Embracing a
Growth Mindset.
2019 Annual Report & Form 10-K
Team members featured from left to right: Renee Blake, Anthony Atencio, Kala Gebhard, Rod Campbell and Niaz Khan
Embracing a Growth Mindset
The world is changing, and it is changing
more quickly than ever. New technologies,
shifting customer demographics and
expectations, and an evolving competitive
landscape are reshaping the banking
industry. Commerce understands that to
thrive and endure for the long term, we need
to stay curious, be agile in response to our
customers’ needs and maintain a strategic
vision that positions us to grow and innovate.
Commerce is committed to changing with
the times, and to do that, our organization
embraces a growth mindset. We look at
challenges as opportunities to innovate, at
disruption as a chance to uncover new ways
to create value. We build on the 154-year
foundation of our successful franchise but
look for ways to raise the performance bar
even higher. To do this, we bring together
best-in-class products with exceptional teams
dedicated to understanding and accepting
our customers’ unique challenges. As we
enter a new and uncertain decade in financial
services, it is Commerce’s growth mindset
that underpins and enables our continued
success.
About the Cover
Our ability to communicate and collaborate is one of
our greatest strengths as an organization, and
embracing a growth mindset will propel us beyond
our current level of success. We encourage team
members from across the bank to come together,
bringing diverse perspectives and new ideas for
helping our customers and growing our business.
From left to right: Crystal Yang, Business Line Project
Manager; Beth Feuring, Director of Talent Development;
Felecia Hogan, Bank Operations Group Manager; and
Matt White, Director of Commercial Strategy, Marketing
and Sales Delivery
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
1
Financial Highlights
(In thousands, except per share data)
2015
2016
2017
2018
2019
OPERATING RESULTS
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
$
634,320
28,727
422,444
6,320
650,792
263,730
254,730
84,961
$
680,049 $
36,318
733,679 $
45,244
446,556
(53)
689,229
275,391
266,391
87,070
461,263
25,051
744,343
319,383
310,383
91,619
823,825 $
821,293
42,694
501,341
(488)
737,821
433,542
424,542
100,238
50,438
524,703
3,626
767,398
421,231
412,231
113,466
AT YEAR END
Total assets
Loans, including held for sale
Investment securities
Deposits
Equity
Non-performing assets
Common shares outstanding1
Tier I common risk-based capital ratio
Tier I risk-based capital ratio
Total risk-based capital ratio
Tier I leverage ratio
Tangible common equity to tangible assets ratio
Efficiency ratio
OTHER FINANCIAL DATA (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)
PER COMMON SHARE DATA
Net income - basic1
Net income - diluted1
Market price1
Book value1
Cash dividends1
Cash dividend payout ratio
$ 24,604,962 $ 25,641,424 $ 24,833,415 $ 25,463,842 $ 26,065,789
12,444,299
13,427,192
14,005,072
14,160,992
14,751,626
9,901,680
9,770,986
8,893,307
8,698,666
8,741,888
19,978,853
21,101,095
20,425,446
20,323,659
20,520,415
2,367,418
2,501,132
2,718,184
2,937,149
3,138,472
29,394
118,179
11.52%
12.33
13.28
9.23
8.48
61.42
14,649
117,454
11.62%
12.38
13.32
9.55
8.66
61.04
12,664
117,543
13,949
116,685
12.65%
14.22%
13.41
14.35
10.39
9.84
62.18
14.98
15.82
11.52
10.45
55.58
10,585
112,132
13.93%
14.66
15.48
11.38
10.99
56.87
1 . 1 1%
1 .1 2%
1.28%
1.76%
1.67 %
11.43
61.44
10.00
2.93
11.33
63.71
10.16
3.04
12.46
66.18
10.53
3.19
16.16
69.27
11.24
3.53
$
2.11
$
2.26 $
2.63 $
3.61
$
2.10
35.00
18.81
0.705
33.35%
2.26
49.94
20.06
0.740
32.69 %
2.62
50.65
21.89
0.777
29.52%
3.60
53.69
23.93
0.853
23.61 %
14.06
71.54
12.20
3.48
3.59
3.58
67.94
26.70
0.990
27.52%
1Restated for the 5% stock dividend distributed December 2019
Return on Average Common Equity
Return on Average Assets
20.0%
15.0%
10.0%
5.0%
0.0%
2.0%
1.5%
1.0%
0.5%
0.0%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Commerce
Peers
Large Banks
Commerce
Peers
Large Banks
Commerce 10-Year Average: 12.4% Peers’ 10-Year Average: 8.2%
Commerce 10-Year Average: 1.3% Peers’ 10-Year Average: 1.0%
Source: S&P Global Market Intelligence, and company reports and filings as of December 31, 2019
2
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
Letter to Our Shareholders
Commerce Bancshares enjoyed another strong year of financial performance in
2019. Modest loan growth and strong deposit retention, combined with low credit
costs, partially offset the compressed net interest margin created by a flattening
yield curve. Despite a slowdown in economic growth in 2019, the overall economy
remains strong as we have now entered the longest business cycle expansion
on record. The Federal Reserve’s interest rate cuts in the second half of the year
provided an additional boost to keep the markets we serve growing and healthy.
We expect this modest economic growth to continue as we head into 2020.
The banking industry continues to face pressure due to consolidation, changing
demographic trends and increased competition. Our team members remain
committed to recognizing these trends as opportunities and strive to continually
deliver innovative products and services to address our customers’ unique
challenges. Our strong culture is the key driver of our long-term success. It’s a
culture that embraces a growth mindset — continuously striving to improve — and
provides us with the framework to build upon our success and deliver
value-added solutions to our customers.
The execution of our long-term strategic objectives allowed us to deliver one of the highest returns on equity among
the 50 largest banks in the country. Consistent with our strong financial position, we returned capital to shareholders
through increased dividends and share repurchases. In February 2020, we increased our quarterly common dividend 9%
to $.27 per share, our 52nd consecutive year of dividend increases. Additionally, over the course of 2019, we repurchased
approximately $285 million of common shares. Over the past 15 years, the annualized total return for shareholders has
been 9.6% compared to the KBW Bank Index of 3.1%.
We will continue to focus on the long-term growth and health of your company with an emphasis on building customer
relationships, collaborating across business lines and providing innovative solutions. While the current interest rate
environment will put pressure on banking industry earnings, I have confidence in our diversified business model and in
our consistent approach to driving shareholder value. It is this approach that will position Commerce to deliver strong
earnings growth for many years to come.
I would like to thank our team members, customers and shareholders for their ongoing support, and look forward to our
continued success in 2020.
Long-Term Shareholder Return
Cumulative Total Return Indexed, 12/31/2004 = $100
$450
$450
$400
$400
$350
$350
$300
$300
$250
$250
$200
$200
$150
$150
$100
$100
$50
$50
$0
$0
Over the
past 15 years
9.6%
Annualized
Shareholder
Return
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
COMMERCE (CBSH)
NASDAQ BANK
KBW BANK
S&P
Source: Bloomberg as of December 31, 2019
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
3
Embracing a Growth Mindset
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 5 , 2 0 2 0
Dear Commerce Shareholders:
The past year for your company was
marked by strong performance against
the backdrop of healthy economic
growth but also an increasingly
challenging yield curve, which put
pressure on net interest margins. This
performance was driven by delivering
innovative products and solutions to our
customers, maintaining discipline related
to credit and expense management, and
investing in technology and talent that
will pay dividends for years to come.
Although we are certainly pleased with
these financial results, we are equally
encouraged by the underlying growth
that makes this possible. At Commerce,
when we talk about growth, we talk
about the mindset that is needed to
sustain and propel our organization into
the future. This mindset, and the work
that supports it, goes beyond merely
showing growth for growth’s sake.
Growth means more than a swelling
balance sheet, increasing headcount and
expansion into new geographic markets
— though certainly these may be
desired outcomes. To us, growth must
be measured in terms of our capabilities
and cohesion as a team. Having a
growth mindset means challenging
ourselves to adapt to a changing world
and avoiding the complacency that can
afflict any high-performing organization,
much less one with a history and culture
154 years in the making. When we
approach our customers’ needs with a
growth mindset, we see their challenges
as opportunities to help. This is how we
strive to be a better partner, add more
value to customers’ lives and enterprises
and, through this collaboration, create
rewards for our team members and
shareholders.
Our Results
In some ways, 2019 had the misfortune
of following 2018, an exceptional year for
bank earnings, driven by an expanding
net interest margin which was, itself,
a product of rising short-term interest
rates. These factors, combined with
the benefits of tax reform and benign
credit, created a near-ideal earnings
environment. Despite the reversal
of this interest rate situation and the
resultant headwinds, our results in 2019
were nonetheless robust, reflecting
the diversity of our business model, the
steady geographic markets we serve
and the focus on delivering on our “blue
chip” strategic objectives.
In 2019, net
income available
to common
shareholders
totaled $412 million.
Returns on average
assets and average
common equity
totaled 1.67% and
14.1%, respectively,
positioning
Commerce as
having one of
the best financial
4
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
performances of the nation’s 50 largest banks.
The bank grew year-end loan balances 4%,
increased year-end deposit balances 1% and
generally grew revenue across our business lines,
all while keeping credit losses to a minimum and
maintaining a strong balance sheet.
We returned more than
$407 million in capital to
our shareholders in 2019,
including $122 million in
cash dividends and $285
million in common share
repurchases. In February
2020, we increased our
common dividend 9% to $.27 per share, the 52nd
consecutive year of such increases. This steady
shareholder return of Commerce stock, including
dividends, has outpaced the KBW Bank Index by
an annualized 6.5% over the last 15 years.
Payout Ratio
Capital Returned to Common Shareholders as a Percentage
of Net Income Available to Common Shareholders
97%
35%
41%
2017
2018
Capital includes total cash dividends paid on common stock
plus total common shares repurchased
2019
The strength of the Commerce franchise also
depends on the diversity in our loan portfolio and
fee-based businesses. Our significant presence
in payments and wealth management provides
consistent returns and positions Commerce
uniquely among our peer bank and non-bank
competitors. More importantly, these capabilities
allow us to add more value to every customer
relationship.
Diverse Revenue
Non-Interest Income as a Percentage of Total Revenue
$550
s
n
o
i
l
l
i
m
n
i
$
$500
$450
$400
50%
40%
30%
20%
10%
0%
2017
2018
2019
Non-Interest Income (left)
Non-Interest Income to Total Revenue (right)
We ended 2019 with a tangible common equity to
asset ratio of 11% and a total risk-based capital ratio
of 15.5%. Our robust capital ratios position us well,
both for future growth and for times of economic
stress. Because of this strong position and steady
earnings profile, Commerce enjoys an a1 baseline
credit assessment rating from Moody’s. Only five
other banks in the country maintain a credit rating
at this level or better.
Strength and Growth Across Our
Business Segments
Strength of Our Business
Consumer Banking
Commerce’s core strengths lie in the super-
community model that distinguishes us from
other banks — a model that emphasizes local
connection, decision-making and service,
coupled with the sophisticated products and
advice typically found at larger banks. Our strong
capital position, credit discipline, earnings profile
and focus on operational efficiency enable us to
invest in new products, services and markets.
In the consumer banking segment, Commerce is
focused on refining and improving the customer
experience and, because all customers are
different, doing so through the channels they
prefer. During 2019, we introduced a host of
new consumer enhancements, with particular
emphasis on digital channels and personalizing
the banking experience. Over the course
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
5
of the year, Commerce
delivered 22 new
functionality releases in
our mobile banking app
while improving our app
store rating to a 4.7 on
both Android® and iOS
platforms. In addition,
we introduced CommercePremier — a new
relationship management program designed to
deepen our engagement with key retail clients.
To better understand our customers’ needs, our
branch bankers leverage a Customer Advising
Referral Assistant (CARA) tool to help identify
financial challenges and recommend proven
solutions.
We continue to innovate with new ideas for
branch design to address changing customer
preferences. We recently opened our first
Commerce Bank Connect™ location in St.
Louis. This location has many new capabilities
compared to a traditional branch and is designed
to connect our brand and solutions with
people, ideas and the community as a whole.
Another new location in Denver is designed as a
collaborative space to engage small business and
retail customers with relevant bank partners. We
also introduced a new branch in Peoria, refreshed
27 locations across our footprint, and optimized
6
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
our branch and ATM locations to align with
customer needs. Our long-term focus continues
to be on making investments in innovation while
managing our expenses appropriately. These
initiatives allowed us to grow retail deposits 2%
while holding costs well below peer benchmarks.
Commercial Banking and
Commercial Payments
Our commercial banking and payments teams
serve more than 13,000 business clients. We
recognize the value of having a financial partner
that truly understands clients’ unique financial
needs. Our teams are comprised of highly skilled
bankers and payments experts with considerable
knowledge of the markets where we operate and
the industry verticals we serve. We use insights
gained from working with clients across the U.S.
to help businesses access the payments system,
manage risk, fund growth and improve cash flow.
Our commercial division continues to focus
on the growing healthcare industry. Through
our team of seasoned specialists, many of
whom have direct experience in the healthcare
field, CommerceHealthcare® delivers a fresh
perspective on financial solutions, focusing on
receivables, payments and financing.
In close consultation with our existing customers,
CommerceHealthcare® recently introduced new
solutions for patient refunds and online bill pay,
pre-service enrollment for patient financing and
remote deposit for providers. Our tools help
providers streamline financial processes, optimize
revenue and payments, and improve cash flow.
Our CommercePayments™ group thinks about the
future of payments beyond the payer — focusing
on the supplier to help balance the equation.
As a payments leader, we take a pragmatic
approach to payment solution development,
keeping our customers at the forefront of all that
we do. Our CommercePayments™ team strives to
provide reimagined and simplified payables and
receivables solutions that allow our customers to
focus on what matters most to them.
With the significant growth in our expansion
markets, we continue efforts to ensure
Commerce is positioned to effectively serve
these communities through strategic locations,
high-performing talent and local industry
specialists. In 2019, we upgraded our commercial
offices in Oklahoma City, Houston, Nashville
and Indianapolis. We also opened an additional
business banking center in the Highlands area of
northwest Denver. We are committed to investing
in and expanding our presence in these markets.
Expansion Market Loan Growth
3-year CAGR
13%
our peers in client satisfaction (96%) and are
industry leading in our retention of individual
investment assets (96%), reflecting the strong
partnerships we form with our clients.
We continue to find innovative ways to fuel
growth in our wealth management business.
We recently invested in a new private banking
lending platform that will transform how
we support unique client needs with highly
specialized products. We launched a new
client relationship management (CRM) system
to better serve our clients and identify future
opportunities. Additionally, we are expanding our
brand awareness efforts and implementing a new
consumer engagement process to increase our
client relationships and the breadth of services
we provide. We believe investments such as
these will position us for continued growth and
superior returns well into the future.
3%
Trust Assets Under Administration
Total Company
Expansion Markets
Wealth Management
As one of the nation’s largest bank-managed trust
companies, we have the scale, product depth
and professional team to serve the needs of
individual and institutional clients, while providing
financial advice with an individualized approach
and tailored solutions. Within our personal wealth
service model, we oversee Commerce Brokerage
Services, Inc., Commerce Trust Company and
Commerce Family Office, delivering a suite of
comprehensive solutions to address our clients’
unique needs.
Our differentiated wealth management business
was a strong contributor to our financial results in
2019. The team grew asset management revenue
7%, and assets under administration reached a
record $56.7 billion. We continue to outperform
s
n
o
i
l
l
i
b
n
i
$
$60
$55
$50
$45
$40
$57
$49
$50
2017
2018
2019
Our Culture - Raising the Bar by
Embracing a Growth Mindset
At Commerce, we cultivate a culture of high
performance and continuous improvement. We
believe our culture — in particular, our ability to
communicate and work collaboratively on behalf
of our customers — is our differentiating strength
and the source of our long-term competitive
advantage.
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
7
Collaboration Across the Bank
Collaboration is at the heart of everything we do.
As mentioned in last year’s report, we have been
immersed in the planning and building phases
of a complete core deposit system conversion.
This project is an example of an extraordinary
collective effort, spanning business lines,
operations and information technology, to create
a successful implementation that is scheduled
to go live in 2020. Recent CRM upgrades in our
commercial, payments and trust areas have
created the foundation for better information-
sharing and collaboration across all corners
of the bank. These tools enable the
communication and collaboration
that is at the heart of our
Commerce culture, allowing
us to work together with
agility on behalf of our
customers.
Diversity, Inclusion
and Equity
Over the past few years,
Commerce has made
significant progress in
building a more diverse and
inclusive culture in which all
team members can thrive. We
believe our success is defined not
only by our ability to help people meet their
financial challenges, but also by the mark we
leave on the world at large. That’s why we make
ongoing investments in ideas, programs and
technology that serve our customers, strengthen
our communities and support a healthy working
environment. As a socially responsible corporate
citizen, we continuously seek opportunities
to make a difference. Our community
involvement, diversity and inclusion initiatives,
and sustainability efforts are all products of a
culture that emphasizes being a force for good
in our region and in our industry. The common
denominator behind these investments is our
commitment to meeting people where they are,
learning about their needs, and building strong
and lasting relationships.
In support of the diverse makeup of today’s
labor force, Commerce offers a variety of internal
resource groups, mentoring programs and
networking opportunities to help team members
feel connected to our bank and to each other.
EMERGE, a resource group that focuses on
creating a culture that attracts, develops and
engages young professionals, now boasts nearly
600 members across Commerce. RISE, a similar
group created to support the personal
and professional growth among
women at Commerce, has
1,200 engaged members.
Recent launches of VIBE
(multicultural) and PRIDE
(LGBTQIA+) groups have
brought even more
diverse stakeholders
into the fold.
Supporting Our
Communities
As a bank, we know our
success is tied inextricably
to the communities we serve.
Our team members volunteer for and
serve a host of local nonprofit entities across our
markets. In 2020, Commerce is offering all team
members the opportunity to spend a day with
full pay volunteering for causes of their choosing.
Our people are also engaged in governance and
leadership roles, serving on the boards of more
than 500 nonprofits. According to the Federal
Reserve, Commerce is considered a leader in
providing community development services,
and we have maintained an “outstanding” rating
for community reinvestment for more than 20
years. Last year, Commerce bankers donated
nearly $300,000 to the E2E Foundation, an
8
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
employee-owned 501(c)(3) that launched in 2016,
to support teammates in need. Additionally in
2019, Commerce Trust Company advised on
more than $22 million of charitable investments
into our communities on behalf of the Commerce
Bancshares Foundation and private foundations
that have engaged the bank as trustee.
Looking Ahead in 2020
We have a lot to be proud of — and grateful
for — as we enter 2020. Our consistently strong
financial performance, our culture and values,
and the strength of our team position us to take
a long-term view. The markets we serve continue
to be healthy, and economic activity remains
strong.
We will continue to invest in our banking
activities in expansion markets outside of our
legacy footprint. We have been successful in
hiring experienced bankers in these markets
who embrace our Commerce culture and deliver
the entire suite of competitive products and
solutions to our customers.
The banking industry will continue to experience
disruption from consolidation and non-bank
competitors. Part of our growth mindset is to
look at this disruption as a source of opportunity.
As we look to the future, our bank will continue
to invest in the people and technology needed
to adapt to a changing landscape. We will focus
on continuous improvement and efficiency while
sustaining our investment and focus on “blue
chip” objectives that drive our growth well into
the future.
Our team members come to work every day
to accept as their own the challenges our
customers face. Our customers are at the center
of everything we do; their needs serve as our
compass. While the future holds challenges, we
will seek to learn and to grow, and to sustain
the success of your company through this new
decade.
Growth in EPS and Stock Price
e
c
i
r
P
k
c
o
t
S
$80.00
$60.00
$40.00
$20.00
$0.00
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
)
S
P
E
(
e
r
a
h
S
r
e
P
s
g
n
n
r
a
E
i
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Stock Price Earnings Per Share (EPS)
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
9
Performance Highlights
Total Loans
$ in billions
5-year CAGR = 5.2%
$14.8
$14.0
$12.4
2015
2017
2019
Fee Income
in 2019
Million in Share
Repurchases
in 2019
10
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
• Commerce reported earnings per share of $3.58, down less than 1% from 2018. Return on average assets totaled 1.67% in 2019, while the return on common average equity was 14.1%, which compares favorably to the top 50 bank industry average of 1.25% for return on average assets and 11.0% for return on average common equity. • Net income available to common shareholders totaled $412 million in 2019 compared to $425 million last year, reflecting 5% growth in our fee income and a disciplined approach to managing expenses, offset by higher loan losses. • In 2019, Commerce paid a regular cash dividend of $.99 per share (restated) on common shares, representing a 16% increase over the prior year. In February 2020, we announced a 9% increase in our regular cash dividend, marking the 52nd consecutive year in which regular cash dividends increased. Also in 2019, for the 26th year in a row, we paid a 5% stock dividend. • Total shareholders’ equity grew to $3.1 billion, while our Tier I common risk-based capital ratio decreased to 13.9%, compared to 14.2% last year. In 2019, we purchased $285 million in treasury stock of the company.• Period end total loans grew $591 million, or 4%, in 2019, driven mostly by increases in commercial and industrial loans and personal real estate loans, which grew 9% and 11%, respectively. • Loan growth in our expansion markets continued to outpace that of the company overall, with loans increasing 5% to $2.3 billion at year end. Revenue growth from our expansion markets increased 12% in 2019. We continued to support and develop our commercial banking teams in our expansion markets, adding new team members and opening a business banking center in Denver during 2019. • Fee income increased 5% overall on solid growth from trust fees, mortgage banking revenue and cash sweep commissions, which grew 5%, 32% and 29%, respectively. The diversity in our products continues to add consistency to our earnings and complements our lending activities to build stronger banking relationships.• Fee income from our wealth management businesses grew 6% to $184 million. Commerce Trust Company assets under administration now total $56.7 billion.• Credit quality remains strong. While net loan charge-offs grew to $50 million, mostly on higher consumer losses, net credit losses totaled only .35% of total loans. In addition, non- performing assets declined to .07% of total loans and remain at very low levels.• Commerce Bank was named among America’s Best Banks 2019 by Forbes. We were the top-ranked Missouri-based bank and ranked 17th in the nation overall. Commerce by the Numbers
$26.1
Billion in Assets
$7.6
Billion in Market Capitalization
47th
Among U.S. Banks
18th
Among U.S. Banks
$34.4
Billion in Trust Assets
Under Management
18th
Among U.S. Banks1
$20.5
Billion in Total Deposits
$14.8
Billion in Total Loans
12 th
Largest Commercial Card Issuer2
154
Years in Business
a1
Baseline Credit Assessment
Commerce is 1 of 6 U.S. banks
with an a1 or better
Moody’s rating
4,858
Full-Time Equivalent
Employees
F U L L - S E RV I C E B A N K I N G F O OT P R I N T
164 full-service branches and 366 ATMs
St. Louis • Kansas City
Springfield • Central Missouri
Central Illinois • Wichita
Tulsa • Oklahoma City • Denver
C O M M E R C I A L O F F I C E S
Cincinnati • Nashville • Dallas
Des Moines • Indianapolis
Grand Rapids • Houston
U. S . P R E S E N C E
Extended Commercial Market Area
Commercial Payments Services
Offered in 48 states across the U.S.
Source: S&P Global Market Intelligence, and company reports and filings as of December 31, 2019
1Regulated U.S. depositories, which includes commercial banks, bank holding companies and credit unions
2Based on Top 50 U.S. Banks by asset size as of 2018 and Nilson Report rankings
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
11
Community Advisors
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 in each of our markets that we’re able to say “Challenge Accepted.®”
Missouri
CAPE GIRARDEAU
Nick Burger
Commerce Bank
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
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
Former Energy Industry CEO
Joe Hartman
Retired, Commerce Bank
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
George M. Huffman
Pearl Motor Company
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
Gina Raines
Commerce Bank
Jim Rolls
Retired, Associated Electric Cooperative
Steve Sowers
Commerce Bank
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
Reece Nichols Smith Realty
Dr. Larry Snider
Retired, Snider Optometry
Timothy Soulis
Golden Classics Jewelers
KANSAS CITY
Ali H. Armistead
Alaris Capital, LLC
Kevin G. Barth
Commerce Bancshares, Inc.
Commerce Bank
Rosana Privitera Biondo
Mark One Electric Co., Inc.
Clay C. Blair, III
Clay Blair Services Corp.
Timothy S. Dunn
J.E. Dunn Construction Co., Inc.
Jon D. Ellis
Paradise Park, Inc.
Stephen E. Gound
Labconco Corp.
Jonathan M. Kemper
Commerce Bancshares, Inc.
Commerce Bank
David F. Kiersznowski
DEMDACO
Michael P. 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 Company
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.
Kenny Rowland
Commerce Bank
Steve Sowers
Commerce Bank
Gregory West
Mills Iron & Supply
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
Patrick Modlin
Room 108/Felix Street Gourmet
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
Rick Schultz
RS Electric
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
Tom Harmon
Commerce Bank
12
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
Juanita Hinshaw
H & H Advisors
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
Kristin Humes
Tacony Corporation
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.
Chrissy Nardini
American Metal Supplies Co., Inc.
Victor L. Richey, Jr.
ESCO Technologies, Inc.
Steven F. Schankman
Contemporary Productions, LLC
James E. Schiele
Consultant
Paul J. Shaughnessy
BSI Constructors, Inc.
Thomas H. Stillman
Summit Distributing
Christine Taylor
Enterprise Holdings, Inc.
Andrew Thome
J.W. Terrill
Gregory Twardowski
Investments
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
Richard Sauget Jr.
Mayor of Sauget
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.
Susan Kalist
Commerce Bank
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
Elizabeth Powers
Powers Insurance
Sue Prapaisilp
Global Foods Market
Dennis Scharf
Scharf Tax Services
ST. CHARLES COUNTY NORTH
Kevin Bray
Commerce Bank
Lou Helmsing
Craftsmen Trailer
Dr. Barbara Kavalier
St. Charles Community College
Susan Kalist
Commerce Bank
Greg Kendall
Commerce Bank
Dr. Art McCoy
Jennings School District
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
Roger Campbell, Jr.
Campbell Ford
Brian Esther
Commerce Bank
James P. Ferguson
Heart of America Beverage Co.
Charles R. Greene
American Sportsmen Holding Co.
Bunch Greenwade
Rancher
Robert A. Hammerschmidt, Jr.
Commerce Bank
Brian Sutton
Commerce Bank
Clive Veri
Commerce Bank
Dr. Hal L. Higdon
Ozarks Technical Community College
Jerry Watley
Able 2 Products Company, Inc.
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
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 D. Neff
Commerce Bank
Eric Schnelle
S & H Farm Supply, Inc.
Steve W. Sloan
Midwest Minerals, 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
Allred & Company, CPA’s, Inc.
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
Allison Vance Moore
Colliers International
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
13
Teresa L. Knox
Community HigherEd
Ken Lackey
The NORDAM Group, Inc.
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
Dr. Andy Revelis
Tulsa Pain Consultants
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
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
Linda Cook
Kansas State University
Monte Cook
Commerce Bank
Shawn Drew
Commerce Bank
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.
Kristi Krok
Commerce Bank
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.
John Rolfe
Kansas Leadership Center
Barry L. Schwan
House of Schwan, Inc.
Thomas D. White
White & Ellis Drilling, Inc.
Illinois
BLOOMINGTON-NORMAL
Brent A. Eichelberger
Commerce Bank
Neil Finlin
Farnsworth Group, Inc.
Ron Greene
Afni, Inc.
Jared Hall
Keplr Vision Services
Mary Bennett Henrichs
Integrity Technology Solutions
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
Colleen Kannaday
AdvocateAuroraHealth
Nick Kemp
Vogo Cabinets
William Phillips
Commerce Bank
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 Foundation
Tim Harrington
Devonshire Group
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Kim Martin
Martin Hood, 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 System
Brent A. Eichelberger
Commerce Bank
Gregg E. Hollabaugh
Commerce Bancshares, Inc.
Robert S. Holmes
Commerce Bancshares, Inc.
Commerce Bank
Dr. James W. Maxey
OSF Orthopaedics
Richard D. Moore
Caterpillar, Inc.
Jonathan A. 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
Shannon O’Doherty
Commerce Bank
Vince Orza
Retired, Family Broadcasting Corporation
Kathy Potts
Rees Associates, Inc.
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
14
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
Officers
Directors
COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT
15
David 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 Paul A. SteinerControllerAaron 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 Vice Chairman, SelectQuote Senior Insurance ServicesDavid W. Kemper Executive 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 Member UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________________________________________________
For the Fiscal Year Ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________________________________________________
For the transition period from to
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)
43-0889454
(IRS Employer Identification No.)
64106
(Zip Code)
Registrant's telephone number, including area code: (816) 234-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Trading symbol(s)
Name of exchange on which registered
$5 Par Value Common Stock
Depositary Shrs, each representing a 1/1000th intrst in a shr of 6.0%
Non-Cum. Perp Pref Stock, Srs B
CBSH
CBSHP
NASDAQ Global Select Market
NASDAQ Global Select Market
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
Securities registered pursuant to Section 12(g) of the Act: NONE
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 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 such files). Yes
No
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
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, 2019, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $6,067,000,000.
As of February 14, 2020, there were 112,086,942 shares of Registrant’s $5 Par Value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2020 annual meeting of shareholders, which will be filed within 120 days of December 31, 2019,
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
13
13
13
13
15
16
16
58
58
126
126
128
128
128
128
128
128
129
130
131
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, 2019, the Company had consolidated assets of $26.1 billion, loans of $14.8
billion, deposits of $20.5 billion, and equity of $3.1 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 164 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 commercial 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 exceptional 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 are mainly located in the lower Midwest, which provides 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. 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 4,576 persons on a full-time basis and 259 persons on a part-time basis at December 31, 2019. 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 employee educational and adoption assistance programs. The Company's health and 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, reputation, industry knowledge, and price. In its
two largest markets, the Company has approximately 12% of the deposit market share in Kansas City and approximately 8% 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 2019, the Commercial, Consumer and
Wealth segments contributed 52%, 24% and 24% of total segment pre-tax income, respectively. See the section captioned
"Operating Segments" in Item 7, Management's Discussion and Analysis, of this report and Note 13 to the consolidated financial
statements for additional discussion on operating segments.
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,
4
loan limits, mergers and acquisitions, issuance of securities, dividend payments, and extensions of credit. The Bank is subject to
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 FDIC's Deposit Insurance Fund (DIF) 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 the FDIC to 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 and 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 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. The Company's deposit insurance
expense was $6.7 million in 2019 and $11.5 million in 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 is intended to absorb losses
during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, stock repurchases and
executive compensation. The rule also adjusted the methodology for calculating risk-weighted assets to enhance risk sensitivity.
At December 31, 2019, the Company's capital ratios are well in excess of those minimum ratios required by Basel III.
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
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
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 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 $250 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. Additionally, a copy of our electronically
filed materials can be found at www.sec.gov. 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
21, 54-57
37-39, 80-84
27
27-28
33-37
30-33
54, 88
17
88
Item 1a. RISK FACTORS
Making or continuing an investment in securities issued by the Company, including its common and preferred stock, involves
certain risks that you should carefully consider. If any of the following risks actually occur, the Company's 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 2019, the United States economy entered the longest expansion in its history. Despite some weakness in consumer
confidence in late 2019, the expansion keeps progressing, seemingly boosted by tax reform in 2018 and a lower interest
rate environment. Unemployment levels remain low and the stock market has performed well in 2019 and early 2020.
The U.S. economy is affected by global events and conditions, including U.S. trade disputes and renewed trade agreements
with various countries. Although the Company does not directly hold foreign debt or have significant activities with
foreign customers, the global economy, the strength of the U.S. dollar, international trade conditions, 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 extensive government regulation and supervision.
As part of the financial services industry, the Company is subject to extensive federal and state regulation and supervision.
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.
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
9
the Company, representing 61% of total revenue for the year ended December 31, 2019. 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.
After raising rates four times in 2018, the Federal Reserve Board lowered the benchmark interest rate three times during 2019
for a total of 75 basis points. Future economic conditions or other factors could shift monetary policy resulting in increases or
additional 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 impact of the phase-out of LIBOR is uncertain.
In 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that LIBOR would likely be
discontinued at the end of 2021 as panel banks would no longer be required to submit estimates that are used to construct LIBOR.
U.S. regulatory authorities have voiced similar support for phasing out LIBOR. 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. The impact of alternatives to LIBOR on the valuations, pricing and operation of the Company's financial instruments is
not yet known. The Company is coordinating with industry groups to identify an appropriate replacement rate for contracts expiring
after 2021, as well as preparing for this transition as it relates to new and existing contracts and customers. The Company has
established a LIBOR Transition Program, which is lead by the LIBOR Transition Steering Committee (Committee) whose purpose
is to guide the overall transition process for the Company. The Committee is an internal, cross-functional team with representatives
from all relevant business lines, support functions and legal counsel. An initial LIBOR impact and risk assessment has been
performed, which identified the associated risks across products, systems, models, and processes. The Committee is assessing
the results of the assessment and developing and prioritizing actions. Additionally, LIBOR fallback language has been included
in key loan provisions of new and renewed loans in preparation for transition from LIBOR to the new benchmark rate when such
transition occurs.
The Company may be adversely affected if the interest rates currently tied to LIBOR on the Company's loans, derivatives, and
other financial instruments are not able to be transitioned to an alternative rate. Furthermore, the Company may be faced with
disputes or litigation with counterparties regarding interpretation and enforcement of fallback language in new and renewed loans
as the transition to a new benchmark rate continues to evolve.
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
10
in market value due to changing interest rates and implied credit spreads. While the Company maintains prudent 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.
The allowance for credit losses may be insufficient or future credit losses could increase.
The allowance for loan losses at December 31, 2019 reflects management's best estimate of probable loan losses that have
been incurred within the existing loan portfolio as of the balance sheet date. 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
at December 31, 2019.
In 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard "Measurement of Credit Losses
on Financial Instruments" (ASU 2016-13), which became effective January 1, 2020 and was adopted by the Company at that time.
This new standard significantly altered the way the allowance for credit losses is determined. The new standard utilizes a life of
loan loss concept and required significant operational changes, especially in data collection and analysis. The level of the allowance
will be based on management’s methodology that utilizes historical net charge-off rates, and adjusts for the impacts in the reasonable
and supportable forecast and other qualitative factors. Key assumptions include the application of historical loss rates, prepayment
speeds, forecast results of a reasonable and supportable period, the period to revert to historical loss rates, and qualitative factors.
Although credit losses have been stable during the past several years, an unforeseen deterioration of financial market conditions
could result in larger credit losses, which may negatively affect the Company's results of operations and could significantly increase
its allowance for credit losses. The Company’s allowance level is subject to review by regulatory agencies, and that review could
also result in adjustments to the allowance for credit losses. Additionally, the Company's provision for credit losses may be more
volatile in the future under the new standard, due to macroeconomic variables that influence the Company's loss estimates, and
the volatility in credit losses may be material to the Company's 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, offers ongoing training to employees, hosts tabletop
exercises to test response readiness, 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, financial condition and results of operations. 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 technological systems to increase efficiency, enhance product and service
capabilities, eliminate risks of end-of-lifecycle products, reduce costs, and better serve our customers. 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 and may not be able to effectively implement new technology-driven products and services and may not 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 technological systems could have a material
adverse effect on the Company’s business, financial condition and results of operations.
The Company plans to convert its core customer and deposit systems during 2020 and may encounter significant adverse
developments.
The Company will replace its core customer and deposit systems and other ancillary systems (collectively referred to as core
system). The core system is used to track customer relationships and deposit accounts. The core system is integrated with channel
applications that are used to service customer requests by bank personnel or directly by customers (such as online banking and
mobile applications). The new core system will provide a new platform based on current technology and will enable the Company
to integrate other systems more efficiently, and is a significant improvement compared to our current core system. However,
changing the core system will subject the Company to operational risks during and after the conversion, including disruptions to
our technology systems, which may adversely impact our customers. We have plans, policies and procedures designed to prevent
or limit the risks of a failure during or after the conversion of our core system. However, there can be no assurance that any such
adverse development will not occur or, if they do occur, that they will be timely and adequately remediated. The ultimate impact
of any adverse development could damage our reputation, result in a loss of customer business, subject us to regulatory scrutiny,
or expose us to civil litigation and possibly financial liability, any of which could have a material 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.
12
Item 1b. UNRESOLVED STAFF COMMENTS
None
Item 2. PROPERTIES
The main offices of the Company are located in Kansas City and St. Louis, Missouri. The Company owns its main offices and
leases unoccupied premises to the public. The larger office buildings include:
Building
1000 Walnut
Kansas City, MO
922 Walnut
Kansas City, MO
811 Main
Kansas City, MO
8000 Forsyth
Clayton, MO
Net rentable
square footage
% occupied in
total
% occupied by
Bank
391,000
256,000
237,000
178,000
97%
52%
95
100
100
93
100
100
The Company has an additional 159 branch locations in Missouri, Illinois, Kansas, Oklahoma and Colorado which are owned
or leased.
Item 3. LEGAL PROCEEDINGS
The information required by this item is set forth in Item 8 under Note 21, Commitments, Contingencies and Guarantees
on page 121.
Item 4. MINE SAFETY DISCLOSURES
Not applicable
13
Information about the Company's Executive Officers
The following are the executive officers of the Company as of February 25, 2020, 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
Kevin G. Barth, 59
Jeffrey M. Burik, 61
Daniel D. Callahan, 63
Sara E. Foster, 59
John K. Handy, 56
Robert S. Holmes, 56
Positions with Registrant
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, 62
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, 69
John W. Kemper, 42
Charles G. Kim, 59
Douglas D. Neff, 51
Paula S. Petersen, 53
David L. Roller, 49
Paul A. Steiner, 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.
Controller of the Company since April 2019. He is also Controller of the Company's subsidiary
bank, Commerce Bank. Assistant Controller and Director of Tax of the Company prior thereto.
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 3,557 common shareholders of record as of December 31, 2019. Certain of the Company's shares are
held in "nominee" or "street" name and the number of beneficial owners of such shares is approximately 92,000.
Performance Graph
The following graph presents a comparison of Company (CBSH) performance to the indices named below. It assumes $100
invested on December 31, 2014 with dividends invested on a cumulative total shareholder return basis.
Commerce (CBSH)
100.00
104.77
152.23
156.84
168.70
217.13
NASDAQ OMX Global-Bank
100.00
102.21
129.34
153.13
128.02
175.61
S&P 500
100.00
101.37
113.46
138.22
132.15
173.74
2014
2015
2016
2017
2018
2019
The Company has a long history of paying dividends. 2019 marked the 51st consecutive year of growth in our regular common
dividend, and the Company has also issued an annual 5% common stock dividend for the past 26 years. However, payment of
future dividends is within the discretion of the Board of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Company. The Board of Directors makes the dividend determination
quarterly.
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 2019.
Period
October 1—31, 2019
November 1—30, 2019
December 1—31, 2019
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
92,536
103,858
470,928
667,322
$64.05
$66.31
$84.13
$78.57
92,536
103,858
470,928
667,322
2,533,045
4,901,886
4,430,958
4,430,958
The Company’s stock purchases shown above were made under authorizations by the Board of Directors. December purchases
include 438,009 shares purchased under the accelerated share repurchase ("ASR") program discussed in Note 14 to the consolidated
financial statements. Under the most recent authorization in November 2019 of 5,000,000 shares, 4,430,958 shares remained
available for purchase at December 31, 2019.
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 316 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, a mobile
application, and a centralized 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 $421.2 million, a
decrease of 2.8% compared to the previous year. The return on average assets was 1.67% in 2019, and the return on
average common equity was 14.06%. Diluted earnings per share decreased 0.6% in 2019 compared to 2018.
Total revenue — Total revenue is comprised of net interest income and non-interest income. Total revenue in 2019
increased $20.8 million, or 1.6% over 2018, driven by growth in non-interest income of $23.4 million. Growth in non-
interest income resulted principally from an increase in trust fees and a one-time gain of $11.5 million resulting from the
sale of our corporate trust business.
Non-interest expense — Total non-interest expense increased 4.0% this year compared to 2018, mainly due to higher
expense for salaries and benefits.
Asset quality — Net loan charge-offs totaled $49.7 million in 2019, an increase of $7.4 million over those recorded in
2018, and averaged .35% of loans compared to .30% in the previous year. Total non-performing assets, which include
non-accrual loans and foreclosed real estate, amounted to $10.6 million at December 31, 2019, compared to $13.9 million
at December 31, 2018, and represented .07% of loans outstanding at December 31, 2019.
Shareholder return — During 2019, the Company paid cash dividends of $.99 per share on its common stock, representing
an increase of 16.1% over the previous year, and paid dividends of 6% on its preferred stock. In 2019, the Company
issued its 26th consecutive annual 5% common stock dividend, and in January 2020, the Company's Board of Directors
authorized an increase of 8.9% in the common cash dividend. The Company purchased 4,670,114 shares of treasury
stock in 2019. Total shareholder return, including the change in stock price and dividend reinvestment, was 16.8%,
13.7%, and 9.6% over the past 5, 10, and 15 years, respectively.
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.
2019
2018
2017
2016
2015
1.67%
14.06
12.20
71.54
32.03
3.48
38.98
56.87
13.93
14.66
15.48
11.38
10.99
27.52
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
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) Risk-based capital information was prepared under Basel III requirements, which were effective January 1, 2015.
(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)
2019
$ 3,138,472
3,788
144,784
138,921
1,785
$ 2,849,194
$ 26,065,789
138,921
1,785
$ 25,925,083
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
10.99%
10.45%
9.84%
8.66%
8.48%
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
2019
2018
2017
2016
2015
$
821,293 $
50,438
524,703
3,626
767,398
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
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
421,231
412,231
3.59
3.58
113,466
.990
67.94
26.70
112,132
26,065,789
14,751,626
8,741,888
20,520,415
2,418
3,138,472
10,585
433,542
424,542
3.61
3.60
100,238
.853
53.69
23.93
116,685
25,463,842
14,160,992
8,698,666
20,323,659
8,702
2,937,149
13,949
319,383
310,383
2.63
2.62
91,619
.777
50.65
21.89
117,543
24,833,415
14,005,072
8,893,307
20,425,446
1,758
2,718,184
12,664
275,391
266,391
2.26
2.26
87,070
.740
49.94
20.06
117,454
25,641,424
13,427,192
9,770,986
21,101,095
102,049
2,501,132
14,649
* Restated for the 5% stock dividend distributed in December 2019.
18
634,320
28,727
422,444
6,320
650,792
263,730
254,730
2.11
2.10
84,961
.705
35.00
18.81
118,179
24,604,962
12,444,299
9,901,680
19,978,853
103,818
2,367,418
29,394
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
'19-'18
'18-'17
'19-'18
'18-'17
$
2019
821,293 $
(50,438)
524,703
3,626
(767,398)
(109,074)
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)
(2,532) $
7,744
23,362
4,114
29,577
3,125
90,146
(2,550)
40,078
(25,539)
(6,522)
(4,557)
(.3)%
18.1
4.7
N.M.
4.0
2.9
(1,481)
(4,672)
(517)
(3,191)
4,155
(68.3)
421,231
(9,000)
433,542
(9,000)
319,383
(9,000)
(12,311)
—
114,159
—
(2.8)
N.M.
12.3%
(5.6)
8.7
N.M.
(.9)
(4.1)
N.M.
35.7
N.M.
$
412,231 $
424,542 $
310,383 $
(12,311) $
114,159
(2.9)%
36.8%
Net income attributable to Commerce Bancshares, Inc. (net income) for 2019 was $421.2 million, a decrease of $12.3 million,
or 2.8%, compared to $433.5 million in 2018. Diluted income per common share was $3.58 in 2019, compared to $3.60 in 2018.
The decline in net income resulted from a decrease of $2.5 million in net interest income, as well as increases of $29.6 million in
non-interest expense, $7.7 million in the provision for loan losses and $3.1 million in income taxes. These decreases in net income
were partly offset by increases of $23.4 million in non-interest income and $4.1 million in investment securities gains, coupled
with a decrease of $3.2 million in non-controlling interest expense. The return on average assets was 1.67% in 2019 compared
to 1.76% in 2018, and the return on average common equity was 14.06% in 2019 compared to 16.16% in 2018. At December 31,
2019, the ratio of tangible common equity to assets increased to 10.99%, compared to 10.45% at year end 2018.
During 2019, net interest income declined mainly due to an increase of $38.0 million in interest expense on interest-bearing
deposits and borrowings, largely due to higher rates paid, while lower average balances on investment securities also resulted in
lower interest income this year. These decreases in interest income were partly offset by growth of $38.3 million in interest earned
on loans, resulting from higher loan yields and average balances. Total rates earned on average earning assets grew 10 basis points
this year, while funding costs for deposits and borrowings increased 23 basis points. The provision for loan losses totaled $50.4
million, an increase of $7.7 million over the previous year and exceeded net loan charge-offs by $750 thousand. Net loan charge-
offs increased $7.4 million in 2019 compared to 2018, mainly due to higher credit card and business loan net charge-offs. The
increase in business loan net charge-offs was primarily the result of a loan charge-off related to a single leasing customer.
Non-interest income grew 4.7% in 2019, mainly due to growth in trust fees, loan fees and sales, and gains on sales of assets.
Net investment securities gains of $3.6 million were recorded in 2019 and were mainly comprised of net gains realized on sales
of equity investments. Non-interest expense grew $29.6 million in 2019 compared to 2018, largely due to higher salaries and
benefits and data processing and software expense, which increased $24.7 million and $6.9 million, respectively.
Net income attributable to Commerce Bancshares, Inc. 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 $3.60 in 2018, compared to $2.62 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.
As compared to 2017, the increase in net interest income in 2018 resulted mainly 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 in 2018, while funding costs for deposits and borrowings increased 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 an $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
19
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 2017.
The Company distributed a 5% stock dividend for the 26th consecutive year on December 18, 2019. All per share and average
share data in this report has been restated for the 2019 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 and fair value measurement.
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 17 on Fair Value Measurements.
At December 31, 2019, assets and liabilities measured using observable inputs that are classified as either Level 1 or Level 2
represented 98.8% and 99.1% 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 $104.6 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
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
20
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 Company would
use valuation techniques requiring more management judgment to estimate the appropriate fair value.
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.
2019
Change due to
Average
Volume
Average
Rate
Total
2018
Change due to
Average
Volume
Average
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
$
9,730 $
(2,961)
5,199
3,261
(3,541)
(979)
(475)
10,234
(33)
(1,667)
(2,319)
(5,766)
10,400
(1,953)
(7,684)
(8,989)
(480)
1,018
(71)
1,679
57
(369)
(16)
4,336
7,741 $
3,223
4,920
1,978
6,881
1,670
1,960
28,373
(56)
915
778
1,261
1,720
5,208
(6,054)
3,828
17,471 $
262
10,119
5,239
3,340
691
1,485
38,607
(89)
(752)
(1,541)
(4,505)
12,120
3,255
(13,738)
(5,161)
16
(464)
(1,001)
536
31,696
(9)
12,230
3,169
7,951
17
465
33,375
48
11,861
3,153
12,287
Total
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
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
184
289
255
2,804
93,759
441
4,010
95,109
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
57
328
(264)
(2,393)
(65)
10,174
834
6,192
(8)
10,502
570
3,799
9,826
(3,041)
21,648
73,461
4,985
920
9,913
(8,234) $
4,775
(13)
28,103
3,593 $
9,760
907
38,016
(4,641) $
48
(3,041)
(5,265)
6,615 $
9,778
—
26,913
66,846 $
$
21
Net interest income totaled $821.3 million in 2019, decreasing $2.5 million compared to $823.8 million in 2018. On a tax
equivalent (T/E) basis, net interest income totaled $835.4 million, and decreased $4.6 million from 2018. This decrease included
combined growth of $38.0 million in interest expense on deposits and borrowings, due to higher average rates paid and higher
average balances. In addition, interest earned on investment securities decreased $5.2 million, mainly due to lower average
balances, while loan interest income (T/E) grew $38.6 million due to higher rates earned and higher average balances. The net
yield on earning assets (T/E) was 3.48% in 2019 compared with 3.53% in 2018.
During 2019, loan interest income (T/E) grew $38.6 million over 2018 mainly due to higher rates earned coupled with increased
average balances for business, business real estate and personal real estate loan categories. The average tax equivalent rate earned
on the loan portfolio increased 18 basis points to 4.71% in 2019 compared to 4.53% in 2018. In addition, average loan balances
increased 2.1%, or $298.6 million, this year. Increased interest of $17.5 million earned on business loans was the main driver of
overall higher loan interest income, due to growth of $251.1 million in average business loan balances and a 16 basis point increase
in the average rate. While higher rates also contributed to the increase in interest income, rates were impacted by actions taken
by the Federal Reserve during the second half of 2019 to lower short-term interest rates, as many of these loans contain variable
interest rate terms. Business real estate interest was higher by $10.1 million as a result of an increase in average balances of $121.2
million, along with an increase in the average rate of 17 basis points. Personal real estate loan interest income increased $5.2
million and resulted from growth in average balances of $84.9 million and a nine basis point increase in the average rate earned.
Interest on consumer loans increased $3.3 million as the average rate grew 36 basis points, but was partly offset by a decline in
average balances of $79.9 million, or 4.0%. Interest on consumer credit card loans grew $1.5 million over the prior year as the
average rate earned increased 26 basis points, while average balances declined $4.0 million.
Tax equivalent interest income on total investment securities decreased $5.2 million during 2019, as average balances declined
$74.4 million and the average rate earned decreased three basis points. The average rate on the total investment portfolio was
2.81% in 2019 compared to 2.84% in 2018, while the average balance of the total investment securities portfolio (excluding
unrealized fair value adjustments on available for sale debt securities) was $8.7 billion in 2019 compared to an average balance
of $8.8 billion in 2018. The decrease in interest income was mainly due to lower interest and dividend income earned on equity
and other securities, coupled with decreases in interest earned on state and municipal obligations, government-sponsored enterprise
(GSE) obligations and U.S. government securities. Interest income on equity securities decreased $10.0 million, due to the receipt
of $8.9 million in dividend income in the second quarter of 2018, which was related to a liquidated equity security that was carried
at fair value. Interest on other securities decreased $3.9 million mainly due to receipts of non-recurring equity investment dividends
in 2018, but was partly offset by higher average balances. Interest income on state and municipal obligations decreased $4.5
million, due to lower average balances of $189.7 million, partly offset by an increase of 10 basis points in the average rate earned.
Interest income on GSE's decreased $1.5 million, due to a decline in average balances of $117.1 million, partly offset by an increase
of 40 basis points in the average rate earned. Interest earned on U.S. government securities fell $752 thousand and was mainly
impacted by a decline of $3.0 million in inflation income on treasury inflation-protected securities (TIPS). In addition, average
balances declined $70.6 million, while the average rate earned increased 10 basis points. Partly offsetting these decreases in
interest income was growth of $12.1 million and $3.3 million in interest earned on mortgage-backed and asset-backed securities,
respectively. The growth in mortgage-backed interest resulted mainly from an increase of $391.0 million in average balances,
coupled with a three basis point increase in the average rate earned. Asset-backed securities interest increased due to growth of
38 basis points in the average rate earned, partly offset by a decline of $83.1 million in average balances.
During 2019, interest expense on deposits increased $27.3 million over 2018 and resulted mainly from a 20 basis point increase
in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts increased $11.9
million due to higher rates paid, which rose 11 basis points. The growth in interest expense on certificates of deposit was due to
both higher rates paid on all certificates of deposit and higher average balances in certificates of deposit over $100,000, which
grew $281.9 million, or 25.3%. The overall rate paid on total deposits increased from .34% in 2018 to .54% in the current year.
Interest expense on borrowings increased $10.7 million due to both higher rates paid and higher average balances of federal funds
purchased and customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .67% in
2019, compared to .44% in 2018.
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, as mentioned above. 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 in 2018 were partly related to short-
term increases in interest rates, which enabled much of the Company's loan portfolio to re-price higher than 2017. In addition,
average loan balances increased 2.3%, or $314.4 million, in 2018. 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 in 2018. Increases in average balances and rates on construction and business
real estate loans drove interest income growth a combined $27.6 million in 2018. 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 2017 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 dividend income of $8.9 million recorded in 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-adjusted
interest on 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 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 2018. 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.
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
$50.4 million in 2019, an increase of $7.7 million from the 2018 provision of $42.7 million. In 2018, the provision exceeded net
loan charge-offs by $400 thousand, increasing the allowance for loan losses by the same amount, whereas the 2019 provision was
$750 thousand greater than net loan charge-offs for the year.
Net loan charge-offs for the year totaled $49.7 million and increased $7.4 million compared to $42.3 million in 2018. The
increase in net loan charge-offs over the previous year was mainly the result of higher net charge-offs on credit card loans and
business loans, which increased $4.8 million and $2.0 million, respectively. In addition, personal real estate loan net charge-offs
increased $391 thousand, while construction loan and business real estate loan net recoveries decreased $518 thousand and $318
thousand, respectively. Partly offsetting these increases in net charge-offs were lower net charge-offs on consumer loans, which
decreased $732 thousand from the prior year. The allowance for loan losses totaled $160.7 million at December 31, 2019, an
increase of $750 thousand compared to the prior year, and represented 1.09% of outstanding loans at year end 2019, compared to
1.13% at December 31, 2018.
23
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
$
$
$
2019
167,879
155,628
95,983
8,146
15,804
15,767
65,496
524,703
39.0%
277.1
$
$
$
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
* Total revenue is calculated as net interest income plus non-interest income.
% Change
'19-'18
'18-'17
(2.2)%
5.2
1.6
5.5
—
23.9
28.3
4.7 %
10.6%
9.5
4.9
(3.4)
8.0
(8.8)
15.0
8.7%
The table below is a summary of net bank card transaction fees for the years ended December 31, 2019, 2018 and 2017, respectively.
(Dollars in thousands)
Net debit card fees
Net credit card fees
Net merchant fees
Net corporate card fees
2019
2018
2017
'19-'18
'18-'17
% Change
$
40,025 $
39,738 $
14,177
19,289
94,388
12,965
19,233
99,640
35,636
14,576
20,069
84,819
0.7 %
9.3
.3
(5.3)
(2.2)%
11.5%
(11.1)
(4.2)
17.5
10.6%
Total bank card transaction fees
$
167,879 $
171,576 $
155,100
Non-interest income totaled $524.7 million, an increase of $23.4 million, or 4.7%, compared to $501.3 million in 2018. Bank
card fees decreased $3.7 million, or 2.2%, from the prior year, largely due to a decline in net corporate card fees of $5.3 million.
This decline was partly offset by growth in net credit card fees of $1.2 million and net debit card fees of $287 thousand. The
decline in net corporate card from the prior year was due to lower interchange income and higher network and rewards expense,
while the growth in net credit and debit card fees was mainly due to higher interchange income. Net credit card revenue also grew
due to lower rewards expense. Trust fee income increased $7.7 million, or 5.2%, as a result of continued growth in private client
trust fees (up 6.5%), which comprised 76.4% of trust fee income in 2019. The market value of total customer trust assets totaled
$56.7 billion at year end 2019, which was an increase of 13.3% over year end 2018 balances. Deposit account fees increased $1.5
million, or 1.6%, mainly due to growth of $3.0 million in corporate cash management fees. This increase was partly offset by
declines of $872 thousand in overdraft and return item fees and $636 thousand in deposit account service charges. In 2019,
corporate cash management fees comprised 43.2% of total deposit fees, while overdraft fees comprised 31.9% of total deposit
fees. Capital market fees grew $425 thousand, or 5.5%, compared to the prior year, while loan fees and sales increased $3.0
million, or 23.9%, mainly due to growth in mortgage banking revenue. Total mortgage banking revenue totaled $10.8 million in
2019 compared to $8.2 million in 2018 and increased as a result of higher loan originations in 2019. Other non-interest income
increased $14.5 million, or 28.3%, mainly due to a one-time gain of $11.5 million resulting from the sale of the Company's corporate
trust business in the fourth quarter of 2019. In addition, cash sweep commissions increased $2.7 million and higher gains of $2.4
million were recorded on sales of leased assets to customers upon lease termination. These increases were partly offset by gains
of $6.6 million recorded on the sales of branch properties in 2018.
During 2018, non-interest income increased $40.1 million, or 8.7%, to $501.3 million compared to $461.3 million in 2017.
Bank card fees increased $16.5 million over 2017. This growth included increases of $4.1 million in net debit card fees and $14.8
million in net corporate card fees, partly offset by a decline of $1.6 million, or 11.1%, in net credit card fees, and $836 thousand,
or 4.2%, in net merchant fees. Trust fee income increased $12.8 million, or 9.5%, as a result of growth in both private client (up
11.1%) and institutional trust (up 6.4%) 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%, 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. Capital market fees declined $275 thousand, or 3.4%, due to 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 in 2018 compared to 2017, mainly due to declines in mortgage banking revenue as a result of
lower originations of fixed-rate loans in 2018. Other non-interest income increased $6.7 million, or 15.0%, over 2017 mainly due
to gains of $6.6 million recorded on the sales of branch properties in 2018. In addition, cash sweep commissions, interest rate
24
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.
Investment Securities Gains (Losses), Net
(In thousands)
2019
2018
2017
Net losses on sales of available for sale debt securities
$
(214)
$
(9,653)
$
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
3,262
344
—
—
367
(133)
1,759
2,542
(8,917)
—
13,849
(68)
Total investment securities gains (losses), net
$
3,626
$
(488)
$
(9,695)
10,643
—
—
31,074
(6,332)
(639)
25,051
Net gains and losses on investment securities during 2019, 2018 and 2017 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 $348 thousand in 2019, compared to expense of $2.8 million in 2018 and income of $575 thousand in 2017.
Net securities gains of $3.6 million were recorded in 2019, which included $214 thousand in net losses realized on bond sales
resulting from the Company's sale of approximately $400 million (book value) of bonds, mainly municipal securities, treasuries
and asset-backed securities. Net securities gains also included $3.3 million in gains from sales of equity investments and a $1.1
million in gain from the sale of a private equity investment. These gains were offset by net losses totaling $727 thousand of fair
value adjustments on private equity investments, in addition to net gains totaling $344 thousand of fair value adjustments on equity
investments.
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. 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.
25
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
2019
2018
2017
'19-'18
'18-'17
$
416,869
$
396,897
$
380,945
5.0%
4.2 %
% Change
76,058
47,157
19,061
20,394
92,899
21,914
6,676
2,446
63,924
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
6.7
2.4
5.2
(1.2)
8.0
6.6
(42.2)
—
(0.6)
5.8
.9
(2.4)
(9.4)
6.1
25.9
(17.4)
(92.9)
1.5
Total non-interest expense
$
767,398
$
737,821
$
744,343
4.0%
(.9)%
Efficiency ratio
Salaries and benefits as a % of total non-interest
expense
Number of full-time equivalent employees
56.9%
64.2%
4,858
55.6%
63.5%
4,795
62.2%
60.2%
4,800
Non-interest expense was $767.4 million in 2019, an increase of $29.6 million, or 4.0%, over the previous year. Salaries and
benefits expense increased $24.7 million, or 5.3%, mainly due to higher full-time salaries and medical expense. Full-time salaries
expense increased due to growth in consumer, commercial, information technology and other support unit salaries expense. Full-
time equivalent employees totaled 4,858 at December 31, 2019, reflecting a 1.3% increase over 2018. Occupancy expense increased
$1.1 million, or 2.4%, mainly due to higher real estate taxes and building depreciation expense, partly offset by a decline in utilities
expense. Equipment expense increased $936 thousand, or 5.2%, due to higher equipment depreciation expense. Data processing
and software expense increased $6.9 million, or 8.0%, primarily due to higher costs for service providers and higher bank card
processing expense. Marketing expense increased $1.4 million, or 6.6%, due to increased marketing efforts to support consumer
and healthcare banking initiatives, partly offset by bank card marketing initiatives in the prior year. Deposit insurance expense
declined $4.9 million, or 42.2%, from the prior year mainly due to reduced FDIC insurance rates.
In 2018, non-interest expense was $737.8 million, a decrease of $6.5 million, or .9%, from 2017. 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.
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 during 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).
Income Taxes
Income tax expense was $109.1 million in 2019, compared to $105.9 million in 2018 and $110.5 million in 2017. The effective
tax rate, including the effect of non-controlling interest, was 20.6% in 2019 compared to 19.6% in 2018 and 25.7% in 2017.
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 for years 2018 and after. The Company's effective tax rate in the years noted
above were lower than the federal statutory rates mainly due to tax-exempt interest on state and local municipal obligations.
Additional information about income tax expense is provided in Note 9 to the consolidated financial statements.
26
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 is
disclosed within the Average Balance Sheets section of Management's Discussion and Analysis of Financial Condition and Results
of Operations below.
(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
2019
2018
2017
2016
2015
Balance at December 31
$
5,565,449 $
5,106,427 $
4,958,554 $
4,776,365 $
4,397,893
899,377
2,833,554
2,354,760
1,964,145
349,251
764,977
6,304
869,659
2,875,788
2,127,083
1,955,572
376,399
814,134
15,236
968,820
2,697,452
2,062,787
2,104,487
400,587
783,864
7,123
791,236
2,643,374
2,010,397
1,990,801
413,634
776,465
10,464
624,070
2,355,544
1,915,953
1,924,365
432,981
779,744
6,142
$
14,737,817 $
14,140,298 $
13,983,674 $
13,412,736 $
12,436,692
The contractual maturities of business and real estate loan categories at December 31, 2019, 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
$
2,716,246
$
2,369,727
$
479,476
$
5,565,449
525,774
560,407
178,280
327,895
1,703,895
525,640
45,708
569,252
1,650,840
899,377
2,833,554
2,354,760
Total business and real estate loans
$
3,980,707
$
4,927,157
$
2,745,276
$
11,653,140
Business and real estate loans:
Loans with fixed rates
Loans with floating rates
Total business and real estate loans
21.3%
78.7%
100.0%
49.2%
50.8%
100.0%
57.2%
42.8%
100.0%
41.6%
58.4%
100.0%
27
The following table shows loan balances at December 31, 2019, 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
$
1,950,291 $
3,615,158 $
5,565,449
65.0%
38,414
1,258,254
1,598,280
1,342,175
5,572
51,622
6,304
860,963
1,575,300
756,480
621,970
343,679
713,355
—
899,377
2,833,554
2,354,760
1,964,145
349,251
764,977
6,304
95.7
55.6
32.1
31.7
98.4
93.3
—
$
6,250,912 $
8,486,905 $
14,737,817
57.6%
Total loans at December 31, 2019 were $14.7 billion, an increase of $597.5 million, or 4.2%, over balances at December 31,
2018. The growth in loans during 2019 occurred in the business, construction, personal real estate and consumer loan categories,
while business real estate, consumer credit card, revolving home equity and overdraft loan categories declined from the prior year.
Business loans increased $459.0 million, or 9.0%, reflecting growth in lease lending and commercial and industrial loans, while
commercial card and tax-advantaged lending declined. Construction loans increased $29.7 million, or 3.4% mainly due to growth
in commercial construction lending. Business real estate loans decreased $42.2 million, or 1.5%, due mainly to decreases in multi-
family real estate lending. Personal real estate loans increased $227.7 million, or 10.8%, due to increased loan originations. The
Company sells certain long-term fixed rate mortgage loans to the secondary market, and loan sales in 2019 totaled $239.0 million,
compared to $193.5 million in 2018. Consumer loans increased $8.6 million, or .4%, mainly due to an increase in health service
financing loans, offset by a decline in fixed rate home equity loans and the continued run off of marine and recreational vehicle
loan balances. Consumer credit card loans decreased $49.2 million, or 6.0% and revolving home equity loan balances declined
$27.1 million, or 7.2%, compared to balances at year end 2018.
The Company currently holds approximately 28% of its loan portfolio in the Kansas City market, 29% in the St. Louis market,
and 43% 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, 2019, the balance of SNC loans totaled
approximately $1.1 billion, with an additional $1.4 billion in unfunded commitments, compared to a balance of $830.2 million,
with an additional $1.3 billion in unfunded commitments, at year end 2018.
Commercial Loans
Business
Total business loans amounted to $5.6 billion at December 31, 2019 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 $858.1 million at December 31, 2019, a decline of $44.4 million, or 4.9%, from December
31, 2018 balances. The business loan portfolio also includes direct financing and sales type leases totaling $584.3 million, which
are used by commercial customers to finance capital purchases ranging from computer equipment to office and transportation
equipment. These leases increased $26.9 million, or 4.8%, over 2018. The Company has outstanding energy-related loans totaling
$197.4 million at December 31, 2019, which are further discussed within the Energy Lending section of the Risk Elements of
Loan Portfolio section located within Management's Discussion and Analysis of Financial Condition and Results of Operations.
Also included in the business portfolio are corporate card loans, which totaled $293.7 million at December 31, 2019 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 limits credit risk.
28
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
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 $4.1 million in 2019 (mainly
representing a charge-off related to the bankruptcy of a single leasing customer), compared to net loan charge-offs of $2.1 million
recorded in 2018. Non-accrual business loans were $7.5 million (.1% of business loans) at December 31, 2019 compared to $9.0
million at December 31, 2018.
Real Estate-Construction and Land
The portfolio of loans in this category amounted to $899.4 million at December 31, 2019, which was an increase of $29.7
million, or 3.4%, from the prior year and comprised 6.1% of the Company’s total loan portfolio. Commercial construction and
land development loans totaled $705.1 million, or 78.4% of total construction loans at December 31, 2019. These loans increased
$40.6 million from 2018 year end balances, driving the growth 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, 2019 totaled $194.3 million, or 21.6% of total construction loans. A stable construction
market has contributed to low loss rates on these loans, with net loan recoveries of $117 thousand and $635 thousand recorded in
2019 and 2018, respectively.
Real Estate-Business
Total business real estate loans were $2.8 billion at December 31, 2019 and comprised 19.2% 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, multi-family housing, farms, 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 (37.0% of this portfolio), which presents lower risk levels. Additional
information about business real estate loans by borrower is disclosed within the Real Estate - Business Loans section of the Risk
Elements of Loan Portfolio section located within Management's Discussion and Analysis of Financial Condition and Results of
Operations. At December 31, 2019, balances of non-accrual loans amounted to $1.0 million, or less than .1% of business real
estate loans, down from $1.7 million at year end 2018. The Company experienced net loan recoveries of $60 thousand in 2019,
compared to net loan recoveries of $378 thousand in 2018.
Personal Banking Loans
Real Estate-Personal
At December 31, 2019, there were $2.4 billion in outstanding personal real estate loans, which comprised 16.0% 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, 2019, 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 no-document products. Levels of mortgage loan origination activity increased in
2019, with originations of $871.6 million in 2019 compared to $563.0 million in 2018. Net loans retained by the Company
increased $227.7 million, driven by growth in new loan production due to the lower interest rate environment. Loans sold to the
secondary market increased $45.5 million. The loan sales were made under an initiative to originate and sell certain long term
fixed rate loans, resulting in sales of $239.0 million in 2019 compared to $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 purchase loans from brokers. Net loan charge-offs in 2019 totaled $56 thousand,
a slight increase from net loan recoveries of $335 thousand in 2018. Balances of non-accrual loans in this category decreased to
$1.7 million at December 31, 2019, compared to $1.8 million at year end 2018.
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
2019. Approximately 46% of the consumer portfolio consists of automobile loans, 21% in private banking loans, 4% in motorcycle
loans, 14% in fixed rate home equity loans, 10% in healthcare financing loans and 2% in marine and RV loans. Total consumer
29
loans increased $8.6 million at year end 2019 compared to year end 2018. Growth of $28.9 million in patient healthcare financing
and $21.3 million in private banking loans was partially offset by declines of $14.7 million in fixed rate home equity loans, $15.6
million in marine and RV loans, and $17.5 million in motorcycle loans. Net charge-offs on total consumer loans were $8.6 million
in 2019, compared to $9.3 million in 2018, averaging .4% and .5% of consumer loans in 2019 and 2018, respectively. Consumer
loan net charge-offs included marine and RV loan net charge-offs of $393 thousand, which were 1.0% of average marine and RV
loans in 2019, compared to 1.2% in 2018.
Revolving Home Equity
Revolving home equity loans, of which 98% are adjustable rate loans, totaled $349.3 million at year end 2019. An additional
$750.9 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 $209 thousand in 2019, compared
to $55 thousand in 2018.
Consumer Credit Card
Total consumer credit card loans amounted to $765.0 million at December 31, 2019 and comprised 5.2% 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 40% of the households that own a Commerce credit card
product also maintain a deposit relationship with the subsidiary bank. At December 31, 2019, approximately 93% of the outstanding
credit card loan balances had a floating interest rate, compared to 92% in the prior year. Net charge-offs amounted to $35.4 million
in 2019, an increase of $4.8 million over $30.6 million in 2018.
Loans Held for Sale
At December 31, 2019, 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
$9.2 million at December 31, 2019. The student loans, carried at the lower of cost or fair value, totaled $4.6 million at December 31,
2019. 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 consist of commercial loans (business, construction and business real estate) which have been graded pass, special mention,
or substandard, and also include 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 markets, 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
30
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
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, 2019, the allowance for loan losses was $160.7 million, compared to $159.9 million at December 31, 2018.
The percentage of allowance to loans decreased to 1.09% at December 31, 2019 compared to 1.13% at year end 2018. Total loans
delinquent 90 days or more and still accruing were $19.9 million at December 31, 2019, an increase of $3.2 million compared to
year end 2018, mainly driven by a $3.5 million increase in construction loan delinquencies on one larger loan and a $955 thousand
increase in consumer credit card loans delinquent 90 days or more, partly offset by a decrease of $1.6 million in consumer loan
delinquencies. Non-accrual loans at December 31, 2019 were $10.2 million, a decrease of $2.3 million over the prior year, mainly
due to a decrease in business and business real-estate non-accrual loans of $1.5 million and $685 thousand, respectively. The
2019 year end balance of non-accrual loans was comprised of $7.5 million of business loans, $1.0 million of business real estate
loans and $1.7 million of personal real estate loans.
Net loan charge-offs totaled $49.7 million in 2019, representing a $7.4 million increase compared to net charge-offs of $42.3
million in 2018. The increase was largely due to higher credit card loan and business loan charge-offs of $4.8 million and $2.0
million, respectively. In addition, personal real estate loan net charge-offs increased $391 thousand, while construction loan and
business real estate net recoveries decreased $518 thousand and $318 thousand, respectively. Partly offsetting these increases in
net charge-offs were lower net loan charge-offs of $732 thousand on consumer loans. Consumer credit card net charge-offs were
4.63% of average consumer credit card loans in 2019 compared to 3.98% in 2018. Consumer credit card loan net charge-offs as
a percentage of total net charge-offs decreased to 71.3% in 2019 compared to 72.3% in 2018. Consumer loan net charge-offs
were .44% of average consumer loans in 2019, compared to .46% in 2018, and represented 17.2% of total net loan charge-offs in
2019.
The ratio of net charge-offs to total average loans outstanding in 2019 was .35%, compared to .30% in 2018 and .31% in 2017.
The provision for loan losses in 2019 was $50.4 million, compared to provisions of $42.7 million in 2018 and $45.2 million in
2017.
The Company considers the allowance for loan losses of $160.7 million adequate to cover losses inherent in the loan portfolio
at December 31, 2019.
31
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
$
$
$
2019
14,737,817
14,224,637
159,932
50,438
$
$
$
Years Ended December 31
2018
2017
2016
2015
14,140,298
13,926,079
$
$
13,983,674
13,611,699
$
$
13,412,736
12,927,778
$
$
12,436,692
11,869,276
159,532
$
155,932
$
151,532
$
42,694
45,244
36,318
156,532
28,727
4,622
7
82
294
12,048
487
42,254
2,086
61,880
520
124
142
238
3,494
278
6,833
563
12,192
49,688
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
$
160,682
$
159,932
$
159,532
$
155,932
$
151,532
Ratio of allowance to loans at end of year
Ratio of provision to average loans outstanding
1.09%
.35%
1.13%
.31%
1.14%
.33%
1.16%
.28%
1.22%
.24%
(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
2019
2018
2017
2016
2015
.08%
(.01)
—
—
.44
.06
4.63
16.55
.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
Ratio of total net charge-offs to total average loans outstanding
.35%
.30%
.31%
.25%
.28 %
32
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)
2019
2018
2017
2016
2015
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
$
44,268
37.8% $
42,890
36.1% $
44,462
35.4% $
43,910
35.6% $
43,617
35.4%
RE — construction and
land
RE — business
RE — personal
Consumer
Revolving home equity
Consumer credit card
Overdrafts
Total
21,589
25,903
3,125
15,932
638
47,997
1,230
$ 160,682
6.1
19.2
16.0
13.3
2.4
5.2
22,515
27,717
3,250
18,007
825
43,755
—
973
100.0% $ 159,932
6.2
20.3
15.0
13.8
2.7
5.8
.1
24,432
24,810
4,201
19,509
1,189
40,052
877
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
—
100.0% $ 159,532
100.0% $ 155,932
100.0% $ 151,532
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
2019
$ 10,220
365
$ 10,585
2018
12,536
1,413
13,949
$
$
December 31
2017
11,983
681
12,664
$
$
$
$
2016
14,283
366
14,649
2015
26,575
2,819
29,394
$
$
.07%
.04%
.10%
.05%
.09%
.05%
.11%
.06%
.24%
.12%
$ 19,859
$
16,658
$
18,127
$
16,396
$
16,467
The table below shows the effect on interest income in 2019 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
$
$
1,543
369
1,174
Non-accrual loans, which are also classified as impaired, totaled $10.2 million at year end 2019, a decrease of $2.3 million
from the balance at year end 2018. The decrease from December 31, 2018 occurred mainly in business loans, which decreased
$1.5 million, and business real estate loans, which decreased $685 thousand. At December 31, 2019, non-accrual loans were
comprised primarily of business (73.3%), personal real estate (16.6%), and business real estate (10.1%) loans. Foreclosed real
estate totaled $365 thousand at December 31, 2019, a decrease of $1.0 million when compared to December 31, 2018. Total non-
performing assets remain low compared to the overall banking industry in 2019, with the non-performing assets to total loans ratio
33
at .07% at December 31, 2019. Total loans past due 90 days or more and still accruing interest were $19.9 million as of December 31,
2019, an increase of $3.2 million when compared to December 31, 2018. 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 $164.8 million at December 31, 2019, compared with $145.7
million at December 31, 2018, resulting in an increase of $19.1 million or 13.1%. The increase in potential problem loans was
largely driven by a $35.2 million increase in business real estate loans, which was partly offset by a $14.1 million decrease in
business loans.
(In thousands)
Potential problem loans:
Business
Real estate – construction and land
Real estate – business
Real estate – personal
Total potential problem loans
December 31
2019
2018
$
$
$
83,943
470
80,071
283
164,767 $
98,009
1,211
44,854
1,586
145,660
At December 31, 2019, the Company had $79.5 million of loans whose terms have been modified or restructured, meeting the
definition of 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
$55.9 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 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 home equity 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 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, current FICO scores, and line utilization. This has remained an effective means
of evaluating credit trends and identifying problem loans, partly because the Company offers standard, conservative lending
products.
34
Real Estate - Construction and Land Loans
The Company’s portfolio of construction and land loans, as shown in the table below, amounted to 6.1% of total loans outstanding
at December 31, 2019. The largest component of construction and land loans was commercial construction, which increased $51.2
million during the year ended December 31, 2019. At December 31, 2019, multi-family residential construction loans totaled
approximately $213.4 million, or 31.8%, of the commercial construction loan portfolio.
(Dollars in thousands)
December 31,
2019
% of Total
% of Total Loans
December 31,
2018
% of Total
% of Total Loans
Commercial construction
Residential construction
Residential land
and land development
Commercial land
and land development
Total real estate –
construction and land loans
Real Estate – Business Loans
$
670,590
128,575
65,687
34,525
74.6%
14.3
7.3
3.8
4.6% $
.9
.4
.2
619,370
123,369
81,740
45,180
71.2%
14.2
9.4
5.2
4.4%
.9
.6
.3
$
899,377
100.0%
6.1% $
869,659
100.0%
6.2%
Total business real estate loans were $2.8 billion at December 31, 2019 and comprised 19.2% 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 37.0% of these loans were for
owner-occupied real estate properties, which present lower risk profiles.
(Dollars in thousands)
Owner-occupied
Retail
Multi-family
Office
Hotels
Farm
Senior living
Industrial
Other
December 31,
2019
% of Total
% of Total Loans
December 31,
2018
% of Total
% of Total Loans
$
1,048,716
37.0%
7.1% $
1,038,589
36.1%
7.3%
383,234
306,577
297,278
210,557
177,669
164,000
108,285
137,238
13.5
10.8
10.5
7.4
6.3
5.8
3.8
4.9
2.6
2.1
2.0
1.4
1.2
1.1
.7
1.0
307,915
408,151
356,733
209,693
160,935
117,635
109,391
166,746
10.7
14.2
12.4
7.3
5.6
4.1
3.8
5.8
2.2
2.9
2.5
1.5
1.1
.8
.8
1.2
Total real estate - business
loans
$
2,833,554
100.0%
19.2% $
2,875,788
100.0%
20.3%
Revolving Home Equity Loans
The Company has revolving home equity loans that are generally collateralized by residential real estate. Most of these loans
(91.9%) 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 portfolio balance at December 31, 2019 was 792. 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 12.5% of the Company's current outstanding balances are expected
to mature. Of these balances, 92.9% 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.
35
(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,
2019
321,126
$
New Lines
Originated
*
During 2019
91.9% $173,969
*
49.8%
Unused Portion
of Available
Lines at
December 31,
2019
$725,187
Balances
Over 30
Days Past
Due
$1,422
*
207.6%
37,347
3,775
41,122
10.7
1.1
11.8
22,603
1,643
24,246
6.5
.4
6.9
43,313
4,969
48,282
12.4
1.4
13.8
213
23
236
349,251
184,085
751,283
* Percentage of total principal outstanding of $349.3 million at December 31, 2019.
(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.
Other Consumer Loans
*
.4%
.1
—
.1
*
.3%
.1
—
.1
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 $908.3 million and $910.5 million at
December 31, 2019 and 2018, respectively. The balances over 30 days past due amounted to $13.2 million at December 31, 2019,
compared to $17.8 million at the end of 2018, and comprised 1.5% of the outstanding balances of these loans at December 31,
2019 compared to 2.0% at December 31, 2018. For the year ended December 31, 2019, $414.9 million of new auto loans were
originated, compared to $365.0 million during 2018. At December 31, 2019, the automobile loan portfolio had a weighted average
FICO score of 756.
Outstanding balances for motorcycle loans were $71.9 million at December 31, 2019, compared to $89.4 million at
December 31, 2018. The balances over 30 days past due amounted to $1.3 million and $2.1 million at December 31, 2019 and
2018, respectively, and comprised 1.9% of the outstanding balances of these loans at December 31, 2019, compared to 2.4% at
December 31, 2018. For the year ended December 31, 2019, $26.5 million of new motorcycle loans were originated, compared
to $15.0 million during 2018.
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 2019 decreased over the prior
year but have been higher than for other consumer loan products, at 1.0% and 1.2% in 2019 and 2018, respectively. Balances
over 30 days past due for marine and RV loans decreased $1.1 million at year end 2019 compared to 2018.
36
The table below provides the total outstanding principal and other data for this group of direct and indirect lending products
at December 31, 2019 and 2018.
Principal
Outstanding at
December 31
2019
New Loans
Originated
Balances
Over 30 Days
Past Due
Principal
Outstanding at
December 31
2018
New Loans
Originated
Balances
Over 30 Days
Past Due
$
908,260 $
414,885 $
13,233
$
910,478 $
364,955 $
17,790
71,927
26,121
9,243
26,459
1,124
1,577
1,338
1,184
302
89,443
37,914
13,003
14,992
1,276
1,603
2,109
1,887
647
$
1,015,551 $
444,045 $
16,057
$
1,050,838 $
382,826 $
22,433
(In thousands)
Automobiles
Motorcycles
RV
Marine
Total
Consumer Credit Card Loans
Additionally, the Company offers low introductory rates on selected consumer credit card products. Out of a portfolio at
December 31, 2019 of $765.0 million in consumer credit card loans outstanding, approximately $144.8 million, or 18.9%, carried
a low promotional rate. Within the next six months, $64.9 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 promotional feature, 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 $197.4
million at December 31, 2019, an increase of $53.6 million from year end 2018, 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,
2019
177,903 $
7,168
4,763
7,598
197,432 $
December 31,
2018
114,152
17,300
3,483
8,892
143,827
$
Unfunded
commitments at
December 31, 2019
62,996
$
19,271
54,761
27,667
164,695
$
Investment Securities Analysis
Investment securities are comprised of securities that are classified as available for sale, equity, trading or other. The largest
component, available for sale debt securities, decreased 1.9% during 2019 to $8.4 billion (excluding unrealized gains/losses in
fair value) at year end 2019. During 2019, debt securities of $1.8 billion were purchased, which included $167.1 million in state
and municipal securities, $1.4 billion in agency mortgage-backed securities, $55.7 million in non-agency mortgage-based securities,
and $106.6 million in asset-backed securities. Total sales, maturities and pay downs were $1.9 billion during 2019. During 2020,
maturities and pay downs of approximately $1.3 billion are expected to occur. The average tax equivalent yield earned on total
investment securities was 2.81% in 2019 and 2.84% in 2018.
At December 31, 2019, the fair value of available for sale securities was $8.6 billion, which included a net unrealized gain in
fair value of $136.1 million, compared to a net unrealized loss of $64.6 million at December 31, 2018. The overall unrealized gain
in fair value at December 31, 2019 included net gains of $42.4 million in state and municipal securities and net gains of $63.4
million in mortgage and asset-backed securities. The portfolio also included unrealized net gains of $23.9 million and $5.9 million
on U.S. government and federal agency obligations and other debt securities, respectively.
37
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
2019
2018
$
827,861 $
138,734
1,225,532
3,893,247
796,451
1,228,151
325,555
914,486
199,470
1,322,785
3,253,433
1,053,854
1,518,976
339,595
$
$
8,435,531 $
8,602,599
851,776 $
139,277
1,267,927
3,937,964
809,782
1,233,489
331,411
907,652
195,778
1,328,039
3,214,985
1,047,716
1,511,614
332,257
$
8,571,626 $
8,538,041
At December 31, 2019, the available for sale portfolio included $3.9 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 $809.8 million and included $526.0 million collateralized by commercial mortgages
and $283.8 million collateralized by residential mortgages at December 31, 2019. 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, 2019, U.S. government obligations included TIPS of $461.8 million, at fair value. Other debt securities
include corporate bonds, notes and commercial paper.
The types of securities held in the available for sale security portfolio at year end 2019 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, 2019
Percent of
Total Debt
Securities
Weighted
Average
Yield
Estimated
Average
Maturity*
9.9%
1.54%
4.2 years
1.6
14.9
45.9
9.4
14.4
3.9
2.26
2.49
2.87
2.98
2.61
2.66
6.0
5.0
4.8
2.3
3.0
3.0
Equity securities include common and preferred stock with readily determinable fair values that totaled $2.9 million at December
31, 2019, compared to $2.6 million at December 31, 2018.
Other securities totaled $137.9 million at December 31, 2019 and $129.2 million at December 31, 2018. These include Federal
Reserve Bank stock and Federal Home Loan Bank (Des Moines) stock held by the bank subsidiary in accordance with debt and
38
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
2019
2018
33,770 $
10,000
44,635
49,487
33,498
10,000
39,831
45,828
137,892 $
129,157
$
$
In addition to its holdings in the investment securities portfolio, the Company invests in long-term securities purchased under
agreements to resell, which totaled $850.0 million at December 31, 2019 and $700.0 million at December 31, 2018. These
investments mature in 2020 through 2023 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 $886.3
million in marketable investment securities at December 31, 2019. The average rate earned on these agreements during 2019 was
1.99%.
The Company also holds offsetting repurchase and resale agreements totaling $200.0 million at December 31, 2019 and $450.0
million at December 31, 2018, which are further discussed in Note 20 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 2020 and earned an average of 45 basis points during 2019.
Deposits and Borrowings
Deposits, including both individual and corporate customers, are the primary funding source for the Bank and are acquired
from a broad base of local markets. Total period-end deposits were $20.5 billion at December 31, 2019, compared to $20.3 billion
last year, reflecting an increase of $196.8 million, or 1.0%.
Average deposits declined by $221.4 million, or 1.1%, in 2019 compared to 2018, resulting from declines in average demand
deposits, which decreased $352.8 million, primarily driven by lower balances in business demand deposits. Additionally, average
money market deposit account balances decreased $734.0 million in 2019. Partially offsetting these decreases in deposit balances
was growth in average certificates of deposit balances, which increased $289.6 million, and in average interest checking balances,
which increased $524.0 million in 2019.
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
2019
2018
33.6%
56.6
3.1
6.7
100.0%
34.3%
57.5
2.9
5.3
100.0%
Core deposits, which include non-interest bearing, interest checking, savings, and money market deposits, supported 75% and
77% of average earning assets in 2019 and 2018, respectively. Average balances by major deposit category for the last six years
are disclosed in the Average Balance Sheets section of Management's Discussion and Analysis of Financial Condition and results
of Operations below. A maturity schedule of certificates of deposits outstanding at December 31, 2019 is included in Note 7 on
Deposits in the consolidated financial statements.
39
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, 2019
were $1.9 billion, a $105.6 million decrease from the $2.0 billion balance outstanding at year end 2018. On an average basis,
these borrowings increased $308.0 million, or 20.3%, during 2019, due to an increase of $143.0 million in repurchase agreements,
and an increase of $165.0 million in federal funds purchased. The average rate paid on total federal funds purchased and repurchase
agreements was 1.61% during 2019 and 1.30% during 2018.
Historically, the majority of the Company’s long-term debt has been comprised of fixed rate advances from the FHLB. During
2019, the Company borrowed $250.0 million of short-term funds from the FHLB, and those borrowings were repaid by the
Company in October 2019. The average rate paid on FHLB advances was 2.19% during 2019. No advances were taken in 2018.
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.
40
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, 2019 and 2018, 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
2019
2018
$
8,571,626 $
8,538,041
—
850,000
395,850
9,817,476 $
$
3,320
700,000
689,876
9,931,237
There were no federal funds sold at December 31, 2019, which are funds lent to the Company’s correspondent bank customers
with overnight maturities. At December 31, 2019, the Company had lent funds totaling $850.0 million under long-term resale
agreements to other large financial institutions. The agreements mature in years 2020 through 2023. Under these agreements,
the Company holds marketable securities, safekept by a third-party custodian, as collateral. This collateral totaled $886.3 million
in fair value at December 31, 2019. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and
are used for general liquidity purposes, totaled $395.9 million at December 31, 2019. The Company’s available for sale investment
portfolio includes scheduled maturities and expected pay downs of approximately $1.3 billion during 2020, 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, 2019 and 2018, total
investment securities pledged for these purposes were as follows:
(In thousands)
2019
2018
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
$
48,304 $
7,637
2,083,716
2,149,575
4,289,232
3,029,268
1,253,126
67,675
9,974
2,469,432
1,784,020
4,331,101
2,872,562
1,334,378
Total available for sale debt securities, at fair value
$
8,571,626 $
8,538,041
* Includes securities pledged for collateral swaps, as discussed in Note 20 to the consolidated financial statements
The average loans to deposits ratio is a measure of a bank's liquidity, and the Company’s average loans to deposits ratio was
71.5% at December 31, 2019. Core customer deposits, defined as non-interest bearing, interest checking, savings, and money
market deposit accounts, totaled $18.5 billion and represented 90.2% of the Company’s total deposits at December 31, 2019.
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 decreased $153.1 million at year end 2019
compared to year end 2018, with declines in wealth management and commercial deposits of $104.7 million and $101.8 million,
respectively. This decrease was partially offset by growth of $51.8 million in consumer deposits. While the Company considers
core consumer and wealth management 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 $1.3
billion over the next year, as noted above. In addition, as shown in the table of collateral available for future advances below, 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
2019
2018
$
6,890,687 $
6,980,298
2,130,591
9,491,125
2,090,936
9,594,303
$
18,512,403 $
18,665,537
41
Certificates of deposit of $100,000 or greater totaled $1.4 billion at December 31, 2019. These deposits are normally considered
more volatile and higher costing, and comprised 6.7% of total deposits at December 31, 2019.
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
2019
2018
$
$
20,035 $
1,830,737
2,418
13,170
1,943,219
8,702
1,853,190 $
1,965,091
Federal funds purchased, which totaled $20.0 million at December 31, 2019, 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, 2019 were comprised of non-insured customer funds totaling
$1.8 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, 2019.
(In thousands)
Total collateral value pledged
Letters of credit issued
Available for future advances
December 31, 2019
FHLB
Federal Reserve
Total
$
$
2,668,773 $
1,280,434 $
3,949,207
(396,608)
—
(396,608)
2,272,165 $
1,280,434 $
3,552,599
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
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.
42
The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash
equivalents and restricted cash of $301.4 million in 2019, as reported in the consolidated statements of cash flows. Operating
activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $512.8 million and has
historically been a stable source of funds. Investing activities used cash of $730.2 million, mainly from an increase in the loan
portfolio, partly offset by activity in the investment securities portfolio. Growth in the loan portfolio used cash of $647.9 million,
purchases of long-term resale agreements used cash of $150.0 million, and net purchases of land, buildings and equipment used
$40.5 million, while sales and maturities (net of purchases) of investment securities provided cash of $108.3 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 2019, financing activities used cash of $84.1 million. The Company paid cash dividends of $122.5 million on common
and preferred stock, and federal funds purchases and short-term securities sold under agreements to repurchase used cash in the
amount of $105.6 million. Treasury stock purchases used cash of $284.9 million during 2019 and included a cash outflow of
$150.0 million related to the Company's accelerated share repurchase agreement. Growth in deposits partially offset these cash
outflows by providing cash of $435.3 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 long-term 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
Accelerated share repurchase agreements
Common cash dividends paid
Preferred cash dividends paid
Cash used
2019
2018
2017
134.9 $
75.2 $
150.0
113.5
9.0
—
100.2
9.0
17.8
—
91.6
9.0
407.4 $
184.4 $
118.4
$
$
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
2019
2018
2017
$
$
500.0 $
36.8
536.8 $
200.0 $
37.7
237.7 $
160.0
30.4
190.4
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, 2019, the Parent’s investment securities totaled $4.4 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
2019 or 2018.
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.
43
Capital Management
Under Basel III capital guidelines, at December 31, 2019 and 2018, 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
2019
2018
$ 19,713,813
$
19,103,966
2,745,538
2,890,322
3,052,079
2,716,232
2,861,016
3,022,023
Minimum Ratios
under Capital
Adequacy
Guidelines
Minimum Ratios
for Well-
Capitalized
Banks*
Tier I common risk-based capital ratio
13.93%
14.22%
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
*under Prompt Corrective Action requirements
14.66
15.48
11.38
10.99
27.52
14.98
15.82
11.52
10.45
23.61
8.50
10.50
4.00
8.00
10.00
5.00
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors and periodically
purchases stock in the open market. During 2018, the Company purchased 1.2 million shares through market purchases. During
2019, the Company purchased 4.7 million shares, including 2.4 million shares purchased under an accelerated share repurchase
(ASR) agreement. The ASR agreement is further discussed in Note 14 to the consolidated financial statements. At December 31,
2019, 4.4 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 16.1% in 2019 compared
with 2018, and the Company increased its first quarter 2020 cash dividend 8.9%, making 2020 the Company's 52nd consecutive
year of regular cash dividend increases. The Company also distributed its 26th consecutive annual 5% stock dividend in December
2019.
Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements
In the normal course of business, various commitments and contingent liabilities arise that are not required to be recorded on
the balance sheet. The most significant of these are loan commitments totaling $11.2 billion (including approximately $5.1 billion
in unused, approved credit card lines) and the contractual amount of standby letters of credit totaling $377.3 million at December 31,
2019. 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, 2019 and the expected timing of these
payments follows:
(In thousands)
Operating lease obligations*
Purchase obligations
Certificates of Deposit**
Total
Payments Due by Period
In One Year or
Less
After One Year
Through Three
Years
After Three Years
Through Five
Years
6,213
231,336
1,727,042
1,964,591 $
$
10,605
349,100
256,692
616,397 $
7,690
103,185
24,225
135,100 $
After Five Years
16,113
42,013
53
58,179
Total
40,621
725,634
2,008,012
2,774,267
$
* Includes operating leases signed but not yet commenced.
** Includes principal payments only.
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 2019 or 2018, and the Company is not required nor does it
expect to make a contribution in 2020.
44
The Company has investments in low-income housing partnerships generally 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 8 to 17 years. At December 31, 2019, the investments totaled $37.3
million and are recorded as other assets in the Company’s consolidated balance sheet. Unfunded commitments, which are recorded
as liabilities, amounted to $19.4 million at December 31, 2019.
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 2019, purchases and sales of tax credits amounted to
$90.6 million and $84.9 million, respectively. Fees from the sales of tax credits were $3.5 million, $4.9 million and $3.3 million
in 2019, 2018 and 2017, respectively. At December 31, 2019, the Company had outstanding purchase commitments totaling
$160.9 million that it expects to fund in 2020. 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 simulation, 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 show the effects of gradual shifts in interest rates over a twelve month period on the Company’s net interest
income versus the Company's net interest income in a flat rate scenario. Simulation A presents two rising rate scenarios and a
falling rate scenario, and in each scenario, rates are assumed to change evenly over 12 months. In these scenarios, the balance
sheet remains flat with the exception of deposit balances, which may fluctuate based on changes in rates. For instance, the Company
may experience deposit disintermediation if the spread between market rates and bank deposit rates widens as rates rise.
The sensitivity of deposit balances to changes in rates is particularly difficult to estimate in exceptionally low rate environments.
Since the future effects of changes in rates on deposit balances cannot be known with certainty, the Company conservatively
models alternate scenarios with greater deposit attrition as rates rise. Simulation B illustrates results from these higher attrition
scenarios to provide added perspective on potential effects of higher rates.
45
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 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.
Simulation A
December 31, 2019
September 30, 2019
(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
200 basis points rising
$
100 basis points rising
7.8
1.1
.14
100 basis points falling
(3.0)
(0.36)
.95% $
(281.9)
$
10.7
1.35% $
(262.4)
(146.5)
154.8
7.3
1.1
.92
0.14
(138.2)
148.6
Simulation B
December 31, 2019
September 30, 2019
(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
200 basis points rising
(6.0)
(.74)
100 basis points rising
(10.5)
(1.29)
(795.2)
(664.8)
(.1)
(2.0)
(.02)
(.25)
(662.2)
(542.4)
Under Simulation A, in the two rising rate scenarios, higher variable rate loan volumes and a slight decline in deposit sensitivity
contributed to increases in income if rates rise relative to the previous period. However, this was more than offset by changes in
rates earned on the Company’s long-term structured repurchase agreements. In the fourth quarter of 2019, lower market rates
increased structured repurchase agreement rates and income in the Base scenario which are expected to decline again if rates rise,
reducing the benefit of higher 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 both rising rate scenarios. In the 100
basis point falling scenario shown in Simulation A, it is assumed that deposits would increase $154.8 million along with an increase
in earning assets, but rates on loans would fall faster than deposit rates. 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.
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. The Company believes that its approach to interest rate risk has appropriately considered
its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of interest rate risk.
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 cash flows. Interest rate floors with a total notional amount of $1.5 billion have been entered into since the beginning of 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 19 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.
46
The following table summarizes the notional amounts and estimated fair values of the Company’s derivative instruments at
December 31, 2019 and 2018. 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.
2019
2018
Notional
Amount
Positive Fair
Value
Negative Fair
Value
Notional
Amount
Positive Fair
Value
Negative Fair
Value
$ 2,606,181
$
1,500,000
59,316
316,225
10,936
13,755
1,943
37,774
67,192
4
140
97
459
6
$
(9,916)
$ 2,006,280
$
—
(4)
(230)
(32)
—
(2)
1,000,000
62,163
143,460
6,206
14,544
5,768
11,537
29,031
24
47
20
536
15
$
(13,110)
—
(24)
(93)
(8)
—
(8)
17,500
$ 4,525,856
2
105,674
$
$
(35)
(10,219)
16,500
$ 3,254,921
$
—
41,210
$
(178)
(13,421)
(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 13 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.
47
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, 2019:
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, 2018:
Net interest income
Provision for loan losses
Non-interest income
Investment securities losses, net
$
315,782
$
342,736
$
48,058
$
706,576
$
114,717
$
821,293
(44,987)
135,257
—
(4,204)
203,952
—
(174)
183,589
—
(49,365)
522,798
—
(297,581)
(308,686)
(124,123)
(730,390)
$
$
$
$
$
$
108,471
294,798
(40,571)
126,253
—
233,798
344,972
(1,134)
202,527
—
$
$
107,350
46,946
32
173,026
—
$
$
449,619
686,716
(41,673)
501,806
—
(1,073)
1,905
3,626
(37,008)
82,167
137,109
(1,021)
(465)
(488)
(50,438)
524,703
3,626
(767,398)
531,786
823,825
(42,694)
501,341
(488)
$
$
Non-interest expense
(286,181)
(297,847)
(123,568)
(707,596)
(30,225)
(737,821)
Income before income taxes
$
94,299
$
248,518
$
96,436
$
439,253
$
104,910
$
544,163
2019 vs 2018
Increase in income before income
taxes:
Amount
$
14,172
$
(14,720)
$
10,914
$
10,366
$
(22,743)
$
(12,377)
Percent
15.0%
(5.9)%
11.3%
2.4%
(21.7)%
(2.3)%
Year ended December 31, 2017:
Net interest income
Provision for loan losses
Non-interest income
Investment securities gains, net
$
276,891
$
329,087
$
47,264
$
653,242
$
80,437
$
733,679
(40,619)
121,362
—
205
184,577
—
(41)
158,175
—
(40,455)
464,114
—
(4,789)
(2,851)
25,051
(45,244)
461,263
25,051
Non-interest expense
(274,225)
(281,845)
(120,461)
(676,531)
(67,812)
(744,343)
Income before income taxes
$
83,409
$
232,024
$
84,937
$
400,370
$
30,036
$
430,406
2018 vs 2017
Increase in income before income
taxes:
Amount
Percent
Consumer
$
10,890
$
16,494
$
11,499
$
38,883
$
74,874
$
113,757
13.1 %
7.1 %
13.5 %
9.7 %
N.M.
26.4 %
The Consumer segment includes consumer deposits, consumer finance, and consumer debit and credit cards. During 2019,
income before income taxes for the Consumer segment increased $14.2 million, or 15.0%, compared to 2018. This increase was
due to growth of $21.0 million, or 7.1%, in net interest income and an increase in non-interest income of $9.0 million, or 7.1%.
Net interest income increased due to a $27.8 million increase in net allocated funding credits assigned to the Consumer segment's
loan and deposit portfolios and growth of $3.4 million in loan interest income, partly offset by an increase of $10.1 million in
deposit interest expense. Non-interest income increased mainly due to growth in mortgage banking revenue and net credit card
fees, (mainly higher interchange fees and lower rewards expense), partly offset by a decline in deposit fees (mainly overdraft and
deposit account service fees). These increases to income were partly offset by growth of $11.4 million, or 4.0%, in non-interest
expense. Non-interest expense increased over the prior year due to higher salaries expense, data processing and software expense
and allocated servicing and support costs (mainly teller services, online banking, installment loan and management fees). The
provision for loan losses totaled $45.0 million, a $4.4 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 $107.1 million, or 4.6%, in 2019 compared
to 2018 mainly due to a decline in auto and other consumer loans. Average deposits increased $25.8 million over the prior year,
resulting from growth in interest checking, savings, and certificate of deposit balances, partly offset by a decline in money market
deposit accounts.
48
During 2018, income before income taxes for the Consumer segment increased $10.9 million, or 13.1%, compared to 2017.
This increase was mainly due to growth of $17.9 million, or 6.5%, 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 $14.2 million increase in net allocated funding credits and growth
of $5.3 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 $12.0 million, or 4.4%, in non-interest
expense. Non-interest expense increased over 2017 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 $40.6
million, a slight decrease from 2017, which was mainly due to lower net charge-offs on home equity loans, partly offset by higher
consumer credit card loan net charge-offs. Total average loans in this segment decreased $45.1 million, or 1.9%, in 2018 compared
to 2017 mainly due to a decline in auto and other personal loans. Average deposits increased $19.9 million over 2017, resulting
from growth in interest checking and savings accounts, partly offset by declines in demand, money market deposit accounts, and
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 correspondent banks, corporations, public institutions, municipalities, and individuals and also provides
securities safekeeping and bond accounting services. Pre-tax income for 2019 decreased $14.7 million, or 5.9%, compared to
2018, mainly due to a decrease in net interest income and increases in non-interest expense and the provision for loan losses. Net
interest income decreased $2.2 million, or .6%, due to a decline of $13.2 million in net allocated funding credits and higher interest
expense of $18.4 million on deposits and customer repurchase agreements, partly offset by an increase of $29.3 million in loan
interest income. The provision for loan losses increased $3.1 million over last year, due to higher lease loan net charge-offs (related
to a charge-off on a single lease loan), partly offset by lower business loan net charge-offs. Non-interest income increased $1.4
million, or .7%, over 2018 due to higher deposit account fees (mainly corporate cash management), cash sweep commissions, and
gains on sales of leased assets to customers upon lease termination. These increases were partly offset by lower net corporate
card fees (driven by lower interchange income and higher network and rewards expense) and lower tax credit sales fees. Non-
interest expense increased $10.8 million, or 3.6%, during 2019, mainly due to increases in salaries expense and allocated support
costs (mainly information technology, marketing and commercial sales and product support). These increases were partly offset
by lower deposit insurance expense and allocated servicing costs (mainly teller services and deposit operations). Average segment
loans increased $310.9 million, or 3.5%, compared to 2018, with growth occurring in business and business real estate loans.
Average deposits decreased $180.9 million, or 2.3%, due to declines in business demand and money market deposit accounts,
partly offset by growth in certificate of deposit balances.
Pre-tax income for 2018 increased $16.5 million, or 7.1%, compared to 2017, mainly due to increases in net interest income
and non-interest income, partly offset by higher non-interest expense. Net interest income increased $15.9 million, or 4.8%, due
to growth of $70.6 million in loan interest income, partly offset by a decline of $32.3 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 2017, due to higher net charge-offs on business loans and lower recoveries on construction loans, partly offset
by lower commercial card loan net charge-offs. Non-interest income increased $18.0 million, or 9.7%, over 2017 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, money market
deposit accounts, and certificates of deposit, partly offset by growth in interest checking 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, 2019, the Trust group managed investments with a
market value of $34.4 billion and administered an additional $22.3 billion in non-managed assets. It also provides investment
management services to The Commerce Funds, a series of mutual funds with $2.9 billion in total assets at December 31, 2019.
In 2019, pre-tax income for the Wealth segment was $107.4 million, compared to $96.4 million in 2018, an increase of $10.9
million, or 11.3%. Net interest income increased $1.1 million, or 2.4%, due to a $4.3 million increase in loan interest income and
a $1.7 million increase in net allocated funding credits, partly offset by higher interest expense of $4.9 million. Non-interest
49
income increased $10.6 million, or 6.1%, over the prior year largely due to higher private client fund trust fees and cash sweep
commissions. Non-interest expense increased $555 thousand, or .4%, resulting from higher salaries and benefits expense and
higher allocated costs for information technology. The provision for loan losses increased $206 thousand, mainly due to higher
revolving home equity loan net charge-offs. Average assets increased $45.0 million, or 3.6%, during 2019 mainly due to growth
in personal real estate and consumer loan balances. Average deposits decreased $39.2 million, or 2.1%, due to declines in interest
checking account balances, partially offset by higher balances of demand deposits. During the fourth quarter of 2019, the Company
sold its corporate trust business, which was included in the Wealth segment.
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 2017 largely due to higher private client 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 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.
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 2019, the pre-tax
income in this category was $82.2 million, compared to $104.9 million in 2018. This decrease was due to lower unallocated net
interest income of $22.4 million and higher unallocated non-interest expense of $6.8 million. Unallocated securities gains were
$3.6 million in 2019, compared to securities losses of $488 thousand in 2018. Also, the unallocated loan loss provision increased
$52 thousand, as the provision was $1.1 million in excess of charge-offs in 2019, while the provision was $1.0 million in excess
of charge offs in 2018. Additionally in 2019, a $11.5 million gain on the sale of Company's corporate trust business, mentioned
above, was also recorded in the Other segment.
Impact of Recently Issued Accounting Standards
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 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 Company adopted
the new accounting standard as of January 1, 2019, and a lease liability of $28.1 million and a ROU asset of $27.5 million were
recognized. The impact of the adoption and required disclosures are discussed in Note 6 to the consolidated financial statements.
Premium Amortization The FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities", in
March 2017. Under former 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 were effective January 1, 2019 and did not have a significant effect on the
Company's consolidated financial statements.
Financial Instruments ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", known as the current expected
credit loss (CECL) model, was issued in June 2016, and has been followed by additional clarifying guidance on specified
implementation issues. This new standard is effective for fiscal years beginning after December 15, 2019 and was adopted by the
Company on January 1, 2020 using the modified retrospective method.
50
This new measurement approach requires the calculation of expected lifetime credit losses and is applied to financial assets
measured at amortized cost, including loans and held-to-maturity securities, as well as certain off-balance sheet credit exposures
such as loan commitments. The standard also changes the impairment model of available for sale debt securities.
The allowance for loan losses under the previously required incurred loss model that is reported on the Company's consolidated
balance sheets is different under the requirements of the CECL model. Upon adoption in the first quarter of 2020, a cumulative-
effect adjustment for the change in the allowance for credit losses will be recognized in retained earnings. The cumulative-effect
adjustment to retained earnings, net of taxes, will be comprised of the impact to the allowance for credit losses on outstanding
loans and leases and the impact to the liability for off-balance sheet commitments. There is no implementation impact on held-
to-maturity debt securities as the Company does not hold any debt securities within the scope of CECL.
The new accounting standard does not require the use of a specific loss estimation method for purposes of determining the
allowance for credit losses. The Company selected a methodology that uses historical net charge-off rates, adjusted by the impacts
of a reasonable and supportable forecast and the impacts of other qualitative factors to determine the expected credit losses. Key
assumptions include the application of historical loss rates, prepayment speeds, forecast results of a reasonable and supportable
period, the period to revert to historical loss rates, and qualitative factors. The forecast is determined using projections of certain
macroeconomic variables, such as, unemployment rate, prime rate, BBB corporate yield, and housing price index. The model
design and methodology requires management judgment.
The allowance for credit losses on the commercial portfolio is expected to decrease due to the relatively short contractual lives
of the commercial loan portfolios coupled with an economic forecast predicting stable macroeconomic factors similar to the current
environment. The allowance for credit losses on the personal banking loan portfolio is expected to increase due to the relatively
longer contractual lives of certain portfolios, primarily those collateralized with personal real estate. Because the commercial
loan portfolio represents 63% of total loans at December 31, 2019, the change in its allowance for credit losses will have a more
significant impact on the total allowance for credit losses, resulting in a potential net reduction in the allowance for credit losses.
Based on preliminary results, the Company expects its allowance for loan losses to total loans ratio to decline from 1.09% at
December 31, 2019, to within a range of approximately 0.85% to 1.05% upon adoption. Offsetting the overall reduction in the
allowance for credit losses for outstanding loans and leases is an expected increase in the liability for off-balance sheet loan
commitments. The liability will increase as the loss estimation is required to expand over the contractual commitment period.
Preliminary results indicate the adoption adjustment will result in an immaterial impact to retained earnings. The Company
is currently performing quality reviews on preliminary results and is planning to finalize the impact in the 1st quarter of 2020. The
adoption adjustment is subject to the completion of the Company’s governance and quality review processes that are in process.
Moving beyond the impact of the adoption of CECL, volatility in the allowance for credit losses, and therefore earnings, will
likely be experienced due to changes in the relevant forward-looking information including forecasts of macroeconomic conditions
utilized in the CECL model and other key assumptions that are applied to the remaining life of the loan and lease portfolios.
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 were effective for impairment tests beginning January 1, 2020
and 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 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 guidance was effective January 1, 2020 and did not 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
were effective January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements.
51
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. Under current guidance the accounting for implementation
costs of a hosting arrangement that is a service contract is not specifically addressed. 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
internal-use software license. The guidance was effective January 1, 2020 and did not have a significant effect on the Company's
consolidated financial statements.
Income Taxes The FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes", in December 2019. The
amendments in the ASU eliminate certain exceptions under current guidance for investments, intraperiod allocations, and the
methodology for calculating interim income tax. In addition, the amendments also add new guidance to simplify accounting for
income taxes. The amendments are effective January 1, 2021, 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 and risk 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 Social Responsibility.
52
SUMMARY OF QUARTERLY STATEMENTS OF INCOME
Year ended December 31, 2019
(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
12/31/2019
9/30/2019
6/30/2019
3/31/2019
For the Quarter Ended
$
226,665 $
(24,006)
202,659
143,461
(248)
(126,901)
(68,273)
(15,206)
135,492
(28,214)
(398)
231,743 $
(28,231)
203,512
132,743
4,909
(123,836)
(67,184)
(10,963)
139,181
(29,101)
(838)
238,412 $
(26,778)
211,634
127,259
(110)
(120,062)
(69,717)
(11,806)
137,198
(28,899)
(328)
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*
$
$
$
106,880 $
109,242 $
107,971 $
.94 $
.93 $
111,730
112,011
.93 $
.93 $
112,982
113,249
.91 $
.91 $
114,961
115,240
Year ended December 31, 2018
(In thousands, except per share data)
12/31/2018
9/30/2018
6/30/2018
3/31/2018
For the Quarter Ended
$
232,832 $
224,751 $
225,623 $
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*
* Restated for the 5% stock dividend distributed in 2019.
(20,612)
212,220
133,087
(7,129)
(120,517)
(68,108)
(12,256)
137,297
(26,537)
(1,108)
(16,997)
207,754
123,714
4,306
(116,194)
(68,865)
(9,999)
140,716
(26,647)
(1,493)
(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 $
.92 $
.91 $
116,000
116,309
.93 $
.94 $
116,434
116,823
.92 $
.91 $
116,519
116,897
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 $
.78 $
.78 $
116,445
116,839
.61 $
.61 $
116,455
116,844
.65 $
.65 $
116,405
116,803
$
$
$
$
$
$
$
53
227,865
(24,377)
203,488
121,240
(925)
(122,128)
(69,297)
(12,463)
119,915
(22,860)
83
97,138
.81
.81
115,511
115,816
205,995
(13,103)
192,892
119,690
5,410
(115,894)
(66,383)
(10,396)
125,319
(23,258)
(1,077)
100,984
.84
.84
116,462
116,827
(67,008)
(11,128)
96,609
(24,907)
(198)
71,504
.59
.58
116,191
116,650
AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
(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
2019
Interest
Income/
Expense
Average
Balance
Average Rates
Earned/Paid
Average
Balance
2018
Interest
Income/
Expense
Average Rates
Earned/Paid
Average
Balance
2017
Interest
Income/
Expense
Average Rates
Earned/Paid
Years Ended December 31
$
5,214,158 $
909,367
2,859,008
2,178,716
1,930,883
358,474
764,828
9,203
14,224,637
18,577
202,308
49,702
127,635
85,604
92,414
18,204
93,754
—
669,621
1,209
3.88 % $
5.47
4.46
3.93
4.79
5.08
12.26
—
4.71
6.51
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
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
851,124
20,968
2.46
921,759
21,720
2.36
914,961
19,697
2.15
191,406
1,220,958
4,594,576
1,372,574
333,105
29,450
4,547
134,255
8,731,995
4,557
38,362
123,806
37,478
9,017
886
1,792
8,466
245,332
2,034
55
15,898
6,698
938,813
1,021
38,691
6,368
26,945
73,025
29,415
952
30,367
103,392
741,089
316,299
24,034,631
(160,212)
74,605
370,709
380,350
513,442
$ 25,213,525
$
918,896
10,607,224
610,807
1,396,760
13,533,687
1,822,098
43,919
1,866,017
15,399,704
6,376,204
360,587
3,077,030
$ 25,213,525
2.38
3.14
2.69
2.73
2.71
3.01
39.41
6.31
2.81
2.70
2.15
2.12
3.91
308,520
1,410,700
4,203,625
1,455,690
340,458
24,731
26,459
114,438
8,806,380
6,098
42,867
111,686
34,223
8,912
759
11,816
12,412
250,493
27,026
519
15,881
6,233
905,438
973
26,830
3,215
14,658
45,676
19,655
45
19,700
65,376
696,438
319,948
23,795,364
(158,791)
(113,068)
360,732
343,636
438,362
$ 24,666,235
.11
.36
1.04
1.93
.54
$
867,150
10,817,169
603,137
1,114,825
13,402,281
1.61
2.17
1.63
.67 %
1,514,144
1,747
1,515,891
14,918,172
6,728,971
247,520
2,771,572
$ 24,666,235
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
7,321
62,073
89,623
36,757
8,410
583
2,283
10,507
237,254
18,518
230
15,440
2,223
810,329
981
16,328
2,645
10,859
30,813
9,829
3,086
12,915
43,728
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
$
835,421
$
840,062
$
766,601
3.48 %
(.55)%
3.53%
9.58%
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
.12
.16
.39
.77
.23
.67
3.52
.83
.29 %
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
2016
Interest
Income/
Expense
Average
Balance
Average Rates
Earned/Paid
Average
Balance
2015
Interest
Income/
Expense
Average Rates
Earned/Paid
Average
Balance
2014
Interest
Income/
Expense
Average Rates
Earned/Paid
Average Balance Five
Year Compound
Growth Rate
Years Ended December 31
$
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
735,081
15,628
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
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
$
775,121
10,285,288
749,261
1,471,610
13,281,280
1,266,093
171,255
1,437,348
14,718,628
7,049,633
292,145
2,496,065
$ 24,556,471
2.89%
3.52
3.66
3.74
3.86
3.54
11.47
—
3.86
5.12
$
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
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
—
2.13
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%
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
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
$
711,433
$
664,038
$
648,628
3.04%
7.14%
2.93%
2.38%
2.83%
3.78
3.83
3.80
4.23
3.79
11.44
—
4.04
—
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%
3.00%
.42%
5.87%
16.78
4.44
3.68
3.61
(3.43)
.27
13.49
4.78
—
11.35
(24.78)
(6.58)
9.04
(13.50)
18.72
9.84
(37.80)
5.98
(.89)
(42.30)
(5.54)
7.45
2.13
(.08)
(3.77)
(.61)
1.39
6.40
2.15
6.50
2.28
(8.17)
.35
1.67
7.70
(15.98)
6.49
2.19
.12
9.84
6.09
2.15%
(B)
Interest income and yields are presented on a fully-taxable equivalent basis using a federal income tax rate of 21% in 2019 and 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 $6,282,000 in 2019, $5,931,000 in 2018, $10,357,000 in 2017, $9,537,000
in 2016, $8,332,000 in 2015 and $7,640,000 in 2014. Investment securities interest income includes tax equivalent adjustments of $7,845,000 in 2019, $10,306,000 in 2018, $22,565,000
in 2017, $21,847,000 in 2016, $21,386,000 in 2015 and $20,784,000 in 2014. 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, 2019
5,362
901
2,820
2,284
1,962
348
749
18
14,444
15
826
185
1,208
4,686
1,258
331
33
4
142
8,673
1
850
390
24,373
(160)
150
379
387
549
25,678
924
10,619
627
1,434
13,604
1,837
94
1,931
15,535
6,553
459
3,131
25,678
206
3.59% $
5.05
4.22
3.85
4.76
4.76
12.11
—
4.47
5.32
2.16
2.17
3.05
2.72
2.62
2.82
2.81
49.40
6.58
2.78
2.22
2.26
1.61
3.75
.11
.35
1.16
1.79
.52
1.20
2.05
1.25
.61%
$
$
$
$
5,265
920
2,883
2,175
1,924
354
763
9
14,293
20
824
182
1,172
4,713
1,298
334
30
5
135
8,693
1
713
227
23,947
(160)
153
367
380
545
25,232
925
10,409
620
1,504
13,458
1,885
77
1,962
15,420
6,290
391
3,131
25,232
207
3.85% $
5.46
4.42
3.91
4.88
5.17
12.42
—
4.71
6.15
2.36
2.69
3.14
2.61
2.80
2.63
2.91
35.67
6.19
2.76
2.57
2.01
2.17
3.90
.11
.38
1.11
1.99
.58
1.74
2.33
1.76
.73%
$
$
$
$
5,142
909
2,869
2,135
1,908
362
766
5
14,096
21
844
200
1,222
4,615
1,412
331
30
5
130
8,789
2
700
332
23,940
(161)
42
369
378
504
25,072
930
10,643
605
1,378
13,556
1,794
2
1,796
15,352
6,336
307
3,077
25,072
215
4.02% $
5.63
4.60
3.97
4.77
5.20
12.33
—
4.82
6.98
4.66
2.32
3.18
2.70
2.79
2.68
3.14
35.97
6.69
3.04
2.76
2.11
2.40
4.05
.11
.38
1.01
2.02
.55
1.80
1.52
1.80
.70%
$
$
$
$
5,086
907
2,864
2,119
1,929
371
781
4
14,061
18
910
199
1,283
4,360
1,526
336
25
5
130
8,774
5
700
317
23,875
(159)
(49)
367
376
454
24,864
896
10,763
590
1,268
13,517
1,772
1
1,773
15,290
6,325
283
2,966
24,864
207
4.07%
5.73
4.61
4.00
4.73
5.17
12.18
—
4.85
7.38
.78
2.35
3.19
2.76
2.70
2.69
3.24
37.55
5.73
2.66
2.79
2.18
2.42
3.93
.11
.35
.87
1.92
.51
1.72
1.62
1.72
.65%
3.36%
3.43%
3.61%
3.52%
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 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%
57
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is disclosed within the Interest Rate Sensitivity section 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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2019, 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, 2019, 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 25, 2020 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for loan losses related to loans collectively evaluated for impairment
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company’s allowance for loan losses related to
loans collectively evaluated for impairment (ASC 450 ALL) was $157.9 million of a total allowance for loan losses of
$160.7 million as December 31, 2019, or 1.07% of total loans. The Company estimated the ASC 450 ALL using a
historical loss methodology utilizing a loss emergence period, which is applied to loans based on loan risk ratings. Such
amounts are adjusted for certain qualitative factors which include an evaluation of the performance and status of loans,
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.
58
We identified the assessment of the ASC 450 ALL as a critical audit matter because it involved significant measurement
uncertainty requiring complex auditor judgment, and knowledge and experience in the industry. In addition, auditor
judgment was required to evaluate the sufficiency of audit evidence obtained. This assessment encompassed the evaluation
of the process used to estimate the ASC 450 ALL, including the following key factors and assumptions (1) historical losses
in the Company’s portfolio over time, (2) an estimate of the length of time between a specific loss event and when the first
loss is identified (known as the estimated loss emergence period), and (3) loan risk ratings; and the development and
evaluation of qualitative adjustments.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal
controls related to the Company’s ASC 450 ALL process, including controls related to the (1) development and approval of
the ASC 450 ALL methodology, (2) determination of the key factors and assumptions used to estimate the ASC 450 ALL,
(3) determination of qualitative adjustments, and (4) analysis of the ASC 450 ALL results, trends, and ratios. We evaluated
the Company’s process to develop the ASC 450 ALL estimate by testing certain sources of data, factors, and assumptions,
and considered the relevance and reliability of such data, factors, and assumptions. We evaluated that the historical losses
in the Company’s portfolio are representative of the credit characteristics of the current portfolio. We tested the estimated
loss emergence period based on historical loss data, including the relevance of the parameters used in the estimate. We
involved credit risk professionals with specialized industry knowledge and experience, who assisted in:
• evaluating the Company’s ASC 450 ALL methodology for compliance with U.S. generally accepted accounting
principles,
• assessing the structured process for the determination of the magnitude of the qualitative adjustments,
• evaluating the qualitative factors and the effect of those factors on the ASC 450 ALL compared with relevant credit
factors and consistency with credit trends, and
• testing individual loan grades for a selection of commercial loans by evaluating the financial performance of the
borrower and the underlying collateral.
We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained
related to the Company’s ASC 450 ALL.
We have served as the Company’s auditor since 1971.
Kansas City, Missouri
February 25, 2020
59
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
Loans
Allowance for loan losses
Net loans
Loans held for sale (including $9,181,000 and $13,529,000 of residential mortgage loans carried at
fair value at December 31, 2019 and 2018, respectively)
Investment securities:
Available for sale debt ($204,942,000 and $463,325,000 pledged at December 31, 2019 and
2018, 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
Premises 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, 2019 and 2018
Common stock, $5 par value
Authorized 140,000,000 shares at December 31, 2019 and 120,000,000 shares at December 31,
2018; issued 112,795,605 shares at December 31, 2019 and 111,886,450 shares at December 31,
2018
Capital surplus
Retained earnings
Treasury stock of 445,952 shares at December 31, 2019
and 555,100 shares at December 31, 2018, 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
2019
2018
(In thousands)
$
14,737,817 $
(160,682)
14,577,135
14,140,298
(159,932)
13,980,366
13,809
20,694
8,571,626
28,161
4,209
137,892
8,741,888
—
850,000
395,850
491,615
370,637
138,921
9,534
476,400
26,065,789 $
6,890,687 $
11,621,716
626,157
1,381,855
20,520,415
1,850,772
2,418
553,712
22,927,317
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
144,784
144,784
563,978
2,151,464
201,562
(37,548)
110,444
3,134,684
3,788
3,138,472
26,065,789 $
559,432
2,084,824
241,163
(34,236)
(64,669)
2,931,298
5,851
2,937,149
25,463,842
$
$
$
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
2018
2017
2019
$
663,338 $
1,209
237,487
625,083 $
1,298
240,187
55
15,898
6,698
924,685
39,712
6,368
26,945
29,415
952
103,392
821,293
50,438
770,855
167,879
155,628
95,983
8,146
15,804
15,767
65,496
524,703
3,626
492,927
47,157
19,061
20,394
92,899
21,914
6,676
2,446
63,924
767,398
531,786
109,074
422,712
1,481
421,231
9,000
412,231 $
3.59 $
3.58 $
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 $
3.61 $
3.60 $
543,825
1,000
214,689
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
2.63
2.62
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
2019
2018
2017
$
422,712 $
438,214 $
319,900
(632)
151,122
1,167
23,456
175,113
597,825
1,481
(277)
(55,631)
664
6,855
(48,389)
389,825
4,672
412
3,022
(301)
—
3,133
323,033
517
322,516
Comprehensive income attributable to Commerce Bancshares, Inc.
$
596,344 $
385,153 $
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 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) decrease in interest receivable
Increase in interest payable
Increase (decrease) in income taxes payable
Donation of securities
Gain on sale of Corporate Trust business
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
Accelerated share repurchase agreement
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
(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
2019
2018
2017
$
422,712 $
438,214 $
319,900
50,438
41,145
27,631
14,195
(3,626)
(10,127)
259,153
(244,976)
3,863
13,854
3,316
5,586
14,465
—
(11,472)
(73,363)
512,794
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
413,203
1,558,244
708,864
1,510,985
792,380
1,899,640
(1,863,180)
(2,090,333)
(1,853,817)
(647,890)
(150,000)
—
(42,575)
2,033
(730,165)
85,438
349,890
(105,617)
(6,394)
(134,904)
(150,000)
(8)
(113,466)
(9,000)
(84,061)
(301,432)
1,209,240
(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
$
$
907,808 $
76,168 $
97,806
581
1,209,240 $
84,172 $
63,239
1,551
(614,849)
(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
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except per share data)
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
($.777 per share)
Cash dividends paid on preferred stock
($1.500 per depositary share)
Stock-based compensation
Issuance under stock purchase and equity
compensation plans
5% stock dividend, net
Balance, December 31, 2017
Adoption of ASU 2018-02
Adoption of ASU 2016-01
Net income
Other comprehensive loss
Distributions to non-controlling interest
Purchases of treasury stock
Cash dividends paid on common stock
($.853 per share)
Cash dividends paid on preferred stock
($1.500 per depositary share)
Stock-based compensation
Issuance under stock purchase and equity
compensation plans
5% stock dividend, net
Balance, December 31, 2018
Net income
Other comprehensive income
Distributions to non-controlling interest
Purchases of treasury stock
Accelerated share repurchase agreement
Cash dividends paid on common stock
($.990 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, 2019
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 $ 510,015 $ 1,552,454 $ 292,849 $
(15,294) $
10,975 $
5,349 $ 2,501,132
3,441
(2,144)
319,383
1,297
517
319,900
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)
144,784
559,432
2,084,824
241,163
421,231
(113,466)
(9,000)
13,854
(19,293)
(17,771)
18,592
(14,473)
(75,231)
23,424
32,044
(34,236)
(134,904)
(150,000)
20,644
4,546
72,079
(338,366)
260,948
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)
(64,669)
175,113
5,851
1,481
2,937,149
422,712
175,113
(3,544)
(3,544)
(134,904)
(150,000)
(113,466)
(9,000)
13,854
1,351
(793)
$ 144,784 $ 563,978 $ 2,151,464 $ 201,562 $
(37,548) $
110,444 $
3,788 $ 3,138,472
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 316 branch
and ATM locations throughout Missouri, Kansas, Illinois, Oklahoma and Colorado. Principal activities include retail and
commercial banking, investment management, securities brokerage, mortgage banking, trust, and private banking services. 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 $20.3 million and $8.2 million at December 31, 2019 and 2018, 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, 2019 totaled $160.7 million. Other interest
earning cash balances held at the Federal Reserve Bank totaled $395.9 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.
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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 borrower's
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.
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.
Investments in Debt and Equity Securities
The majority of the Company's investment portfolio is comprised of debt securities that 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 certain
callable debt securities purchased at a premium, the amortization is instead recorded to the earliest call date. For mortgage and
asset-backed securities, prepayment experience is evaluated quarterly to determine if a change in a bond's estimated remaining
life is necessary. A corresponding adjustment is then made in the related amortization of premium or discount accretion.
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
67
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 20, Resale and Repurchase Agreements.
Premises 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.
Premises and equipment also includes the Company's right-of-use leased assets, which is mainly comprised of operating leases
for branches, office space, ATM locations, and certain equipment.
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
68
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 that 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 9, 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
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
69
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 the Company
has 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 17, Fair
Value Measurements and Note 19, Derivative Instruments.
Pension Plan
The Company’s pension plan is described in Note 10, 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
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.
70
Stock-Based Compensation
The Company’s stock-based employee compensation plan is described in Note 11, 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. The Company
recognizes forfeitures as a reduction to expense only when they have occurred.
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 2019.
71
2. Loans and Allowance for Loan Losses
Major classifications within the Company’s held for investment loan portfolio at December 31, 2019 and 2018 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
2019
2018
$
5,565,449 $
5,106,427
899,377
869,659
2,833,554
2,875,788
2,354,760
1,964,145
349,251
764,977
6,304
2,127,083
1,955,572
376,399
814,134
15,236
$
14,737,817 $
14,140,298
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, 2019
Additions
Amounts collected
Amounts written off
Balance, December 31, 2019
$
$
46,728
133,607
(123,956)
—
56,379
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, 2019 to principal holders (over 10% ownership) of the Company’s common stock.
The Company’s lending activity is generally centered in Missouri, Kansas, Illinois 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, 2019, unfunded
loan commitments totaled $11.2 billion (which included $5.1 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, 2019, loans
totaling $4.0 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 $795.8 million and $752.2 million at December 31, 2019 and 2018, respectively, which is included in business loans
on the Company’s consolidated balance sheets. This investment includes deferred income of $71.8 million and $62.6 million at
December 31, 2019 and 2018, respectively. The net investment in operating leases amounted to $14.7 million and $16.1 million
at December 31, 2019 and 2018, respectively, and is included in other assets on the Company’s consolidated balance sheets.
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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, 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
Balance at December 31, 2018
Provision for loan losses
Deductions:
Loans charged off
Less recoveries
Net loans charged off
Commercial
Personal
Banking
Total
$
91,361 $
64,571 $
155,932
2,327
42,917
45,244
2,538
2,554
(16)
93,704
254
3,164
2,075
1,089
92,869
2,816
4,711
786
3,925
52,641
10,981
41,660
65,828
42,440
52,657
11,452
41,205
67,063
47,622
57,169
11,406
45,763
55,179
13,535
41,644
159,532
42,694
55,821
13,527
42,294
159,932
50,438
61,880
12,192
49,688
Balance at December 31, 2019
$
91,760 $
68,922 $
160,682
The following table shows the balance in the allowance for loan losses and the related loan balance at December 31, 2019 and
2018, 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, 2019
Commercial
Personal Banking
Total
December 31, 2018
Commercial
Personal Banking
Total
Impaired Loans
All Other Loans
Allowance for
Loan Losses
Loans
Outstanding
Allowance for
Loan Losses
Loans
Outstanding
1,629 $
1,117
2,746 $
1,780 $
916
2,696 $
64,500
17,232
81,732
61,496
17,120
78,616
$
$
$
$
90,131 $
9,233,880
67,805
5,422,205
157,936 $ 14,656,085
91,089 $
8,790,378
66,147
5,271,304
157,236 $ 14,061,682
$
$
$
$
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Impaired loans
The table below shows the Company’s investment in impaired loans at December 31, 2019 and 2018. 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. 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 below.
(In thousands)
Non-accrual loans
Restructured loans (accruing)
Total impaired loans
2019
2018
$
$
10,220 $
71,512
81,732 $
12,536
66,080
78,616
The following table provides additional information about impaired loans held by the Company at December 31, 2019 and
2018, 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, 2019
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, 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
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
$
$
$
$
$
$
$
$
$
$
7,054 $
7,054 $
13,738 $
13,738 $
30,437 $
30,487 $
46
26,963
4,729
4,421
35
8,047
51
27,643
5,968
4,421
35
8,047
74,678 $
81,732 $
76,652 $
90,390 $
8,725 $
8,725 $
14,477 $
14,477 $
—
—
837
1
791
258
35
1
823
2,746
2,746
—
—
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 $
11
546
266
38
1
611
2,696
2,696
74
Total average impaired loans during 2019 and 2018 are shown in the table below.
(In thousands)
Commercial
2019
Personal
Banking
Total
Commercial
2018
Personal
Banking
Total
Average impaired loans:
Non-accrual loans
Restructured loans (accruing)
Total
$
$
9,892 $
2,031 $
49,544
15,667
59,436 $
17,698 $
11,923
65,211
77,134
$
$
7,619 $
2,122 $
73,261
16,526
80,880 $
18,648 $
9,741
89,787
99,528
The table below shows interest income recognized during the years ended December 31, 2019, 2018 and 2017 for impaired
loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled
debt restructurings" section below.
(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
2019
2018
2017
$
1,329 $
2,219 $
3,135
2
1,456
136
286
3
828
25
558
139
305
3
746
41
514
402
307
10
673
$
4,040 $
3,995 $
5,082
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, 2019 and 2018.
(In thousands)
December 31, 2019
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, 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
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
$
5,545,104
$
12,064 $
792 $
7,489 $
5,565,449
882,826
2,830,494
2,345,243
1,928,082
347,258
742,659
5,972
13,046
2,030
6,129
34,053
1,743
10,703
332
3,503
—
1,689
2,010
250
11,615
—
2
899,377
1,030
2,833,554
1,699
—
—
—
—
2,354,760
1,964,145
349,251
764,977
6,304
$
14,627,638
$
80,100 $
19,859 $
10,220 $
14,737,817
$
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
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 applied 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.
76
(In thousands)
December 31, 2019
Pass
Special mention
Substandard
Non-accrual
Total
December 31, 2018
Pass
Special mention
Substandard
Non-accrual
Total
Commercial Loans
Business
Real Estate -
Construction
Real Estate -
Business
Total
$
5,393,928 $
856,364 $
2,659,827 $
8,910,119
$
$
80,089
83,943
7,489
42,541
470
2
5,565,449 $
899,377 $
92,626
80,071
1,030
2,833,554 $
215,256
164,484
8,521
9,298,380
4,915,042 $
866,527 $
2,777,374 $
8,558,943
84,391
98,009
8,985
1,917
1,211
4
51,845
44,854
1,715
138,153
144,074
10,704
$
5,106,427 $
869,659 $
2,875,788 $
8,851,874
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. This is a published credit score designed to
measure the risk of default by taking into account various factors from a borrower's financial history. 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 $198.2 million at December
31, 2019 and $201.7 million at December 31, 2018. The table also excludes consumer loans related to the Company's patient
healthcare loan program, which totaled $199.2 million at December 31, 2019 and $170.3 million at December 31, 2018. 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, 2019 and 2018 by
FICO score.
December 31, 2019
FICO score:
Under 600
600 – 659
660 – 719
720 – 779
780 and over
Total
December 31, 2018
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
1.0%
3.0%
1.7%
5.6%
1.9
9.2
25.7
62.2
5.2
15.4
27.0
49.4
1.9
9.0
21.5
65.9
14.3
32.2
26.6
21.3
100.0%
100.0%
100.0%
100.0%
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 %
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. Certain personal real estate, revolving
home equity, and consumer loans were classified as consumer bankruptcy 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
2019
2018
$
$
55,934 $
50,904
8,365
3,592
3,621
7,938
7,410
4,103
3,663
9,759
79,450 $
75,839
The table below shows the balance of troubled debt restructurings by loan classification at December 31, 2019, in addition to
the outstanding 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, 2019
$
37,055 $
44
25,933
3,915
4,421
35
8,047
—
—
—
347
83
—
987
1,417
Total troubled debt restructurings
$
79,450
$
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
$1.2 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 other 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 $4.7 million at December 31, 2019 to lend additional funds to borrowers with restructured
loans, compared to $1.8 million at December 31, 2018.
Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans 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 19. The loans are primarily sold to FNMA, FHLMC, and GNMA. At December 31, 2019,
the fair value of these loans was $9.2 million, and the unpaid principal balance was $8.9 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 totaled $4.6 million at December 31, 2019.
At December 31, 2019, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing.
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $365 thousand and $1.4 million at December 31, 2019 and 2018,
respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles (RV), totaled $5.5
million and $2.0 million at December 31, 2019 and 2018, respectively. The December 31, 2019 balance of repossessed assets also
included trailers with an asset value of $3.4 million, which were acquired due to the bankruptcy of a single leasing customer. 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, at fair value, consisted of the following at December 31, 2019 and 2018:
(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
2019
2018
$ 8,571,626 $ 8,538,041
27,059
28,161
2,929
1,280
2,585
1,824
33,770
10,000
94,122
33,498
10,000
85,659
$ 8,741,888 $ 8,698,666
The Company has elected to measure equity securities with no readily determinable fair value 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. This
portfolio includes the Company's holdings of Visa Class B shares, which have a carrying value of zero, as there have not been
observable price changes in orderly transactions for identical or similar investments of the same issuer. During the year-ended
December 31, 2019, the Company did not record any impairment or other adjustments to the carrying amount of its portfolio of
equity securities with no readily determinable fair value.
Other investment securities 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, 2019 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, 2019. 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.
80
(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
Total U.S. government and federal agency obligations
Government-sponsored enterprise obligations:
Within 1 year
After 10 years
Total government-sponsored enterprise obligations
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
Amortized Cost
Fair Value
Weighted Average
Yield
(.01)*%
2.17*
.59*
1.54*
1.99
2.65
2.26
2.55
2.42
2.56
2.92
2.49
2.87
2.98
2.61
2.83
$
57,234 $
518,035
252,592
827,861
81,616
57,118
138,734
51,230
740,283
377,009
57,010
57,192
533,805
260,779
851,776
81,830
57,447
139,277
51,540
763,396
395,014
57,977
1,225,532
1,267,927
3,893,247
3,937,964
796,451
1,228,151
5,917,849
51,998
218,950
54,607
325,555
809,782
1,233,489
5,981,235
52,180
222,770
56,461
331,411
Total available for sale debt securities
$
8,435,531 $
8,571,626
* 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 $461.8 million, at fair value, at December 31, 2019. 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 $9.9 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 AOCI,
by security type.
(In thousands)
December 31, 2019
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
U.S. government and federal agency obligations
$
827,861 $
23,957 $
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, 2018
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
138,734
1,225,532
3,893,247
796,451
1,228,151
5,917,849
325,555
730
42,427
50,890
14,036
11,056
75,982
5,863
(42) $
(187)
(32)
(6,173)
(705)
(5,718)
(12,596)
(7)
851,776
139,277
1,267,927
3,937,964
809,782
1,233,489
5,981,235
331,411
$
$
8,435,531 $
148,959 $
(12,864) $
8,571,626
914,486 $
4,545 $
(11,379) $
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)
907,652
195,778
1,328,039
3,214,985
1,047,716
1,511,614
5,774,315
332,257
$
8,602,599 $
35,266 $
(99,824) $
8,538,041
The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special
emphasis 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 those which have been identified based
on management’s judgment. These securities are placed on a watch list and cash flow analyses are prepared on an individual
security basis. Inputs to these models include factors such as cash flow projections, contractual payments required, expected
delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values),
and various other information related to the underlying collateral (including current delinquencies). 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, 2019, the fair value of securities on this watch list was $51.6 million compared to $57.7 million at December 31,
2018.
As of December 31, 2019, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency
mortgage-backed securities with a current par value of $17.5 million. These securities, which are part of the watch list mentioned
above, had an aggregate fair value of $13.1 million at December 31, 2019. The cumulative credit-related portion of the impairment
on these securities, which was recorded in earnings, totaled $13.3 million. 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, 2019 included the following:
Significant Inputs
Prepayment CPR
Projected cumulative default
Credit support
Loss severity
82
Range
0% - 25%
9% - 52%
0% - 20%
8% - 63%
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
2019
2018
2017
14,092 $
14,199 $
14,080
48
85
(950)
58
10
(175)
111
274
(266)
13,275 $
14,092 $
14,199
$
$
Debt securities with unrealized losses recorded in AOCI are shown in the table below, along with the length of the impairment
period.
(In thousands)
December 31, 2019
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
$
31,787
$
21
$
25,405 $
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, 2018
6,155
6,700
652,352
102,931
330,876
1,086,159
5,496
$ 1,136,297
U.S. government and federal agency obligations
$ 317,699
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
187
31
5,306
254
3,610
9,170
4
—
1,554
147,653
189,747
152,461
489,861
997
21
—
1
867
451
2,108
3,426
3
$
57,192
$
6,155
8,254
800,005
292,678
483,337
42
187
32
6,173
705
5,718
1,576,020
12,596
6,493
$
$
9,413
$
517,817 $
3,451
$ 1,654,114
6,515
$ 116,728 $
—
704
1,502
1,085
728
3,315
564
188,846
257,051
1,927,268
657,685
813,427
3,398,380
260,682
4,864
3,747
4,326
$ 434,427
188,846
414,889
46,766
11,694
10,483
68,943
6,846
2,258,201
865,191
961,424
4,084,816
312,518
—
157,838
330,933
207,506
147,997
686,436
51,836
$
$
7
12,864
11,379
3,747
5,030
48,268
12,779
11,211
72,258
7,410
$ 1,213,809 $
11,098
$ 4,221,687 $
88,726
$ 5,435,496 $
99,824
The available for sale debt portfolio included $1.7 billion of securities that were in a loss position at December 31, 2019,
compared to $5.4 billion at December 31, 2018. The total amount of unrealized loss on these securities was $12.9 million at
December 31, 2019, a decrease of $87.0 million compared to the unrealized loss at December 31, 2018. This decrease in losses
was mainly due to a declining interest 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
2019
2018
2017
$ 402,103 $ 667,227 $ 779,793
10,953
1,634
$ 413,203 $ 708,864 $ 792,380
41,637
—
3,856
7,244
$
— $
— $
2,354
(2,568)
(133)
448
(10,101)
(68)
—
3,262
—
344
—
1,759
(8,917)
2,542
1,094
—
(727)
3,626 $
—
—
13,849
(488) $
$
(254)
592
(10,287)
(385)
31,074
10,653
(10)
—
381
(880)
(5,833)
25,051
Investment securities with a fair value of $4.3 billion were pledged at both December 31, 2019 and 2018 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 $204.9 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. Premises and Equipment
Premises and equipment consist of the following at December 31, 2019 and 2018:
(In thousands)
Land
Buildings and improvements
Equipment
Right of use leased assets
Total
Less accumulated depreciation
Net premises and equipment
2019
2018
$
91,678 $
566,177
237,047
28,195
923,097
552,460
$
370,637 $
91,603
545,510
226,666
—
863,779
530,660
333,119
Depreciation expense of $30.8 million in 2019, $28.6 million in 2018 and $29.1 million in 2017, was included in occupancy
expense and equipment expense in the consolidated statements of income. Repairs and maintenance expense of $17.0 million,
$16.9 million and $16.4 million for 2019, 2018 and 2017, respectively, was included in occupancy expense and equipment expense.
There has been no interest expense capitalized on construction projects in the past three years.
Right of use leased assets are comprised mainly of operating leases for branches, office space, ATM locations, and certain
equipment, as described in Note 6.
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, 2019
December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net
Amount
$ 31,270
12,942
$ 44,212
$
$
(29,485)
(4,866)
(34,351)
$
$
— $ 1,785
7,749
$ 9,534
(327)
(327)
$ 31,270
10,339
$ 41,609
$
$
(28,954)
(3,861)
(32,815)
$
$
— $ 2,316
—
6,478
— $ 8,794
The carrying amount of goodwill and its allocation among segments at December 31, 2019 and 2018 is shown in the table
below. As a result of ongoing assessments, no impairment of goodwill was recorded in 2019, 2018 or 2017. Further, the annual
assessment of qualitative factors on January 1, 2020 revealed no likelihood of impairment as of that date.
(In thousands)
Consumer segment
Commercial segment
Wealth segment
Total goodwill
December 31,
2019
December 31,
2018
$
$
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, 2019 and
2018 are shown in the following table.
(In thousands)
Balance at December 31, 2017
Originations
Amortization
Impairment reversal
Balance at December 31, 2018
Originations
Amortization
Impairment
Goodwill
Core Deposit
Premium
Mortgage
Servicing Rights
$
138,921 $
2,965 $
—
—
—
138,921
—
—
—
—
(649)
—
2,316
—
(531)
—
4,653
2,433
(617)
9
6,478
2,603
(1,005)
(327)
7,749
Balance at December 31, 2019
$
138,921 $
1,785 $
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 at a tranche level, 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, 2019, temporary impairment of $327 thousand 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 17 on Fair Value Measurements.
Aggregate amortization expense on intangible assets for the years ended December 31, 2019, 2018 and 2017 was $1.5 million,
$1.3 million and $1.3 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, 2019. 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)
2020
2021
2022
2023
2024
$
1,507
1,286
1,099
919
770
85
6. Leases
The Company adopted ASU 2016-02, "Leases", and its related amendments on January 1, 2019 using a modified retrospective
approach. The Company's leasing activities include leasing certain real estate and equipment, providing lease financing to
commercial customers, and leasing office space to third parties. The Company adopted the package of practical expedients
permitted within the new standard, along with the lease component expedient for all lease classes and the disclosure expedient.
The Company uses the FHLB fixed-advance rate at lease commencement or at any subsequent remeasurement event date based
on the remaining lease term to calculate the liability for each lease.
Lessee
The Company primarily has operating leases for branches, office space, ATM locations, and certain equipment. As of
December 31, 2019, the right-of-use asset for operating leases, reported within premises and equipment, net, and lease liability,
reported within other liabilities, recognized on the Company's consolidated balance sheets totaled $26.3 million and $27.0 million,
respectively. Total lease cost for the year ended December 31, 2019 was $7.3 million. For leases with a term of 12 months or
less, an election was made not to recognize lease assets and lease liabilities for all asset classes, and to recognize lease expense
for these leases on a straight-line basis over the lease term. The Company's leases have remaining terms of 1 month to 34 years,
most of which contain renewal options. However, the renewal options are generally not included in the leased asset or liability
because the option exercises are uncertain.
The maturities of operating leases are included in the table below.
(in thousands)
2020
2021
2022
2023
2024
After 2024
Total lease payments
Less: Interest(2)
Present value of lease liabilities
Operating
Leases(1)
5,913
5,001
4,304
3,802
2,530
12,600
34,150
7,126
27,024
$
$
$
(1) Excludes $6.5 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2) Calculated using the interest rate for each lease.
The following table presents the average lease term and discount rate of operating leases.
Weighted-average remaining lease term
Weighted-average discount rate
December 31, 2019
11.7 years
3.67%
Supplemental cash flow information related to operating leases is included in the table below.
(in thousands)
Operating cash paid toward lease liabilities
Leased assets obtained in exchange for new lease liabilities
For the Year Ended
December 31
2019
$
$
5,989
3,958
86
The Company adopted the new lease standard using the effective date as the date of initial application as noted above, and as
required, the table below provides the disclosure for periods prior to adoption. Under ASC Topic 840, Leases, rent expense
amounted to $7.7 million and $7.3 million in 2018 and 2017, respectively. Future minimum lease payments as of December 31,
2018 are shown below, which include leases that have not yet commenced.
(in thousands)
Year Ended December 31
2019
2020
2021
2022
2023
After
Total minimum lease payments
Total
5,763
4,817
4,055
3,598
3,273
15,161
36,667
$
$
Lessor
The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities.
These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases
various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options for the
lessee to renew or purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease
component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company
also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew
or to expand the leased space, and currently the leases have remaining terms of 1 month to 8 years.
The following table provides the components of lease income.
(in thousands)
Direct financing and sales-type leases
Operating leases(1)
Total lease income
For the Year Ended
December 31
2019
24,062
7,951
32,013
$
(1) Includes rent of $75 thousand from Tower Properties Company, a related party.
The following table presents the components of the net investments in direct financing and sales-type leases.
(in thousands)
Lease payment receivable
Unguaranteed residual assets
Total net investments in direct financing and sales-type leases
Deferred origination cost
Total net investment included within business loans
The maturities of lease receivables are included in the table below.
December 31, 2019
$
$
$
738,809
53,408
792,217
3,609
795,826
(in thousands)
2020
2021
2022
2023
2024
After 2024
Total lease receipts
Less: Net present value adjustment
Present value of lease receipts
Direct Financing
and Sale-Type
Leases
Operating
Leases
$
$
224,297 $
177,143
136,787
92,813
58,773
114,188
804,001 $
65,192
738,809
7,564 $
7,511
13,816
5,536
4,811
8,643
47,881 $
Total
231,861
184,654
150,603
98,349
63,584
122,831
851,882
87
7. Deposits
At December 31, 2019, the scheduled maturities of certificates of deposit were as follows:
(In thousands)
Due in 2020
Due in 2021
Due in 2022
Due in 2023
Due in 2024
Thereafter
Total
$
1,727,042
229,487
27,205
14,387
9,838
53
$
2,008,012
The following table shows a detailed breakdown of the maturities of certificates of deposit, by size category, at December 31,
2019.
(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
117,635 $
632,064 $
144,309
223,756
140,457
286,240
323,038
140,513
Total
749,699
430,549
546,794
280,970
626,157 $
1,381,855 $
2,008,012
$
$
The aggregate amount of certificates of deposit that exceeded the $250,000 FDIC insurance limit totaled $1.1 billion at
December 31, 2019.
8. Borrowings
At December 31, 2019, the Company's borrowings primarily consisted of federal funds purchased and securities sold under
agreements to repurchase (repurchase agreements). The following table sets forth selected information for federal funds
purchased and repurchase agreements.
(Dollars in thousands)
Federal funds purchased and repurchase agreements:
2019
2018
2017
Year End
Weighted
Rate
Average
Weighted
Rate
Average Balance
Outstanding
Maximum
Outstanding at
any Month End
Balance at
December 31
.8%
1.6% $
1,822,098 $
2,394,294 $
1,850,772
.9
.8
1.3
.7
1,514,144
1,462,387
1,981,761
1,984,071
1,956,389
1,507,138
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, 2019, and $1.8 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 20 on Resale and Repurchase Agreements.
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, 2019, 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 $396.6 million at
December 31, 2019.
88
9. Income Taxes
The components of income tax expense from operations for the years ended December 31, 2019, 2018 and 2017 were as
follows:
(In thousands)
Year ended December 31, 2019:
U.S. federal
State and local
Total
Year ended December 31, 2018:
U.S. federal
State and local
Total
Year ended December 31, 2017:
U.S. federal
State and local
Total
Current
Deferred
Total
$
$
$
$
$
$
82,556 $
12,323
94,879 $
90,390 $
10,223
100,613 $
89,154 $
7,735
96,889 $
11,388 $
2,807
14,195 $
3,220 $
2,116
5,336 $
12,190 $
1,427
13,617 $
93,944
15,130
109,074
93,610
12,339
105,949
101,344
9,162
110,506
The components of income tax (benefit) expense recorded directly to stockholders’ equity for the years ended December 31,
2019, 2018 and 2017 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
Income tax (benefit) expense allocated to stockholders’ equity
2019
2018
2017
$
$
50,163 $
7,818
389
58,370 $
(18,634) $
2,286
222
(16,126) $
2,104
—
(184)
1,920
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2019 and 2018 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
Other
Total deferred tax assets
Deferred tax liabilities:
Equipment lease financing
Unrealized gain on available for sale debt securities
Land, buildings and equipment
Cash flow hedges
Intangibles
Other
Total deferred tax liabilities
Net deferred tax liabilities
2019
2018
$
$
39,130 $
—
7,554
6,662
5,053
4,270
4,057
66,726
68,814
34,024
17,202
9,015
6,491
7,331
142,877
(76,151) $
39,169
16,140
7,609
5,911
4,125
2,152
4,640
79,746
55,738
—
14,207
2,104
5,973
5,309
83,331
(3,585)
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.
89
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 2019 and 2018, and 35% in 2017. 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
2019
2018
2017
$
111,364 $
113,293 $
150,461
(10,973)
(11,502)
—
11,953
—
(3,337)
67
—
9,748
—
(3,928)
(1,662)
(20,295)
(10,864)
5,955
(6,753)
(6,613)
(1,385)
$
109,074 $
105,949 $
110,506
The gross amount of unrecognized tax benefits was $1.4 million and $1.3 million at December 31, 2019 and 2018, respectively,
and the total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $1.1 million and
$993 thousand, respectively. The activity in the accrued liability for unrecognized tax benefits for the years ended December 31,
2019 and 2018 was as follows:
(In thousands)
Unrecognized tax benefits at beginning of year
Gross increases – tax positions in prior period
Gross decreases – tax positions in prior period
Gross increases – current-period tax positions
Lapse of statute of limitations
Unrecognized tax benefits at end of year
2019
2018
1,257 $
1,208
18
(4)
361
(260)
1,372 $
31
—
322
(304)
1,257
$
$
The Company and its subsidiaries are subject to income tax by federal, state and local government taxing authorities. Tax
years 2016 through 2019 remain open to examination for U.S. federal income tax and for major state taxing jurisdictions.
10. 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
2019
2018
2017
26,959 $
29,635
15,810
605
3,049
76,058 $
25,712 $
27,030
14,986
651
2,918
71,297 $
24,402
25,143
14,244
704
2,883
67,376
$
$
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. 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. 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. 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
90
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 2019 or 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 2020 is
expected to be zero. The Company does not expect to make any further contributions in 2020 other than the necessary funding
contributions to the CERP. Contributions to the CERP were $25 thousand, $24 thousand and $439 thousand during 2019, 2018
and 2017, respectively.
The following items are components of the net pension cost for the years ended December 31, 2019, 2018 and 2017.
(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
2019
2018
2017
$
$
607 $
651 $
4,198
(4,842)
(271)
2,288
3,756
(5,255)
(271)
2,267
1,980 $
1,148 $
621
3,826
(5,785)
(271)
2,313
704
The following table sets forth the pension plans’ funded status, using valuation dates of December 31, 2019 and 2018.
(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
2019
2018
$
112,063 $
120,667
607
4,198
(7,016)
10,750
120,602
99,418
15,129
25
(7,016)
107,556
651
3,756
(6,622)
(6,389)
112,063
108,260
(2,244)
24
(6,622)
99,418
(12,645)
Funded status and net amount recognized at valuation date
$
(13,046) $
The accumulated benefit obligation, which represents the liability of a plan using only benefits as of the measurement date,
was $120.6 million and $112.1 million for the combined plans on December 31, 2019 and 2018, respectively.
91
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at
December 31, 2019 and 2018 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
2019
2018
$
$
$
$
1,265 $
(30,516)
(29,251)
16,205
(13,046) $
(461)
2,288
(271)
1,556 $
(424) $
1,535
(32,342)
(30,807)
18,162
(12,645)
(1,110)
2,267
(271)
886
(262)
The estimated net loss and prior service cost to be amortized from accumulated other comprehensive income into net periodic
pension cost in 2020 is $1.9 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
2019
2018
2017
3.07%
5.00%
4.13%
3.81%
5.00%
5.00%
4.14%
5.00%
3.57%
3.28%
5.00%
5.00%
3.57%
5.00%
3.95%
3.28%
6.00%
5.00%
92
The following table shows the fair values of the Company’s pension plan assets by asset category at December 31, 2019 and
2018. Information about the valuation techniques and inputs used to measure fair value are provided in Note 17 on Fair Value
Measurements.
(In thousands)
December 31, 2019
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, 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
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
$
4,746 $
4,746 $
— $
1,302
8,612
8,892
3,919
5,093
39,663
6,315
22,552
4,674
1,788
107,556 $
—
—
—
—
—
—
6,315
22,552
4,674
1,788
40,075 $
1,302
8,612
8,892
3,919
5,093
39,663
—
—
—
—
67,481 $
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 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(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 producer manufacturing 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, 2019. 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.
93
The assumed overall expected long-term rate of return on pension plan assets used in calculating 2019 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 7.3%. During 2019, the plan’s assets gained 14.8% of their value, compared to a loss of 1.7% in 2018. 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 $402 thousand in 2020, compared to $2.0 million in 2019.
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, 2019, the Company utilized an updated mortality table and
projection scale, which decreased the pension benefit obligation on that date by approximately $1.1 million.
The following future benefit payments are expected to be paid:
(In thousands)
2020
2021
2022
2023
2024
2025 - 2029
$
7,281
7,430
7,409
7,467
7,371
35,721
11. Stock-Based Compensation and Directors Stock Purchase Plan*
The Company’s stock-based compensation is provided under a stockholder-approved plan that 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, 2019, 2,249,326 shares remained available for issuance under the plan.
The stock-based compensation expense that was charged against income was $13.9 million, $12.8 million and $12.1 million for
the years ended December 31, 2019, 2018 and 2017, respectively. The total income tax benefit recognized in the income statement
for share-based compensation arrangements was $3.0 million, $3.2 million and $4.5 million for the years ended December 31,
2019, 2018 and 2017, respectively.
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, 2019 and changes during the year then
ended is presented below.
Nonvested at January 1, 2019
Granted
Vested
Forfeited
Shares
1,239,970
217,182
(339,618)
(13,323)
Nonvested at December 31, 2019
1,104,211
$
Weighted
Average Grant
Date Fair Value
41.18
$
58.82
31.33
47.41
47.57
The total fair value (at vest date) of shares vested during 2019, 2018 and 2017 was $19.9 million, $21.5 million and $23.8
million, respectively.
94
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 generally vest ratably over 4 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 2019 is presented below.
(Dollars in thousands, except per share data)
Outstanding at January 1, 2019
Granted
Forfeited
Expired
Exercised
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
38.30
58.82
49.67
37.00
32.30
43.55
36.16
6.6 years $
25,601
5.3 years $
17,728
Shares
1,119,405 $
196,129
(5,935)
(1,917)
(257,866)
1,049,816 $
557,763 $
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
2019
$11.35
2018
2017
$11.28
$10.83
1.7%
19.8%
2.6%
1.6%
20.6%
2.7%
1.6%
21.1%
2.4%
6.0 years
6.6 years
7.0 years
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
2019
2018
2017
$
$
7,109 $
1,385 $
9,632
1,928
$
$
9,310
2,698
As of December 31, 2019, there was $27.7 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 3.0 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 33,914 at December 31, 2019. In 2019, 21,904 shares were purchased at an average price of $61.14, and in
2018, 32,454 shares were purchased at an average price of $54.92.
* All share and per share amounts in this note have been restated for the 5% common stock dividend distributed in 2019.
95
12. 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 the amortization from other comprehensive income of losses associated with pension benefits, which
occurs as the losses are included in current net periodic pension cost. The remaining component is gains in fair value on certain
interest rate floors that have been designated as cash flow hedging instruments.
(In thousands)
Balance January 1, 2019
Unrealized Gains (Losses)
on Securities (1)
OTTI
Other
Pension
Loss
Unrealized
Gains on Cash
Flow Hedge
Derivatives (2)
Total
Accumulated
Other
Comprehensive
Income (Loss)
$
3,861
$ (52,278) $ (23,107) $
6,855
$
(64,669)
Other comprehensive income (loss) before reclassifications
(975)
201,280
(461)
27,481
227,325
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, 2019
Balance January 1, 2018
ASU 2018-02 Reclassification of tax rate change
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
133
(842)
210
(632)
215
201,495
(50,373)
151,122
2,017
1,556
(389)
1,167
3,793
31,274
(7,818)
23,456
6,158
233,483
(58,370)
175,113
$
$
35
3,264
3,411
715
$
$
(35)
—
—
—
98,809
$ (21,940) $
30,311
$
110,444
30,326
$ (19,629) $
— $
14,108
6,359
(4,142)
—
—
—
(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)
—
—
—
Balance December 31, 2018
$
3,861
$ (52,278) $ (23,107) $
6,855
$
(64,669)
(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.
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.
New accounting guidance, 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).
96
13. 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 securities 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.
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, 2019:
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, 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
Consumer
Commercial
Wealth
Segment Totals
Other/
Elimination
Consolidated
Totals
$
$
$
$
$
315,782 $
(44,987)
135,257
—
(297,581)
108,471 $
294,798 $
(40,571)
126,253
—
(286,181)
94,299 $
276,891 $
(40,619)
121,362
—
(274,225)
$
83,409 $
342,736 $
(4,204)
203,952
—
(308,686)
233,798 $
344,972 $
(1,134)
202,527
—
(297,847)
248,518 $
329,087 $
205
184,577
—
(281,845)
232,024 $
97
48,058 $
(174)
183,589
—
(124,123)
107,350 $
46,946 $
32
173,026
—
(123,568)
96,436 $
47,264 $
(41)
158,175
—
(120,461)
84,937 $
706,576 $
(49,365)
522,798
—
(730,390)
449,619 $
686,716 $
(41,673)
501,806
—
(707,596)
439,253 $
653,242 $
(40,455)
464,114
—
(676,531)
400,370 $
114,717 $
(1,073)
1,905
3,626
(37,008)
82,167 $
137,109 $
(1,021)
(465)
(488)
(30,225)
104,910 $
80,437 $
(4,789)
(2,851)
25,051
(67,812)
30,036 $
821,293
(50,438)
524,703
3,626
(767,398)
531,786
823,825
(42,694)
501,341
(488)
(737,821)
544,163
733,679
(45,244)
461,263
25,051
(744,343)
430,406
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 2019:
Assets
Loans, including held for sale
Goodwill and other intangible assets
Deposits
Average balances for 2018:
Assets
Loans, including held for sale
Goodwill and other intangible assets
Deposits
$
$
Consumer
Commercial
Wealth
Segment Totals
Other/
Elimination
Consolidated
Totals
2,375,326 $
2,239,100
79,055
10,236,257
9,486,074 $
9,250,645
68,109
7,848,367
1,288,806 $
1,276,839
746
1,832,418
13,150,206 $
12,766,584
147,910
19,917,042
12,063,319 $
1,476,630
—
(7,151)
25,213,525
14,243,214
147,910
19,909,891
2,481,060 $
2,346,166
78,062
10,210,502
9,115,738 $
8,939,696
68,300
8,029,248
1,243,806 $
1,233,780
746
1,871,596
12,840,604 $
12,519,642
147,108
20,111,346
11,825,631 $
1,425,930
—
19,906
24,666,235
13,945,572
147,108
20,131,252
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.
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.
14. Common and Preferred Stock*
On December 18, 2019, the Company distributed a 5% stock dividend on its $5 par common stock for the 26th 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 11 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.
98
(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
2019
2018
2017
$
$
$
$
$
$
421,231 $
9,000
412,231
4,019
408,212 $
113,784
3.59 $
412,231 $
4,012
408,219 $
113,784
433,542 $
9,000
424,542
4,558
419,984 $
116,352
3.61 $
424,542 $
4,547
419,995 $
116,352
282
114,066
361
116,713
3.58 $
3.60 $
319,383
9,000
310,383
3,848
306,535
116,375
2.63
310,383
3,838
306,545
116,375
410
116,785
2.62
Unexercised stock appreciation rights of 356 thousand, 235 thousand and 167 thousand were excluded from the computation
of diluted income per share for the years ended December 31, 2019, 2018 and 2017, respectively, because their inclusion would
have been anti-dilutive.
On August 7, 2019, the Company entered into an accelerated share repurchase ("ASR") agreement with Morgan Stanley &
Co. LLC (Morgan Stanley). Under this ASR agreement, the Company paid $150.0 million to Morgan Stanley and received from
Morgan Stanley 1,994,327 shares of the Company’s common stock, representing approximately 75% of the estimated total number
of shares to be delivered by Morgan Stanley at the conclusion of the program. Final settlement occurred on December 30, 2019
at which time the remaining shares, totaling 438,009, were received by the Company. The specific number of shares that the
Company ultimately repurchased was based on the volume-weighted-average price per share of the Company’s common stock
during the repurchase period.
In the Annual Meeting of the Shareholders, held on April 17, 2019, a proposal to increase the shares of Company common
stock authorized for issuance under its articles of incorporation was approved. The approval increased the authorized shares from
120,000,000 to 140,000,000.
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 November 2019 approved future purchases of 5,000,000 shares of the Company's common stock. At December 31, 2019,
4,430,958 shares of common stock remained available for purchase under the current authorization.
99
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
2019
2018
2017
111,129
106,615
101,461
329
5,359
(4,670)
(15)
112,132
416
5,305
(1,194)
(13)
111,129
403
5,078
(315)
(12)
106,615
* 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 2019.
100
15. 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, 2019
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)
$ 3,052,079
15.48% $ 1,577,105
8.00%
N.A.
N.A.
Commerce Bank
2,583,676
13.19
1,566,866
8.00
$ 1,958,583
10.00%
Tier I Capital (to risk-weighted assets):
Commerce Bancshares, Inc. (consolidated)
$ 2,890,322
14.66% $ 1,182,829
6.00%
N.A.
Commerce Bank
2,421,919
12.37
1,175,150
6.00
$ 1,566,866
Tier I Common Capital (to risk-weighted assets):
Commerce Bancshares, Inc. (consolidated)
$ 2,745,538
13.93% $ 887,122
4.50%
N.A.
Commerce Bank
2,421,919
12.37
881,362
4.50
$ 1,273,079
Tier I Capital (to adjusted quarterly average assets):
(Leverage Ratio)
Commerce Bancshares, Inc. (consolidated)
$ 2,890,322
11.38% $ 1,015,771
4.00%
N.A.
Commerce Bank
December 31, 2018
Total Capital (to risk-weighted assets):
2,421,919
9.57
1,012,232
4.00
$ 1,265,290
N.A.
8.00%
N.A.
6.50%
N.A.
5.00%
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
2,494,584
10.07
991,185
4.00
$ 1,238,981
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, 2019 and 2018, the Company met all capital requirements to which it is subject, and the Bank’s capital
position exceeded the regulatory definition of well-capitalized.
101
16. 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, 2019, approximately 61% 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 adoption of ASU 2014-09 did not require any significant change to the Company's 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 year ended December 31, 2017.
(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
As Previously
Reported
Adoption of
ASU 2014-09
As Adjusted
$
$
180,441 $
(25,341) $
486,604
(25,341)
92,246 $
(11,248) $
77,459
769,684
(14,093)
(25,341)
155,100
461,263
80,998
63,366
744,343
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 (1)
Total non-interest income
For the Year Ended December 31
2019
2018
2017
$
167,879 $
171,576 $
155,628
95,983
15,804
48,597
483,891
40,812
147,964
94,517
15,807
37,440
467,304
34,037
$
524,703 $
501,341 $
155,100
135,159
90,060
14,630
30,128
425,077
36,186
461,263
(1) 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, 2019 and 2018
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,
2019
December 31,
2018
December 31,
2017
$
13,915 $
13,035 $
13,315
2,093
6,523
596
2,721
6,107
559
2,802
5,597
380
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.
102
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
2019
2018
2017
$
42,106 $
41,522 $
(2,081)
40,025
27,416
(13,239)
14,177
196,984
(102,596)
94,388
31,517
(8,779)
(3,449)
19,289
(1,784)
39,738
26,799
(13,834)
12,965
199,651
(100,011)
99,640
30,241
(7,831)
(3,177)
19,233
40,134
(4,498)
35,636
25,275
(10,699)
14,576
179,642
(94,823)
84,819
31,863
(8,228)
(3,566)
20,069
155,100
Total bank card transaction fees
$
167,879 $
171,576 $
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.
103
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 shown 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, which are reported within the Wealth segment.
(In thousands)
Private client
Institutional
Other
Total trust fees
For the Years Ended December 31
2019
2018
2017
$
$
118,832 $
111,533 $
29,468
7,328
29,241
7,190
155,628 $
147,964 $
100,358
27,477
7,324
135,159
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's 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
2019
2018
2017
41,442 $
30,596
38,468 $
31,468
23,945
24,581
95,983 $
94,517 $
36,044
30,576
23,440
90,060
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
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
104
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, and nearly all of this revenue is
reported in the Company's Wealth segment.
(In thousands)
Commission income
Managed account services
Total consumer brokerage services
For the Years Ended December 31
2019
2018
2017
$
$
9,071 $
6,733
15,804 $
8,956 $
6,851
15,807 $
8,400
6,230
14,630
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 from contracts with customers 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.
105
17. 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 available for sale debt securities, equity
securities, trading debt 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 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.
106
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, 2019 and 2018. There were no transfers among levels during these years.
(In thousands)
December 31, 2019
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, 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
* The fair value of each class of derivative is shown in Note 19.
.
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
$
9,181 $
— $
9,181 $
—
851,776
139,277
1,267,927
3,937,964
809,782
1,233,489
331,411
28,161
2,929
94,122
105,674
16,518
8,828,211
851,776
—
—
—
—
—
—
—
2,929
—
—
16,518
871,223
—
139,277
1,258,074
3,937,964
809,782
1,233,489
331,411
28,161
—
—
105,075
—
7,852,414
10,219
16,518
26,737 $
—
16,518
16,518 $
9,989
—
9,989 $
—
—
9,853
—
—
—
—
—
—
94,122
599
—
104,574
230
—
230
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 $
—
—
14,158
—
—
—
—
—
—
85,659
583
—
100,400
93
—
93
$
$
$
107
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
108
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-
109
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.
110
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, 2019:
Balance at January 1, 2019
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, 2019
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, 2019
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
$
$
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
State and
Municipal
Obligations
Private Equity
Investments
Derivatives
Total
$
14,158 $
85,659 $
490 $
100,307
—
246
(4,635)
84
—
—
—
—
—
(727)
(93)
—
—
—
15,706
(6,548)
32
—
—
—
—
—
—
—
—
439
(467)
(820)
246
(4,635)
84
15,706
(6,548)
32
439
(467)
$
$
$
9,853 $
94,122 $
369 $
104,344
— $
(2,177) $
457 $
(1,720)
17,016 $
55,752 $
503 $
73,271
13,849
105
—
(274)
(2,616)
32
—
—
—
—
—
14,158 $
—
—
—
16,395
(371)
34
—
—
85,659 $
—
—
—
—
—
—
61
13,954
(274)
(2,616)
32
16,395
(371)
34
61
(179)
490 $
(179)
100,307
— $
13,849 $
663 $
14,512
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, 2019:
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, 2019
Year ended December 31, 2018:
Total gains or losses included in earnings
Change in unrealized gains or losses relating to assets still held at
December 31, 2018
$
$
$
$
(77) $
458 $
(45) $
535 $
(16) $
(727) $
(820)
(1) $
(2,177) $
(1,720)
150 $
13,849 $
13,954
128 $
13,849 $
14,512
111
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 $9.9 million at December 31, 2019, while private equity investments, included in other securities, totaled
$94.1 million.
Information about these inputs is presented in the table and discussions below.
Auction rate securities
Private equity investments
Mortgage loan commitments
Quantitative Information about Level 3 Fair Value Measurements
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
Range
Weighted
Average
3.4% -
-
4.0
5 years
3.7%
6.0
47.8% - 100.0% 83.7%
1.2%
2.3%
—% -
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 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.
112
Instruments Measured at Fair Value on a Nonrecurring Basis
For assets measured at fair value on a nonrecurring basis during 2019 and 2018, and still held as of December 31, 2019 and
2018, 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, 2019 and 2018.
(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, 2019
Collateral dependent impaired loans
Mortgage servicing rights
Long-lived assets
Balance at December 31, 2018
Collateral dependent impaired loans
Mortgage servicing rights
Long-lived assets
$
$
422 $
— $
— $
422 $
7,749
1,098
294 $
6,478
914
—
—
— $
—
—
—
—
— $
—
—
7,749
1,098
294 $
6,478
914
(263)
(327)
(362)
(269)
9
(552)
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, 2019 and 2018 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.
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.
113
18. 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.
The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within
the valuation hierarchy are as follows at December 31, 2019 and 2018:
Estimated Fair Value at December 31, 2019
Level 1
Level 2
Level 3
Total
$
— $
—
—
—
—
—
—
—
—
—
854,705
—
395,850
491,615
—
16,518
— $ 5,526,303 $ 5,526,303
898,152
898,152
—
2,849,213
2,849,213
—
2,333,002
2,333,002
—
1,938,505
1,938,505
—
344,424
344,424
—
708,209
708,209
—
4,478
4,478
—
14,602,286
— 14,602,286
13,809
—
8,741,888
149,025
869,592
869,592
395,850
—
491,615
—
105,674
599
16,518
—
$ 1,758,688 $ 7,857,042 $ 15,621,502 $ 25,237,232
13,809
7,738,158
—
—
—
105,075
—
$ 6,890,687 $
11,621,716
—
20,035
—
—
—
16,518
$ 18,548,956 $
— $
—
—
—
—
988
9,989
—
— $ 6,890,687
— 11,621,716
2,022,629
20,035
1,831,518
988
10,219
16,518
10,977 $ 3,854,377 $ 22,414,310
2,022,629
—
1,831,518
—
230
—
(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
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
$ 5,565,449
899,377
2,833,554
2,354,760
1,964,145
349,251
764,977
6,304
14,737,817
13,809
8,741,888
850,000
395,850
491,615
105,674
16,518
$ 25,353,171
$ 6,890,687
11,621,716
2,008,012
20,035
1,830,737
988
10,219
16,518
$ 22,398,912
114
(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
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 $
— $
—
—
—
—
7,751
13,328
—
— $ 6,980,298
— 11,685,239
1,663,748
13,170
1,944,458
8,702
13,421
12,968
21,079 $ 3,609,250 $ 22,322,004
1,663,748
—
1,944,458
951
93
—
19. 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. 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
2019
2018
$
2,606,181
$
2,006,280
1,500,000
59,316
316,225
10,936
13,755
1,943
17,500
1,000,000
62,163
143,460
6,206
14,544
5,768
16,500
$
4,525,856
$ 3,254,921
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
115
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 contracts 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 instant settlement of the contracts. The Company
maintains debt ratings and capital well above these minimum requirements.
As of December 31, 2019, the Company has entered into three interest rate floors with a combined notional value of $1.5
billion, to hedge the risk of declining interest rates on certain floating rate commercial loans indexed to one month LIBOR. The
first interest rate floor has a purchased strike rate of 2.25% and became effective on January 1, 2020 and matures on January 1,
2026. The second interest rate floor has a purchased strike rate of 2.50% and is effective on June 1, 2020 and matures on June 1,
2026. The third interest rate floor has a purchased strike rate of 2.00% and is effective December 15, 2020 and matures on
December 15, 2026. The premiums paid for these floors totaled $31.3 million. As of December 31, 2019, the maximum length
of time over which the Company is hedging its exposure to the variability in future cash flows is approximately 7.0 years. 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, 2019, net deferred
gains on the interest rate floors totaled $40.4 million (pre-tax) and were recorded in AOCI in the consolidated balance sheet. As
of December 31, 2019, it is expected that $4.1 million (pre-tax) of interest rate floor premium amortization will be reclassified
from AOCI into earnings over the next twelve months.
The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with
certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further
discussed in Note 21 on Commitments, Contingencies and Guarantees. In addition, the Company enters into foreign exchange
contracts, which are mainly comprised of contracts to purchase or deliver foreign currencies for customers at specific future dates.
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.
116
The fair values of the Company’s derivative instruments, whose notional amounts are listed above, are shown in the table
below. Information about the valuation methods used to determine fair value is provided in Note 17 on Fair Value Measurements.
The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in its consolidated balance
sheets and these are reported in other assets and other liabilities. 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, 2019 in the table below, the positive
fair values of cleared swaps were reduced by $617 thousand and the negative fair values of cleared swaps were reduced by $28.5
million. At December 31, 2018, 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.
(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
2019
2018
2019
2018
Fair Value
Fair Value
$
$
$
$
$
$
67,192
67,192
37,774
4
140
97
459
6
2
29,031
29,031
11,537
24
47
20
536
15
—
$
$
$
— $
— $
—
—
(9,916)
(4)
$
(13,110)
(24)
(230)
(32)
—
(2)
(35)
(93)
(8)
—
(8)
(178)
$
$
38,482
105,674
$
$
12,179
41,210
$
$
(10,219)
(10,219)
$
$
(13,421)
(13,421)
117
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
Included
Component
Excluded
Component
Location of Gain (Loss)
Reclassified from AOCI into
Income
(In thousands)
Amount of Gain (Loss) Reclassified
from AOCI into Income
Included
Component
Excluded
Component
Total
Total
Interest rate floors*
(In thousands)
For the Year Ended December 31, 2019
Derivatives in cash flow hedging relationships:
$
$
Total
For the Year Ended December 31, 2018
Derivatives in cash flow hedging relationships:
$
$
27,481 $
27,481 $
8,381 $
8,381 $
Interest rate floors*
Total
50,327 $
50,327 $
— $
— $
* No hedging relationship existed during 2017.
(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
(22,846)
(22,846)
Interest and fees on loans
Total
8,381
8,381
Interest and fees on loans
Total
$
$
$
$
(3,793) $
(3,793) $
— $
— $
(3,793)
(3,793)
(760) $
(760) $
— $
— $
(760)
(760)
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
2019
2018
2017
Other non-interest income
$
4,732
$
3,914
$
1,978
Other non-interest income
Other non-interest income
Other non-interest income
Loan fees and sales
Loan fees and sales
Loan fees and sales
—
(16)
53
(77)
(3)
(837)
11
150
31
(45)
5
414
—
35
(80)
231
64
(648)
$
3,852
$
4,480
$
1,580
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 exchanged between
the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consist of
marketable securities. By contract, these 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 or securities to its
clearing agent. 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.
118
(In thousands)
December 31, 2019
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, 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
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
$
105,147 $
— $
105,147 $
(8,104) $
(59,525) $
37,518
527
105,674
10,083
136
10,219
—
—
—
—
—
527
105,674
10,083
(8,104)
(437)
1,542
136
10,219
$
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
119
20. 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 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
consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $200.0
million at December 31, 2019 and $450.0 million at December 31, 2018. At December 31, 2019, the Company had posted collateral
of $204.3 million in marketable securities, consisting of agency mortgage-backed bonds, and had accepted $209.6 million in
agency mortgage-backed bonds.
(In thousands)
December 31, 2019
Total resale agreements, subject to
master netting arrangements
Total repurchase agreements, subject to
master netting arrangements
December 31, 2018
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
$
1,050,000 $
(200,000) $
850,000 $
— $
(850,000) $
2,030,737
(200,000)
1,830,737
—
(1,830,737)
$
1,150,000 $
(450,000) $
700,000 $
— $
(700,000) $
2,393,219
(450,000)
1,943,219
—
(1,943,219)
—
—
—
—
120
The table below shows the remaining contractual maturities of repurchase agreements outstanding at December 31, 2019 and
2018, 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, 2019
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, 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
Remaining Contractual Maturity of the Agreements
Overnight and
continuous
Up to 90 days
Greater than 90
days
Total
$
$
$
$
526,283 $
32,575
973,774
71,399
60,012
50,375
1,714,418 $
387,541 $
18,466
882,744
187,740
322,680
98,522
1,897,693 $
— $
—
48,517
—
40,000
—
88,517 $
— $
—
227,802
—
—
—
227,802 $
150,000 $
100,000 $
—
31,774
—
—
—
—
213,752
—
—
—
181,774 $
313,752 $
526,283
32,575
1,250,093
71,399
100,012
50,375
2,030,737
637,541
18,466
1,128,270
187,740
322,680
98,522
2,393,219
21. Commitments, Contingencies and Guarantees
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
2019
2018
$
5,063,166 $
5,328,502
6,123,264
5,840,967
377,338
7,050
353,905
13,774
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.
121
At December 31, 2019, the Company had recorded a liability in the amount of $2.6 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 $377.3 million at December 31, 2019.
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 2019, purchases and sales of tax credits amounted to
$90.6 million and $84.9 million, respectively. At December 31, 2019, the Company had outstanding purchase commitments
totaling $160.9 million that it expects to fund in 2020.
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, 2019, 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 3 to 11 years. At December 31, 2019, the fair value of
the Company's guarantee liability RPAs was $230 thousand, and the notional amount of the underlying swaps was $208.9 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, 2019, 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.
22. 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, 2019, Tower owned 211,996 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
2019
2018
2017
154 $
133 $
118
2,001
250
210
95
1,935
136
181
2,733 $
2,480 $
32
82
1,954
146
232
2,446
$
$
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 $11.5 million at December 31, 2019. There were no borrowings under this line during 2019, and no balance
outstanding at December 31, 2019. There were no borrowings during 2018, and the maximum borrowings during 2017 were $5.2
million. There was no balance outstanding at December 31, 2018 or 2017. Interest paid on 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 2019, 2018 or 2017, 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 2019, 2018
and 2017.
122
Tower leases office space in the Kansas City bank headquarters building owned by the Company. Rent paid to the Company
totaled $75 thousand in 2019, $74 thousand in 2018, and $74 thousand in 2017, at $17.00, $16.69 and $15.75 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 21 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 2019, the Company sold
state tax credits to its Executive Chairman, its former Vice Chairman, its Chief Executive Officer, and its Chief Credit Officer in
the amount of $865 thousand, $663 thousand, $166 thousand, and $83 thousand, respectively, for personal tax planning. 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. 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. 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.
123
23. 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
2019
2018
$
2,687,692 $
2,587,489
71,290
301,913
67,538
207,462
1,399
2,969
50,000
26,097
9,973
23,528
2,576
3,191
50,000
19,867
8,590
23,734
3,174,861 $
2,970,447
$
$
13,028 $
27,149
40,177
3,134,684
$
3,174,861 $
12,645
26,504
39,149
2,931,298
2,970,447
For the Years Ended December 31
2019
2018
2017
$
500,000 $
200,000 $
(79,641)
233,785
1,698
36,776
3,572
1,208
4,700
10,698
37,688
(4,581)
1,299
2,390
160,002
147,678
2,099
30,431
41,717
514
3,346
468,313
481,279
385,787
32,882
2,050
3,142
87
13,019
51,180
(4,098)
33,588
2,383
3,341
152
10,729
50,193
(2,456)
$
421,231 $
433,542 $
33,714
2,036
3,512
32,093
10,671
82,026
(15,622)
319,383
124
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
Decrease in securities purchased under agreements to resell
(Increase) 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 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
Accelerated share repurchase agreements
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 in cash
Cash at beginning of year
Cash at end of year
Income tax receipts, net
For the Years Ended December 31
2019
2018
2017
$
421,231 $
433,542 $
319,383
79,641
2,491
503,363
—
(12)
3,856
1,150
(63)
—
(6,230)
(235)
(1,534)
(134,904)
(150,000)
(8)
(233,785)
(147,678)
2,505
202,262
—
—
41,638
1,988
(125)
—
(5,296)
(133)
38,072
(11,268)
160,437
155,775
11
11,006
2,295
—
(50,000)
(9,518)
(52)
109,517
(75,231)
(17,771)
—
(10)
—
(8)
(91,619)
(9,000)
(118,398)
151,556
51
(113,466)
(100,238)
(9,000)
(9,000)
(407,378)
(184,479)
94,451
207,462
55,855
151,607
$
$
301,913 $
207,462 $
151,607
(2,337) $
(1,965) $
(8,991)
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 Parent has not borrowed under this line during the past three years.
At December 31, 2019, the fair value of the investment securities held by the Parent consisted of investments of $2.8 million
in preferred stock with readily determinable fair values, $188 thousand in equity securities that do not have readily determinable
fair values, and $1.4 million in non-agency mortgage-backed securities.
125
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, 2019.
The Company’s internal control over financial reporting as of December 31, 2019 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.
126
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.'s and subsidiaries (the Company) internal control over financial reporting as of
December 31, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated
February 25, 2020 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 25, 2020
127
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 “Information about the
Company's Executive Officers” and under the captions “Proposal One - Election of the 2023 Class of Directors”, “Delinquent
Section 16(a) Reports”, “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 2023 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.
128
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
53
(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 1-36502) dated May 7, 2019, and the same are hereby incorporated by reference.
(2) By-Laws, as amended, were filed in annual report on Form 10-K (Commission file number 1-36502) dated
February 25, 2020, 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.
(2) Description of Commerce Bancshares, Inc. registered securities.
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, was filed in annual report on Form 10-K (Commission file number 1-36502) dated February 21, 2019, and
the same is hereby incorporated by reference.
(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 1-36502) 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 1-36502) 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 was filed in annual report on Form 10-K (Commission file number 1-36502) dated February 21,
2019, and the same is hereby incorporated by reference.
129
(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.
(8) Commerce Bancshares, Inc. 2020 Compensatory Arrangements with CEO and Named Executive Officers
were filed in amended current report on Form 8-K (Commission file number 1-36502) dated February 7, 2020,
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, was filed in annual report on Form 10-K
(Commission file number 1-36502) dated February 21, 2019.
(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, was filed in annual report on Form 10-K (Commission file number
1-36502) dated February 21, 2019, and the same is hereby incorporated by reference.
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. The instance document does not appear in the interactive data file because
its XBRL tags are embedded within the inline XBRL document.
104 — Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Item 16. FORM 10-K SUMMARY
None.
130
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 25th day of February 2020.
SIGNATURES
COMMERCE BANCSHARES, INC.
By:
/s/ THOMAS J. NOACK
Thomas J. Noack
Senior Vice President & 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 25th day of February 2020.
By:
By:
By:
/s/ JOHN W. KEMPER
John W. Kemper
Chief Executive Officer
/s/ CHARLES G. KIM
Charles G. Kim
Chief Financial Officer
/s/ PAUL A. STEINER
Paul A. Steiner
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:
131
/s/ THOMAS J. NOACK
Thomas J. Noack
Attorney-in-Fact
The consolidated subsidiaries of the Registrant at February 1, 2020 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 25, 2020, with respect to the consolidated
balance sheets of Commerce Bancshares, Inc. as of December 31, 2019 and 2018, 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, 2019,
and the related notes (collectively, the consolidated financial statements), and the effectiveness of internal control over financial
reporting as of December 31, 2019, which reports appear in the December 31, 2019 annual report on Form 10-K of Commerce
Bancshares, Inc.
KPMG LLP
Kansas City, Missouri
February 25, 2020
POWER OF ATTORNEY
Exhibit 24
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby appoint Thomas J. Noack and Paul A. Steiner, 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, 2019, 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 7th day of February, 2020.
/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 25, 2020
/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 25, 2020
/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, 2019 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 25, 2020
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.
CORPOR ATE HEADQUARTERS
INVESTOR INQUIRIES
1000 Walnut
P.O. Box 419248
Kansas City, MO 64141-6248
816.234.2000
www.commercebank.com
INDEPENDENT ACCOUNTANTS
KPMG LLP
Kansas City, MO
TR ANSFER AGENT, REGISTR AR
AND DIVIDEND DISBURSING AGENT
Shareholder correspondence should be mailed to:
Computershare Trust Company, N.A.
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
Shareholders, analysts and investors seeking information about the
company should direct their inquiries to:
Matthew Burkemper
Senior Vice President, Commerce Bank
Corporate Development and Investor Relations
8000 Forsyth Boulevard
St. Louis, MO 63105
314.746.7485
Matthew.Burkemper@commercebank.com
SHAREHOLDERS MAY RECEIVE FUTURE ANNUAL REPORTS AND PROX Y
MATERIALS ONLINE
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.”
Hearing Impaired/TDD: 800.952.9245
Website: www.computershare.com/investor
Please note:
• Your consent is entirely revocable.
Shareholder online inquiries:
https://www.us.computershare.com/investor/Contact
• 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.
STOCK EXCHANGE LISTING
Nasdaq
Symbol-Common Stock: CBSH
Symbol-Preferred Stock: CBSHP
COMMON STOCK INFORMATION
The table below sets forth the high and low prices of actual
transactions for the company’s common stock, adjusted for
the December 2019 5% stock dividend, which is publicly
traded on the Nasdaq Stock Market.
FISCAL 2019
HIGH
LOW
First Quarter
$60.97
$52.97
Second Quarter
Third Quarter
Fourth Quarter
ANNUAL MEETING
59.01
58.90
68.65
53.93
52.05
54.56
The annual meeting of shareholders will be held Wednesday,
April 15, 2020 at 9:30 a.m. on the 10th floor of the Commerce
Bank building located at 8000 Forsyth Boulevard, St. Louis,
MO 63105.
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: CBSHInvestorRelations@commercebank.com
Website: www.commercebank.com
An Equal Opportunity Employer
Copyright © 2020 Commerce Bancshares, Inc. All rights reserved.