
Karen L. Daniel
John W. Kemper
Jonathan M. Kemper
Benjamin F. Rassieur, III
Todd R. Schnuck
Andrew C. Taylor
Kimberly G. Walker
____________
* The Directors of Registrant listed executed a power of attorney authorizing Thomas J. Noack, their attorney-in-fact, to sign this
report on their behalf.
By:
130
/s/ THOMAS J. NOACK
Thomas J. Noack
Attorney-in-Fact
The consolidated subsidiaries of the Registrant at February 1, 2019 were as follows:
Exhibit 21
Name
CBI-Kansas, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Kansas
Location
State or Other
Jurisdiction of
Incorporation
Clayton Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO
Clayton Realty Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO
Commerce Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri
Commerce Brokerage Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO
Missouri
Clayton Holdings, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri
Missouri
Missouri
Delaware
Illinois Financial, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peoria, IL
Delaware
Illinois Realty, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peoria, IL
Commerce Insurance Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fenton, MO
Missouri
Commerce Investment Advisors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri
CBI Equipment Finance, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri
Tower Redevelopment Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri
CBI Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Arizona
CFB Partners, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO
Delaware
CFB Venture Fund I, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri
Delaware
Capital for Business, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri
CFB Venture Fund, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Board of Directors
Commerce Bancshares, Inc.:
We consent to the incorporation by reference in the Registration Statements No. 33-28294, No. 33-82692, No. 33-8075, No.
33-78344, No. 333-14651, No. 333-186867, No. 333-188374, and No. 333-214495 on Form S-8 and No. 333-140221 and No.
333-196689 on Form S-3ASR of Commerce Bancshares, Inc. of our reports dated February 21, 2019, with respect to the consolidated
balance sheets of Commerce Bancshares, Inc. as of December 31, 2018 and 2017, the related consolidated statements of income,
comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2018,
and the related notes (collectively, the consolidated financial statements), and the effectiveness of internal control over financial
reporting as of December 31, 2018, which reports appear in the December 31, 2018 annual report on Form 10-K of Commerce
Bancshares, Inc.
KPMG LLP
Kansas City, Missouri
February 21, 2019
POWER OF ATTORNEY
Exhibit 24
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby appoint Thomas J. Noack and Jeffery D. Aberdeen,
or either of them, attorney for the undersigned to sign the Annual Report on Form 10-K of Commerce Bancshares, Inc., for the
fiscal year ended December 31, 2018, together with any and all amendments which might be required from time to time with
respect thereto, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, with respect
to Commerce Bancshares, Inc., with full power and authority in either of said attorneys to do and perform in the name of and on
behalf of the undersigned every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and
purposes as the undersigned might or could do in person.
IN WITNESS WHEREOF, the undersigned have executed these presents as of this 25th day of January, 2019.
/s/ TERRY D. BASSHAM
/s/ JOHN R. CAPPS
/s/ EARL H. DEVANNY, III
/s/ W. THOMAS GRANT, II
/s/ KAREN L. DANIEL
/s/ DAVID W. KEMPER
/s/ JOHN W. KEMPER
/s/ JONATHAN M. KEMPER
/s/ BENJAMIN F. RASSIEUR, III
/s/ TODD R. SCHNUCK
/s/ ANDREW C. TAYLOR
/s/ KIMBERLY G. WALKER
CERTIFICATION
Exhibit 31.1
I, John W. Kemper, certify that:
1. I have reviewed this annual report on Form 10-K of Commerce Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
February 21, 2019
/s/ JOHN W. KEMPER
John W. Kemper
President and
Chief Executive Officer
Exhibit 31.2
I, Charles G. Kim, certify that:
1. I have reviewed this annual report on Form 10-K of Commerce Bancshares, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
February 21, 2019
/s/ CHARLES G. KIM
Charles G. Kim
Executive Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of Commerce Bancshares, Inc. (the “Company”) on Form 10-K for the year ended
December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, John W. Kemper
and Charles G. Kim, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, hereby certify, pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ JOHN W. KEMPER
John W. Kemper
Chief Executive Officer
/s/ CHARLES G. KIM
Charles G. Kim
Chief Financial Officer
February 21, 2019
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
C O R P O R AT E H E A D Q U A R T E R S
I N V E S T O R I N Q U I R I E S
Shareholders, analysts and investors seeking information about the
Company should direct their inquiries to:
Jeffery D. Aberdeen, Controller
1000 Walnut
P.O. Box 419248
Kansas City, MO 64141-6248
(800) 892-7100
mymoney@commercebank.com
S H A R E H O L D E R S M AY R E C E I V E F U T U R E A N N U A L
R E P O R T S A N D P R O X Y M AT E R I A L S O N L I N E
To take advantage of the opportunity to receive
materials electronically, rather than by mail, individuals
who hold stock in their name may enroll for electronic
delivery at Computershare’s investor website
www.computershare.com/investor
• If you have already created a login ID and password at the above site,
log in and follow the prompts to “Enroll in Electronic Delivery.”
• If you have not created a login ID and password on the above site,
choose “Create Login.” You will need the Social Security number or tax
ID number associated with your Commerce stock account to create the
login. After you have created your login, follow the prompts to “Enroll in
Electronic Delivery.”
Please note:
• Your consent is entirely revocable.
• You can always vote your proxy on the internet whether
or not you elect to receive your materials electronically.
Shareholders who hold their Commerce stock through a bank,
broker or other holder of record should refer to the information
provided by that entity for instructions on how to elect to view future
annual reports and proxy statements over the internet.
Employee PIP (401(k)) shareholders who have a Company email
address and online access will automatically be enrolled to receive the
Annual Report, Proxy Statement and proxy card over the
internet unless they choose to opt out by emailing the Corporate
Secretary at thomas.noack@commercebank.com.
1000 Walnut
P.O. Box 419248
Kansas City, MO 64141–6248
(816) 234–2000
www.commercebank.com
I N D E P E N D E N T A C C O U N TA N T S
KPMG LLP
Kansas City, Missouri
T R A N S F E R A G E N T, R E G I S T R A R
A N D D I V I D E N D D I S B U R S I N G A G E N T
Shareholder correspondence should be mailed to:
Computershare
P.O. Box 505000
Louisville, KY 40233
Overnight correspondence should be sent to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Within USA Telephone: 800–317–4445
Outside USA Telephone: 781–575–2723
Hearing Impaired/TDD: 800–952–9245
Website: www.computershare.com/investor
Shareholder online inquiries:
https://www-us.computershare.com/investor/Contact
S T O C K E X C H A N G E L I S T I N G
Nasdaq
Symbol–Common Stock: CBSH
Symbol–Preferred Stock: CBSHP
C O M M O N S T O C K I N F O R M AT I O N
The table below sets forth the high and the low prices of actual
transactions for the Company’s common stock, adjusted for the
December 2018 5% stock dividend, which is publicly traded on the
Nasdaq Stock Market.
FISCAL 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
A N N U A L M E E T I N G
HIGH
$58.93
64.21
69.10
64.70
LOW
$52.24
55.11
61.26
53.40
The annual meeting of shareholders will be held Wednesday, April 17,
2019 at 9:30 a.m., in the Kemper Auditorium on the 15th floor of the
Commerce Trust Company Building at 922 Walnut Street, Kansas City,
Missouri 64106.
29
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT
C O M M E R C E B A N C S H A R E S , I N C .
1000 WALNUT
P.O. BOX 419248
KANSAS CITY, MO 64141-6248
Phone: (816) 234-2000
(800) 892-7100
Email: mymoney@commercebank.com
Website: www.commercebank.com
An Equal Opportunity Employer
30
COMMERCE BANCSHARES, INC. | 2018 ANNUAL REPORT